ITERIS INC
S-1/A, 2000-01-27
PREPACKAGED SOFTWARE
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<PAGE>


 As filed with the Securities and Exchange Commission on January 27, 2000

                                                Registration No. 333-93035
================================================================================
               UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             Washington, DC 20549

                               ----------------

                             Amendment No. 1
                                   FORM S-1
                            REGISTRATION STATEMENT
                                     Under
                          The Securities Act of 1933

                                 Iteris, Inc.
            (Exact name of registrant as specified in its charter)

<TABLE>
<S>                               <C>                            <C>
            Delaware                           7379                        95-2954623
(State or Other Jurisdiction of   (Primary Standard Industrial         (I.R.S. Employer
 Incorporation or Organization)    Classification Code Number)       Identification Number)
</TABLE>

                          1515 S. Manchester Avenue,
                               Anaheim, CA 92802
                                (714) 758-0200
  (Address, Including Zip Code, and Telephone Number, Including Area Code, of
                 the Registrant's Principal Executive Offices)

                                 JACK JOHNSON
                     President and Chief Executive Officer
                           1515 S. Manchester Avenue
                               Anaheim, CA 92802
                                (714) 758-0200
  (Name and Address, Including Zip Code, and Telephone Number, Including Area
                          Code, of Agent for Service)

                                  Copies to:
         NICK E. YOCCA, ESQ.                     LAWRENCE D. LEVIN, ESQ.
          K.C. SCHAAF, ESQ.                        BRIAN M. HOYE, ESQ.
      CHRISTOPHER D. IVEY, ESQ.                    Katten Muchin Zavis
  Stradling Yocca Carlson & Rauth,         525 West Monroe Street, Suite 1600
     A Professional Corporation                  Chicago, Illinois 60661
660 Newport Center Drive, Suite 1600                 (312) 902-5200
   Newport Beach, California 92660
           (949) 725-4000

   Approximate date of commencement of proposed sale to the public: As soon as
practicable after this registration statement becomes effective.
   If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
   If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_] _______
   If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_] _______
   If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_] _______
   If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [_]

                               ----------------
<TABLE>
<CAPTION>
=================================================================================================
                                                                  Proposed Maximum
    Title of Each Class of                       Proposed Maximum    Aggregate        Amount of
          Securities              Amount to be    Offering Price      Offering       Registration
       to be Registered          Registered(1)       Per Unit       Price(1)(2)         Fee(3)
- -------------------------------------------------------------------------------------------------
 <S>                            <C>              <C>              <C>              <C>
Common Stock, $.001 par value..     4,971,476          13.00         $64,109,188        $16,925
=================================================================================================
</TABLE>
(1) Includes shares of common stock which may be purchased by the Underwriters
    to cover over-allotments, if any.

(2) Estimated solely for the purpose of calculating the registration fee
    pursuant to Rule 457(a) under the Securities Act of 1933, as amended.

(3) This fee includes $13,200 previously paid by the Registrant.

                               ----------------

   The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the Registration Statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.

================================================================================
<PAGE>

++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this preliminary prospectus is not complete and may be     +
+changed. We may not sell these securities until the registration statement    +
+filed with the Securities and Exchange Commission becomes effective. This     +
+preliminary prospectus is not an offer to sell these securities nor a         +
+solicitation of an offer to buy these securities in any jurisdiction where    +
+the offer or sale is not permitted.                                           +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++

               SUBJECT TO COMPLETION, DATED JANUARY 27, 2000

PRELIMINARY PROSPECTUS

                             4,288,240 Shares

                         [LOGO OF ITERIS APPEARS HERE]

                                  Common Stock

                                  -----------

This is an initial public offering of shares of common stock of Iteris, Inc. Of
the 4,288,240 shares of common stock offered under this prospectus, we are
offering 4,166,667 shares and the selling stockholders are offering an
additional 121,573 shares. We will not receive any of the proceeds from the
shares of common stock sold by selling stockholders.

We anticipate that the initial public offering price will be between $11.00 and
$13.00 per share. We have applied to have our common stock approved for
quotation on the Nasdaq National Market under the symbol "ITER."

See "Risk Factors" beginning on page 6 to read about risks that you should
consider carefully before buying shares of our common stock.

Neither the Securities and Exchange Commission nor any other regulatory body
has approved or disapproved these securities or passed upon the adequacy or
accuracy of this prospectus. Any representation to the contrary is a criminal
offense.

                                  -----------

<TABLE>
<CAPTION>
                                                                     Per
                                                                    Share Total
                                                                    ----- -----
<S>                                                                 <C>   <C>
Public offering price.............................................. $     $
Underwriting discounts and commissions............................. $     $
Proceeds, before expenses, to us................................... $     $
Proceeds to the selling stockholders............................... $     $
</TABLE>

                                  -----------

The underwriters may purchase up to an additional 643,236 shares of common
stock from us at the initial public offering price, less the underwriting
discount, to cover over-allotments.

The underwriters expect to deliver the shares in New York, New York, on       ,
2000.

                                  -----------

Bear, Stearns & Co. Inc.

                                   SG Cowen

                                                    Cruttenden Roth Incorporated

                The date of this prospectus is           , 2000.
<PAGE>

   You may rely only on the information contained in this prospectus. Neither
we, the selling stockholders, nor any underwriter have authorized anyone to
provide prospective investors with different or additional information. This
prospectus is not an offer to sell nor is it seeking an offer to buy these
securities in any jurisdiction where the offer or sale is not permitted. The
information contained in this prospectus is correct only as of the date of this
prospectus, regardless of the time of the delivery of this prospectus or any
sale of these securities.

                               TABLE OF CONTENTS
<TABLE>
<CAPTION>
                                                                          Page
                                                                          ----
<S>                                                                       <C>
Prospectus Summary.......................................................   1
Risk Factors.............................................................   6
Forward-Looking Statements...............................................  16
Use of Proceeds..........................................................  17
Dividend Policy..........................................................  17
Capitalization...........................................................  18
Dilution.................................................................  19
Selected Consolidated Financial Data.....................................  20
Management's Discussion and Analysis of Financial Condition and Results
 of Operations...........................................................  21
Business.................................................................  30
</TABLE>
<TABLE>
<CAPTION>
                                                                            Page
                                                                            ----
<S>                                                                         <C>
Arrangements with Odetics..................................................  42
Management.................................................................  44
Principal and Selling Stockholders.........................................  51
Certain Transactions.......................................................  52
Description of Capital Stock...............................................  53
Shares Eligible for Future Sale............................................  57
Underwriting...............................................................  59
Legal Matters..............................................................  61
Experts....................................................................  61
Where You Can Find Additional Information..................................  62
Index to Consolidated Financial Statements................................. F-1
</TABLE>

   Until               , 2000, 25 days after the date of this prospectus, all
dealers that effect transactions in these securities, whether or not
participating in this offering, may be required to deliver a prospectus. This
is in addition to the dealers' obligation to deliver a prospectus when acting
as underwriters and with respect to their unsold allotments or subscriptions.

<PAGE>


                               PROSPECTUS SUMMARY

   This summary highlights information found in greater detail elsewhere in
this prospectus. In addition to this summary, we urge you to read the entire
prospectus carefully, including the risks of investing in our common stock
discussed under "Risk Factors," before you decide to buy our common stock.

                                  ITERIS, INC.

Our Company

   We design, develop, market and implement software based solutions that
improve the safety and efficiency of vehicle transportation. Using our
proprietary software and industry expertise, we are a leading provider of video
sensor systems and transportation management and traveler information systems
for the intelligent transportation systems, or ITS, industry. The ITS industry
is comprised of companies applying a variety of technologies to enable the safe
and efficient movement of people and goods. Our systems and solutions are
designed to address three critical demands of vehicle transportation: improving
vehicle safety, reducing traffic congestion and increasing the availability of
personalized traveler information.

   According to the U.S. Department of Transportation and the National Highway
Transportation Safety Administration, more than six million motor vehicle
accidents occurred in the United States in 1997. Accidents in 1998 resulted in
more than 40,000 fatalities, approximately 39.4% of which were related to
drivers departing unintentionally from their designated lanes according to
NHTSA. To help prevent accidents caused by unintended lane departures, we
developed AutoVue, a small windshield mounted sensor that detects and warns
drivers of unintended lane departures. AutoVue is currently being installed in
heavy trucks for pre-production testing and marketed to passenger car and light
and medium truck manufacturers.

   There were more than 200 million vehicles in operation in the United States
in 1998 according to Automotive News. The U.S. DOT estimated that in 1996
drivers on U.S. highways spent more than two billion hours in traffic
congestion. According to a study conducted for the U.S. DOT, traffic congestion
cost the American public $72 billion in 1997 in lost time and wasted fuel. As
an alternative to expanding a substantially built-out infrastructure of
highways, transportation agencies are turning to ITS to increase the efficiency
of the existing highway infrastructure. As a result, we developed our Vantage
video vehicle sensing systems to detect the presence of vehicles at signalized
intersections, enabling an efficient allocation of green signal time. In
addition, our transportation management and traveler information systems enable
traffic managers to monitor transportation networks in real-time and to
implement corrective actions to relieve traffic congestion.

   Each of our AutoVue and Vantage systems incorporate our proprietary software
algorithms designed to maximize the accuracy of outdoor video imaging. We have
entered into strategic relationships with DaimlerChrysler Corporation and its
subsidiary, Freightliner Corporation, to jointly develop software applications
for AutoVue and to install AutoVue in their heavy trucks. We also intend to
sell AutoVue to manufacturers for installation on passenger cars and light and
medium trucks. We believe AutoVue is currently the only commercially-available
unintended lane departure warning system for vehicles and Vantage is a market
leader for video vehicle detection systems in the United States.

   In addition to focusing on vehicle safety and traffic congestion, drivers
are increasingly demanding the availability of timely and accurate traffic
information. Traditionally, traffic information has been provided over the
radio and more recently over the Internet. Our transportation management and
traveler information systems enable the dissemination of information on current
traffic conditions through changeable message signs, radio, telephone, cable
television, paging networks and the Internet. We also are developing
personalized traveler information services that will be customized to the
travel patterns and information needs of individual travelers, to be delivered
in real-time through personal digital assistants, or PDAs, cellular telephones,
pagers, the mobile Internet and in-vehicle computers.

                                       1
<PAGE>


   We are one of only two companies awarded a contract to develop and maintain
the National ITS Architecture, a federal program designed to create a single
national architecture to enable seamless communication among ITS systems. We
believe our involvement in the National ITS Architecture provides us with
unique vision and insight into emerging market trends and product opportunities
and a significant competitive market advantage. We have the experience to
design and implement transportation management systems that perform the
functions necessary to conform with the National ITS Architecture. Through the
training programs we conduct on the Architecture, we have developed strong
relationships and credibility with national, regional, state and local
transportation agencies responsible for managing funds allocated for
ITS systems.

   We have assembled an experienced management team and board of directors
focused on the ITS industry. Our management team and board of directors include
two former U.S. Secretaries of Transportation, a former Deputy Insurance
Commissioner for the State of California, a former General Manager for the
Los Angeles Department of Transportation and a founding board member of ITS
America, a leading industry trade association and federal advisory agency. Our
board also includes a former Technical Director of the ITS program for General
Motors Corporation and a former Chairman of Chrysler Technologies Corporation.

Our Strategy

   Our objective is to enhance our position as a leading provider of software
based ITS systems and solutions for the safe and efficient movement of people
and goods. Our strategies to achieve this objective are:

  .  Combine our proprietary software with our ITS industry expertise to
     provide transportation solutions;

  .  Establish AutoVue as the leading platform for in-vehicle video sensing;

  .  Provide personalized traveler information to travelers through wireless
     communication devices and the mobile Internet;

  .  Pursue strategic acquisitions and alliances; and

  .  Broaden our systems and solutions offerings and expand our penetration
     of international markets.

Corporate Information; Spin-Off from Odetics

   We were formed in 1994 as a division of Odetics, Inc., a publicly-held
company based in Anaheim, California that serves as an incubator for
technology-oriented businesses. We were incorporated as Odetics ITS, Inc. in
September 1998 as a California corporation and reincorporated in Delaware as
Iteris, Inc. in January 2000. Odetics currently owns approximately 93% of our
outstanding common stock. Immediately prior to this offering, Odetics will
distribute to its stockholders all of the outstanding common stock of our
company owned by Odetics in a tax-free spin-off. The shares distributed in the
spin-off will not be transferable for a period of 180 days following the date
of this prospectus. In preparation for the spin-off, we will enter into the
following agreements with Odetics: separation and distribution agreement,
services agreement, tax allocation agreement and promissory note. Please see
"Arrangements with Odetics."

   Any references to "we," "our," "us" or "Iteris" refer to Iteris, Inc. Our
executive offices are located at 1515 S. Manchester Avenue, Anaheim, California
98202. Our telephone number is (714) 758-0200. Our website address is
www.iteris.com. Information contained in our website does not constitute part
of this prospectus.

   AutoVue(TM), DATEX Toolkit(TM), EzHCM(TM), Lane Tracker(TM), Iteris(TM),
Odetics ITS(TM), SpecWizard(TM), Vantage(TM), Vantage One(TM), Vantage
Plus(TM), Vantage Edge(TM), Vantage Remote Access System(TM), VRAS(TM),

                                       2
<PAGE>

Vantage Wireless Systems(TM) and Vectura(TM) are our logos and trademarks. This
prospectus also includes the tradenames and trademarks of other companies whose
mention in this prospectus is with due recognition of and without intent to
misappropriate such names or marks.

   Except as otherwise noted, all information in this prospectus assumes:

  .  outstanding options to purchase shares of common stock are not
     exercised;

  .  the underwriters' over-allotment option is not exercised;

  .  that the spin-off from Odetics is consummated immediately prior to this
     offering;

  .  a stock split of 1.875675 to 1; and

  .  the issuance of 435,470 shares of common stock to DaimlerChrysler
     Venture GmbH upon the conversion of the Subordinated Convertible
     Promissory Note issued to DaimlerChrysler on January 25, 2000 assuming
     no adjustment to the number of shares issued upon conversion.


                                       3
<PAGE>

                                  THE OFFERING

<TABLE>
<S>                                                   <C>
Common stock offered by us..........................   4,166,667 shares

Common stock offered by selling stockholders........     121,573 shares

Common stock to be outstanding after this offering..  16,666,667 shares

Use of proceeds.....................................  We intend to use the net proceeds from this
                                                      offering to repay $10.0 million of debt
                                                      payable to Odetics, expand sales and
                                                      marketing activities, acquire or invest in
                                                      complementary businesses and for working
                                                      capital and other general corporate purposes.

Proposed Nasdaq National Market symbol..............  ITER
</TABLE>

   The number of shares of common stock outstanding after this offering is
based on shares outstanding on December 31, 1999 and excludes:

  .  2,632,000 shares of common stock issuable upon exercise of options
     outstanding with a weighted average exercise price of $2.01 per share.
     773,000 of these options were exercisable as of December 31, 1999 and
     the balance are subject to future vesting requirements; and

  .  1,081,000 additional shares of common stock reserved for issuance under
     our stock option plan.

   If the underwriters exercise their over-allotment option in full, there will
be 17,309,903 shares outstanding after this offering.

                            RECENT DEVELOPMENT

   On January 25, 2000, we entered into a subordinated convertible note
purchase agreement in which DaimlerChryslers Venture invested $3.75 million
that shall automatically convert into approximately 2.5% of our outstanding
common stock immediately prior to the closing of this offering. This investment
enhances our strategic relationship with DaimlerChrysler. As part of the
agreement, DaimlerChrysler Venture has agreed to facilitate the adoption of
AutoVue in DaimlerChrysler's commercial vehicles and passenger cars. In
addition, DaimlerChrysler Venture will also support our efforts to develop a
personalized traveler information system targeted at DaimlerChrysler's customer
base. This investment is the first of its kind by DaimlerChrysler Venture in
North America. It is seen as a model for future investments in U.S. firms with
advanced technologies that are of strategic importance to DaimlerChrysler.

   The number of shares of common stock into which the promissory note is
convertible will fluctuate depending on the number of shares sold by us in this
offering and the initial public offering price per share. Assuming the sale by
us of 4,166,667 shares of common stock at an initial public offering price of
$12.00 per share, the promissory note will convert into approximately 435,470
shares of our common stock, after this offering. If the price per share at
which our common stock is sold or the number of shares sold in this offering
decrease, then DaimlerChrysler Venture will be entitled to receive additional
shares of common stock or the repayment of a portion of the principal amount
under the Promissory Note in an amount in excess of the amount that, upon
conversion, would result in DaimlerChrysler Venture owning approximately 2.5%
of our common stock after this offering. If the price per share at which our
common stock is sold or the number of shares sold in this offering increase,
then DaimlerChrysler Venture may elect to receive fewer shares or pay an
additional sum to us such that, upon conversion, DaimlerChrysler Venture will
own approximately 2.5% of our common stock after this offering. All shares of
common stock issued to DaimlerChrysler Venture upon conversion of the
promissory note shall be subject to restrictions on sale and transfer, as
contained in the related purchase agreement, until April 25, 2001.

                                       4
<PAGE>

                             SUMMARY FINANCIAL DATA
                (in thousands, except share and per share data)

   The following table summarizes the financial data for our business during
the periods indicated. The data set forth below should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and our consolidated financial statements and related notes
included elsewhere in this prospectus.

   Also, with respect to information relating to the number of shares used in
per share calculations, please see Note 1 of Notes to Consolidated Financial
Statements for an explanation of the determination of the number of shares used
in computing basic and diluted net loss per share.

<TABLE>
<CAPTION>
                                                                                       Nine Months Ended
                                         Years Ended March 31,                           December 31,
                         ----------------------------------------------------------  ----------------------
                            1995        1996        1997        1998        1999        1998        1999
                         ----------  ----------  ----------  ----------  ----------  ----------  ----------
<S>                      <C>         <C>         <C>         <C>         <C>         <C>         <C>
Consolidated Statement
 of Operations Data:
Total revenue........... $      200  $      287  $      538  $    5,841  $   14,580  $   10,400  $   17,447
Gross profit (loss).....         85         (71)         68         471       4,256       2,967       5,700
Loss from operations....       (742)     (2,455)     (3,826)     (5,903)     (4,874)     (3,105)     (3,100)
Net loss................       (849)     (2,759)     (4,506)     (7,247)     (7,041)     (4,655)     (5,291)
Basic and diluted net
 loss per share.........       (.08)       (.25)       (.40)       (.64)       (.60)       (.40)       (.44)
Shares used in
 computation of net
 losses per share, basic
 and diluted............ 11,254,050  11,254,050  11,254,050  11,254,050  11,646,900  11,494,100  12,081,300
</TABLE>

<TABLE>
<CAPTION>
                                                       December 31, 1999
                                                 -------------------------------
                                                                      Pro Forma
                                                  Actual   Pro Forma As Adjusted
                                                 --------  --------- -----------
<S>                                              <C>       <C>       <C>
Consolidated Balance Sheet Data:
Working capital (deficit)....................... $  2,069   $(4,181)   $41,419
Total assets....................................   19,248    12,998     58,598
Total liabilities...............................   43,483    20,771     20,771
Total stockholders' equity (deficit)............  (24,235)   (7,773)    37,827
</TABLE>

   At December 31, 1999, the amount of indebtedness owed to Odetics was $37.4
million. Upon completion of this offering, Odetics will contribute to our
capital approximately $12.7 million in the form of cancellation of
indebtedness, which is reflected in the pro forma column. Also upon completion
of this offering, we will pay Odetics $10.0 million from the proceeds of this
offering and enter into a promissory note payable to Odetics in the principal
amount of $14.7 million, representing the balance of our obligations to
Odetics. This promissory note will be payable in interest only for the first
year and in 16 quarterly installments of principal and interest thereafter. The
actual amount of indebtedness cancelled by Odetics will vary from the amount
reflected in the pro forma column depending on the actual total amount of
indebtedness owed to Odetics at the completion of this offering.

   The pro forma as adjusted information also gives effect to the sale of
4,166,667 shares of common stock offered by us at an assumed initial public
offering price of $12.00 per share and after deducting estimated underwriting
discounts and commissions and estimated offering expenses.


                                       5
<PAGE>

                                  RISK FACTORS

                         Risks Related to Our Business

We have a history of losses, we expect losses in the future and we may not ever
become profitable

   We have incurred significant losses in all prior fiscal periods since our
formation. We incurred net losses of $5.3 million in the nine months ended
December 31, 1999, $7.0 million in fiscal 1999, $7.2 million in fiscal 1998 and
$4.5 million in fiscal 1997. We had an accumulated deficit of $28.3 million as
of December 31, 1999. We also expect to incur losses in fiscal 2000. These
losses may be substantial, and we may not ever become profitable. In addition,
we expect to significantly increase our expenses in the near-term. In
particular, we expect to incur additional expenses to establish and maintain
our own administrative functions, expand research and development and increase
marketing. Therefore, our operating results will be harmed if our revenue does
not keep pace with our expected increase in expenses or is not sufficient for
us to achieve profitability. If we do achieve profitability in any period, we
cannot be certain that we will sustain or increase profitability on a quarterly
or annual basis. If we do not achieve and sustain profitability, the trading
price of our common stock will decline.

Variations in our quarterly operating results may cause our stock price to
decline

   Our quarterly operating results are unpredictable and we expect them to
continue to fluctuate in the future due to a number of factors that are often
outside of our control. If our operating results in future quarters fall below
the expectations of market analysts and investors, the trading price of our
common stock will decline. Factors that may cause our operating results to
fluctuate on a quarterly basis are:

  .  variations in product roll-outs, purchasing lead times and production
     quantities associated with the vehicle transportation industry;

  .  the size and timing of significant government contracts and customer
     orders;

  .  the long lead times and lengthy sales cycles associated with government
     contracts;

  .  our ability to develop, introduce, market and gain market acceptance of
     our products and product enhancements in a timely and cost effective
     manner;

  .  the introduction of new products by competitors;

  .  our success in securing additional transportation management and
     traveler information systems projects;

  .  product developments by competitors in the ITS industry that may be
     superior to our products;

  .  the availability of components used in the manufacture of our products;

  .  changes in pricing policies of our suppliers;

  .  the loss of significant customers;

  .  delays of orders from vehicle manufacturers due to events beyond our
     control;

  .  the revenue mix between our systems and sensors; and

  .  general economic and market conditions.

The success of our products depends on the willingness of vehicle manufacturers
to incorporate AutoVue into their vehicles and market AutoVue to end users and
on dealers of traffic management systems to market Vantage to transportation
agencies

   We are currently selling AutoVue systems to heavy truck manufacturers for
pre-production testing and marketing AutoVue to light and medium truck and
passenger car manufacturers. The success of AutoVue

                                       6
<PAGE>

depends on the willingness of vehicle manufacturers to incorporate AutoVue into
their vehicles. Vehicle manufacturers may incur delays during testing and may
elect to delay product introductions, or limit the scope of vehicle platforms
on which AutoVue will be offered. These events could have a substantial adverse
impact on our results of operations. In addition, there can be no assurance
that we will be able to establish relationships with vehicle manufacturers for
the installation of AutoVue. Our Vantage video vehicle detection systems are
sold primarily through independent dealers who distribute a broad range of
traffic signal control products. Since we often have no direct contact with the
end user of our products, we depend on the ability of vehicle manufacturers to
market and sell AutoVue as an attractive, safe and effective feature and on
dealers of traffic management systems to sell Vantage as an effective means of
monitoring traffic. If these third parties with whom we develop relationships
fail to successfully market our products, they may not be accepted by consumers
and our sales may decline.

   Some vehicle manufacturers may require us to achieve various quality
assurance standards, including QS 9000. QS 9000 defines the fundamental quality
requirements consistent with those required by Ford Motor Company,
DaimlerChrysler AG, General Motors Corporation and other vehicle manufacturers.
Compliance with QS 9000 helps to prevent defects and reduce variations and
waste of products. If we fail to receive QS 9000 certification, vehicle
manufacturers may not purchase our systems resulting in decreased sensor
revenues which would have a negative impact on our business.

Dependence on relationships with DaimlerChrysler and Freightliner

   We have entered into strategic relationships with two vehicle manufacturers
to acquire key technologies and design expertise to expedite the development of
our AutoVue systems. AutoVue incorporates technology that we jointly developed
with DaimlerChrysler and integrates proprietary technologies of both companies.
We entered into an agreement with DaimlerChrysler to serve as its exclusive
production source until July 2000 for AutoVue systems installed in Mercedes'
European heavy trucks. We have also entered into an agreement with Freightliner
for the development of an AutoVue system modified for driving and road
conditions in North America. The success of AutoVue is dependent upon the
marketing efforts of DaimlerChrysler and Freightliner. If either of our
relationships with DaimlerChrysler or Freightliner was terminated, our ability
to market AutoVue to the end user and achieve market acceptance would be
negatively impacted, which could have a material adverse effect on our
business, financial condition and operating results.

If the market for AutoVue does not develop or AutoVue is not accepted by
consumers, we will not generate anticipated revenue

   The market for in-vehicle lane departure warning systems is not well
developed. Also, our AutoVue system has only recently been made available to
heavy truck manufacturers and has not yet been made widely available to
passenger car and light and medium truck manufacturers. If the market for lane
departure warning systems does not develop, our AutoVue system is not accepted
or competitors develop alternative technology that is more effective than
AutoVue, the revenue we expect to generate from the sale of our AutoVue system
will not be realized.

The success of Vantage depends on our ability to overcome significant barriers
to entry as a result of an installed base of competing products used to achieve
the same purpose

   Traffic monitoring has historically been addressed by inductive loops, which
require the installation of wires beneath the roadway surface. These inductive
loops are still the primary technology used to detect
vehicles at signalized intersections. As a result, we must convince
transportation authorities that our Vantage systems are more effective vehicle
detection systems. We may have difficulty selling Vantage systems if
transportation authorities do not consider it to be an effective alternative to
inductive loops. If we are unable to convince a sufficient number of
transportation authorities to replace their current vehicle detection systems
with Vantage or install Vantage at new intersections, our sales may decline.


                                       7
<PAGE>

Revenue from our transportation management and traveler information systems may
fluctuate due to our dependence on government contracts that often involve long
purchase cycles, competitive bidding and fixed price contracts

   A significant portion of our revenue has historically been derived from
traffic management contracts with governmental agencies, either as a prime
contractor, subcontractor or supplier. Obtaining government contracts may
involve long purchase cycles, competitive bidding, qualification requirements,
performance bond requirements, delays in funding, budgetary constraints,
extensive specification development and price negotiations and milestone
requirements. Each government agency also maintains its own rules and
regulations with which we must comply and which can vary significantly among
agencies. Governmental agencies also often retain a significant portion of fees
payable upon completion of a project and collection of such fees may be delayed
for several months.

   In addition, an increasing number of our government contracts are fixed
price contracts which may prevent us from recovering costs incurred in excess
of our budgeted costs. 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 such costs accurately and complete the project on a timely
basis. In the event our actual costs exceed the fixed contractual cost, we will
not be able to recover the excess costs. If we fail to properly anticipate
costs on fixed priced contracts our profit margins will decrease. Some of our
government contracts are also subject to termination or renegotiation at the
convenience of the government, which could result in a large decline in revenue
in any given quarter.

We currently have a small number of customers and if any of our customers
discontinue use of our systems and solutions, experience business difficulties
or cause us to reduce prices, our revenues may decline

   A relatively small number of customers, primarily governmental agencies,
have accounted for a substantial portion of our total revenue, and the identity
of such customers has varied from period to period. Similarly, our AutoVue
systems are being marketed primarily to a small group of vehicle manufacturers.
As a result, we expect that we will continue to be dependent upon a small
number of customers for a significant portion of our total revenue for the
foreseeable future. Revenue from the Federal Highway Administration accounted
for approximately 17%, and revenue from Rockwell Collins, Inc. accounted for
approximately 13%, of our systems revenue for the year ended March 31, 1999. No
other customer accounted for 10% or more of sensors or systems revenue. Our
largest five customers, however, accounted for an aggregate of approximately
55% of our systems revenue for the year ended March 31, 1999 and 56% of our
systems revenue for the nine month period ended December 31, 1999. If any of
these significant customers experience business difficulties or choose to no
longer purchase our systems and solutions, it could have a material adverse
effect on our business. In addition, our customers are large established
businesses and governmental agencies that aggressively negotiate prices and
related purchase terms. If any of our customers cause us to reduce our prices,
or negotiate other terms that are unfavorable to us, our revenues may decline.

If the system and service offerings we develop for the personalized traveler
information market are not accepted by consumers, we will not generate
anticipated revenue from these offerings

   The market for personalized traveler information is not well developed and
our systems and services under development to address this market are in the
early stages of development. If this market does develop, but our systems are
not well received, or if competitors develop alternative products that are more
effective or render our systems and services obsolete, we will not generate the
amount of revenues we anticipate. In addition, we cannot assure you that we
will be able to develop a cost effective means of compiling useful travel
information from remote sources or that we will be able to develop or obtain an
effective means of delivering such information to consumers, which could have a
material adverse effect on our business, financial condition and operating
results.

                                       8
<PAGE>

If we are unable to protect our intellectual property rights, this inability
could weaken our competitive position, reduce our revenue and increase our
costs

   Our success depends in large part on our proprietary technology. We rely on
a combination of patent, copyright, trademark and trade secrets,
confidentiality procedures and licensing arrangements to establish and protect
our proprietary rights. We may be required to spend significant resources to
monitor and police our intellectual property rights. We hold five U.S. patents
and various foreign patents for image recognition technologies. We also have
applied for additional patents in the United States, Australia, Canada, Europe
and Japan and may in the future file patents. Our pending patent applications
and any patent application we file in the future may not be allowed or
competitors may successfully challenge the validity or scope of issued and
pending patents.

   Even if competitors develop similar technology independently which infringes
our proprietary rights, we may not be able to detect infringement and may lose
our competitive position in the market before we do so. In addition,
competitors may design around our technology or develop substantially
equivalent or superior systems to our systems. Also, the laws of some foreign
countries do not protect proprietary rights to the same extent as do the laws
of the United States.

   Litigation may be necessary in the future to enforce our intellectual
property rights, to determine the validity and scope of the proprietary rights
of others, or to defend against claims of infringement or invalidity by others.
An adverse outcome in such litigation or similar proceeding could subject us to
significant liabilities to third parties, require disputed rights to be
licensed from others or require us to cease marketing or using certain
products, any of which could have a material adverse effect on our business. In
addition, the cost of
addressing any intellectual property litigation claim, both in legal fees and
expenses and the diversion of management resources, regardless of whether the
claim is valid, could be significant and could have a material adverse effect
on our business. If we fail to successfully enforce our intellectual property
rights, our competitive position may be harmed.

We depend on two subcontractors to produce our AutoVue systems and single
source suppliers of components for our Vantage systems

   We have outsourced the manufacture of our AutoVue systems to two independent
subcontractors. We are dependent on these subcontractors to supply all of our
current needs to support orders from heavy truck manufacturers. Our current
manufacturers of AutoVue do not have the capacity to produce all of the
expected demand for AutoVue. We will be required to engage other third parties
to manufacture expected increases in volume for AutoVue. We also subcontract
the manufacture of certain components of our Vantage systems to independent
single source suppliers. Reliance on a limited number of subcontractors'
involves several risks, including the potential inadequacy of capacity,
interruptions in the subcontractors operations and reduced control over product
quality. Production capacity constraints, interruptions of our subcontractors'
businesses or delays due to quality control will impair our ability to ship
products and will result in decreased revenue until we are able to find a
substitute subcontractor. We may not be able to find a substitute subcontractor
at reasonable prices without incurring significant delays in production. Delays
in production could inhibit our ability to fulfill purchase orders, resulting
in a decrease in sensor revenues which would have a negative impact on our
business.

Our rapid growth may strain our management, operational and financial resources

   We are currently experiencing a period of significant expansion and we
anticipate that we must expand further and continue to develop our business
plan to address potential growth in our customer base and market opportunities.
Our expansion has placed, and we expect it to continue to place, a significant
strain on our management, operating systems and financial resources. Also, as
our business plan evolves, we risk distracting management away from current
operations. We cannot assure you that our current and planned facilities,
computer systems, personnel and other resources will be adequate to support our
future operations. Any strain on our management, operational and financial
resources could have a material adverse effect on our business, financial
condition and operating results.

                                       9
<PAGE>

Acquisitions may disrupt our business and require additional financing

   If appropriate opportunities present themselves, we intend to acquire
additional businesses, technologies, services or products that we believe will
help us develop and expand our business. The process of integrating an acquired
business, technology, service or product may result in operating difficulties
and expenditures which we cannot anticipate and may absorb significant
management attention that would otherwise be available for further development
of our existing business. Moreover, the anticipated benefits of any acquisition
may not be realized. Any future acquisitions of other businesses, technologies,
services or products might require us to obtain additional equity or debt
financing, which might not be available to us on favorable terms or at all, and
might be dilutive. Additionally, we may not be able to successfully identify,
negotiate or finance future acquisitions or to integrate acquisitions with our
current business. If we are unable to manage our growth effectively, it could
have a material adverse effect on our business, financial condition and
operating results.

Our success depends on our ability to attract, retain and motivate management
and other skilled employees

   Our success depends to a significant extent upon the continued service of
our executive officers and other key management and technical personnel, and on
our ability to continue to attract, retain and motivate qualified personnel,
such as experienced systems, software and image processing engineers and
transportation engineers. In addition, due to the relatively recent emergence
of the ITS industry, there is a shortage of qualified personnel with
significant ITS experience or a working knowledge of the National ITS
Architecture. The competition for such qualified personnel is intense. The
experience of individual key employees and their relationships with
governmental agencies is a critical factor in securing government contracts.
The loss of the services of one or more of our executive officers or other key
personnel or our inability to recruit replacements for such personnel or to
otherwise attract, retain and motivate qualified personnel could have a
material adverse effect on our business.

We may suffer losses due to claims against our product and systems warranties

   We generally warrant the continued operation and performance of our
transportation management and traveler information systems following initial
acceptance, and offer extended warranty contracts under certain circumstances.
These warranties typically include the continued operation and maintenance of
the systems, and in certain circumstances are unlimited in amount. In addition,
we may guarantee the completion of certain projects by a specified date or the
achievement of certain functional specifications. Claims on our warranties or
failures to meet any such schedule or performance requirements could result in
significant additional costs, the amount of which could exceed project profit
margins or even project revenues, which would have a negative impact on our
business.

We may incur significant development and production costs prior to recognizing
significant revenue on our AutoVue systems due to long sales and testing cycles
with vehicle manufacturers

   The sale to vehicle manufacturers of AutoVue for new vehicles often requires
substantial lead times and will require us to invest heavily in producing
prototypes and conduct extensive testing before any equipment is accepted by
the vehicle manufacturer. We have little control over how long the testing may
take or what quantities will be ordered for product roll-out. Once the
manufacturer decides to include AutoVue in a new model, several years may pass
before vehicles containing AutoVue are manufactured and any revenue is
recognized. As a result, we will be required to invest heavily in establishing
and solidifying relationships with vehicle manufacturers without any
corresponding increase in revenue at that time. These expenditures could
negatively impact our profit margins, which would have a negative impact on our
business.

Potential year 2000 problems with our internal systems, our products or the
products with which our products are integrated could adversely affect our
business

   Many existing computer systems and applications, and other control devices
were designed to use two digits rather than four digits to define an applicable
year. As a result, such systems and applications may be unable to recognize the
year 2000 and could fail or create erroneous results. These problems are
commonly referred to as the year 2000 problem.

                                       10
<PAGE>

   The year 2000 problem could affect the systems, transaction processing
computer applications and devices that we use to operate and monitor all major
aspects of our business, including financial systems (such as general ledger,
accounts payable, and payroll), customer services, infrastructure, master
productions scheduling, materials requirement planning, test equipment,
security systems, networks and telecommunications systems.

   We estimate that Odetics has expended approximately $500,000 addressing year
2000 issues for its consolidated group, a portion of which was allocated to us.
Assuming that we have already identified our most significant year 2000 issues,
and that the plans of our third party suppliers will be fulfilled in a timely
manner without cost to us, we do not expect to incur any additional significant
costs to address year 2000 issues. We cannot be sure that these assumptions are
accurate, and actual results could differ materially from those we anticipate.

   We have developed contingency plans to address the year 2000 issues that may
pose a significant risk to our on-going operations. These plans include
accelerated replacement of affected equipment and software, temporary use of
back-up equipment and software or the implementation of manual procedures to
compensate for system deficiencies. We cannot be certain that any contingency
plans implemented by us are adequate to meet our needs without materially
impacting our operations, that any such plan will be successful or that our
results of operations would not be materially and adversely affected by the
delays and inefficiencies inherent in conducting operations in an alternative
manner.

            Risks Related to Our Separation from Odetics, Inc.

Our historical financial information may not be representative of our results
as a separate company

   We operated as a business unit of Odetics from 1994 to 1998, and thereafter
as a subsidiary of Odetics. Accordingly, we have had no independent operating
history. Our financial results as a division of Odetics may not be
representative of what financial results would have been had we been a
separate, stand-alone company during the periods presented or be indicative of
future results. Differences in financial results may be attributable to:

  .  expense adjustments and allocations as a result of not being operated as
     a single stand-alone business for all periods presented; and

  .  changes that will occur in our funding and operations as a result of our
     separation from Odetics.

These differences may have a material adverse effect on our business, financial
condition and operating results.

We may incur unanticipated expenses and suffer business interruptions if
Odetics does not provide transition support services

   We are currently dependent upon Odetics for significant support functions,
including operational, financial, management, administrative, information
systems and manufacturing support, as well as other resources or systems. These
functions are necessary to operate as an independent company and we may not be
able to develop these functions independently. Prior to consummation of the
offering, we will enter into a services agreement with Odetics intended to
facilitate our transition to an independent public company, pursuant to which
Odetics will continue to provide treasury, accounting, tax, internal audit,
legal and human resources services for up to 18 months following the
consummation of this offering. If Odetics does not provide the support we need
pursuant to the services agreement, we may be forced to incur additional
expenses to replace such support services and our business operations could be
interrupted. In addition, loss of access to the senior management of Odetics
could impair our ability to operate as a separate company. Unanticipated
expenses or interruptions in our operations could have a negative effect on our
business by decreasing our revenues.

Failure of representations and assumptions underlying the IRS tax ruling could
cause the spin-off not to be tax-free to Odetics or to Odetics' stockholders
and may require us to indemnify Odetics

   While the tax ruling relating to the qualification of the spin-off as a tax-
free distribution within the meaning of Section 355 of the Internal Revenue
Code of 1986, as amended (the "Code"), generally is binding

                                       11
<PAGE>


on the IRS, the continuing validity of the tax ruling is subject to certain
factual representations and assumptions. We are not aware of any facts or
circumstances that would cause such representations and assumptions to become
untrue.

   If the spin-off were not to qualify as a tax-free distribution within the
meaning of Section 355 of the Code, Odetics would recognize taxable gain
generally equal to the amount by which the fair market value of the Iteris
common stock distributed to Odetics' stockholders exceeded the tax basis in our
assets. In addition, the distribution of our common stock to each Odetics
stockholder would generally be treated as taxable to such stockholder in an
amount equal to the fair market value of the Iteris common stock they receive.

   If the spin-off qualified as a distribution under Section 355 of the Code
but was disqualified as tax-free to Odetics because of certain post-spin-off
circumstances (such as an acquisition of Iteris), Odetics would recognize
taxable gain as described above, but the distribution of our common stock in
the spin-off would generally be tax-free to each Odetics stockholder.

   The Tax Allocation Agreement provides that we will indemnify Odetics for any
taxes imposed on and other amounts paid by Odetics, its agents and
representatives or its stockholders as a result of the failure of the spin-off
to qualify as a tax-free distribution within the meaning of Section 355 of the
Code if the failure or disqualification is caused by certain post-spin-off
actions by or with respect to us (including our subsidiaries) or our
stockholders. For example, the acquisition of Iteris by a third party during
the two-year period following the spin-off could cause such a failure or
disqualification. If any of the taxes or other amounts described above were to
become payable by us, the payment could have a material adverse effect on our
business, results of operations, financial position, and cash flow and could
exceed our net worth by a substantial amount. See "Arrangements with Odetics--
Tax Allocation Agreement."

We will incur significant costs in connection with our separation from Odetics

   Our obligations to Odetics, which consisted of advances from Odetics to
support our working capital requirements, fund our operating losses and support
acquisition activities, were approximately $37.4 million as of December 31,
1999. Upon completion of this offering Odetics will contribute to our capital
approximately $12.7 million to us in the form of cancellation of indebtedness,
we will pay Odetics $10.0 million from the proceeds of this offering and we
will enter into a promissory note payable to Odetics in the principal amount of
$14.7 million, representing the balance of our existing obligations to Odetics.
We have also entered into a services agreement under which we are obligated to
pay Odetics for services rendered at a rate consistent with amounts charged by
Odetics to us in prior periods. We will also incur expenses to develop our own
treasury, accounting, tax, internal audit, legal and human resources services.
These expenses may be substantial and may adversely impact our results of
operations.

                         Risks Related to Our Industry

Failure to develop technologies to adapt to new technological advancements in
the ITS industry could harm our business

   The ITS industry has been subject to fundamental changes recently reflecting
the adoption of the National ITS Architecture and the overburdening of the
existing transportation infrastructure. Our ability to remain competitive will
depend in part on our ability to develop systems and solutions that incorporate
the new standards and advanced traffic management technologies. In addition,
since our AutoVue and Vantage systems are currently based on image recognition
technology, any change in such capabilities or the emergence and acceptance of
any new technologies may require us to incur substantial unanticipated costs to
incorporate technologies. In addition, the introduction of a new, non-intrusive
technology to address vehicle detection could replace video as a leading
alternative to inductive loops. We may not be able to develop or obtain the
technology necessary to address these changes in a timely manner or at all. Our
inability to modify our systems and solutions to reflect changes in technology
on a timely and cost-effective basis, or at all, could have a material adverse
effect on our business.

                                       12
<PAGE>

New product introductions and pricing strategies by our competitors could
adversely affect our ability to sell our systems and solutions and could result
in pressure to price our systems and solutions in a manner that reduces our
margins

   Competitive pressures could prevent us from growing, obtaining market share
or require us to reduce prices on our systems and solutions, any of which could
harm our business. Many of our current and potential competitors have longer
operating histories, greater name recognition, access to larger customer bases
and significantly greater financial, technical, manufacturing, distribution and
marketing resources than we do. As a result, they may be able to adapt more
quickly to new or emerging standards of technologies or to devote greater
resources to the promotion and sale of their products than we can. Accordingly,
it is possible that new competitors or alliances among competitors could emerge
and rapidly acquire significant market share, resulting in price reductions,
reduced margins and greater operating losses, any of which could materially and
adversely affect our business.

 AutoVue lane departure warning systems

   While we believe that AutoVue is the only commercially-available lane
departure warning system currently available, potential competitors, including
Delphi Automotive Systems Corporation domestically, NEC Corporation and Hitachi
Ltd. in Japan and Robert Bosch Gmbh in Europe are currently developing video
sensor technology for the vehicle transportation industry that could be used
for lane departure warning systems.

 Vantage vehicle detection systems

   In the market for vehicle detection systems, we compete with both
manufacturers of "above ground" video camera detection systems, such as Image
Sensing Systems, Inc., Econolite Control Products, Inc. and the Peek Traffic
Systems division of Thermo Electron Corporation, and other non-intrusive
detection devices including microwave, infrared, ultrasonic and magnetic
detectors, as well as manufacturers and installers of in-pavement inductive
loop products. These competitors may offer products that offer more functions
at less expensive prices.

 Traffic management and traveler information systems

   The intelligent transportation management and traveler information systems
market is highly fragmented and characterized by rapidly changing technology
and evolving national and regional technical standards. Our competitors vary in
number, scope and breadth of the products and services they offer. Our
competitors in advanced management and traveler information systems include
corporations like Transcore, Lockheed Martin Corporation, PB Farradyne Inc.,
Kimley-Horn and Associates, Inc., TRW, Inc. and National Engineer Technology,
Inc. Our competitors in transportation engineering, planning and design include
major firms like Parsons Brinkerhoff, Inc. and Parsons Transportation Group
Inc., as well as many regional engineering firms.

We could incur significant losses as a result of product liability claims

   We face an inherent business risk of exposure to product liability claims in
the event that our systems and solutions malfunction resulting in personal
injury or death. We may be named in these actions even if there is no evidence
our systems and solutions caused the accident. Product liability claims could
result in significant losses as a result of expenses incurred in defending
claims and as a result of damage awards. The sale of systems and solutions for
the vehicle transportation industry entails a high risk of such claims. In
addition, if any of our systems prove to be defective, we may be required to
participate in a recall involving such systems, or due to various industry or
business practices or the need to maintain good customer relationships, may be
placed in a position whereby we may voluntarily initiate a recall or make
payments related to such claims. We currently maintain product liability
insurance. However, there can be no assurance that product liability claims
will be covered by such insurance, that such claims will not exceed insurance
coverage limits or that such insurance will continue to be available on
commercially reasonable terms, if at all. Any product liability claim brought
against us could have a material adverse effect on our reputation and business.

                                       13
<PAGE>

Our ability to expand into international markets is limited by regulatory,
cultural, economic and other differences

   We intend to expand our international marketing and sales efforts. If our
international sales increase, we will be subject to additional risks inherent
in international operations. These risks include:

  .  adapting our products to foreign road conditions and regulations;

  .  longer buying cycles associated with sales to foreign governments;

  .  imposition of governmental controls;

  .  performance bond requirements;

  .  challenges related to cultural differences, including language barriers;

  .  exposure to different legal standards, particularly with respect to
     government contracting requirements and intellectual property;

  .  burdens of complying with a variety of foreign laws and trade
     restrictions;

  .  currency exchange fluctuations;

  .  unexpected changes in regulatory requirements;

  .  foreign technical standards;

  .  political, social and economic instability;

  .  changes in tariffs;

  .  difficulties in staffing and managing international operations;

  .  potentially adverse tax consequences; and

  .  difficulties in finding and managing local dealers.

   While substantially all of our international sales to date have been
denominated in U.S. dollars, some foreign countries may experience dramatic
currency devaluation, stock price declines and general market instability,
leading to significant economic problems in the affected region. As a result,
an increase in the value of the U.S. dollar relative to foreign currencies
could make our systems and solutions less competitive in international markets.
These risks may limit our ability to expand into international markets
successfully or require us to modify significantly our current business
practices.

                         Risks Related to This Offering

The liquidity of our common stock is uncertain since it has not been publicly
traded

   There has not been a public market for our common stock. We cannot predict
the extent to which investor interest in our company will lead to the
development of an active, liquid trading market. Active trading markets
generally result in lower price volatility and more efficient execution of buy
and sell orders for investors. The price of our common stock that will prevail
in the market after this offering may be lower than the price you pay. The
initial public offering price for the shares will be determined by negotiations
between us and the representatives of the underwriters and may not be
indicative of prices that will prevail in the trading market.

Since we have broad discretion in how we use the proceeds from this offering,
we may use some of the proceeds in ways with which you disagree

   We have not allocated specific amounts of the net proceeds from this
offering for any specific purpose other than repayment of a portion of our debt
to Odetics. Accordingly, our management will have significant discretion in
applying the net proceeds of this offering. The failure of our management to
use such funds effectively could have a material adverse effect on our
business, financial condition and operating results.

                                       14
<PAGE>

Our need for additional financing is uncertain as is our ability to raise
further financing, if required

   We currently anticipate that our available cash resources combined with the
net proceeds from this offering will be sufficient to meet our anticipated
working capital and capital expenditure requirements for at least two years
after the date of this prospectus. We may need to raise additional funds,
however, to respond to business contingencies which may include the need to:

  .  fund more rapid expansion;

  .  fund additional marketing expenditures;

  .  enhance our operating infrastructure;

  .  respond to competitive pressures; or

  .  acquire complementary businesses or technologies.

   We cannot assure you that additional financing will be available on terms
favorable to us, or at all. If adequate funds are not available or are not
available on acceptable terms, our ability to fund our operations, take
advantage of opportunities, develop systems or solutions or otherwise respond
to competitive pressures could be significantly limited.

Future financing could adversely affect your ownership interest and rights in
comparison with those of other shareholders

   If additional funds are raised through the issuance of equity or convertible
debt securities, the percentage ownership of our stockholders will be reduced,
and these newly issued securities may have rights, preferences or privileges
senior to those of existing stockholders, including you.

Future sales of our common stock could cause our stock price to decline

   The market price for our common stock could drop as a result of sales of a
large number of shares of common stock in the market after the offering or the
perception that such sales could occur. These factors also could make it more
difficult for us to raise funds through future offerings of common stock.

   There will be 16,666,667 shares of common stock outstanding immediately
after this offering. The shares sold in this offering will be freely
transferable without restriction or further registration under the Securities
Act. In connection with the offering all current stockholders and option
holders have agreed that, with certain exceptions, they will not sell any
shares of common stock or enter into similar transactions for 180 days after
the date of this prospectus without the consent of Bear, Stearns & Co. Inc.
Similarly, all shares of our common stock distributed to stockholders of
Odetics, Inc. will not be transferable for 180 days after the date of this
prospectus. After the expiration of the 180 day period, all shares of common
stock will be freely transferable and additional shares of common stock issued
upon exercise of options granted under our stock-based compensation plans will
be available for sale in the public market. Future sales of our common stock
could cause our stock price to decline. See "Shares Eligible For Future Sale."

New investors will suffer immediate and substantial dilution in the tangible
net book value of their shares

   We expect the initial public offering price to be substantially higher than
the net tangible book value per share of the common stock. The pro forma net
tangible book value of a share of common stock purchased at an assumed initial
public offering price of $12.00 per share will be only $1.69. You may incur
additional dilution if holders of stock options, whether currently outstanding
or granted after the closing of this offering, exercise their options to
purchase common stock.

                                       15
<PAGE>

Provisions in our charter documents may make an acquisition of us more
difficult

   Provisions of our Certificate of Incorporation and Bylaws, as well as
provisions under Delaware law, could make it more difficult for a third party
to acquire us, even if doing so would be beneficial to stockholders. See
"Description of Capital Stock."

                  Additional Information on Risk Factors

   The following disclaimers pertain to and should be read in conjunction with
the risk factors discussed above. These disclaimers further explain the effect
that the occurence of these risks may have on your investment:

  .  An investment in our common stock involves a high degree of risk.

  .  You should carefully consider the risks described above and the other
     information contained in this prospectus before deciding to invest in
     our common stock.

  .  The risks described above are not the only ones facing our company.

  .  Additional risks not presently known to us or which we currently
     consider immaterial may also adversely affect our company.

  .  If any of these risks actually occur, our business, financial condition
     and operating results could be materially adversely affected. In such
     case, the trading price of our common stock could decline, and you could
     lose part or all of your investment.

                           FORWARD-LOOKING STATEMENTS

   This prospectus contains forward-looking statements that involve risks and
uncertainties. Forward-looking statements generally can be identified by the
use of forward-looking terminology such as "believes," "expects," "may,"
"will," "intends," "plans," "should," "seeks," "pro forma," "anticipates,"
"estimates," "continues," or other variations thereof, including their use in
the negative, or by discussions of strategies, opportunities, plans or
intentions. Such statements include but are not limited to statements under the
captions "Risk Factors," "Use of Proceeds," "Management's Discussion and
Analysis of Financial Condition and Results of Operations," and "Business." A
number of factors could cause results to differ materially from those
anticipated by such forward-looking statements, including those discussed under
"Risk Factors" and "Business" and elsewhere in this prospectus.

   In addition, such forward-looking statements are necessarily dependent upon
assumptions and estimates that may prove to be incorrect. Although we believe
that the assumptions and estimates reflected in such forward-looking statements
are reasonable, we cannot guarantee that our plans, intentions or expectations
will be achieved. The information contained in this prospectus, including the
section discussing risk factors, identifies important factors that could cause
such differences.

   The cautionary statements made in this prospectus are intended to be
applicable to all related forward-looking statements wherever they appear in
this prospectus. We assume no obligation to update such forward-looking
statements or to update the reasons why actual results could differ materially
from those anticipated in such forward-looking statements.

                                       16
<PAGE>

                                USE OF PROCEEDS

   The net proceeds we will receive from the sale of the 4,166,667 shares of
common stock offered at an assumed public offering price of $12.00 per share by
us are estimated to be approximately $45.6 million, $52.8 million if the
underwriters' over-allotment option is exercised in full, after deducting the
underwriting discounts and commissions and the estimated offering expenses
payable by us.

   We currently intend to use the proceeds of this offering to:

  .  repay $10.0 million of debt payable to Odetics;

  .  expand our sales and marketing activities;

  .  fund acquisitions or investments in businesses, products, services or
     technologies complementary to our business;

  .  provide working capital; and

  .  fund other general corporate expenses.

   Upon consummation of this offering, we will enter into a promissory note
payable to Odetics representing the balance of our obligations to Odetics,
which will be $14.7 million after payment of $10.0 million from the proceeds of
this offering and the cancellation of an estimated $12.7 million of debt that
will be treated as a contribution to our capital. This note will accrue
interest at the lowest rate charged to Odetics from time to time by its
principal lender, which was 10.5% at December 31, 1999 and will be payable in
interest only for the first year and 16 quarterly installments of principal and
interest thereafter. Portions of the proceeds from this offering will be used
to make payments under this promissory note. All obligations payable to Odetics
consist of advances from Odetics for services and support provided to us by
Odetics and for working capital requirements, to fund our operating losses and
support acquisition activities.

   We have not yet determined the amount of expenditures for sales and
marketing activities, acquisitions or investments, or for working capital and
other general corporate purposes, and thus cannot estimate the amounts to be
used for each purpose. The amounts and timing of these expenditures will vary
significantly depending on a number of factors, including, but not limited to,
the amount of cash generated by our operations. Accordingly, our management
will retain broad discretion as to the allocation of the net proceeds of this
offering. Also, we currently have no specific agreements or commitments and are
not currently engaged in any negotiations with respect to any significant
acquisitions or investments.

   Pending the above uses, we intend to invest the net proceeds of this
offering in interest-bearing investment grade securities, including taxable
securities such as governmental securities, asset-backed securities, corporate
bonds and certificates of deposit and tax exempt securities such as municipal
bonds and notes.

                                DIVIDEND POLICY

   We have never paid cash dividends on our common stock. We currently
anticipate that we will retain earnings, if any, to support operations and to
finance the growth and development of our business and do not anticipate paying
cash dividends in the foreseeable future. Declaration or payment of future
dividends, if any, will be at the discretion of our board of directors after
taking into account various factors, including our financial condition,
operating results, current and anticipated cash needs and plans for expansion.

                                       17
<PAGE>

                                 CAPITALIZATION

   The following table sets forth our capitalization as of December 31, 1999,

  .  on an actual basis;

  .  on a pro forma basis to reflect:

    .  the payment of $10.0 million to Odetics that will be paid from the
       proceeds of this offering;

    .  the cancellation of $12.7 million of debt. This amount is an
       estimate of the amount of indebtedness in excess of $14.7 million
       that will be payable under a promissory note to Odetics after the
       payment of $10 million to Odetics paid from the proceeds of this
       offering. The actual amount of indebtedness cancelled by Odetics
       will vary depending on the actual amount of indebtedness owed to
       Odetics at the completion of the offering; and

    .  the issuance of 435,470 shares of common stock upon conversion of
       the promissory note issued to DaimlerChrysler Venture for proceeds
       of $3.75 million.

  .  on a pro forma basis as adjusted to reflect the sale of 4,166,667 shares
     of common stock being offered by us at an assumed initial public
     offering price of $12.00 per share, and after deducting estimated
     underwriting discounts and commissions and estimated offering expenses
     payable by us.

   This information should be read in conjunction with our financial statements
and the notes relating to those statements appearing elsewhere in this
prospectus.

<TABLE>
<CAPTION>
                                                 December 31, 1999
                                        ----------------------------------------
                                                                    Pro Forma
                                          Actual     Pro Forma     As Adjusted
                                        -----------  -----------  --------------
                                         (in thousands, except share data)
<S>                                     <C>          <C>          <C>
Obligation payable to Odetics.......... $    37,412  $    14,700    $   14,700
Other debt.............................          12           12            12
                                        -----------  -----------    ----------
Total debt.............................      37,424       14,712        14,712
                                        -----------  -----------    ----------
Stockholders' equity (deficit):
  Preferred Stock, $.0001 par value;
   5,000,000 shares authorized; no
   shares issued and outstanding.......          --           --            --
  Common Stock, $.0001 par value,
   25,000,000 shares authorized; shares
   issued and outstanding: 12,065,000
   actual, 12,500,000 pro forma and
   16,666,667 pro forma as
   adjusted(1)(2)......................           1            1             6
  Additional paid-in capital(2)........       4,039       20,501        66,096
  Accumulated deficit..................     (28,275)     (28,275)      (28,275)
                                        -----------  -----------    ----------
    Total stockholders' equity
     (deficit).........................     (24,235)      (7,773)       37,827
                                        -----------  -----------    ----------
    Total capitalization............... $    13,189  $     6,939    $   52,539
                                        ===========  ===========    ==========
</TABLE>
- --------

(1) Excludes 2,632,000 shares of common stock issuable upon the exercise of
    options outstanding with a weighted average exercise price of $2.01 per
    share. 773,000 of these options were exercisable as of December 31, 1999
    and the balance are subject to future vesting requirements.

(2) The conversion of the DaimlerChrysler Venture promissory note is subject to
    adjustment if the price per share of common stock differs from $12.00 or
    the number of shares sold by us in this offering changes.

                                       18
<PAGE>

                                    DILUTION

   Our pro forma net tangible book value as of December 31, 1999, was ($17.4
million) or ($1.39) per share of common stock. Pro forma net tangible book
value per share is equal to our pro forma total tangible assets less pro forma
total liabilities, divided by the pro forma number of shares of common stock
outstanding on December 31, 1999. Assuming the sale by us of 4,166,667 shares
of common stock at an initial public offering price of $12.00 per share and
after deducting the underwriting discount and commissions and the estimated
offering expenses payable by us, our net pro forma tangible book value at
December 31, 1999 would have been $28.2 million, or $1.69 per share of common
stock. This represents an immediate increase in pro forma net tangible book
value of $3.08 per share to existing stockholders and an immediate dilution of
$10.31 per share to new investors. The following table illustrates this per
share dilution.

<TABLE>
<S>                                                            <C>     <C>
Assumed initial public offering price per share...............         $  12.00
  Pro forma net tangible book value per share as of December
   31, 1999................................................... $(1.39)
  Increase in net tangible book value attributable to new
   investors..................................................   3.08
                                                               ------
Net tangible book value per share after this offering.........         $   1.69
                                                                       --------
Dilution per share to new investors...........................         $  10.31
                                                                       ========
</TABLE>

   The following table summarizes the total number of shares of common stock
purchased from us, the pro forma total consideration paid to us and the pro
forma average price per share paid by existing stockholders, by DaimlerChrysler
and by new investors purchasing shares in this offering.

<TABLE>
<CAPTION>
                          Shares Purchased(1)     Total Consideration(2)
                         ---------------------  ------------------------- Average Price
                           Number     Percent      Amount       Percent     Per Share
                         ------------ --------  -------------- ---------- -------------
<S>                      <C>          <C>       <C>            <C>        <C>
Existing stockholders...   12,064,530     72.4% $   16,752,000      23.8%    $ 1.39
DaimlerChrysler.........      435,470      2.6       3,750,000       5.3       8.61
New investors...........    4,166,667     25.0      50,000,000      70.9      12.00
                         ------------  -------  --------------  --------
Total...................   16,666,667    100.0% $   70,502,000     100.0%
                         ============  =======  ==============  ========
</TABLE>
- --------

(1) Excludes 2,632,000 shares of common stock issuable upon exercise of options
    outstanding as of December 31, 1999 at a weighted average exercise price of
    $2.01 per share. 773,000 of these options were exercisable as of December
    31, 1999 and the balance are subject to future vesting requirements. To the
    extent options are exercised, there will be further dilution to new
    investors.

(2) Does not reflect any deductions for commissions or expenses paid or
    incurred in connection with the issuance of such shares of common stock.

   Pro forma net tangible book value is comprised of our historical net
tangible book value at December 31, 1999 plus the assumed contribution to
capital of $12.7 million by Odetics through forgiveness of amounts due to
Odetics and the assumed sale of 435,470 shares of common stock to
DaimlerChrysler for total proceeds of $3.75 million. The pro forma transactions
are expected to occur immediately prior to the closing of the sale of shares to
new investors pursuant to this prospectus. On a historical basis, "Net tangible
book value per share," "Dilution to new investors," and "Total Consideration"
paid by "existing stockholders" are $(2.81), $11.28, and $4,040,000,
respectively.

                                       19
<PAGE>

                      SELECTED CONSOLIDATED FINANCIAL DATA

   The following selected financial data set as of March 31, 1998 and 1999 and
December 31, 1999 and for each of the years ended March 31, 1997, 1998 and 1999
and the nine months ended December 31, 1999 has been derived from our
consolidated financial statements audited by Ernst & Young LLP, independent
auditors, included elsewhere in this prospectus. Selected consolidated
financial data as of March 31, 1995, 1996 and 1997 and for each of the years
ended March 31, 1995 and 1996 has been derived from our unaudited consolidated
financial statements not included in this prospectus. The selected consolidated
financial data as of and for the nine months ended December 31, 1998 has been
derived from our unaudited consolidated financial statements for such period
included elsewhere in this prospectus. The unaudited financial information
includes adjustments, consisting only of normal recurring adjustments, that we
consider necessary for a fair presentation of this information in accordance
with generally accepted accounting principles. The consolidated statement of
operations data for the nine month period ended December 31, 1999 are not
necessarily indicative of the results to be expected for the full fiscal year
ending March 31, 2000 or any future period. The following data should be read
in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and our consolidated financial statements
and related notes included elsewhere in this prospectus.

<TABLE>
<CAPTION>
                                                                                        Nine Months Ended
                                           Years Ended March 31                            December 31
                          ----------------------------------------------------------  ----------------------
                             1995        1996        1997        1998        1999        1998        1999
                          ----------  ----------  ----------  ----------  ----------  ----------  ----------
                                        (in thousands, except share and per share data)
<S>                       <C>         <C>         <C>         <C>         <C>         <C>         <C>
Consolidated Statement
 of Operations Data:
Revenue:
 Sensors................  $      200  $      287  $      538  $    1,607  $    4,339  $    3,051  $    5,880
 Systems................           0           0           0       4,234      10,241       7,349      11,567
                          ----------  ----------  ----------  ----------  ----------  ----------  ----------
   Total revenue........         200         287         538       5,841      14,580      10,400      17,447
Cost of sales:
 Sensors................         115         358         470       2,555       3,129       2,342       3,282
 Systems................           0           0           0       2,815       7,195       5,091       8,465
                          ----------  ----------  ----------  ----------  ----------  ----------  ----------
   Total cost of sales..         115         358         470       5,370      10,324       7,433      11,747
Gross profit:
 Sensors................          85         (71)         68        (948)      1,210         709       2,598
 Systems................           0           0           0       1,419       3,046       2,258       3,102
                          ----------  ----------  ----------  ----------  ----------  ----------  ----------
   Total gross profit...          85         (71)         68         471       4,256       2,967       5,700
Operating expenses:
 Research and
  development...........         652       1,269       2,378       2,037       2,152       1,441       2,498
 Selling, general and
  administrative........         160       1,055       1,411       3,414       5,729       3,844       4,717
 Charges allocated by
  Odetics...............          15          60         105         458         881         562       1,057
 Other expenses.........           0           0           0         465         368         225         528
                          ----------  ----------  ----------  ----------  ----------  ----------  ----------
Loss from operations....        (742)     (2,455)     (3,826)     (5,903)     (4,874)     (3,105)     (3,100)
Interest charge
 allocated by Odetics...         107         304         680       1,344       2,167       1,550       2,191
                          ----------  ----------  ----------  ----------  ----------  ----------  ----------
Loss before income
 taxes..................        (849)     (2,759)     (4,506)     (7,247)     (7,041)     (4,655)     (5,291)
Income taxes............           0           0           0           0           0           0           0
                          ----------  ----------  ----------  ----------  ----------  ----------  ----------
Net loss................  $     (849) $   (2,759) $   (4,506) $   (7,247) $   (7,041) $   (4,655) $   (5,291)
                          ==========  ==========  ==========  ==========  ==========  ==========  ==========
Net loss per share,
 basic and diluted......  $    (0.08) $    (0.25) $    (0.40) $    (0.64) $    (0.60) $    (0.40) $    (0.44)
                          ==========  ==========  ==========  ==========  ==========  ==========  ==========
Shares used in
 computation of net loss
 per share, basic and
 diluted................  11,254,050  11,254,050  11,254,050  11,254,050  11,646,900  11,494,100  12,081,300
<CAPTION>
                                             As of March 31,                           As of December 31,
                          ----------------------------------------------------------  ----------------------
                             1995        1996        1997        1998        1999        1998        1999
                          ----------  ----------  ----------  ----------  ----------  ----------  ----------
                                                         (in thousands)
<S>                       <C>         <C>         <C>         <C>         <C>         <C>         <C>
Consolidated Balance
 Sheet Data:
Working capital
 (deficit)..............  $   (1,431) $      481  $     (672) $   (3,315) $      (96) $     (192) $    2,069
Total assets............           0         576       1,675      11,614      17,996      15,656      19,248
Total liabilities.......       1,431       4,766      10,371      27,557      36,711      31,984      43,483
Total stockholders'
 equity (deficit).......      (1,431)     (4,190)     (8,696)    (15,943)    (18,715)    (16,328)    (24,235)
</TABLE>

                                       20
<PAGE>

                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                 FINANCIAL CONDITION AND RESULTS OF OPERATIONS

   The following discussion and analysis should be read in conjunction with our
financial statements and notes included elsewhere in this prospectus. This
prospectus contains forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially from those discussed
in such forward-looking statements. Factors that could cause or contribute to
such differences include those discussed below and in "Risk Factors" and
"Business."

Overview

   We design, develop, market and implement software based solutions which
improve the safety and efficiency of vehicle transportation. Our current
customers include federal, state, and other public agencies as well as vehicle
manufacturers from which we have limited revenue. We currently operate in two
business segments: sensors and systems. Our sensors segment has historically
consisted of our Vantage video vehicle detection systems and more recently our
AutoVue lane departure warning system. Our systems segment consists of our
transportation management and traveler information systems. For the fiscal
years ended March 31, 1998 and 1999 and the nine months ended December 31, 1998
and 1999, approximately 66% to 72% of our total revenue has been derived from
our systems segment. However, with the recent introduction of AutoVue and with
the continued growth of Vantage, we expect that revenue from our sensors
segment will represent an increasing percentage of total revenue.

   We began as a division of Odetics, Inc. in 1994 and incorporated as a
subsidiary of Odetics in September 1998. Odetics currently owns approximately
93% of our outstanding common stock. Immediately prior to this offering,
Odetics will distribute all of its shares of our common stock to its
stockholders in a tax-free spin-off. During the periods presented and through
the period prior to the spin-off, we have been charged by Odetics for expenses
allocable to our business and interest on debt owed to Odetics. Concurrent with
the spin-off, we will enter into a services agreement with Odetics for the
provision of treasury, accounting, tax, audit, legal and human resources
services, which will be charged to us on terms consistent with past practices.

   Prior to June 1997, our revenue consisted solely of sales from our Vantage
systems. In June 1997, we acquired certain assets from the transportation
systems business of Rockwell, which expanded our product offerings to include
transportation systems consulting and design services. The acquisition of
assets from Rockwell also provided us with some of the technologies for the
AutoVue system. We further augmented our transportation management and traveler
information systems design and consulting capabilities with the acquisition of
Meyer Mohaddes Associates, Inc. in October 1998, and the acquisition of the
assets of Viggen Corporation in January 1999.

   Revenue from the sale of sensors and the related costs of sales are
generally recognized on the date of shipment. Systems revenue is derived
primarily from long-term contracts with government agencies. Systems revenue
includes costs incurred plus a portion of estimated fees or profits determined
on the percentage of completion method of accounting based on the relationship
of costs incurred to total estimated costs. Revenue from follow-on service and
support after installation is recognized when earned.

   In our sensors business we design, assemble and test components of Vantage
and subcontract the manufacturing of AutoVue. As a result, cost of sales for
sensors include subassemblies purchased from outside sources, related
manufacturing overhead and direct labor. Our systems business is labor
intensive and often involves a significant amount of custom software
development. As a result, cost of sales for systems consists primarily of
wages, overhead and subcontracting costs. We do not manufacture or procure any
of the hardware components used in the systems that we design and implement.

   Our operating expenses are comprised of:

  .  research and development, which consist primarily of wages,
     subcontracting expenses, prototype materials and related overhead costs
     to support new systems development for AutoVue and Vantage;

                                       21
<PAGE>

  .  selling, general and administrative, which consist primarily of wages
     and related benefits, advertising and promotional expenses and travel
     expenses;

  .  charges allocated by Odetics, which consist of accounting, auditing,
     payroll processing, treasury functions, administration of employee
     incentive programs, marketing support, facilities and facilities
     management, certain legal services, insurance costs and other
     miscellaneous expenses; and

  .  other expenses, which primarily consists of goodwill amortization and
     non-recurring charges.

   Our operating expenses have increased significantly in recent periods as a
result of business acquisitions and growth in both our sensors and systems
segments. We expect our operating expenses to continue to increase to support
growth and as we separate from Odetics.

   We also pay interest charges on debt we owe to Odetics. Odetics has
historically advanced funds to meet our capital requirements and charged
interest on the resulting intercompany account balance using Odetics' cost of
the related borrowed funds, which was 10.5% at December 31, 1999.

   Income tax expenses for each member of the Odetics consolidated group has
been allocated only to companies in the group with separate taxable income. As
of the date of our separation we will not have received any taxable benefit for
our accumulated losses. We expect to derive benefit from taxable losses
incurred in the future and will incur liabilities for future taxable income.

   We have incurred net operating losses and negative cash flows since our
inception. To date, our losses and working capital needs have been funded by
Odetics. We expect to continue to incur net losses and negative cash flows as
we seek to grow our business and implement our strategy.

Results of Operations

   The following table sets forth certain statements of operations data
expressed as a percentage of total revenue for the periods indicated, except
for cost of sales and gross profit, which are each expressed as a percentage of
the corresponding segment revenue.
<TABLE>
<CAPTION>

                                                              Nine Months
                              Years Ended March 31          Ended December 30
                            -----------------------------   -----------------
                              1997       1998      1999      1998      1999
                            --------   --------   -------   -------   -------
<S>                         <C>        <C>        <C>       <C>       <C>
Revenue:
  Sensors..................    100.0 %     27.5 %    29.8 %    29.3 %    33.7 %
  Systems..................      0.0       72.5      70.2      70.7      66.3
                            --------   --------   -------   -------   -------
    Total revenue..........    100.0      100.0     100.0     100.0     100.0
Cost of sales:
  Sensors..................     87.4      159.0      72.1      76.8      55.8
  Systems..................      0.0       66.5      70.3      69.3      73.2
    Total costs of sales...     87.4       91.9      70.8      71.5      67.3
Gross profit:
  Sensors..................     12.6      (59.0)     27.9      23.2      44.2
  Systems..................      0.0       33.5      29.7      30.7      26.8
    Total gross profit.....     12.6        8.1      29.2      28.5      32.7
Operating expenses:
  Research and
   development.............    442.0       34.9      14.8      13.9      14.3
  Selling, general and
   administrative..........    262.3       58.4      39.3      37.0      27.0
  Charges allocated by
   Odetics.................     19.5        7.8       6.0       5.4       6.1
  Other expenses...........      0.0        8.0       2.5       2.2       3.0
                            --------   --------   -------   -------   -------
Loss from operations.......   (711.2)    (101.1)    (33.4)    (29.9)    (17.7)
  Interest charges
   allocated by Odetics....    126.4       23.0      14.9      14.9      12.6
                            --------   --------   -------   -------   -------
Loss before income taxes...   (837.6)    (124.1)    (48.3)    (44.8)    (30.3)
  Income tax expense.......      0.0        0.0       0.0       0.0       0.0
                            --------   --------   -------   -------   -------
Net loss...................   (837.6)%   (124.1)%   (48.3)%   (44.8)%   (30.3)%
                            ========   ========   =======   =======   =======
</TABLE>


                                       22
<PAGE>


Nine Months Ended December 31, 1999 Compared with Nine Months Ended December
31, 1998

   Total Revenue. Total revenue increased by 67.8% to $17.4 million for the
nine months ended December 31, 1999 from $10.4 million for the nine months
ended December 31, 1998.

   Sensors revenue increased by 92.7% to $5.9 million for the nine months ended
December 31, 1999 from $3.1 million for the nine months ended December 31,
1998. Vantage sales comprised approximately 92% of sensors revenues in the nine
months ended December 31, 1999 with the remainder comprised of sales of
AutoVue. The increase primarily represented increased sales as a result of
growth in our installed user base.

   Systems revenue increased by 57.4% to $11.6 million for the nine months
ended December 31, 1999 from $7.4 million for the nine months ended December
31, 1998. Included in the 1999 period was $4.5 million of systems revenue from
the acquisitions of Meyer Mohaddes and of Viggen, and included in the 1998
period was $1.6 million of revenue derived from a contract with the City of
Jinan, China. Excluding these items, systems revenue increased $1.3 million due
to a general increase in systems activity. Approximately 54% of our systems
revenue was derived from cost plus fee contracts, with the remainder
represented by fixed price contracts.

   Gross Profit. Total gross profit increased to $5.7 million, or 32.7% of
total revenue, for the nine months ended December 31, 1999 from $3.0 million,
or 28.5% of total revenue, for the nine months ended December 31, 1998.

   Gross profit from sensors revenue increased to $2.6 million, or 44.2% of
sensors revenue, for the nine months ended December 31, 1999 from $709,000 or
23.2% of sensors revenue, for the nine months ended December 31, 1998. The
increase in gross profit on sensors revenue reflected increased sales of
Vantage and improved absorption of manufacturing overhead. In addition,
improved gross profit performance reflected the benefits of Vantage cost
reduction efforts.

   Gross profit from systems revenue increased to $3.1 million, or 26.8% of
systems revenue, for the nine months ended December 31, 1999 from $2.3 million,
or 30.7% of systems revenue, for the nine months ended December 31, 1998. The
dollar increase in gross profits of systems revenue reflected the 57.4%
increase in systems revenue in the nine months ended December 31, 1999. The
decline in gross profit as a percentage of systems revenue reflected the lower
relative gross profits of contracts acquired as part of the acquisition of
Meyer Mohaddes and of Viggen as well as lower gross profit from certain fixed
priced contracts during the nine months ended December 31, 1999.

   Research and Development Expenses. Research and development expenses
increased by 73.4% to $2.5 million, or 14.3% of total revenue, for the nine
months ended December 31, 1999 from $1.4 million, or 13.9% of total revenue,
for the nine months ended December 31, 1998. Research and development expenses
reflected new product development to support AutoVue and Vantage. These two
development programs consumed approximately equal levels of research and
development expenses in the nine months ended December 31, 1998. The increase
in research and development expenses in the nine months ended December 31, 1999
primarily reflected a 180% increase in expenses to support AutoVue development
as we continued to enhance performance, add features and functionality and
improve packaging, which was partially offset by reduced expenses for
development of Vantage.

   Selling, General and Administrative Expenses. Selling, general, and
administrative expenses increased by 22.7% to $4.7 million, or 27.0% of total
revenue, for the nine months ended December 31, 1999 from $3.8 million, or
37.0% of total revenue, for the nine months ended December 31, 1998. The
acquisitions of Meyer Mohaddes and of Viggen constituted approximately $730,000
of the increase. Approximately $920,000 of the increase primarily reflected the
addition of personnel and infrastructure to support Vantage and AutoVue sales.
These increases were offset in part by cost savings resulting from our
completion and withdrawal of activities to support market activity in China.

                                       23
<PAGE>


   Charges Allocated by Odetics. Charges allocated by Odetics increased by
88.1% to $1.1 million or 6.1% of total revenue, for the nine months ended
December 31, 1999 from $562,000, or 5.4% of total revenue, for the nine months
ended December 31, 1998. The increase was attributable to our expanding wage
base, higher square footage occupancy of facilities, and higher revenue
relative to Odetics' consolidated group revenue.

   Other Expenses. Other expenses increased by 134.7% to $528,000, or 3.0% of
total revenue, for the nine months ended December 31, 1999 from $225,000, or
2.2% of total revenue, for the nine months ended December 31, 1998. The
increase primarily represented the amortization of goodwill arising from the
acquisition of Meyer Mohaddes in October 1998.

   Interest Charges Allocated by Odetics. Interest charges allocated by Odetics
increased by 41.4% to $2.2 million, or 12.6% of total revenue, in the nine
months ended December 31, 1999 from $1.6 million, or 14.9% of total revenue, in
the nine months ended December 31, 1998. The increase reflected increased
intercompany borrowings necessary to support our working capital requirements
and fund our operating losses.

Year Ended March 31, 1999 Compared with Year Ended March 31, 1998

   Total Revenue. Total revenue increased by 149.6% to $14.6 million for the
fiscal year ended March 31, 1999 from $5.8 million for the fiscal year ended
March 31, 1998.

   Sensors revenue increased by 170.0% to $4.3 million in fiscal 1999 from $1.6
million in fiscal 1998. The increase in sensors revenue reflects increased unit
sales volume of Vantage across a broad customer base.

   Systems revenue increased by 141.9% to $10.2 million in fiscal 1999 from
$4.2 million in fiscal 1998. All of our systems revenue in fiscal 1998
reflected services performed by us on contracts acquired from Rockwell in June
1997. Fiscal 1999 systems revenue includes $1.6 million derived from a contract
with the City of Jinan, China. Approximately 21.2% of our systems revenue in
fiscal 1999 reflected revenue from the acquisitions of Meyer Mohaddes in
October 1998 and the assets of Viggen Corporation in January 1999. 59.0% of the
system revenue in fiscal 1999 was generated under cost plus fee and time and
material contracts, while the remaining revenue was derived from fixed price
contracts.

   Gross Profit. Total gross profit increased by 803.6% to $4.3 million, or
29.2% of total revenue, for fiscal 1999 from $471,000, or 8.1% of total
revenue, for fiscal 1998.

   Gross profit on sensors revenue totaled $1.2 million, or 27.9% of sensors
revenue in fiscal 1999 as compared to a gross profit (loss) of ($948,000), or
(59%) of sensors revenue, in fiscal 1998. Through fiscal 1998 Vantage had
limited sales volume and we incurred significant costs for direct labor,
manufacturing overhead and other manufacturing costs relative to its limited
sales. During fiscal 1998, gross profit on sensor revenue was also negatively
impacted by $800,000 of costs for upgrades to the installed base of an earlier
generation of Vantage, in addition to charges for inventory obsolescence
related to earlier design versions of Vantage. The improvement in gross profit
on sensors revenue in fiscal 1999 also reflected the benefit of increased sales
volume and manufacturing efficiencies. Also during fiscal 1999, we introduced
certain design changes to lower total cost.

   Gross profit on systems revenue increased by 114.7% to $3.0 million, or
29.7% of systems revenue, in fiscal 1999 from $1.4 million, or 33.5% of systems
revenue, in fiscal 1998. The slight decrease in gross profit as a percentage of
systems revenue in fiscal 1999 reflected the contribution of contracts from the
acquisitions of Meyer Mohaddes and the assets of Viggen. These acquired
contracts had associated lower gross profit percentages compared to our other
ongoing systems activities.

   Research and Development Expenses. Research and development expense
increased by 5.6% to $2.2 million, or 14.8% of total revenue, in fiscal 1999
from $2.0 million, or 34.9% of total revenue, in fiscal 1998. The increase in
research and development expense reflected the acceleration of development of
AutoVue during fiscal 1999, which was partially offset by a reduction in
development activities supporting Vantage.

                                       24
<PAGE>

Approximately 47% of our research and development expense in fiscal 1999 was
incurred to support AutoVue development efforts. As a percentage of total
revenue, research and development expenses declined sharply in fiscal 1999 as a
result of substantial increases in systems and sensors revenue in fiscal 1999.

   Selling, General and Administrative Expense. Selling, general and
administrative expense increased by 67.8% to $5.7 million, or 39.3% of total
revenue, in fiscal 1999 from $3.4 million, or 58.4% of total revenue, in fiscal
1998. Approximately $500,000 of the increase resulted from increased expenses
associated with the acquisition of Meyer Mohaddes and the assets of Viggen.
During fiscal 1999, we also expanded our sales and marketing efforts to support
increases in both systems and sensor revenue. As a percentage of total revenue,
selling, general and administrative expenses declined in fiscal 1999 as a
result of substantial increases in systems and sensors revenue in fiscal 1999.

   Charges Allocated by Odetics. Charges allocated by Odetics increased by
92.4% to $881,000, or 6.0% of total revenue, in fiscal 1999 from $458,000, or
7.8% of total revenue, in fiscal 1998. The increase was attributable to our
expanding wage base, higher square footage occupancy of facilities, and higher
revenue relative to Odetics' consolidated group revenue.

   Other Expenses. Other expenses decreased by 20.9% to $368,000, or 2.5% of
total revenue, in fiscal 1999 from $465,000, or 8.0% of total revenue, in
fiscal 1998. Other expenses in fiscal 1999 consisted of goodwill amortization
related to the acquisition of certain assets of the transportation systems
business from Rockwell in June 1997. Other expenses in fiscal 1998 included
goodwill amortization related to the acquisition of certain assets of Rockwell
and non-recurring charges of approximately $200,000 related to the wind-down of
our business development activities in China in fiscal 1998.

   Interest Charges Allocated by Odetics. Interest charges allocated by Odetics
increased by 61.2% to $2.2 million in fiscal 1999, or 14.9% of total revenue,
from $1.3 million, or 23.0% of total revenue, in fiscal 1998. The increase
reflected increased intercompany borrowings necessary to support our working
capital requirements and fund our operating losses.

Year Ended March 31, 1998 Compared with Year Ended March 31, 1997

   Total Revenue. Total revenue increased by 985.7% to $5.8 million for the
fiscal year ended March 31, 1998 from $538,000 for the fiscal year ended March
31, 1997.

   Sensors revenue increased by 198.7% to $1.6 million in fiscal 1998 from
$538,000 in fiscal 1997. The increase in sensors revenue primarily reflected
increased unit sales of Vantage.

   Systems revenue of $4.2 million in fiscal 1998 reflects services performed
by us on contracts acquired from Rockwell. No systems revenue was recognized in
fiscal 1997. 72% of the systems revenue in fiscal 1998 was generated under cost
plus fee and time and material contracts, while the remaining systems revenue
was derived from fixed price contracts.

   Gross Profit. Total gross profit increased by 592.6% to $471,000, or 8.1% of
total revenue, for fiscal 1998 from $68,000, or 12.6% of total revenue, for
fiscal 1997.

   Gross profit (loss) on sensors revenue totaled ($948,000), or (59%) of
sensors revenue, in fiscal 1998 as compared to a gross profit of $68,000, or
12.6% of sensors revenue, in fiscal 1997. Prior to fiscal 1998, all of our
gross profit (loss) was derived from sales of Vantage. During fiscal 1998
Vantage had limited sales volume and we incurred significant costs for direct
labor, manufacturing overhead and other manufacturing costs relative to its
limited volume. During fiscal 1998, gross profit on sensors revenue was also
negatively impacted by $800,000 of costs for upgrades to the installed base of
an earlier generation of Vantage, in addition to charges for inventory
obsolescence related to earlier design versions of Vantage systems.

   Gross profit on systems revenue was 33.5% of systems revenue in fiscal 1998.

                                       25
<PAGE>

   Research and Development Expenses. Research and development expenses
decreased by 14.3% to $2.0 million, or 34.9% of total revenue, in fiscal 1998
from $2.4 million, or 442.0% of total revenue, in fiscal 1997. The decrease
primarily reflected the completion of development of Vantage Plus during fiscal
1998, which was partially offset by new product development activities related
to AutoVue. Approximately 23.0% of our research and development expenses in
fiscal 1998 were incurred to support AutoVue development efforts. As a
percentage of total revenue, research and development expenses declined sharply
in fiscal 1998 as a result of a substantial increase in systems revenue in
fiscal 1998.

   Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by 142.0% to $3.4 million, or 58.4% of total
revenue, in fiscal 1998 from $1.4 million, or 262.3% of total revenue, in
fiscal 1997. The increase was due primarily to the acquisition of certain
assets of the transportation systems business of Rockwell in June 1997 in
addition to increased spending to support our marketing and sales proposal
efforts in China.

   Charges Allocated by Odetics. Charges allocated by Odetics increased by
336.2% to $458,000, or 7.8% of total revenue, in fiscal 1998 from $105,000, or
19.5% of total revenue, in fiscal 1997. The increase was attributable to our
expanding wage base, higher square footage occupancy of facilities, and higher
revenues relative to Odetics' consolidated group revenues.

   Other Expenses. Other expenses for fiscal 1998 represented goodwill
amortization related to the acquisition of certain assets of the transportation
systems business from Rockwell in June 1997 and other non-recurring charges of
approximately $200,000 related to the wind-down of our market development
activities in China.

   Interest Charges Allocated by Odetics. Interest charges allocated by Odetics
increased by 97.6% to $1.3 million, or 23.0% of total revenue, in fiscal 1998
from $680,000, or 126.4% of total revenue, in fiscal 1997. The increase
reflected increased intercompany borrowings necessary to support our working
capital requirements, fund our operating losses and support acquisition
activities.

                                       26
<PAGE>

Selected Quarterly Results of Operations

   The following tables present selected quarterly financial information for
each of the six quarters through September 30, 1999. This information has been
prepared by us on a basis consistent with our audited financial statements
appearing elsewhere in this prospectus. The information includes all
adjustments, consisting only of normal recurring adjustments, that we consider
necessary for a fair presentation of this information in accordance with
generally accepted accounting principles. Such quarterly results are not
necessarily indicative of future results of operations.

<TABLE>
<CAPTION>
                                                       Three Months Ended
                          ----------------------------------------------------------------------------------------
                           June 30,    Sept. 30,     Dec. 31,     Mar. 31,     June 30,    Sept. 30,     Dec. 31,
                             1998         1998         1998         1999         1999         1999         1999
                          ----------   ----------   ----------   ----------   ----------   ----------   ----------
                                        (unaudited, in thousands except per share data)
<S>                       <C>          <C>          <C>          <C>          <C>          <C>          <C>
Revenue:
 Sensors................  $      793   $      759   $    1,499   $    1,288   $    1,487   $    2,019   $    2,374
 Systems................       2,721        1,644        2,984        2,892        3,610        4,089        3,868
                          ----------   ----------   ----------   ----------   ----------   ----------   ----------
   Total revenue........       3,514        2,403        4,483        4,180        5,097        6,108        6,242
Cost of sales:
 Sensors................         659          812          871          787          699        1,130        1,453
 Systems................       2,108        1,009        1,974        2,104        2,565        3,196        2,704
                          ----------   ----------   ----------   ----------   ----------   ----------   ----------
   Total cost of sales..       2,767        1,821        2,845        2,891        3,264        4,326        4,157
Gross profit:
 Sensors................         134          (53)         628          501          788          889          921
 Systems................         613          635        1,010          788        1,045          893        1,164
                          ----------   ----------   ----------   ----------   ----------   ----------   ----------
   Total gross profit...         747          582        1,638        1,289        1,833        1,782        2,085
Operating expenses:
 Research and
  development...........         453          486          502          711          743          892          863
 Selling, general and
  administrative........       1,244        1,143        1,457        1,885        1,604        1,483        1,630
 Charges allocated by
  Odetics...............         121          189          252          319          303          367          387
 Other expenses.........         100           36           89          143          178          174          176
                          ----------   ----------   ----------   ----------   ----------   ----------   ----------
Loss from operations....      (1,171)      (1,272)        (662)      (1,769)        (995)      (1,134)        (971)
Interest charges
 allocated by Odetics...         471          517          562          617          679          728          784
                          ----------   ----------   ----------   ----------   ----------   ----------   ----------
Loss before income
 taxes..................      (1,642)      (1,789)      (1,224)      (2,386)      (1,674)      (1,862)      (1,755)
Income tax expense......           0            0            0            0            0            0            0
                          ----------   ----------   ----------   ----------   ----------   ----------   ----------
Net loss................  $   (1,642)  $   (1,789)  $   (1,224)  $   (2,386)  $   (1,674)  $   (1,862)  $   (1,755)
                          ==========   ==========   ==========   ==========   ==========   ==========   ==========
Net loss per share,
 basic and diluted......  $    (0.15)  $    (0.16)  $    (0.10)  $    (0.20)  $    (0.14)  $    (0.15)  $    (0.15)
                          ==========   ==========   ==========   ==========   ==========   ==========   ==========
Shares used in computing
 net loss per share,
 basic and diluted......  11,254,000   11,254,000   11,968,000   12,111,000   12,111,000   12,069,000   12,065,000

   The following table sets forth certain statements of operations data
expressed as a percentage of total revenue for the periods indicated, except
for cost of sales and gross profit, which are each expressed as a percentage of
the corresponding segment revenue.

Revenue:
 Sensors................        22.6 %       31.6 %       33.4 %       30.8 %       29.2 %       33.1 %       38.0 %
 Systems................        77.4         68.4         66.6         69.2         70.8         66.9         62.0
                          ----------   ----------   ----------   ----------   ----------   ----------   ----------
   Total revenue........       100.0        100.0        100.0        100.0        100.0        100.0        100.0
Cost of sales:
 Sensors................        83.1        107.0         58.1         61.1         47.0         56.0         61.2
 Systems................        77.5         61.4         66.2         72.8         71.1         78.2         69.9
   Total cost of sales..        78.7         75.8         63.5         69.2         64.0         70.8         66.6
Gross profit:
 Sensors................        16.9         (7.0)        41.9         38.9         53.0         44.0         38.8
 Systems................        22.5         38.6         33.8         27.2         28.9         21.8         30.1
   Total gross profit...        21.3         24.2         36.5         30.8         36.0         29.2         33.4
Operating expenses:
 Research and
  development...........        12.9         20.2         11.2         17.0         14.6         14.6         13.8
 Selling, general and
  administrative........        35.4         47.6         32.5         45.1         31.5         24.3         26.1
 Charges allocated by
  Odetics...............         3.4          7.9          5.6          7.6          5.9          6.0          6.2
 Other expenses.........         2.8          1.5          2.0          3.4          3.5          2.8          2.8
                          ----------   ----------   ----------   ----------   ----------   ----------   ----------
Loss from operations....       (33.3)       (52.9)       (14.8)       (42.3)       (19.5)       (18.6)       (15.6)
Interest charges
 allocated by Odetics...        13.4         21.5         12.5         14.8         13.3         11.9         12.6
                          ----------   ----------   ----------   ----------   ----------   ----------   ----------
Loss before income
 taxes..................       (46.7)       (74.4)       (27.3)       (57.1)       (32.8)       (30.5)       (28.1)
Income tax expense......         0.0          0.0          0.0          0.0          0.0          0.0          0.0
                          ----------   ----------   ----------   ----------   ----------   ----------   ----------
Net loss................       (46.7)%      (74.4)%      (27.3)%      (57.1)%      (32.8)%      (30.5)%      (28.1)%
                          ==========   ==========   ==========   ==========   ==========   ==========   ==========
</TABLE>

                                       27
<PAGE>

Quarterly Results of Operations

   Total Revenue. Sensors revenue in all quarters presented primarily reflected
sales of Vantage with the exception of the quarter ended December 31, 1999
which included $382,000 of revenue from sales of AutoVue. Systems revenue in
the quarter ended June 30, 1998 included $1.4 million of revenue derived from a
contract with the City of Jinan, China which was substantially completed in
such quarter. Systems revenue in the quarter ended December 31, 1998 includes
the contributions of revenue from the acquisition of Meyer Mohaddes.

   Gross Profit. Gross profit as a percentage of sensors revenue rose to 53.0%
in the quarter ended June 30, 1999, reflecting the benefit of direct sales of
Vantage to a customer that yielded higher than customary gross profit margins.
Quarterly gross profits on systems revenue are subject to fluctuation as a
result of changes in estimates used in percentage of completion accounting.

   Expenses. Our operating expenses have generally increased over each of the
last seven quarters ended December 31, 1999 as we have increased investments in
our sales, marketing and administrative infrastructure to support growth.
Research and development expenses have increased to support expansion of
Vantage and to support investments in AutoVue. In the quarter ended March 31,
1999 selling, general, and administrative expenses included a charge of
approximately $353,000 representing deferred financing costs.

Liquidity and Capital Resources

   From April 1, 1996 through December 31, 1999, we have incurred cumulative
losses of $24.1 million. Our cumulative negative cash flow from operating
activities, primarily as a result of those losses for such period was $27.2
million. During fiscal 1998, we used $2.2 million in cash to acquire certain
assets of the transportation systems business from Rockwell. To date, we have
relied upon interest bearing advances from Odetics to provide the necessary
cash to support our working capital requirements, fund our operating losses and
support acquisition activities. Days sales in accounts receivable were 73 days
at December 31, 1999 compared to 96 days at March 31, 1999 and 38 days at March
31, 1998. The increase at March 31, 1999 resulted primarily from incremental
accounts receivable that accompanied the acquisitions of Meyer, Mohaddes
Associates, Inc. and of Viggen. At December 31, 1999, we owed Odetics
approximately $37.4 million as a result of the net advances made to us since
our inception including accrued interest. $10.0 million of the net proceeds
received from this offering will be paid by us to Odetics as a reduction of
principal on this obligation. An additional principal amount of approximately
$12.7 million will be cancelled by Odetics and treated as a contribution to
capital. The balance of the obligation then due will be $14.7 million, which
will be converted to a promissory note, payable in interest only for the first
year and in 16 quarterly installments of principal and interest thereafter.

   We are currently co-borrowers with Odetics under a joint Loan and Security
Agreement with Transamerica Business Credit Corporation and are jointly and
severally liable for all amounts advanced. The maximum amount available under
this credit facility is $17.0 million, of which no borrowings were outstanding
at December 31, 1999. This facility provides for borrowings at a prime rate as
defined in the agreement, (8.5% at December 31, 1999) plus 2.00%. The
borrowings under this facility are secured by substantially all of our assets.
Upon consummation of the spin-off we will no longer be a co-borrower under this
facility and the security interests in our assets will be released. Shortly
after this offering, we intend to establish a line of credit. However, we
cannot ensure that we will be successful in obtaining this line of credit on
acceptable terms, if at all.

   At December 31, 1999, we had a net capital deficiency of $24.2 million as a
result of accumulated losses since our inception. Upon completion of this
offering, we anticipate that we will have sufficient capital to fund our
operations for a period of at least two years. We may in the future require
additional funds through bank financings, debt or equity offerings or other
sources of capital. Such additional funding may not be available when needed or
on terms acceptable by us, which would have a material adverse effect on our
business, financial condition and results of operations.

                                       28
<PAGE>

Impact of the Year 2000

   Many existing computer systems and applications, and other control devices
were designed to use two digits rather than four digits to define an applicable
year. As a result, such systems and applications may be unable to recognize the
year 2000 and could fail or create erroneous results. These problems are
commonly referred to as the year 2000 problem. Through January 26, 2000, we
have experienced no significant problems resulting from the year 2000 issue.

   We have evaluated each of our products and believe that each is
substantially year 2000 compliant. We have adopted the British Standards
Institute standard for its statements of compliance regarding the year 2000
problem. We believe that it is not possible to determine whether all of our
customers' products into which our products are incorporated will be year 2000
compliant because we have little or no control over the design, production and
testing of our customers' products.

   The year 2000 problem could affect the systems, transaction processing
computer applications and devices that we use to operate and monitor all major
aspects of our business, including financial systems (such as general ledger,
accounts payable, and payroll), customer services, infrastructure, master
productions scheduling, materials requirement planning, test equipment,
security systems, networks and telecommunications systems. We believe that we
have identified and corrected substantially all of the major systems, software
applications and related equipment used in connection with our internal
operations that required modification or upgrading in order to minimize the
possibility of a material disruption to our business. Because most of our
software applications are recent versions of vendor supported, commercially
available products, we have not incurred, and do not expect in the future to
incur, significant costs to upgrade these applications.

   We estimate that Odetics has expended approximately $500,000 addressing year
2000 issues for its consolidated group, a portion of which was allocated to us.
Assuming we have identified our most significant year 2000 issues and that the
plans of our third party suppliers will be fulfilled in a timely manner without
cost to us, we do not expect to incur any additional significant costs to
address year 2000 issues. We cannot be sure that these assumptions are
accurate, and actual results could differ materially from those we anticipate.

   We have developed contingency plans to address the year 2000 issues that may
pose a significant risk to our on-going operations. These plans include
accelerated replacement of affected equipment and software, temporary use of
back-up equipment and software or the implementation of manual procedures to
compensate for system deficiencies. We cannot be certain that any contingency
plans implemented by us are adequate to meet our needs without materially
impacting our operations, that any such plan will be successful or that our
results of operations would not be materially and adversely affected by the
delays and inefficiencies inherent in conducting operations in an alternative
manner.

Quantitative and Qualitative Disclosures About Market Risk

   Market risk represents the risk of loss that may impact our financial
position, operating results or cash flows due to adverse changes in financial
and commodity market prices and rates. We are exposed to market risk due to
changes in United States interest rates. This exposure is directly related to
our normal operating and funding activities. Historically and as of December
31, 1999, we have not used derivative instruments or engaged in hedging
activities.

   The interest payable on our obligation payable to Odetics is variable based
on the prime rate, and, therefore, affected by changes in market interest
rates. We have managed interest rate risk by remitting all cash we received to
Odetics to minimize the amount of such obligation outstanding at any point in
time. Following the completion of this offering, we expect to reduce our
outstanding indebtedness to Odetics to $14.7 million, which will be evidenced
by a note payable over the 20 fiscal quarters following completion of this
offering with interest payable at variable rates. As a result, we expect to
continue to have exposure to interest rate risk.

                                       29
<PAGE>

                                    BUSINESS

Our Company

   We design, develop, market and implement software based solutions that
improve the safety and efficiency of vehicle transportation. Using our
proprietary software and ITS industry expertise, we are a leading provider of
video sensor systems and transportation management and traveler information
systems for the ITS industry. The ITS industry is comprised of companies
applying a variety of technologies to enable the safe and efficient movement of
people and goods. We use our outdoor image recognition software expertise to
develop proprietary algorithms for video sensor systems that improve vehicle
safety and the flow of traffic. Our knowledge of the ITS industry enables us to
design and implement transportation solutions that help public agencies reduce
traffic congestion and provide greater access to traveler information. Our ITS
systems and solutions include:

  .  Sensors. Our proprietary image recognition systems include AutoVue and
     Vantage. AutoVue is a small windshield mounted sensor that utilizes
     proprietary software to detect and warn drivers of unintended lane
     departures. Through new software development we are expanding the
     AutoVue platform to incorporate additional safety and convenience
     features. Vantage is a video vehicle sensing system that detects the
     presence of vehicles at signalized intersections enabling a more
     efficient allocation of green signal time.

  .  Transportation Management and Traveler Information Systems. We design,
     develop and implement software based systems that integrate sensors,
     video surveillance, computers and advanced communications equipment
     enabling public agencies to monitor, control and direct traffic flow,
     assist in the quick dispatch of emergency crews and distribute real-time
     information about traffic conditions and alternative routes.

Market Overview

   According to a study conducted for the U.S. Department of Transportation,
traffic congestion cost the American public more than $72 billion in 1997 in
lost time and wasted fuel in the United States. Over 40,000 people are killed
and 3 million more injured each year in traffic accidents in the United States
according to 1997 National Highway Transportation Safety Administration data.
The total economic cost of motor vehicle crashes in the United States was
$150.5 billion according to the most recent data published by NHTSA in 1994,
and the personal costs due to lost lives and injuries are incalculable. To
address the high economic and personal costs associated with traffic congestion
and accidents, the ITS industry has identified technological solutions which
can cost effectively add capacity to our roads and improve roadway safety.

   The U.S. DOT, believes that a combination of ITS and new road construction
will accommodate future traffic growth at a 35% savings as opposed to meeting
the same demand with construction alone. The federal government has stimulated
the implementation of ITS systems by allocating significant federal funding for
research and development of ITS related projects, including approximately $1.28
billion over six years through 2003. Conformance with the National ITS
Architecture standards gives access to additional federal funding for ITS
projects from subsequent legislative appropriations. Additionally, state and
local funding is available for ITS projects.

   The U.S. DOT estimates the benefit-to-cost ratio of deploying ITS
infrastructure in the 75 largest metropolitan areas to be approximately eight-
to-one. The U.S. DOT also estimates that ITS applications will eliminate 1.2
million crashes per year, saving thousands of lives and $26 billion in lost
productivity.

   We believe the key market drivers for the ITS industry are the demand for
improved vehicle safety, the demand for reduced traffic congestion and the
demand for the availability of personalized traveler information.

 Demand for Improved Vehicle Safety

   Consumers are concerned with safety on roadways and are increasingly
demanding that the vehicles they buy include effective safety features.
Traditionally, many of the safety features designed for vehicles have

                                       30
<PAGE>

focused on protecting occupants from injury caused by an accident, such as seat
belts and air bags, as opposed to accident prevention. Now, however, we believe
vehicle manufacturers are focusing on safety features that are designed to
prevent accidents. This trend has accelerated the demand for "collision
avoidance" technologies to enhance vehicle safety.

   There were more than 12 million passenger cars, trucks and buses produced in
the United States in 1997. We believe that lane departure warning systems may
be deployed in a significant number of these types of vehicles produced in the
future. As vehicle manufacturers and their customers increasingly focus on
vehicle safety, the market for collision avoidance sensor systems is expected
to grow from $45 million in 1997 to $320 million in 2002 according to the
Freedonia Group, a market research company. These statistics do not include
international markets.

 Demand for Reduced Traffic Congestion

   In 1998, there were more than 200 million vehicles in operation in the
United States according to Automotive News. Better Roads, an ITS trade
publication, estimates that in the past 10 years the amount of travel on
interstate highways has grown by 30% and that the demand for roadway travel is
expected to increase by another 50% over the next 20 years. For drivers this
means more lost time and problems. According to the U.S. DOT, in 1995,
Americans spent more than two billion hours in traffic jams. In addition to
economic costs, traffic congestion leads to frustration among travelers and
adverse effects on the environment due to increased emissions from wasted fuel
burning. The Texas Transportation Institute estimates that over 6 billion
gallons of fuel were wasted in 1997 due to traffic congestion.

   Increased traffic congestion is primarily the result of more vehicles on
U.S. highways and the difficulty of expanding or creating new roadways due to a
substantially built-out infrastructure. As a result, governmental
transportation agencies are increasingly using ITS to monitor and regulate
traffic. Transport Technology Publishing, a leading industry market research
firm, projects the market for vehicle detection systems to grow from an average
of approximately $500 million per year in the period from 1994 to 1998 to over
$800 million per year in the period from 1998 to 2003 and that the market for
alternative technologies to in-pavement inductive loops, including video based
systems, is growing at over 26% per year.

   Recognizing the potential impact of traffic congestion on our economy and
environment, the federal government has been active in drafting legislation to
decrease traffic congestion and increase the safety and efficiency of U.S.
highways. A primary example is the development of the National ITS
Architecture, which defined a framework for systems integration and identified
a set of standards to be used by transportation agencies when designing their
transportation management systems. Additionally, in 1996 the U.S. DOT launched
Operation Time Saver with the objective of implementing an intelligent
transportation infrastructure in 75 of the largest metropolitan areas within 10
years. Hagler Bailly, a leading market research firm for the ITS industry,
estimates that the market for ITS infrastructure will be in excess of $4
billion in 2000.

 Demand for the Availability of Personalized Traveler Information

   Traditionally, a limited amount of traffic information has been disseminated
over the radio. This information is typically untimely and impersonal. Because
of increased traffic congestion, drivers are demanding more timely and accurate
traffic information. Drivers want to know traffic conditions on their intended
route to assist them in deciding when to start a trip, what their estimated
arrival time will be, which route to take and whether a change in route is
necessary. This increase in the demand for traffic information is evidenced by
the proliferation of web sites that now offer traffic information.

Our Solution

   We believe we are a market leader in the ITS industry in the United States.
We design, develop, market and implement software based solutions to address
the demands of the vehicle transportation industry, including

                                       31
<PAGE>

improving vehicle safety, reducing traffic congestion and increasing the
availability of personalized traffic information. Our proprietary outdoor image
processing software and algorithms are incorporated into our AutoVue and
Vantage video sensor systems. AutoVue is currently the only commercially-
available lane departure warning system and Vantage is a leader in the market
for video vehicle detection systems.

   We are also a leading provider of transportation management and traveler
information systems, which incorporate our customized systems integration
software and commercial software that we have developed. We are one of the two
companies selected by the U.S. DOT to develop and maintain the National ITS
Architecture. This has enabled us to develop invaluable experience with the
standards mandated by the federal government and to establish a reputation as
an expert on the National ITS Architecture.

   Our ITS systems and solutions address the demands to improve safety and
efficiency of vehicle transportation in the following manner:


<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
          Market Demand                                Our Solution
- -----------------------------------------------------------------------------------------
  <C>                           <S>
  Improve Vehicle Safety        . AutoVue warns drivers of unintended lane departures and
                                  addresses the largest contributing factor in fatal
                                  motor vehicle accidents in the United States.

                                . We are expanding the AutoVue platform to include
                                  additional safety features.

- -----------------------------------------------------------------------------------------
  Reduce Traffic Congestion     . Vantage systems monitor and provide efficient control
                                  of traffic flow at signalized intersections and on
                                  highways.

                                . Our transportation management and traveler information
                                  systems enable management of transportation networks
                                  with real-time monitoring of traffic conditions and the
                                  ability to implement corrective actions to relieve
                                  traffic congestion.

- -----------------------------------------------------------------------------------------
  Increase Access to            . Our transportation management and traveler information
   Information                    systems enable the dissemination of information on
                                  current traffic conditions through changeable message
                                  signs, highway advisory radio and telephones, cable
                                  television, commercial radio, paging networks and the
                                  Internet.

                                . We are developing personalized traveler information
                                  services for delivery over wireless communication
                                  devices and the mobile Internet.
- -----------------------------------------------------------------------------------------
</TABLE>


   By combining our proprietary software with our ITS industry expertise, we
believe we are uniquely positioned to deliver a broad array of innovative ITS
systems and solutions.

Our Strategy

   Our objective is to enhance our position as a leading provider of software
based ITS systems and solutions to the vehicle transportation industry by
leveraging our ITS expertise and capitalizing on industry trends. The key
elements of our strategy include:

   Combine Our Proprietary Software with Our ITS Industry Expertise to Provide
Transportation Solutions. Consumers and transportation authorities are looking
for safer, non-intrusive technological transportation solutions. As a result,
we developed our Vantage system to provide a more efficient means of monitoring
and controlling traffic at signalized intersections and on highways. In
addition, our transportation management and traveler information systems reduce
traffic congestion, improve vehicle safety and disseminate traveler
information. We intend to use our proprietary software and ITS industry
expertise to provide fully-integrated intelligent transportation management and
traveler information systems that enable traffic managers

                                       32
<PAGE>


to monitor efficiently and direct traffic flow, promptly dispatch emergency
vehicles to clear accidents, continuously monitor highway operations and
accurately provide information to travelers about delays or alternative routes.

   Establish AutoVue as the Leading Platform for In-vehicle Video Sensing. We
designed AutoVue to accommodate software upgrades that provide sensing
functions in addition to warning drivers of unintended lane departures.
Initially these additional functions will be focused on safety and convenience.
Our proprietary software algorithms and the scalable design of the AutoVue
system enable us to add these functions at low marginal costs. Therefore, the
AutoVue system not only has the capacity to provide improved safety and
additional convenience features, but may also significantly reduce the cost to
vehicle manufacturers who otherwise might purchase multiple sensors from
different suppliers. We also intend to expand our direct sales force and
applications engineering capability to further increase market penetration for
AutoVue systems.

   Provide Personalized Traveler Information to Travelers Through Wireless
Communication Devices and the Mobile Internet. We intend to utilize our
knowledge and experience in the areas of transportation management and traveler
information systems, the Internet and wireless communications to provide a new,
higher level of information to travelers. Personalized traveler information
includes information on road and weather conditions, traffic congestion, travel
times and suggested routes provided directly to travelers based on their
personal profiles. We intend to disseminate timely and accurate information
compiled from data collected from a variety of sources, such as video
surveillance, vehicle sensor systems and transportation management systems.

   Pursue Strategic Acquisitions and Alliances. Since 1995, we acquired three
ITS firms and have been jointly developing technology for AutoVue with
DaimlerChrysler. These acquisitions and alliances have provided us with new
technologies, customers and experienced technical personnel. We intend to
pursue new strategic acquisitions and alliances with:

  .  other developers of sensor systems and software technologies that will
     complement our existing business by delivering increased functionality
     and allow us to market our systems and solutions to new customers;

  .  other firms that design transportation management and traveler
     information systems to expand our presence into areas where we can gain
     significant contracts, valuable personnel and exposure to state and
     local transportation agencies; and

  .  wireless communications and Internet service providers who have
     interests in the delivery of personalized traveler information.

   Broaden Our Systems and Solutions Offerings and Expand Our Penetration of
International Markets. We intend to generate additional revenue by expanding
our systems and solutions to address related applications and market segments
which utilize our proprietary software technologies, increasing our geographic
coverage and leveraging our sales and distribution channels. For example, we
intend to market wireless Vantage systems that enhance our ability to address
retrofit applications. Similarly, we are targeting new applications and
geographic expansion opportunities for the software and system designs we
incorporate in our transportation management and traveler information systems.
We also intend to increase our sales and marketing efforts internationally,
particularly in Europe and Asia, where trends such as increased demand for
vehicle safety and increased traffic congestion are similar to those in the
United States.

Our Products and Services

 Sensor Systems

   Our sensor systems combine our proprietary software and algorithms with
advanced outdoor video image processing to deliver roadway image recognition
and vehicle detection systems that contribute to increase vehicle safety and
reduce traffic congestion.

   AutoVue. We have developed what we believe to be currently the only
commercially-available unintended lane departure warning system for heavy
trucks and are marketing AutoVue for installation also in passenger cars

                                       33
<PAGE>

and light and medium trucks. AutoVue is a windshield mounted device that is
approximately the size of a deck of cards which serves as a platform for an
image processing camera and on-board computer system. AutoVue utilizes software
based upon our proprietary algorithms to predict effectively driving behavior
and driver reactions in order to differentiate between intended and unintended
lane departures. For example, the use of a directional signal or sudden lane
changes will not elicit a warning. We integrated these software applications
with our video image processing technologies to create an image sensing
platform that recognizes the difference between the roadway and lane markings
and accurately monitors a vehicle's placement within the lane markings. As a
vehicle travels down a roadway, the AutoVue system tracks both solid and dashed
lane markings. The AutoVue computer processor combines this data with the
vehicle's speed to calculate the proper lane positioning of the vehicle. When a
vehicle traveling at 35 miles per hour or more begins to drift towards an
unintended lane departure, AutoVue sends a distinctive rumble strip sound
through the vehicle's audio system, alerting the driver to make a correction.
AutoVue works effectively both day and night and in most weather conditions
where the lane markings are visible. AutoVue incorporates technology that we
and DaimlerChrysler Corporation have been jointly developing for over four
years.

   The illustration below demonstrates the perspective of AutoVue while
tracking lane markings:

                              [LOGO APPEARS HERE]

   Through new software development we are expanding the AutoVue platform to
incorporate additional safety and convenience features. Our proprietary
algorithms and the scalable design of AutoVue enable us to add these additional
features at low marginal costs. AutoVue not only allows vehicle manufacturers
to respond to increasing safety demands, but also provides the opportunity to
reduce costs, increase functionality and consolidate their supplier base.

   We expect to ship AutoVue for installation in selected models of Mercedes'
European heavy trucks in the first half of calendar year 2000. We have also
developed an AutoVue system modified for driving and road conditions in North
America and also expect to begin shipments to Freightliner in the first half of
calendar year 2000. In addition, we have delivered AutoVue system prototypes to
other leading vehicle manufacturers for evaluation and test. Our software
engineers are currently developing upgrades to the AutoVue system that will
work with existing AutoVue image sensing technology to deliver additional
safety and convenience features.

   Vantage. Our Vantage system is a market leader for video vehicle detection.
Vantage incorporates proprietary image processing technologies to provide
reliable and easy to implement vehicle detection at

                                       34
<PAGE>

signalized intersections and on highways. Vantage cameras, mounted on the arm
of street lights or traffic signals at intersections, send video images to a
Vantage processor located in a roadside cabinet. The processor analyzes the
image to detect vehicle presence enabling the traffic controller to allocate
effectively green signal time. The Vantage video processor includes built-in
programming capability, eliminating the need for a separate computer. This
makes our system very easy to use by traffic system maintenance technicians.

   The illustration below demonstrates a two approach camera placement of a
Vantage system:


                              [LOGO APPEARS HERE]

   We believe that Vantage provides a more reliable, flexible and easy to use
and maintain solution than in-pavement inductive loops. In addition to vehicle
detection, Vantage offers functions including remote programming of detection
zones and remote real-time monitoring. Vantage can also provide an attractive
cost of ownership in comparison to inductive loops, which are vulnerable to
failure due to road construction, weather conditions and ground movement.
Maintenance and repair costs for these inductive loops are significant.
Additionally, because inductive loops are buried beneath the roadway surface,
entire lanes of traffic must be diverted when inductive loops are installed,
replaced or serviced and they are ineffective when traffic is diverted during
road repairs and resurfacing projects. Vantage systems are currently used in
over 150 cities in the United States and nine cities in Canada and Asia.
Vantage has been adopted as a method of vehicle detection in cities such as
Santa Barbara, California; Las Vegas, Nevada; St. Louis, Missouri; Omaha,
Nebraska; and Philadelphia, Pennsylvania and by such transportation agencies as
the Colorado Department of Transportation, the Nevada Department of
Transportation, the Texas Department of Transportation, the Virginia Department
of Transportation and the Ministry of Transportation in Ontario, Canada.

   We currently offer the following Vantage systems, each of which addresses a
distinct market segment:

  .  Vantage Plus consists of an advanced processor that can be deployed with
     one to six video cameras mounted at an intersection for vehicle
     detection on up to six different roadway approaches. Each of these
     cameras can accurately provide up to 24 detection zones in a single
     roadway approach. Vantage Plus is often deployed at new or fully
     refurbished intersections.

  .  Vantage One incorporates the vehicle detection technology of Vantage
     Plus into a modular, single camera system for affordable video detection
     on a flexible, per camera basis. Vantage One provides video detection
     for a single intersection approach, enabling our customers to retrofit
     cost effectively in-pavement inductive loops one approach to an
     intersection at a time.

                                       35
<PAGE>

  .  Vantage Edge incorporates the same vehicle detection algorithms found in
     Vantage Plus and Vantage One into a processor designed to plug easily
     into standard Type 170 cabinets, a widely used type of traffic control
     cabinet in the United States.

  .  Vantage Remote Access System, or VRAS, is a software application that
     may be installed on any personal computer equipped with a modem. Traffic
     agencies typically use VRAS to perform system diagnostics and
     reconfigure detection zones for each Vantage camera from a remote
     location. The VRAS allows traffic control personnel to view images to
     visually verify traffic conditions and emergency situations.

  .  Vantage Wireless Systems incorporate the full functionality of the
     Vantage family of systems in a wireless architecture, obviating the need
     to run coaxial cables from the camera to the traffic control cabinets.

 Transportation Management and Traveler Information Systems

   We design, implement and maintain transportation management and traveler
information systems for local, state and federal agencies to improve vehicle
safety, reduce traffic congestion and disseminate information. We also design
customized software applications to link independent transportation management
and traveler information systems. These systems allow transportation agencies
to manage their transportation networks in a real-time and coordinated fashion
by using a variety of detection, communication, and information technologies.
Our systems also provide traffic information necessary to enable drivers to
avoid traffic congestion. As one of only two companies awarded a contract to
develop and maintain the National ITS Architecture, we have the experience to
design, implement and maintain transportation management and traveler
information systems that conform with the National ITS Architecture. We believe
this experience provides us with unique insight into emerging market trends and
product opportunities and a significant competitive market advantage.
Transportation management and traveler information systems are the basic
building blocks of successful intelligent transportation systems.

   The illustration below demonstrates some of the typical elements of a fully
integrated transportation management and traveler information system which
enables traffic control officials to monitor continuously highway operations,
efficiently manage traffic flow, promptly dispatch emergency assistance and
provide information to travelers about delays or alternative routes:

                              [LOGO APPEARS HERE]

                                       36
<PAGE>

   Systems Design and Implementation. A transportation management system
typically consists of a transportation management center that houses computers,
software and video surveillance monitors used to process and display traffic
data gathered from roadway sensors, video surveillance cameras, and other
sources. This data is delivered to the transportation management center through
communication pathways, including fiber optic lines and wireless technologies.
Transportation management center staff analyze the data using software
applications that convert the raw data into useful information. This
information may be disseminated through changeable message signs, highway
advisory radios and telephones, cable television, commercial radio, paging
networks and the Internet for a variety of commercial and government uses.
These uses include traffic management, freight and fleet management, toll
administration, emergency services, commercial vehicle operations, traveler
information services and transit management. We believe there will be demand
for this information by consumers through PDAs, cellular telephones, pagers,
in-vehicle computers and the mobile Internet.

   We often serve as the primary contractor throughout the development of the
customer's entire transportation management and traveler information system.
For example, we worked with the Michigan Department of Transportation to deploy
and maintain one of the nation's largest integrated traffic management and
traveler information systems located in the metropolitan Detroit area. Our
software enabled the integration of more than 1,200 vehicle detectors, 43
changeable message signs, 12 highway advisory radios, 145 closed-circuit
television surveillance cameras and 10 ramp metering stations. Our innovative
design, incorporating an existing fiber optic ring with wireless communication
technologies to collect information from roadway detection devices and
disseminate traffic advisories to drivers, resulted in an affordable and
effective freeway management system that serves as a model for other
transportation departments.

   Maintenance. In addition to designing and implementing transportation
management and traveler information systems, our staff of engineers and
technicians maintains and upgrades existing systems on a contract basis. We
believe that our significant experience in the design and implementation of ITS
projects uniquely positions us to maintain and upgrade existing systems on
behalf of transportation agencies on a cost effective basis. Our maintenance
teams utilize specialized software to diagnose malfunctioning equipment and
provide automated documentation and reporting when problems are detected. Our
staff of engineers and technicians are available 24 hours a day to perform
preventive maintenance, remedial maintenance and emergency maintenance on
damaged systems.

   Commercial Software. We design customized software applications that link
independent transportation management centers to enable a comprehensive
monitoring of regional traffic conditions and to provide communications among
transportation agencies. We have also developed and license several
commercially-available proprietary software applications to facilitate systems
design and integration. Our DATEX Toolkit software assists in the
implementation of a communications protocol to enable the sharing of traffic
data among transportation management centers using the Datex-Asn standard,
while our SpecWizard software assists transportation engineers in designing ITS
systems that comply with National ITS Architecture based standards. In
addition, our VECTURA Internet data publishing software utilizes "push"
technology which moves information from a central database to web and custom
application servers to accommodate user requests for information. VECTURA
enables the availability of information without degrading the performance or
compromising the security of a central database. Our EzHCM software assists
transportation engineers in performing complex highway capacity calculations.

Technology and Intellectual Property

   We have developed expertise in several important technology areas, including
software to enhance the applications of outdoor image processing cameras,
communication linkage software for the integration of management systems, and
low cost image processing hardware design and assembly techniques. Our advanced
expertise of algorithms and outdoor imaging technologies form the foundation
upon which AutoVue and Vantage systems are built. The software applications
installed in our sensors incorporate image processing algorithms for outdoor
image recognition based upon complex mathematical calculations in order to
operate in

                                       37
<PAGE>

diverse lighting and inclement weather conditions and to mitigate the effects
of camera motion. We have developed these image processing algorithms
internally for Vantage and jointly with DaimlerChrysler over a period of four
years for AutoVue. We also employ our design expertise to develop electronic
components for AutoVue to mitigate the effects of severe automotive operating
environments.

   We have developed expertise in system integration techniques, data
communication protocols, and emerging ITS architecture standards as a result of
designing and implementing transportation management and traveler information
systems. We use state-of-the-art database and distributed computing
architectures, including CORBA and Enterprise JavaBean, to facilitate the
distribution of information over the Internet for our transportation management
and traveler information systems customers.

   We currently have five U.S. patents and various other foreign patents for
image recognition technologies that we use in our ITS business. We intend to
aggressively pursue patent protection for our proprietary technologies
incorporated in our AutoVue and Vantage systems. We also rely on a combination
of copyright, trademark, and trade secret laws, confidentiality procedures and
contractual provisions to protect our intellectual property.

Key Relationships with Vehicle Manufacturers

   We intend to use our relationships to build upon brand awareness and
worldwide distribution channels of major vehicle manufacturers and to further
penetrate our target markets. We have entered into the following key
relationships:

 DaimlerChrysler

   AutoVue incorporates technology that we jointly developed with the
DaimlerChrysler Corporation and integrates proprietary technologies of both
companies. As part of our development agreement, DaimlerChrysler granted us a
license to use their driver heuristics algorithms for the software applications
incorporated in AutoVue. While our right to use this license is perpetual, we
have agreed to pay DaimlerChrysler a 3% royalty of net sales of all lane
departure warning applications of AutoVue systems sold to non-DaimlerChrysler
vehicle manufacturers through July 1, 2002.

   We recently completed successful testing of AutoVue in Mercedes' European
heavy trucks, and entered into an agreement with DaimlerChrysler to serve as
DaimlerChrysler's exclusive production source until July 2000 for AutoVue
systems installed in Mercedes' European heavy trucks.

   On January 25, 2000 we entered into a subordinated convertible note purchase
agreement with DaimlerChrysler Venture in which DaimlerChrysler Venture
invested $3.75 million that shall automatically convert into approximately 2.5%
of our outstanding common stock immediately prior to the closing of this
offering. This investment enhances our strategic relationship with
DaimlerChrysler. As part of the agreement, DaimlerChrysler Venture has agreed
to facilitate the adoption of AutoVue in DaimlerChrysler commercial vehicles
and passenger cars. DaimlerChrysler Venture has also agreed to support our
efforts to develop a personalized traveler information system targeted at
DaimlerChrysler's customer base.

 Freightliner

   In January 1999, we entered into an agreement with Freightliner for the
development of an AutoVue system modified for driving and road conditions in
North America. We have shipped several prototypes to Freightliner and they have
started commercial testing of the systems in their Class 3-8 trucks. As part of
our Freightliner agreement, we granted Freightliner an exclusive three year
right, following the commercial availability of AutoVue in North America, to
purchase AutoVue from us for resale to manufacturers of Class 3-8 trucks
destined for use in North America.

Sales and Marketing

 Sensor Systems

   Our marketing strategy for AutoVue is to establish it as the leading
platform for in-vehicle video sensing for trucks and passenger cars. We believe
the AutoVue system not only has the capacity to provide improved

                                       38
<PAGE>

safety and additional convenience features, but may also significantly reduce
the cost to vehicle manufacturers who otherwise might purchase multiple
sensors from different suppliers. AutoVue is sold directly by us to vehicle
manufacturers. We have a direct sales force of three product managers. We
intend to expand our sales force in the future to include engineers and
product managers who will be responsible for sales and customer service to
specific vehicle manufacturers. Since our target customer base is well known,
we do not engage in large scale marketing campaigns.

   Our marketing strategy for Vantage is to focus customers on the competitive
advantages of Vantage, which we believe to be price, performance and ease of
use. Vantage systems are primarily marketed and sold through independent
dealers. To enhance our market presence, we exhibit at a variety of national
and regional trade shows and encourage our dealers to conduct technical
seminars on our products. We currently have 25 dealers in the United States,
two in Canada and three in Asia. In addition, we intend to increase our
existing sales force of five regional and district sales managers.

   Our independent dealers are primarily responsible for sales, installation
and support of Vantage systems. Our dealers maintain an inventory of
demonstration traffic products including the Vantage vehicle detection systems
and sell directly to government agencies and installation contractors. Our
dealers often have long-term arrangements with the government agencies in
their territory for the supply of various products for the construction and
renovation of traffic intersections. We hold technical training classes for
our dealers and maintain a full time staff of customer support technicians to
provide technical assistance when needed.

 Transportation Management and Traveler Information Systems

   We market and sell our transportation management and traveler information
systems and services directly to government agencies pursuant to negotiated
contracts which involve competitive bidding and specific qualification
requirements. To enhance our presence in this market we actively participate
in various professional organizations, such as ITS America and the Institute
of Transportation Engineers, conduct presentations on issues involving
transportation management and ITS and attend trade shows. We also advertise in
professional trade magazines and participate in ITS conferences, workshops and
symposiums. We currently have eight offices throughout the United States and
plan to open three to five additional offices over the next 24 months.

   We are one of only two companies awarded a contract to develop and maintain
the National ITS Architecture. We believe our involvement in the National ITS
Architecture provides us with unique vision and insight into emerging market
trends and product opportunities and a significant competitive market
advantage. Through the training programs we conduct on the National ITS
Architecture, we have developed strong relationships and credibility with
national, regional, state and local transportation agencies responsible for
managing funds allocated for intelligent transportation systems.

   We are currently expanding our marketing efforts to enter the rural ITS
market, where we have already been awarded several contracts. In addition, we
are broadening the application of our transportation management and traveler
information systems and services to apply to transit priority projects and
personalized traveler information.

   Our traffic engineering and transportation planning services staff works
closely with over 100 local, regional, and state agencies. Their efforts help
identify and define projects where ITS technologies could be an effective
solution and help us establish relationships with those agencies who desire
our system design, software development, and system integration services.

Competition

 Sensor Systems

   The market for vehicle sensor systems is intensely competitive. Vehicle
manufacturers comprise our target market for the AutoVue system. These
companies generally purchase products from first time suppliers only to

                                      39
<PAGE>

lower costs or access technology that is not otherwise available from their
existing suppliers. While we believe that AutoVue is the only commercially-
available lane departure warning system, potential competitors, including
Delphi Automotive Systems Corporation domestically, NEC Corporation and Hitachi
Ltd. in Japan and Robert Bosch Gmbh in Europe are currently developing video
sensor technology for the vehicle industry that could be used for lane
departure warning systems.

   In the market for our Vantage vehicle detection systems, we compete with
both manufacturers of "above ground" video camera detection systems, such as
Econolite Control Products, Inc. and the Peek Traffic Systems division of
Thermo Electron Corporation, and other non-intrusive detection devices
including microwave, infrared, ultrasonic and magnetic detectors, as well as
manufacturers and installers of in-pavement inductive loop products. We believe
that we are a market leader in many key competitive categories including price,
ease of use, and detection accuracy in a broad range of intersection
architecture geometries and varying weather and lighting conditions. However,
we must continue to develop and expand upon existing Vantage technologies, as
more end user agencies are requiring additional video detection functions.

 Transportation Management and Traveler Information Systems

   The transportation management and traveler information systems market is
highly fragmented and characterized by rapidly changing technology and evolving
national and regional quality and safety standards. Our competitors vary in
number, scope and breadth of the products and services they offer. Our
competitors in advanced transportation management and traveler information
systems include corporations like TRW, Inc., Transcore, Lockheed Martin
Corporation, PB Farradyne Inc., Kimley-Horn and Associates, Inc. and National
Engineering Technology, Inc. Our competitors in transportation engineering,
planning and design include major firms like Parsons Brinkerhoff, Inc. and
Parsons Transportation Group Inc., as well as many regional engineering firms.
We believe that the principal competitive factors for securing contracts are
the experience of key individuals and their relationships with government
agencies, project management experience, name recognition and the ability to
develop software and to integrate systems. We expect the competition in the
transportation management and traveler information systems market to increase
as additional competitors gain experience and expertise.

   Many of our current and prospective competitors have longer operating
histories, greater name recognition, access to larger customer bases and
significantly greater financial, technical, manufacturing, distribution and
marketing resources than we do. As a result, they may be able to adapt more
quickly to new or emerging standards or technologies or to devote greater
resources to the promotion and sale of their products than we do. Accordingly,
it is possible that new competitors or alliances among competitors could emerge
and rapidly acquire a significant market share. Our failure to provide services
and develop and market products that compete successfully with those of other
suppliers and consultants in the market would have a material adverse effect on
our business, financial condition and results of operations.

Production

   We design, assemble and test the components of our Vantage systems. Our
facility consists of approximately 5,000 square feet of space located in
Anaheim, California. Production equipment consists of assembly lines and test
apparatus for final assembly and testing of the manufactured product.
Production volume is based upon quarterly forecasts that we readjust on a
monthly basis to control inventory. We subcontract the manufacture of AutoVue
systems to two manufacturers. We expect these manufacturers to produce unit
volume sufficient to support sales to heavy truck manufacturers. We intend to
engage additional manufacturers with expertise in high volume production to
produce higher volumes for light and medium trucks and passenger cars. We do
not produce any of the hardware used in the transportation management and
traveler information systems that we design and implement. Our production
facility is ISO 9001 certified.

Associates

   We refer to our employees as associates. As of December 31, 1999, we had 149
associates, including 97 in engineering, 17 in sales and marketing, nine in
production and 26 in other business and administrative services.

                                       40
<PAGE>

Our associates are not subject to any collective bargaining agreements, and we
generally have good relations with them.

Facilities

   As of December 31, 1999, we leased eight facilities, all located within the
United States. Our principal executive and corporate offices are located in
Anaheim, California. We also have offices for our support staff and development
teams in Madison Heights, Michigan, Sterling, Virginia, Long Beach, California,
Las Vegas, Nevada, Los Angeles, California, San Bruno, California and Boise,
Idaho. We believe that our facilities are adequate for our current operations
and that additional leased space can be obtained if needed.

Legal Proceedings

   There are no legal proceedings pending to which we are a party and our
management is unaware of any contemplated legal actions against us.

                                       41
<PAGE>

                           ARRANGEMENTS WITH ODETICS

   Odetics currently owns 93% of our outstanding common stock. Immediately
prior to this offering, Odetics will distribute all of its shares of our common
stock to its stockholders in a tax-free spin-off. Odetics has been responsible
for providing us with financial, management, administrative and other
resources. Odetics also maintains substantial control over our operations and
provides us with significant management functions and services, including
treasury, accounting, tax, internal audit, legal, human resources, marketing
and other support services. As a result of these services we incurred charges
allocated by Odetics of $1.1 million for the nine month period ended December
31, 1999, $105,000 in fiscal 1997, $458,000 in fiscal 1998 and $881,000 in
fiscal 1999. The costs of these services have been directly charged and/or
allocated using methods that we believe are reasonable. Odetics has
historically allocated these corporate costs, which are applicable and common
to all of its businesses. Allocation of these costs has been based upon a
formula that takes into account payroll, revenues and assets of each individual
business. However, these charges are not necessarily indicative of the costs we
would have incurred to obtain these services from an independent entity.

   For the purpose of governing certain of the relationships between us and
Odetics relating to the spin-off, to provide for an orderly transition and for
other matters, we have entered or intend to enter into the agreements described
below with Odetics. The following summaries of the material terms of these
agreements are qualified by reference to the complete agreements that have been
filed as exhibits to the registration statement of which this prospectus is a
part.

   These agreements were negotiated in the context of a parent-subsidiary
relationship and therefore are not the result of negotiations between
independent parties. It is our intention that these agreements should
accommodate the parties' interests in a manner that is fair to both parties,
while continuing certain mutually beneficial joint arrangements. The parties
intend that these agreements provide fair market value to them on terms no less
favorable to either party as would otherwise be available from unaffiliated
parties.

   Additional or modified arrangements and transactions may be entered into by
us with Odetics after this offering. Any of these future arrangements and
transactions will be determined through negotiation with Odetics. We have
adopted a policy that all future agreements between the parties be on terms
that we believe are no less favorable to us than we believe would be available
from unaffiliated parties. Any future agreements will also require the approval
of a majority of our directors who are not officers, directors or significant
stockholders of Odetics.

Separation and Distribution Agreement; Technology License Agreement

   We have entered into a Separation and Distribution Agreement with Odetics
that provides for the principle corporate transactions required to effect the
separation of our business from those of Odetics, the spin-off and certain
other matters governing the relationship between us and Odetics after the spin-
off.

   To separate our business from other businesses of Odetics, Odetics has
transferred to us those assets used in our business that are currently held by
Odetics without representation or warranty on an "as is" basis. We will assume
all liabilities associated with our business, including those arising from the
operation of our business both before and after the spin-off. Part of the
assets transferred to us by Odetics will be all intellectual property,
including patents and pending patent applications, related to our business. We
will license back to Odetics, on a nonexclusive, royalty free basis, a portion
of such intellectual property.

   We will release Odetics from all other obligations and liabilities owed to
us existing on the date of the spin-off, other than liabilities and obligations
arising under the Separation and Distribution Agreement and the other
agreements entered into in connection with the spin-off. Likewise, each of
Odetics and Iteris will indemnify the other for liabilities arising from a
breach of these agreements or the failure to pay or discharge the liabilities
assumed by such party under the Separation and Distribution Agreement.

                                       42
<PAGE>

   The Separation and Distribution Agreement also provides that each party will
take all reasonable steps necessary and appropriate to cause all conditions to
the distribution to be satisfied and to effect the distribution. The directors
of Odetics will set the record date for the distribution and the date on which
shares will be distributed. Odetics has agreed to consummate the distribution
as promptly as practicable after the satisfaction or waiver by its board of
directors, in its sole discretion, of the following conditions:

  .  effectiveness of the registration statement of which this prospectus is
     a part;

  .  any material governmental approvals and consents necessary or required
     under material contracts to consummate the distribution shall have been
     obtained and be in full force and effect;

  .  no order, injunction or decree issued by any court or agency of
     competent jurisdiction or other legal restraint or prohibition
     preventing the consummation of the distribution shall be in effect, and
     no other event outside the control of Odetics shall have occurred or
     failed to occur that prevents the consummation of the distribution; and

  .  no other events or developments shall have occurred that, in the
     judgment of the Board of Directors of Odetics, would result in the
     distribution having a material adverse effect on Odetics or on its
     stockholders.

   The Separation and Distribution Agreement also provides that all shares of
common stock of our company distributed to Odetics stockholders shall be marked
with a legend restricting the public transfer of the shares for a period of 180
days following the date of this prospectus and that stop transfer instructions
will be placed with the transfer agent for these shares.

   The Separation and Distribution Agreement requires that we complete a public
offering of our common stock immediately following the spin-off. It also
requires that we use proceeds of the offering to repay $10.0 million of debt
payable to Odetics and for the other purposes described under the heading "Use
of Proceeds" in this prospectus.

   We are currently an additional named insured under various Odetics insurance
policies. Under the Separation and Distribution Agreement, we will be entitled
to the benefit of pre-spin-off historical coverage under Odetic's property,
liability and certain other insurance policies to the extent coverage is
applicable or potentially available and where limits of liability have not been
exhausted, either on a per occurrence or aggregate basis. The terms and
conditions of these policies, including limits of liability, will not be
amended as a consequence of the spin-off. Going forward, we will be responsible
for maintaining separate policies of insurance, which we will obtain prior to
this offering.

Services Agreement

   We will enter into a Services Agreement with Odetics upon consummation of
the spin-off, pursuant to which Odetics will continue to provide limited
services to us, including treasury, accounting, tax, internal audit, legal and
human resources functions. Under the Services Agreement, Odetics will also
provide us with the facilities at which our principle executive and corporate
offices are located. The cost of services under the Service Agreement is
expected to be consistent with costs allocated to us by Odetics during prior
periods. The actual expenditures will depend on numerous factors, some of which
are beyond our control.

Tax Allocation Agreement

   We will enter into a Tax Allocation Agreement with Odetics upon the
consummation of the spin-off, pursuant to which tax liability for any given
taxable period prior to the spin-off will be apportioned among the members of
the Odetics consolidated group that generated taxable income for that period.
The tax liability will be allocated according to each member's share of taxable
income of the consolidated group. No tax liability will be allocated to us if
we generate a taxable loss during such period and we will not receive any
benefit from the use of any such loss by other members of the Odetics
consolidated group. We will be responsible for all of our tax liabilities after
the spin-off.

                                       43
<PAGE>

                                   MANAGEMENT

Executive Officers and Directors

   Our executive officers and directors are as follows:

<TABLE>
<CAPTION>
          Name           Age                           Position
          ----           ---                           --------
<S>                      <C> <C>
Joel Slutzky............  60 Chairman of the Board
Jack Johnson............  52 Chief Executive Officer, President and Director
Victor Rumana...........  49 Chief Financial Officer
Stephen E. Rowe.........  64 Sr. Vice President and Director of Transportation Systems
Donald W. Sinnar........  56 Sr. Vice President of Marketing and Products
Abbas Mohaddes..........  42 Vice President and Deputy Director of Transportation Systems
Andrew H. Card, Jr......  52 Director
Gary Hernandez..........  41 Director
Gregory A. Miner........  45 Director
Samuel K. Skinner.......  61 Director
William M. Spreitzer....  70 Director
Paul E. Wright..........  68 Director
</TABLE>

   Joel Slutzky has served as our Chairman of the Board since inception and has
served as Chairman of the Board and Chief Executive Officer of Odetics since he
co-founded Odetics in 1969. From August 1993 until January 1994, Mr. Slutzky
served as the Chief Financial Officer of Odetics, and as President of Odetics
from 1969 to 1975. Prior to founding Odetics, Mr. Slutzky was an engineering
manager at Leach Corporation, now part of the Lockheed Electronics Division of
Lockheed Corporation. Mr. Slutzky holds a B.S. in both Electrical Engineering
and Mechanical Engineering and an M.S. in Mechanical Engineering from the
University of Illinois.

   Jack Johnson has served as our President since May 1998, our Chief Executive
Officer since January 1999 and a director since our inception. From October
1996 through May 1998, Mr. Johnson served as our Vice President and General
Manager. Mr. Johnson is a Vice President of Odetics and has also served in
various capacities at Odetics including the General Manager of the Odetics
Customer Service Division from 1990 to 1996, the Vice President and General
Manager of Odetics' Omutec division from 1986 to 1990, the Director of
Contracts for the Space Division from 1980 to 1986, the Controller of
Infodetics, a former subsidiary of Odetics, from 1975 to 1980 and the
Controller of Odetics from 1974 to 1975. Prior to joining Odetics, Mr. Johnson
served as a certified public accountant with Peat Marwick and Mitchell. Mr.
Johnson holds a B.S. in Accounting from Northern Illinois University.

   Victor Rumana has served as our Chief Financial Officer since December 1999.
From February 1997 until September 1999, Mr. Rumana served as a Vice President,
Telecommunication Products Division, at Ball Aerospace & Technologies, Inc.
From April 1995 to November 1996, Mr. Rumana served as Vice President, Finance
and Administration, at Efratom Time & Frequencing, Inc., a subsidiary of Datum,
Inc. Mr. Rumana holds a B.S. in Accounting from the University of Colorado and
an M.B.A. from the University of California, Irvine.

   Stephen E. (Ed) Rowe joined us in June 1997 as Director of Transportation
Systems, and has served as Senior Vice President since January 1999. From 1958
to 1993, Mr. Rowe was employed by the Los Angeles Department of Transportation
in various capacities, most recently as its General Manager from 1987 to 1993.
At the Los Angeles Department of Transportation, Mr. Rowe directed the planning
and implementation of the Automated Traffic Surveillance and Control System as
well as the City's 1984 Olympic Games Transportation Program. Mr. Rowe was also
largely responsible for Los Angeles' participation in the Los Angeles Smart
Corridor Project, which was one of the early field-operational tests of ITS
concepts. From 1993 to 1997, Mr. Rowe provided ITS consultation services for
federal, state and municipal government agencies, in addition to private
corporations such as Rockwell International. Such consulting projects included
the National ITS Architecture Development Program. Mr. Rowe is a current and
founding member of ITS America, a member of the California Alliance for
Advanced Transportation Systems, and past Chairman of the ITS Council of the
Institute of Transportation Engineers. Mr. Rowe is also a recipient of the
prestigious ITE Matson award for

                                       44
<PAGE>

contributions to the science and technology of transportation engineering. Mr.
Rowe holds a Bachelor degree in Engineering from the University of Southern
California and a Masters in Engineering from the University of California, Los
Angeles.

   Donald W. Sinnar has served as our Senior Vice President, Marketing and
Products since January 1998, and prior to that served as the Corporate Director
of Business Communications of Odetics since February 1997, and as the General
Manager of Odetics Telecom from 1995 to 1997. From 1993 until 1995, Mr. Sinnar
served as the Vice President, Marketing and Sales of Efratom Time and Frequency
Products, which was subsequently acquired by Datum, Inc. Mr. Sinnar also served
as the Vice President, Sales and Marketing of First Pacific Networks, Inc. from
1991 to 1993, Fiberstars, Inc. from 1989 to 1990 and American Telecorp., Inc.
from 1987 to 1989. Mr. Sinnar holds a B.S. in Accounting and Finance from
Benjamin Franklin University.

   Abbas Mohaddes has served as our Vice President, Transportation Systems,
since October 1998. Prior to joining us, since January 1991, Mr. Mohaddes
served as Chief Executive Officer of our wholly owned subsidiary Meyer,
Mohaddes Associates, Inc., a consulting firm specializing in ITS and traffic
engineering. Mr. Mohaddes is a founding member of ITS America. Mr. Mohaddes is
also Chairman of the Committee on innovative procurement methods for traffic
control and a member of the traffic flow committee of the Transportation
Research Board. Mr. Mohaddes holds a B.S. in Civil Engineering and an M.S. in
Transportation Engineering from the University of Nebraska.

   Andrew H. Card, Jr. has been a Director since January 1999. Since June 1999,
Mr. Card has served as Vice President, Government Relations, for General
Motors. From September 1993 to January 1999, Mr. Card served as President and
Chief Executive Officer of the American Automobile Manufacturers Association.
Mr. Card was U.S. Secretary of Transportation from February 1992 to January
1993 and White House Deputy Chief of Staff from January 1989 to February 1992.
Mr. Card has also been a Distinguished Fellow of the U.S. Chamber of Commerce
since January 1999. Mr. Card holds a B.S. in Engineering from the University of
South Carolina and an M.S. in Government from Harvard University.

   Gary Hernandez has been a Director since January 1999. Mr. Hernandez has
been a partner in the law firm of Sonnenschein, Nath and Rosenthal since
December 1997. From December 1995 to December 1997, Mr. Hernandez was a partner
in the law firm of Long & Levit. Mr. Hernandez served as the Deputy Insurance
Commissioner of California from April 1991 to November 1995. Mr. Hernandez
received his B.A. from the University of California, Berkeley and his J.D. from
the University of California, Davis.

   Gregory A. Miner has been a director since April 1998 and served as our
Chief Financial Officer and Secretary from our incorporation in September 1998
to December 1999. Mr. Miner is the Vice President, Finance and Chief Financial
Officer of Odetics and has served in those capacities since January 1994. In
April 1998, Mr. Miner also assumed the duties of Chief Operating Officer of
Odetics. Prior to joining Odetics, Mr. Miner served as Vice President, Chief
Financial Officer and a member of the Board of Directors of Laser Precision
Corporation, a manufacturer of telecommunications test equipment, from January
1984 until December 1993. Mr. Miner holds a B.A. degree from California
Polytechnic State University, San Luis Obispo, and is a certified public
accountant.

   Samuel K. Skinner has been a Director since April 1999. From December 1991
to September 1992, Mr. Skinner served as Chief of Staff to President George
Bush from February 1989 to December 1991 served as U.S. Secretary of
Transportation. Mr. Skinner served as President of Unicom and Commonwealth
Edison from February 1993 to April 1998. Mr. Skinner is currently co-chairman
of the law firm of Hopkins & Sutter. Mr. Skinner holds a B.A. in Accounting
from the University of Illinois and his J.D. from DePaul University.

   William M. Spreitzer has been a Director since January 1999. From March 1991
to January 1998, Mr. Spreitzer was Technical Director of the ITS program for
General Motors. From 1966 to 1989, Mr. Spreitzer served as head of General
Motors Transportation Research Department. Mr. Spreitzer was also a founding
member of ITS America. Mr. Spreitzer holds a B.S. and an Honorary Professional
Degree in Aeronautical Engineering from the University of Detroit.

                                       45
<PAGE>

   Paul E. Wright has been a Director since January 1999. Since 1996, Mr.
Wright has served as President of Wright Associates, Inc. From 1988 to 1996,
Mr. Wright served as Chairman of Chrysler Technologies Corporation. Mr. Wright
is also a member of the board of directors of Odetics. Mr. Wright holds a B.S.
in Engineering from California Polytechnic State University, San Luis Obispo
and an M.S. in Engineering from the University of Pennsylvania.

   In accordance with our certificate of incorporation, the terms of office of
the members of our board of directors are divided into three classes. Mr. Miner
and Mr. Skinner serve as Class I directors (whose term expires in 2001), Mr.
Hernandez, Mr. Slutzky and Mr. Wright serve as Class II directors (whose term
expires in 2002), and Mr. Card, Mr. Johnson and Mr. Spreitzer serve as Class
III directors (whose term expires in 2003). At each annual meeting of our
stockholders, the successors to directors whose terms then expire will be
elected to serve from the time of election and qualification until the third
annual meeting following elections. If we add additional directors, they will
be distributed among the three classes so that, as nearly as possible, each
class will consist of one-third of the total number of directors. The
classification of our board of directors may have the effect of delaying or
preventing changes in control of our management.

Other Key Employees

   Our other key employees are as follows:

   James C. Barbaresso has served as our Midwest Regional Vice President,
Transportation Systems since June, 1997. Prior to joining us from April 1996 to
June 1997, Mr. Barbaresso served as Regional Manager, Midwest Region, for
Rockwell Transportation Systems. From February 1988 to April 1996, Mr.
Barbaresso served as Director, Planning and Development, for Oakland County,
Michigan. Mr. Barbaresso holds a B.S. in Sociology and an M.S. in
Transportation Planning from the University of Iowa.

   Richard D. Crawshaw has served as our Vice President, Engineering, since
January 1999, and prior to that served as our Director of Engineering since
January 1998, and as Product Manager from November 1995 to December 1997. Mr.
Crawshaw worked as a Senior Software Engineer at Hewlett Packard. Mr. Crawshaw
holds a B.S. in Physics from Oregon State University and an M.S. in Physics
from the University of Oregon.

   Clifford D. Heise has served as our Eastern Regional Vice President,
Transportation Systems, since January 1999. Mr. Heise served as our Regional
Manager, Eastern Region, from July 1997 to December 1999. From July 1996 to
June 1997, Mr. Heise served as Regional Manager, Eastern Region, and from
January 1994 to June 1996 was a Systems Engineer for Rockwell International
Corporation. Mr. Heise holds a B.S. in Mathematics from Oklahoma State
University.

   Richard P. Hooper, Ph.D. has served as our Chief Scientist since June 1997
and Vice President since January 1999. Prior to joining us, Dr. Hooper served
as Chief Technologist at Rockwell International Corporation since April 1994.
Dr. Hooper holds a B.A. in Mathematics-Computer Science, and an M.S. and Ph.D.
in Computer Science from the University of California, Los Angeles.

   Gregory McKhann has served as our Vice President of Strategic Business
Development since December 1999 and our Director of Strategic Business
Development from October 1999 to December 1999. From July 1997 to October 1999,
Mr. McKhann served as our Marketing Director. Prior to joining us from 1990 to
1997 Mr. McKhann served as a Marketing Manager at Rockwell International. Mr.
McKhann holds a B.S. degree in Computer Science from Duke University and an
M.B.A. from the University of California, Irvine.

   Francis Memole has served as our Vice President of Vehicle Sensors since
December 1998. From June 1997 to December 1998, Mr. Memole served as our
Marketing Director. Prior to joining us, from January 1994 to June 1997, Mr.
Memole was a Vehicle Products Manager at Rockwell International. Mr. Memole
holds a B.S.E.E. from the University of South Florida and an M.B.A. from
Claremont Graduate School.

   Michael P. Meyer serves as Vice President of Meyer, Mohaddes Associates,
Inc. From January 1991 until our acquisition of Meyer, Mohaddes, Mr. Meyer
served as both President and Secretary of Meyer, Mohaddes. Mr. Meyer holds a
B.S. and an M.S. in Civil Engineering from the University of California,
Berkeley.

                                       46
<PAGE>

   Arya Rohani has served as our Western Regional Vice President,
Transportation Systems, since 1997. Prior to joining us, from 1991 until 1997,
Mr. Rohani served as Manager of Transportation for the city of Irvine,
California. Mr. Rohani holds a B.S. in Engineering from the University of
Florida.

Board Committees

   Our board of directors currently has two committees, a compensation
committee and an audit committee. The compensation committee consists of Mr.
Hernandez, Mr. Miner, Mr. Skinner and Mr. Slutzky. The compensation committee
reviews and recommends the salaries and bonuses of our officers and certain key
employees, establishes compensation and incentive plans, authorizes and
approves the granting of stock options and restricted stock in accordance with
our stock option and incentive plans and determines other fringe benefits.

   The audit committee consists of Mr. Card, Mr. Spreitzer and Mr. Wright. The
audit committee recommends engagement of our independent public accountants and
is primarily responsible for approving the services performed by our
independent accountants and for reviewing and evaluating our accounting
principles and our system of internal controls.

Director Compensation

   Directors who are not employed by us receive cash compensation of $12,000
per year for service on our board of directors, in addition to $1,500 for each
board meeting attended in person and $250 for each telephonic board meeting.
Directors are also reimbursed for out of pocket expenses incurred in connection
with service on our board of directors. In addition, each non-employee director
received an option to purchase 18,756 shares of our common stock upon
appointment as a director and are eligible to receive periodic stock option
grants under our 1998 Stock Incentive Plan. Upon completion of this offering,
Mr. Slutzky and Mr. Miner shall receive cash compensation equal to amounts
received by other non-employee directors and will be eligible to receive
periodic stock option grants under our 1998 Stock Incentive Plan.

Compensation Committee Interlocks and Insider Participation

   Mr. Slutzky and Mr. Miner, each directors, are stockholders, executive
officers and directors of Odetics. Mr. Wright, a director is also a director of
Odetics. No other relationship exists between our Board of Directors or
Compensation Committee and the Board of Directors of any other company.

Executive Compensation

   The following table summarizes all compensation earned by or paid to our
Chief Executive Officer and the other executive officers whose total salary and
bonus exceeded $100,000 for services rendered in all capacities to us during
the year ended March 31, 1999. We refer to these officers as our named
executive officers in other parts of this prospectus.

                           Summary Compensation Table

<TABLE>
<CAPTION>
                                                    Long Term
                                                   Compensation
                                                      Awards
                                       Annual      ------------
                                   Compensation(1)  Securities
                                   ---------------  Underlying     All Other
Name and Principal Position(2)     Salary(3) Bonus Options (#)  Compensation(4)
- ------------------------------     --------- ----- ------------ ---------------
<S>                                <C>       <C>   <C>          <C>
Jack Johnson ..................... $152,115    --       --          $3,920
  Chief Executive Officer and
   President
Gregory A. Miner(5)...............  156,751    --       --           4,613
  Chief Financial Officer and
   Secretary
Stephen E. Rowe...................  136,794    --       --           2,726
  Senior Vice President and
   Director of Transportation
   Systems
Donald W. Sinnar .................  157,198    --       --           4,430
  Senior Vice President, Marketing
   and Products
</TABLE>

                                       47
<PAGE>

- --------
(1) Other than salary and bonus described herein, we did not pay any named
    executive officer, any fringe benefits, perquisites or other compensation
    in excess of 10% of such executive officer's salary and bonus during fiscal
    1999.

(2) Mr. Mohaddes, our Vice President and Deputy Director of Transportation
    Systems, joined us in October 1998. His annual salary is $127,200.

(3) Represents amounts paid by Odetics and its subsidiaries on an aggregated
    basis. Odetics charged us for the salaries of Mr. Johnson, Mr. Rowe and Mr.
    Sinnar and a portion of the salary for Mr. Miner.

(4) Represents Odetics matching contribution under the Odetics Section 401(k)
    Plan.

(5) Mr. Miner resigned as the Chief Financial Officer and Secretary in
    December 1999. Mr. Rumana joined us as Chief Financial Officer in December
    1999. Mr. Rumana's annual salary is $135,000.

Option Grants

   There were no stock options granted to our named executive officers during
the fiscal year ended March 31, 1999.

Option exercises and fiscal year-end values

   Our named executive officers did not exercise any stock options during the
fiscal year ended March 31, 1999. The following table sets forth the number and
value of the named executive officers' unexercised options at March 31, 1999,
based upon an exercise price of $1.06 per share. The value of unexercised in-
the-money options at March 31, 1999 represents an amount equal to the
difference between the assumed initial public offering price of $12.00 per
share and the option exercise price, multiplied by the number of unexercised
in-the-money options.

   Aggregated Option Exercises In Last Fiscal Year and Fiscal Year End Option
                                     Values

<TABLE>
<CAPTION>
                               Number of Securities      Value of Unexercised
                              Underlying Unexercised     in-the-money Options
                             Options at March 31, 1999     at March 31, 1999
                             ------------------------- -------------------------
Name                         Exercisable Unexercisable Exercisable Unexercisable
- ----                         ----------- ------------- ----------- -------------
<S>                          <C>         <C>           <C>         <C>
Jack Johnson................   56,270       168,810      615,594     1,846,781
Gregory A. Miner............       --            --           --            --
Stephen W. Rowe.............   46,891       140,675      513,925     1,541,798
Donald W. Sinnar............   23,445        70,337      256,957       770,894
</TABLE>

Employment Agreements

   Mr. Mohaddes is employed as our Vice President and Deputy Director of
Systems under a four-year employment agreement. The employment agreement
provides for the payment to him of a base salary of $120,000 per year. Mr.
Mohaddes may participate in all employee benefit plans or programs generally
available to our employees, and we will pay or reimburse him for all reasonable
and necessary out-of-pocket expenses he incurs in the performance of his
duties. If Mr. Mohaddes is terminated without cause or he voluntarily
terminates for good reason, he is entitled to severance pay in an amount equal
to the lesser of twelve months salary or the amount of salary remaining under
the term of his employment agreement.

1998 Stock Incentive Plan

   Our 1998 Stock Incentive Plan was adopted by our board of directors on April
13, 1998 and was approved by our stockholders on April 14, 1998. Our 1998 Stock
Incentive Plan provides for awards or sales of shares, incentive stock options
and nonstatutory stock options. We have authorized a total of 2,813,513 shares
of common stock for issuance under our 1998 Stock Incentive Plan.

                                       48
<PAGE>

   Our 1998 Stock Incentive Plan consists of:

  .  the Discretionary Option Grant program under which eligible individuals
     in our employ or service, including officers, non-employee board members
     and consultants and independent advisors, may be granted options to
     purchase shares of common stock at an exercise price not less than 85%
     of their fair market value on the grant date;

  .  the Stock Issuance Program under which such individuals may be issued
     shares of common stock directly, through the purchase of such shares at
     a price not less than 85% of their fair market value at the time of
     issuance or as a bonus tied to the performance of services; and

  .  the Automatic Option Grant Program under which option grants will
     automatically be made at periodic intervals to eligible non-employee
     members of our board of directors to purchase shares of common stock at
     an exercise price per share equal to 100% of their fair market value on
     the option grant date.

   The Discretionary Option Grant and Stock Issuance Programs will be
administered by our board of directors prior to the effectiveness of our
registration statement under Section 12(g) of the 1934 Act and will be
administered by the compensation committee after that time. The compensation
committee or the plan administration will have complete discretion to
administer the 1998 Stock Option Plan. The Automatic Option Grant Program will
be self-executing in accordance with the terms of that program, and neither the
compensation committee nor the board of directors will exercise any
administrative discretion with respect to option grants under that program.

   In the event that we are acquired by merger or a sale of substantially all
of our assets, each outstanding option under the Discretionary Option Grant
Program which is not to be assumed by the successor corporation or replaced
with a cash incentive program of the successor corporation which preserves the
spread existing at the time of the transaction for any shares for which the
option is not otherwise at that time exercisable will automatically accelerate
in full, and all unvested shares under the Discretionary Option Grant and Stock
Issuance Programs will immediately vest, except to the extent our repurchase
rights with respect to those shares are assigned to the successor corporation.
The plan administration will have complete discretion to grant one or more
options under the Discretionary Option Grant Program which will become
exercisable on an accelerated basis for all or part of the option shares if we
are acquired, whether or not those options are assumed, or if an optionee is
terminated within a designated period following an acquisition in which those
options are assumed. The vesting of outstanding shares under the Stock Issuance
Program may be accelerated upon similar terms and conditions.

   We have authorized stock appreciation rights under the Discretionary Option
Grant Program which provide the optionholders with the election to surrender
their outstanding options for an appreciation distribution from us equal to the
excess of the fair market value of the vested shares of common stock subject to
the surrendered option over the aggregate exercise price payable for such
shares. Such appreciation distribution may be made in cash or in shares of
common stock.

   The plan administrator will have the authority to effect the cancellation of
outstanding options under the Discretionary Option Grant Program in return for
the grant of new options for the same or different number of option shares with
an exercise price per share based upon the fair market value of the common
stock on the new grant date.

   Under the Automatic Option Grant Program, as amended, each individual who
first becomes a non-employee member of our board of directors at any time
thereafter receives a 20,000 share option grant on the date such individual
joins the board of directors, provided such individual has not been employed by
us or any parent or subsidiary corporation. On the date of each annual
stockholders meeting, beginning with the annual meeting held in the calendar
year immediately following the effective date of this offering, each non-
employee member of our board of directors who is to continue to serve as non-
employee board member will automatically be granted an option to purchase
10,000 shares of common stock, provided such individual has

                                       49
<PAGE>

served on our board of directors for at least six months. The shares subject to
each automatic grant will immediately vest in full upon certain changes in
control or ownership of us or upon the optionee's death or disability while a
member of our board of directors.

   The board of directors may amend or modify the 1998 Stock Incentive Plan at
any time, subject to any required shareholder approval. The 1998 Stock
Incentive Plan will terminate on the earliest of April 13, 2008, the date on
which all shares available for issuance under the 1998 Stock Incentive Plan
have been issued as fully-vested shares or the termination of all outstanding
options in connection with certain changes in control or ownership of us.

Options Issued Outside of the 1998 Stock Incentive Plan

   Prior to the adoption of our 1998 Stock Incentive Plan, we issued
nonqualified options to purchase 900,324 shares of our common stock to selected
employees, including executive officers. The purchase price under these
nonqualified option agreements is equal to the fair market value of our shares
of common stock at the time of grant.

Employee Stock Purchase Plan

   In December 1999, our board of directors adopted our Employee Stock Purchase
Plan, to be effective upon completion of this offering. A total of 1,406,756
shares of common stock have been reserved for issuance under our Employee Stock
Purchase Plan. Our Employee Stock Purchase Plan, which is intended to qualify
under Section 423 of the Internal Revenue Code of 1986, as amended, will be
administered by the board of directors or by a committee appointed by the
board. Employees are eligible to participate if they are customarily employed
for at least 20 hours per week and for more than five months in any calendar
year. Employees who own more than 5% of our outstanding stock may not
participate. Our Employee Stock Purchase Plan permits eligible employees to
purchase common stock through payroll deductions which may not exceed the
lesser of 15% of any employee's compensation, or $25,000.

   Our Employee Stock Purchase Plan will be implemented by six month offering
periods with purchases occurring at six month intervals commencing on the date
of this prospectus.

   The purchase price of the common stock under our Employee Stock Purchase
plan will be equal to 85% of the fair market value per share of common stock on
either the start date of the offering period or on the purchase date, whichever
is less. Employees may end their participation in an offering period at any
time during that period, and participation ends automatically on termination of
employment with us. In the event of a proposed dissolution or liquidation of
our company, the offering periods terminate immediately prior to the
consummation of the proposed action, unless otherwise provided by our board of
directors. If there is a proposed sale of all or substantially all of our
assets or the merger of our company with or into another company, then the
offering period in progress will be shortened and a new exercise date will be
set that is before the sale or merger. Our Employee Stock Purchase Plan will
terminate in 2009, unless sooner terminated by the board of directors.

Section 401(k) Plan

   We intend to adopt a 401(k) Plan covering our full-time employees following
the offering. Our 401(k) Plan is intended to qualify under Section 401(k) of
the Internal Revenue Code of 1986, as amended, so that contributions to the
401(k) Plan by employees or by us, and the investment earnings thereon, are not
taxable to employees until withdrawn from the 401(k) Plan, and so that we can
deduct any contributions that we make, at the time they are made. Pursuant to
the 401(k) Plan, employees may elect to reduce their current compensation by up
to the statutorily prescribed annual limit and to have the amount of such
reduction contributed to the 401(k) Plan. The 401(k) Plan permits us, but does
not require us to make, additional matching contributions to the 401(k) Plan on
behalf of all participants in the 401(k) Plan.

                                       50
<PAGE>

                       PRINCIPAL AND SELLING STOCKHOLDERS

   The following table sets forth specified information with respect to the
beneficial ownership of our common stock as of December 31, 1999:

  .  each person, or group of affiliated persons, who is known by us to
     beneficially own 5% or more of the common stock;

  .  each of our selling stockholders;

  .  each of our directors;

  .  each of our named executive officers; and

  .  all of our directors and executive officers as a group.

   Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and includes voting and investment power
with respect to shares. Unless otherwise indicated, the persons named in the
table have sole voting and sole investment control with respect to all shares
beneficially owned. The number and percentage of shares beneficially owned are
based on 12,500,001 shares of common stock outstanding as of December 31, 1999.
The number and percentage of shares beneficially owned also assumes that:

  .  shares of common stock subject to options that are currently exercisable
     or exercisable within 60 days of December 31, 1999 are deemed to be
     outstanding and beneficially owned;

  .  the spin-off from Odetics has been consummated; and

  .  executive officers, directors and selling stockholders who hold options
     to purchase Odetics common stock have fully exercised their options.
<TABLE>
<CAPTION>

                         Shares Beneficially Owned                    Shares Beneficially Owned
                           Prior to the Offering      Number of          After the Offering
  Name and Address of    -------------------------      Shares       ----------------------------
   Beneficial Owners       Number      Percentage    Being Offered       Number      Percentage
  -------------------    ---------    ------------   -------------   -------------  -------------
<S>                      <C>          <C>            <C>             <C>           <C>
Jack Johnson(1).........   178,459        1.4               --             178,459            1.0
Stephen E. Rowe(2)......   105,135          *               --             105,135              *
Donald W. Sinnar(3).....    58,637          *               --              58,637              *
Andrew Card(4)..........     6,251          *               --               6,251              *
Gary Hernandez(4).......     6,251          *               --               6,251              *
Gregory A. Miner(5).....   150,695        1.2               --             150,695              *
Samuel K. Skinner.......         0          *               --                 --               *
Joel Slutzky(6)......... 1,108,139        8.9               --           1,108,139            6.6
William M.
 Spreitzer(4)...........     6,251          *               --               6,251              *
Paul E. Wright(7).......    68,047          *               --              68,047              *
Abbas Mohaddes(8).......   406,154        3.2            55,924            350,230            2.1
Michael P. Meyer(9).....   440,325        3.5            55,924            384,401            2.3
Gary Hamrick(10)........    49,922          *             6,078             43,844              *
Viggen Davidian(11).....    30,587          *             3,647             26,940              *
All executive officers
 and directors as a
 group (11 persons)..... 2,094,019       16.4                --           2,038,095           12.0
</TABLE>
- --------
*Less than 1%

(1) Consists of options to purchase 112,540 shares of common stock exercisable
    within 60 days of December 31, 1999 and 65,918 shares distributed in the
    spin-off.

(2) Consists of options to purchase 93,783 shares of common stock exercisable
    within 60 days of December 31, 1999 and 11,351 shares distributed in the
    spin-off.

                                       51
<PAGE>


 (3) Consists of options to purchase 46,891 shares of common stock exercisable
     within 60 days of December 31, 1999 and 6,262 shares distributed in the
     spin-off.

 (4) Consists of options to purchase 6,251 shares of common stock exercisable
     within 60 days of December 31, 1999.

 (5) Includes 150,695 shares distributed in the spin-off.

 (6) Includes 1,108,139 shares distributed in the spin-off.

 (7) Consists of options to purchase 6,251 shares of common stock exercisable
     within 60 days of December 31, 1999 and 61,795 shares distributed in the
     spin-off.

 (8) Includes 30,933 shares distributed in the spin-off.

 (9) Includes 39,002 shares distributed in the spin-off.

(10) Consists of options to purchase 9,378 shares of common stock exercisable
     within 60 days of December 31, 1999 and 1,146 shares distributed in the
     spin-off.

(11) Consists of options to purchase 7,033 shares of common stock exercisable
     within 60 days of December 31, 1999 and 2,914 shares distributed in the
     spin-off.

                              CERTAIN TRANSACTIONS

   Odetics has provided us with significant management functions and services,
including treasury, accounting, tax, internal audit, legal, human resources,
sales and marketing and other support services. As a result of these services,
we incurred charges allocated by Odetics of $105,000 in fiscal 1997, $458,000
in fiscal 1998 and $881,000 in fiscal 1999 and $1.1 million for the nine months
ended December 31, 1999. We directly charged and/or allocated the costs of
these services using methods that we believe are reasonable, but these charges
are not necessarily indicative of the costs we would have incurred to obtain
these services from an independent agency. We will enter into the following
agreements with Odetics in connection with the spin-off: separation and
distribution agreement, services agreement, tax allocation agreement and
promissory note. See "Arrangements with Odetics."

   We have agreed to take all reasonable steps necessary and appropriate to
satisfy the conditions to and effect the spin-off of our shares by Odetics. As
a result of the spin-off and assuming all Odetics stock options held by the
following persons are exercised, Mr. Johnson will receive 65,918 shares, Mr.
Miner will receive 150,695 shares, Mr. Mohaddes will receive 30,933 shares, Mr.
Rowe will receive 11,351 shares, Mr. Sinnar will receive 11,745 shares, Mr.
Slutzky will receive 1,108,139 shares and Mr. Wright will receive 61,795 shares
of our common stock.


                                       52
<PAGE>

                          DESCRIPTION OF CAPITAL STOCK

   Upon the closing of this offering, our authorized capital stock will consist
of 40,000,000 shares of common stock, $.001 par value, and 5,000,000 shares of
preferred stock, $.001 par value.

   The following is a summary of certain provisions of our common stock,
preferred stock, certificate of incorporation and bylaws.

Common Stock

   As of December 31, 1999, there were 12,500,001 shares of common stock
outstanding, held by five stockholders of record. All outstanding shares of our
common stock are, and the common stock to be issued in this offering will be,
fully paid and nonassessable.

   The following summarizes the rights of holders of our common stock:

  .  each holder of shares of common stock is entitled to one vote per share
     on all matters to be voted on by stockholders generally, including the
     election of directors;

  .  there are no cumulative voting rights;

  .  the holders of our common stock are entitled to dividends and other
     distributions as may be declared from time to time by the board of
     directors out of funds legally available for that purpose, if any;

  .  upon our liquidation, dissolution or winding up, the holders of shares
     of common stock will be entitled to share ratably in the distribution of
     all of our assets remaining available for distribution after
     satisfaction of all our liabilities and the payment of the liquidation
     preference of any outstanding preferred stock;

  .  the holders of common stock have no preemptive or other subscription
     rights to purchase shares of our stock, nor are they entitled to the
     benefits of any redemption or sinking fund provisions; and

  .  shares of our common stock that will be distributed by Odetics in the
     spin-off will not be publicly transferable for the period ending 180
     days after the date of this prospectus.

Preferred Stock

   There are no shares of preferred stock outstanding. Our certificate of
incorporation authorizes our board of directors to create and issue one or more
series of preferred stock and determine the rights and preferences of each
series within the limits set forth in our certificate of incorporation and
applicable law. Among other rights, the board of directors may determine,
without further vote or action by our stockholders:

  .  the number of shares constituting the series and the distinctive
     designation of the series;

  .  the dividend rate on the shares of the series, whether dividends will be
     cumulative, and if so, from which date or dates, and the relative rights
     of priority, if any, of payment of dividends on shares of the series;

  .  whether the series will have voting rights in addition to the voting
     rights provided by law and, if so, the terms of the voting rights;

  .  whether the series will have conversion privileges and, if so, the terms
     and conditions of conversion;

  .  whether or not the shares of the series will be redeemable or
     exchangeable, and, if so, the dates, terms and conditions of redemption
     or exchange, as the case may be;

  .  whether the series will have a sinking fund for the redemption or
     purchase of shares of that series, and, if so, the terms and amount of
     the sinking fund; and

  .  the rights of the shares of the series in the event of our voluntary or
     involuntary liquidation, dissolution or winding up and the relative
     rights or priority, if any, of payment of shares of the series.

                                       53
<PAGE>

   Unless otherwise provided by our board of directors, the shares of all
series of preferred stock will rank on a parity with respect to the payment of
dividends and to the distribution of assets upon liquidation. Although we have
no present plans to issue any shares of preferred stock, any future issuance of
shares of preferred stock, or the issuance of rights to purchase preferred
shares, may have the effect of delaying, deferring or preventing a change of
control in our company or an unsolicited acquisition proposal. The issuance of
preferred stock also could decrease the amount of earnings and assets available
for distribution to the holders of common stock or could adversely affect the
rights and powers, including voting rights, of the holders of the common stock.

Registration Rights

   After the offering, the holders of 688,914 shares of our common stock have
the right to cause us to register their shares under the Securities Act of 1933
anytime we file a registration statement to register any of our securities for
our own account. Such registration opportunities are unlimited but the number
of shares that can be registered may be eliminated entirely or cut back in
certain situations by the underwriters of such offering.

   After April 25, 2001, DaimlerChrysler Venture or any transferee of the
shares of common stock issued to DaimlerChrysler Venture upon the conversion of
the promissory note issued to DaimlerChrysler Venture on January 25, 2000, has
the right to cause us to register its shares under the Securities Act of 1933
any time we file a registration statement to register any of our securities for
our own account. In addition, after April 25, 2001, and after we have qualified
for registration on Form S-3, DaimlerChrysler Venture or any transferee of the
DaimlerChrysler Venture shares may request that we register its shares under
the Securities Act of 1933 if the aggregate offering price is more than $2.0
million. We are not obligated to register such shares on Form S-3 more than
twice during any 12 month period.

Anti-Takeover Effects of Provisions of Delaware Law and Our Certificate of
Incorporation and Bylaws

   We are subject to the provisions of Section 203 of the Delaware General
Corporation Law. Subject to certain exceptions, Section 203 prohibits a
publicly-held Delaware corporation from engaging in a "business combination"
with an "interested stockholder" for a period of three years after the date of
the transaction in which the person became an interested stockholder, unless
the interested stockholder attained such status with the approval of the board
of directors or the business combination is approved in a prescribed manner. A
"business combination" includes mergers, asset sales and other transactions
resulting in a financial benefit to the interested stockholder. Subject to
certain exceptions, an "interested stockholder" is a person who, together with
affiliates and associates, owns, or within three years did own, fifteen percent
or more of a corporation's voting stock. This statute could prohibit or delay
the accomplishment of mergers or other takeover or change in control attempts
relating to our company and, accordingly, may discourage attempts to acquire
us.

   In addition, some provisions of our certificate of incorporation and bylaws
may be deemed to have an anti-takeover effect and may delay, defer or prevent a
tender offer or takeover attempt that a stockholder might consider in its best
interest, including those attempts that might result in a premium over the
market price for the shares held by our stockholders. These provisions include:

  .  Board of Directors. Our board of directors is divided into three classes
     of directors serving staggered terms. Our certificate of incorporation
     authorizes our board of directors to fill vacant directorships or
     increase the size of the board of directors. Accordingly, even if a
     stockholder succeeds in a proxy contest, he would likely only be able to
     elect a minority of our board of directors at any one annual meeting.

  .  Stockholder Action; Special Meeting of Stockholders. Our certificate of
     incorporation provides that stockholders may not take action by written
     consent, but only at a duly called annual or special meeting of
     stockholders. Our certificate of incorporation further provides that
     special meetings of our stockholders may be called only by the Chairman
     of the Board of directors, by a committee of the board of directors or a
     majority of the board of directors, and in no event may the stockholders
     call a special meeting. Thus, without approval by the board of directors
     or Chairman, stockholders may take no action between annual meetings.

                                       54
<PAGE>

  .  Advance Notice Requirements for Stockholder Proposals and Director
     Nominations. The bylaws provide that stockholders seeking to bring
     business before an annual meeting of stockholders, or to nominate
     candidates for election as directors at an annual meeting of
     stockholders, must provide timely notice of this intention in writing.
     To be timely, a stockholder's notice must be delivered to or mailed and
     received at our principal executive offices not less than 120 days prior
     to the first anniversary of the date of our notice of annual meeting
     provided with respect to the previous year's annual meeting of
     stockholders. However, if no annual meeting of stockholders was held in
     the previous year or the date of the annual meeting of stockholders has
     been changed to be more than 30 calendar days from the time contemplated
     at the time of the previous year's proxy statement, then a proposal
     shall be received no later than the close of business on the tenth day
     following the date on which notice of the date of the meeting was mailed
     or a public announcement was made, whichever first occurs. The bylaws
     also include a similar requirement for making nominations at special
     meetings and specify requirements as to the form and content of a
     stockholder's notice. These provisions may preclude stockholders from
     bringing matters before an annual meeting of stockholders or from making
     nominations for directors at an annual or special meeting of
     stockholders.

  .  Authorized but Unissued Shares. The authorized but unissued shares of
     our common stock and preferred stock are available for future issuance
     without stockholder approval, subject to certain limitations imposed by
     the Nasdaq National Market. These additional shares may be utilized for
     a variety of corporate purposes, including future public offerings to
     raise additional capital, corporate acquisitions and employee benefit
     plans. The existence of authorized but unissued and unreserved common
     stock and preferred stock could render more difficult or discourage an
     attempt to obtain control of our company by means of a proxy contest,
     tender offer, merger or otherwise.

   Delaware law provides generally that the affirmative vote of a majority of
the shares entitled to vote on any matter is required to amend a corporation's
certificate of incorporation or bylaws, unless a corporation's certificate of
incorporation or bylaws, as the case may be, requires a greater percentage. We
have provisions in our certificate of incorporation and bylaws which require a
vote of 66 2/3% of the holders of the outstanding common stock to amend, revise
or repeal anti-takeover provisions.

Limitations of Liability and Indemnification Matters

   Our certificate of incorporation provides that, except to the extent
permitted by Delaware law, our directors shall not be personally liable to us
or our stockholders for monetary damages for any breach of fiduciary duty as a
director. Under Delaware law, the directors have a fiduciary duty to us that is
not eliminated by this provision of our certificate and, in appropriate
circumstances, equitable remedies such as injunctive or other forms of
nonmonetary relief will remain available. In addition, each director will
continue to be subject to liability under Delaware law for breach of the
director's duty of loyalty to us for acts or omissions which are found by a
court of competent jurisdiction to be not in good faith or that involve
intentional misconduct, or knowing violations of law, for actions leading to
improper personal benefit to the director, and for payment of dividends or
approval of stock repurchases or redemptions that are prohibited by Delaware
law. This provision also does not affect the director's responsibilities under
any other laws, such as the federal securities laws.

   Section 145 of the Delaware corporate law empowers a corporation to
indemnify its directors and officers and to purchase insurance with respect to
liability arising out of their capacity or status as directors and officers,
provided that this provision shall not eliminate or limit the liability of a
director:

  .  for any breach of the director's duty of loyalty to the corporation or
     its stockholders;

  .  for acts or omissions not in good faith or which involve intentional
     misconduct or a knowing violation of law;

  .  arising under Section 174 of the Delaware corporate law; or

  .  for any transaction from which the director derived an improper personal
     benefit.

                                       55
<PAGE>


   Delaware law provides further that the indemnification permitted by that law
shall not be deemed exclusive of any other rights to which the directors and
officers may be entitled under a corporation's bylaws, any agreement, a vote of
stockholders or otherwise. Our certificate of incorporation eliminates the
personal liability of directors to the fullest extent permitted by Section
102(b)(7) of the Delaware corporate law and provides that we may fully
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action, suit or proceeding, whether
civil, criminal, administrative or investigative, by reason of the fact that
such person is or was our director or officer or is or was serving at our
request as an employee, director or officer of another corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise,
against expenses, judgments, fines and amounts paid in settlement actually and
reasonably incurred by such person in connection with such action, suit or
proceeding.

   We have entered into agreements to indemnify our directors and officers, in
addition to the indemnification provided for in the bylaws. We believe that
these provisions and agreements are necessary to attract and retain qualified
directors and officers. Our bylaws also permit us to secure insurance on behalf
of any officer, director, employee or other agent for any liability arising out
of his or her actions, regardless of whether Delaware law would permit
indemnification.

Transfer Agent and Registrar

   The transfer agent and registrar for our common stock will be EquiServe, LP.

                                       56
<PAGE>

                        SHARES ELIGIBLE FOR FUTURE SALE

   Prior to this offering there has been no public market for our common stock.
No predictions can be made regarding the effect, if any, that sales of shares
or the availability of shares for sale will have on the market price prevailing
from time to time. As described below, only a limited number of shares will be
available for sale shortly after this offering due to certain contractual and
legal restrictions on resale. Sales of substantial amounts of our common stock
in the public market after the restrictions lapse could adversely affect the
prevailing market price.

   Upon completion of this offering, we will have 16,666,667 shares of common
stock outstanding based on 12,500,001 shares outstanding at December 31, 1999.
The 4,288,240 shares of common stock being sold in this offering will be freely
tradable, other than by our "affiliates" as such term is defined in the
Securities Act, without restriction or registration under the Securities Act.
The remaining 12,378,427 shares includes 1,124,384 shares issued and sold by us
in private transactions and 11,254,043 shares to be distributed by Odetics to
its stockholders in the spin-off. The shares sold in private transactions are
restricted shares and are eligible for public sale if registered under the
Securities Act or sold in accordance with Rule 144 under the Securities Act.
The shares distributed in the spin-off will be freely tradable, other than by
persons deemed to be our affiliates, 180 days after the date of this
prospectus.

   In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, a person not deemed to be our affiliate, or a
person holding restricted shares who beneficially owns shares that were not
acquired from us or our affiliates within the previous year, would be entitled
to sell within any three-month period a number of shares that does not exceed
the greater of:

  .  1% of the then outstanding shares of common stock, or

  .  the average weekly trading volume of the common stock during the four
     calendar weeks preceding the date on which notice of the sale is filed
     with the Securities and Exchange Commission.

   Sales under Rule 144 are subject to requirements relating to manner of sale,
notice and availability of current public information about us. However, if a
person, or persons whose shares are aggregated, is not deemed to have been our
affiliate at any time during the 90 days immediately preceding the sale, he or
she may sell his or her restricted shares under Rule 144(k) without regard to
the limitations described above if at least two years have elapsed since the
later of the date the shares were acquired from us or from our affiliates. The
foregoing is a summary of Rule 144 and is not intended to be a complete
description of it.

   In connection with this offering, all current stockholders and optionholders
will be subject to lock-up agreements with the underwriters under which the
holders of the shares and options to purchase shares have agreed they will not
sell any common stock owned by them, other than the shares being sold by the
selling stockholders identified in this prospectus, without the prior written
consent of Bear, Stearns & Co. Inc. for a period of 180 days from the date of
this prospectus.

   The following table indicates approximately when the shares of our common
stock that are not being sold in the offering, but which will be outstanding
after the offering is completed, will be eligible for sale into the public
market.

 Eligibility for Resale into Public Market of Restricted and Other Shares

<TABLE>
<CAPTION>
       Time                                                    Number of Shares
       ----                                                    ----------------
   <S>                                                         <C>
   Effective Date.............................................             0
   180 days after Effective Date..............................    11,942,957
   After April 25, 2001.......................................    12,378,427
</TABLE>

   11,629,976 of the shares eligible for sale after the 180 day period will be
subject to volume and other restrictions pursuant to Rule 144 because the
holders are our affiliates or have held their shares for less than two years.

                                       57
<PAGE>

   Subject to limitations on the aggregate offering price of a transaction and
other conditions, Rule 701 may be relied upon with respect to the resale of
securities originally purchased from us by our employees, directors, officers,
consultants or advisers prior to the closing of this offering, pursuant to
written compensatory benefit plans or written contracts relating to the
compensation of such persons. In addition, the Securities and Exchange
Commission has indicated that Rule 701 will apply to stock options granted by
us before this offering, along with the shares acquired upon exercise of these
options. Securities issued in reliance on Rule 701 are deemed to be restricted
shares and, beginning 90 days after the date of this prospectus, unless subject
to the contractual restrictions described above, may be sold by persons other
than affiliates subject only to the manner of sale provisions of Rule 144 and
by affiliates under Rule 144 without compliance with its one-year minimum
holding period requirements.

   We intend to file a registration statement on Form S-8 under the Securities
Act to register shares of common stock reserved for issuance under our 1998
Stock Incentive Plan and Employee Stock Purchase Plan, thus permitting the
resale by non-affiliates of shares issued under the plans in the public market
without restriction under the Securities Act. Such registration statement will
become effective immediately upon filing which is expected shortly after the
closing of this offering. As of December 31, 1999, options to purchase
2,632,000 shares of common stock were outstanding, all of which are subject to
lock-up agreements described above.

                                       58
<PAGE>

                                  UNDERWRITING

   Subject to the terms and conditions set forth in an underwriting agreement
among the underwriters, the selling stockholders and us, each of the
underwriters named below, through their representatives Bear, Stearns & Co.
Inc., SG Cowen Securities Corporation and Cruttenden Roth Incorporated, has
severally agreed to purchase from us and the selling stockholders the aggregate
number of shares of common stock set forth opposite its name below:

<TABLE>
<CAPTION>
                                                                        Number
       Underwriter                                                     of Shares
       -----------                                                     ---------
   <S>                                                                 <C>
   Bear, Stearns & Co. Inc............................................
   SG Cowen Securities Corporation....................................
   Cruttenden Roth Incorporated.......................................
                                                                       ---------
     Total............................................................ 4,288,240
                                                                       =========
</TABLE>

   The obligations of the underwriters under the underwriting agreement are
several and not joint. This means that each underwriter is obligated to
purchase from us only the number of shares of common stock set forth opposite
its name in the table above. Except in limited circumstances set forth in the
underwriting agreement, an underwriter has no obligation in relation to the
shares of common stock which any other underwriter has agreed to purchase.

   The underwriting agreement provides that the obligations of the several
underwriters are subject to approval of various legal matters by their counsel
and to various other conditions including delivery of legal opinions by our
counsel, the delivery of a letter by our independent auditors and the accuracy
of the representations and warranties made by us in the underwriting agreement.
Under the underwriting agreement, the underwriters are obliged to purchase and
pay for all of the above shares of common stock if any are purchased.

Public Offering Price

   The underwriters propose to offer the shares of common stock directly to the
public at the offering price set forth on the cover page of this prospectus and
at that price less a concession not in excess of $      per share of common
stock to other dealers who are members of the National Association of
Securities Dealers, Inc. The underwriters may allow, and those dealers may
reallow, concessions not in excess of $      per share of common stock to other
dealers. After the offering, the offering price, concessions and other selling
terms may be changed by the underwriters. Our common stock is offered subject
to receipt and acceptance by the underwriters and subject to other conditions,
including the right to reject orders in whole or in part. The underwriters have
informed us that the underwriters do not intend to confirm sales to any
accounts over which they exercise discretionary authority.

   The following table summarizes the per share and total public offering price
of the shares of common stock in the offering, the underwriting compensation to
be paid by us and the selling stockholders to the underwriters by us and the
proceeds of the offering, before expenses, to us. The information presented
assumes either no exercise or full exercise by the underwriters of their over-
allotment option.

<TABLE>
<CAPTION>
                                                             Total
                                                 -----------------------------
                                                    Without          With
                                      Per Share  Over-Allotment Over-Allotment
                                     ----------- -------------- --------------
<S>                                  <C>         <C>            <C>
Public offering price............... $            $              $
Underwriting discounts and
 commissions payable by us.......... $            $              $
Proceeds, before expenses, to us.... $            $              $
</TABLE>

   The underwriting discount and commission per share is equal to the public
offering price per share of common stock less the amount paid by the
underwriters to us per share of common stock. The underwriting commissions and
fees are expected to represent    % of the public offering price per share of
common stock.

                                       59
<PAGE>

   The following table indicates the expenses payable by us in the offering.
All amounts are estimates other than the Securities and Exchange Commission
registration fee, the NASD fee and the Nasdaq listing fee.

<TABLE>
   <S>                                                                 <C>
   Securities Exchange Commission registration fee.................... $ 16,925
   National Association of Securities Dealers, Inc. fee...............    6,911
   Nasdaq listing fee.................................................   95,000
   Accounting fees and expenses.......................................  325,000
   Legal fees and expenses............................................  250,000
   Printing and engraving.............................................  150,000
   Transfer agent fees and expenses...................................   15,000
   Miscellaneous expenses.............................................   41,164
                                                                       --------
     Total............................................................ $900,000
                                                                       ========
</TABLE>

Over-Allotment Option to Purchase Additional Shares

   We have granted a 30-day over-allotment option to the underwriters to
purchase an amount, up to an aggregate of 15% of the aggregate number of shares
appearing above, of additional shares of our common stock exercisable at the
offering price less the underwriting discounts and commissions, each as set
forth on the cover page of this prospectus. If the underwriters exercise this
option in whole or in part then each of the underwriters will become obligated,
subject to various conditions, to purchase approximately the same percentage of
such additional shares as is approximately the percentage of shares of common
stock that it is obligated to purchase of the total number of shares under the
underwriting agreement as shown in the table set for the above.

Indemnification and Contribution

   The underwriting agreement provides that we and the selling stockholders
must indemnify the underwriters against liabilities arising out of any alleged
misstatements of fact or omissions in this prospectus and the registration
statement, including liabilities under the Securities Act, and contribute to
payments that the underwriters may be required to make in respect of those
liabilities.

Nasdaq National Market Quotation

   Prior to the offering, there has been no public market for our common stock.
Consequently, the initial offering price for the common stock will be
determined by negotiations between us and the representatives of the
underwriters. Among the factors to be considered in those negotiations, the
primary factors will be our results of operations in recent periods, estimates
of our prospects and the industry in which we compete, an assessment of our
management, the general state of the securities markets at the time of the
offering and the prices of similar securities of generally comparable
companies. We have applied to have our common stock approved for quotation on
the Nasdaq National Market under the symbol "ITER." We cannot assure you,
however, that an active or orderly trading market will develop for the common
stock or that our common stock will trade in the public market subsequent to
the offering at or above the initial offering price.

Stabilization, Syndicate Short Position and Penalty Bids

   In order to facilitate the offering, persons participating in the offering
may engage in transactions that stabilize, maintain or otherwise affect the
price of the common stock during and after the offering. Specifically, the
underwriters may over-allot or otherwise create a short position in the common
stock for their own account by selling more shares of common stock than we and
the selling stockholders have actually sold to them. The underwriters may elect
to cover any short position by purchasing shares of stock in the open market or
by exercising the over-allotment option granted to the underwriters. In
addition, the underwriters may stabilize or maintain the price of the common
stock by bidding for or purchasing shares of common stock in the open market
and may impose penalty bids, under which selling concessions allowed to
syndicate members or other

                                       60
<PAGE>

broker-dealers participating in the offering are reclaimed if shares of common
stock previously distributed in the offering are repurchased in connection with
stabilization transactions or otherwise. The effect of these transactions may
be to stabilize or maintain the market price at a level above that which might
otherwise prevail in the open market. The imposition of a penalty bid may also
affect the price of the common stock to the extent that it discourages resales
of the common stock. No representation is made as to the magnitude or effect of
any of these activities.

Reserved Share Program

   At our request, the underwriters have reserved for sale, at the initial
public offering price, up to 5% of the shares of common stock being offered by
this prospectus for employees and other persons or entities with when we have a
business relationship, and to their associates and related persons. The number
of shares available for sale to the general public in the offering will be
reduced to the extent those persons purchase these reserved shares. Purchases
of reserved shares are to be made through an account at Bear, Stearns & Co.
Inc. in accordance with Bear, Stearns & Co. Inc.'s procedures for opening an
account and transacting in securities. Any reserved shares not so purchased
will be offered by the underwriters to the general public on the same terms as
the other shares offered in this offering.

                                 LEGAL MATTERS

   The validity of the issuance of the shares of common stock offered hereby
will be passed upon for Iteris by Stradling Yocca Carlson & Rauth, a
Professional Corporation, Newport Beach, California. Certain legal matters in
connection with this offering will be passed upon for the representatives of
the underwriters by Katten Muchin Zavis, Chicago, Illinois.

                                    EXPERTS

   The consolidated financial statements and schedule of Iteris, Inc. as of
March 31, 1998 and 1999 and December 31, 1999, and for each of the three years
in the period ended March 31, 1999 and the nine months ended December 31, 1999,
and the financial statements of Meyer, Mohaddes Associates, Inc. for the year
ended December 31, 1997 and the period from January 1, 1998 to October 16,
1998, appearing in this prospectus and registration statement have been audited
by Ernst & Young LLP, independent auditors, as set forth in their reports
thereon appearing elsewhere herein, and are included in reliance on such
reports given on the authority of said firm as experts in accounting and
auditing.


                                       61
<PAGE>

                   WHERE YOU CAN FIND ADDITIONAL INFORMATION

   We have filed with the SEC a registration statement on Form S-1 with respect
to the common stock offered hereby. This prospectus, which constitutes a part
of the registration statement, does not contain all of the information set
forth in the registration statement or the exhibits and schedules which are
part of the registration statement. For further information with respect to us
and our common stock, reference is made to the registration statement and the
exhibits and schedules thereto. You may read and copy any document we file at
the SEC's public reference room in Washington, DC. Please call the SEC at 1-
800-SEC-0330 for further information on the public reference room. Our SEC
filings are also available to the public from the SEC's website at
http://www.sec.gov.

   Upon completion of this offering, we will become subject to the information
and periodic reporting requirements of the Exchange Act and, in accordance
therewith, will file periodic reports, proxy statements and other information
with the SEC. Such periodic reports, proxy statements and other information
will be available for inspection and copying at the SEC's public reference
rooms, our website and the website of the SEC referred to above. Information on
our website does not constitute a part of this prospectus.

                                       62
<PAGE>


                       INDEX TO FINANCIAL STATEMENTS

<TABLE>
<S>                                                                         <C>
ITERIS, INC.

Report of Independent Auditors.............................................  F-2

Consolidated Balance Sheets................................................  F-3

Consolidated Statements of Operations......................................  F-4

Consolidated Statements of Net Capital Deficiency..........................  F-5

Consolidated Statements of Cash Flows......................................  F-6

Notes to Consolidated Financial Statements.................................  F-7



MEYER, MOHADDES ASSOCIATES, INC.

Report of Independent Auditors............................................. F-20

Balance Sheets............................................................. F-21

Statements of Income....................................................... F-22

Statements of Stockholders' Equity......................................... F-23

Statements of Cash Flows................................................... F-24

Notes to Financial Statements.............................................. F-25



ITERIS, INC.

Unaudited Pro Forma Statement of Operations................................ F-28

Notes to Unaudited Pro Forma Statement of Operations....................... F-29
</TABLE>

                                      F-1
<PAGE>


                      REPORT OF INDEPENDENT AUDITORS

Stockholders and Board of Directors

Iteris, Inc.

   We have audited the accompanying consolidated balance sheets of Iteris, Inc.
(the Company), a subsidiary of Odetics, Inc. (Parent), as of March 31, 1998 and
1999 and December 31, 1999, and the related consolidated statements of
operations, net capital deficiency, and cash flows for each of the three years
in the period ended March 31, 1999 and the nine months ended December 31, 1999.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.

   We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

   In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Iteris, Inc. at March 31, 1998 and 1999 and December 31, 1999, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended March 31, 1999 and the nine months ended December 31,
1999, in conformity with accounting principles generally accepted in the United
States.

                                          Ernst & Young LLP

Orange County, California

January 25, 2000, except for the
 last paragraph of Note 7 as to
 which date is        .

   The foregoing report is in the form that will be signed upon the
effectiveness of the 1.875675-to-1 stock split discussed in Note 7 to the
consolidated financial statements.

                                          /s/ Ernst & Young LLP

Orange County, California

January 25, 2000

                                      F-2
<PAGE>


                               ITERIS, INC.

                      (a subsidiary of Odetics, Inc.)

                        CONSOLIDATED BALANCE SHEETS

                   (In thousands, except share amounts)

<TABLE>
<CAPTION>
                                                    March 31
                                                ------------------  December 31,
                                                  1998      1999        1999
                                                --------  --------  ------------
<S>                                             <C>       <C>       <C>
ASSETS
Current assets:
 Cash.........................................  $     66  $      1    $      1
 Trade accounts receivable, net of allowance
  for doubtful accounts of $0 at March 1998,
  $252 at March 1999 and $327 at December
  1999........................................       800     4,471       4,941
 Costs and estimated earnings in excess of
  billings on uncompleted contracts (Note 5)..       790     1,159       1,726
 Inventories:
  Finished goods..............................        66       139         149
  Work in process.............................     1,140       139         127
  Materials and supplies......................       912       585       1,018
 Prepaid expenses and other...................       284       149         166
                                                --------  --------    --------
Total current assets..........................     4,058     6,643       8,128
Equipment, furniture and fixtures:
 Equipment....................................     1,551     1,915       2,329
 Furniture and fixtures.......................       195       224         232
 Building and improvements....................        --        23          23
 Allowances for depreciation..................      (325)     (697)     (1,095)
                                                --------  --------    --------
                                                   1,421     1,465       1,489
Goodwill, net of accumulated amortization of
 $266 at March 1998, $706 at March 1999 and
 $1,230 at December 1999......................     5,713     9,888       9,631
Other assets..................................       423        --          --
                                                --------  --------    --------
Total assets..................................  $ 11,615  $ 17,996    $ 19,248
                                                ========  ========    ========
LIABILITIES AND NET CAPITAL DEFICIENCY
Current liabilities:
 Trade accounts payable.......................  $  1,006  $  1,213    $  1,320
 Accrued payroll and related..................       226       588         696
 Accrued expenses.............................       517       686         141
 Contract reserve.............................     4,541     3,892       3,264
 Billings in excess of costs and estimated
  earnings on uncompleted contracts (Note 5)..     1,083       333         609
 Current portion of long-term debt............        --        27          29
                                                --------  --------    --------
Total current liabilities.....................     7,373     6,739       6,059
Long-term debt:
 Payable to Parent............................    20,184    29,950      37,412
 Long-term, less current portion..............        --        22          12
                                                --------  --------    --------
Total long-term debt..........................    20,184    29,972      37,424
Commitments and contingencies
Net capital deficiency:
 Preferred stock, $.001 par value:
  Authorized shares-5,000,000
  Issued and outstanding shares-none..........        --        --          --
 Common stock, $.001 par value:
  Authorized shares-25,000,000
  Issued and outstanding shares-11,254,000 at
   March 31, 1998, 12,111,000 at March 31,
   1999 and 12,065,000 at December 31, 1999...         1         1           1
 Additional paid in capital...................        --     4,268       4,039
 Accumulated deficit..........................   (15,943)  (22,984)    (28,275)
                                                --------  --------    --------
Net capital deficiency........................   (15,942)  (18,715)    (24,235)
                                                --------  --------    --------
Total liabilities and net capital deficiency..  $ 11,615  $ 17,996    $ 19,248
                                                ========  ========    ========
</TABLE>

                          See accompanying notes.

                                      F-3
<PAGE>


                               ITERIS, INC.

                      (a subsidiary of Odetics, Inc.)

                   CONSOLIDATED STATEMENTS OF OPERATIONS

               (In thousands, except per share information)

<TABLE>
<CAPTION>
                                                           Nine months ended
                                Years ended March 31          December 31
                               -------------------------  -------------------
                                1997     1998     1999       1998      1999
                               -------  -------  -------  ----------- -------
                                                          (Unaudited)
<S>                            <C>      <C>      <C>      <C>         <C>
Revenue:
  Sensor...................... $   538  $ 1,607  $ 4,339    $ 3,051   $ 5,880
  Systems.....................      --    4,234   10,241      7,349    11,567
                               -------  -------  -------    -------   -------
Total Revenue.................     538    5,841   14,580     10,400    17,447
Costs of sales:
  Sensors.....................     470    2,555    3,129      2,342     3,282
  Systems.....................      --    2,815    7,195      5,091     8,465
                               -------  -------  -------    -------   -------
Total cost of sales...........     470    5,370   10,324      7,433    11,747
                               -------  -------  -------    -------   -------
Gross profit..................      68      471    4,256      2,967     5,700

Operating expenses:
  Research and development....   2,378    2,037    2,152      1,441     2,498
  Selling, general and
   administrative.............   1,411    3,414    5,729      3,844     4,717
  Charges allocated by
   Parent.....................     105      458      881        562     1,057
  Other expense...............      --      465      368        225       528
                               -------  -------  -------    -------   -------
Total operating expenses......   3,894    6,374    9,130      6,072     8,800
                               -------  -------  -------    -------   -------
Loss from operations..........  (3,826)  (5,903)  (4,874)    (3,105)   (3,100)
Interest charge allocated by
 Parent.......................     680    1,344    2,167      1,550     2,191
                               -------  -------  -------    -------   -------
Loss before income taxes......  (4,506)  (7,247)  (7,041)    (4,655)   (5,291)
Income taxes..................      --       --       --         --        --
                               -------  -------  -------    -------   -------
Net loss...................... $(4,506) $(7,247) $(7,041)   $(4,655)  $(5,291)
                               -------  -------  -------    -------   -------
Net loss per share of common
 stock--basic and diluted..... $  (.40) $  (.64) $  (.60)   $  (.40)  $  (.44)
                               =======  =======  =======    =======   =======
Shares used in computation of
 net loss per share...........  11,254   11,254   11,647     11,494    12,081
                               =======  =======  =======    =======   =======
</TABLE>

                          See accompanying notes.

                                      F-4
<PAGE>


                               ITERIS, INC.

                      (a subsidiary of Odetics, Inc.)

             CONSOLIDATED STATEMENTS OF NET CAPITAL DEFICIENCY

                              (In thousands)

<TABLE>
<CAPTION>
                                Common stock   Additional
                                --------------  paid-in   Accumulated
                                Shares  Amount  capital     deficit    Total
                                ------  ------ ---------- ----------- --------
<S>                             <C>     <C>    <C>        <C>         <C>
Balance at March 31, 1996...... 11,254   $ 1     $   --    $ (4,190)  $ (4,189)
  Net loss.....................     --    --         --      (4,506)    (4,506)
                                ------   ---     ------    --------   --------
Balance at March 31, 1997...... 11,254     1         --      (8,696)    (8,695)
  Net loss.....................     --    --         --      (7,247)    (7,247)
                                ------   ---     ------    --------   --------
Balance at March 31, 1998...... 11,254     1         --     (15,943)   (15,942)
  Acquisition of MMA ..........    857    --      4,268          --      4,268
  Net loss.....................     --    --         --      (7,041)    (7,041)
                                ------   ---     ------    --------   --------
Balance at March 31, 1999...... 12,111     1      4,268     (22,984)   (18,715)
  Purchase price adjustment....    (46)   --       (249)         --       (249)
  Issuance of stock options....     --    --         20          --         20
  Net loss.....................     --    --         --      (5,291)    (5,291)
                                ------   ---     ------    --------   --------
Balance at December 31, 1999... 12,065   $ 1     $4,039    $(28,275)  $(24,235)
                                ======   ===     ======    ========   ========
</TABLE>

                          See accompanying notes.

                                      F-5
<PAGE>


                               ITERIS, INC.

                      (a subsidiary of Odetics, Inc.)

                   CONSOLIDATED STATEMENTS OF CASH FLOWS

                              (In thousands)

<TABLE>
<CAPTION>
                                                            Nine months ended
                                 Years ended March 31          December 31
                                -------------------------  -------------------
                                 1997     1998     1999       1998      1999
                                -------  -------  -------  ----------- -------
                                                           (Unaudited)
<S>                             <C>      <C>      <C>      <C>         <C>
Operating activities
Net loss......................  $(4,506) $(7,247) $(7,041)   $(4,655)  $(5,291)
Adjustments to reconcile net
 loss to net cash used in
 operating activities:
  Depreciation and
   amortization...............       64      514      812        707       922
  Stock option expense........       --       --       --         --        20
  Changes in operating assets
   and liabilities ...........     (811)    (379)  (2,114)    (1,506)   (2,183)
                                -------  -------  -------    -------   -------
Net cash used in operating
 activities...................   (5,253)  (7,112)  (8,343)    (5,454)   (6,532)

Investing activities
Purchases of equipment,
 furniture and fixtures.......     (233)    (576)    (239)      (167)     (422)
Cash paid in connection with
 assumption of contracts .....       --   (2,183)      --         --        --
                                -------  -------  -------    -------   -------
Net cash used in investing
 activities...................     (233)  (2,759)    (239)      (167)     (422)

Financing activities
Net cash received from
 Parent.......................    5,488    9,930    8,517      5,556     6,962
Payments on long-term debt....       --       --       --         --        (8)
                                -------  -------  -------    -------   -------
Net cash provided by financing
 activities...................    5,488    9,930    8,517      5,556     6,954

Increase (decrease) in cash...        2       59      (65)       (65)       --
Cash at beginning of year.....        5        7       66         66         1
                                -------  -------  -------    -------   -------
Cash at end of year...........  $     7  $    66  $     1    $     1   $     1
                                =======  =======  =======    =======   =======
</TABLE>

                          See accompanying notes.

                                      F-6
<PAGE>


                               ITERIS, INC.

                      (a subsidiary of Odetics, Inc.)

                NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                             December 31, 1999

(1) Summary of Significant Accounting Policies

The Company

   Iteris, Inc. (the Company), a 93% owned subsidiary of Odetics, Inc.
(Parent), designs, develops, markets and implements software based solutions
that improve the safety and efficiency of vehicle transportation. The Company
incorporates its software into sensor systems that it sells to vehicle
manufacturers in North America and Europe and to governmental agencies,
principally in the United States. It also develops transportation management
and traveler information systems for the intelligent transportation systems, or
ITS, industry; these systems are sold to local, state and national
transportation agencies in the United States.

Basis of Presentation

   The accompanying financial statements include the accounts of the Company
and its wholly-owned subsidiary, Meyer, Mohaddes Associates, Inc., a California
corporation ("MMA"). All intercompany transactions and balances have been
eliminated in consolidation.

Use of Estimates

   The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Significant estimates made in preparing the consolidated financial statements
include the allowance for doubtful accounts, inventory reserves, costs to
complete long-term contracts and income tax valuation allowances.

Revenue Recognition

   Sensor revenue and related cost of sales are recognized on the date of
shipment or, if required, upon acceptance by the customer, provided that the
Company believes collectibility of the sales amount is probable. Accordingly,
at the date revenue is recognized, the significant uncertainties concerning the
sale have been resolved.

   Systems revenue is derived primarily from long-term contracts with
governmental agencies. Systems revenue includes costs incurred plus a portion
of estimated fees or profits determined on the percentage of completion method
of accounting 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 cost and revenue and are recognized in the period in
which the revisions are determined. Profit incentives are included in revenue
when their realization is reasonably assured.

   Revenues from follow-on service and support, for which the Company charges
separately, are recognized when earned.

Concentration of Credit Risk

   The Company performs periodic credit evaluations of its customers' financial
condition and generally does not require collateral. Credit losses have been
within management's expectations and within amounts provided through the
allowances for doubtful accounts. At March 31, 1998 and 1999 and December 31,
1999, accounts receivable from governmental agencies and prime government
contractors were approximately $586,000, $2,996,000, and $2,880,000,
respectively.

                                      F-7
<PAGE>


                               ITERIS, INC.

                     (a subsidiary of Odetics, Inc.)

         NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Fair Values of Financial Instruments

   The fair value of amounts payable to Parent approximates its carrying value
because interest charges thereon are based on the prevailing market rates of
interest charged to the Parent under related borrowings.

Inventory Valuation

   Inventories are stated at the lower of cost or market. Cost is determined
on the first-in, first-out method.

Equipment, Furniture and Fixtures

   Equipment, furniture and fixtures are recorded at cost and are depreciated
principally by the declining balance method over their estimated useful lives
(four to eight years).

Long-Lived Assets

   Long-lived assets and certain identifiable intangibles held and used by the
Company are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. If required, the recoverability test is performed at the lowest
level practicable based on undiscounted net cash flows.

Goodwill

   Goodwill, representing the excess of the purchase price over the fair value
of the net assets of acquired entities, is being amortized using the straight-
line method over the estimated useful life of 15 years.

Warranty

   The Company provides a warranty of one to two years on all products and
records a related provision for estimated warranty costs at the date of sale.
The estimated warranty liability was $698,000, $95,000 and $95,000 at March
31, 1998 and 1999 and December 31, 1999, respectively.

Income Taxes

   The Company is included in the consolidated federal income tax return of
its Parent. The Company and the Parent have entered into a tax sharing
arrangement whereby U.S. and state income taxes are computed in accordance
with consolidated return Section 1552(a)(1) of the Internal Revenue Code, as
if they were separate legal entities. Under this allocation, the consolidated
tax liability (including alternative minimum tax) for a given tax year is
allocated only to companies in the group which have separate taxable income
for that year. The tax liability is allocated pro rata based on each Company's
relative separate taxable income. Companies with losses are not allocated any
of the tax liability and are not given any benefit for their losses.

   Deferred income tax assets and liabilities are computed for differences
between the financial statement and tax basis of assets and liabilities based
on enacted tax laws and rates applicable to the period in which differences
are expected to affect taxable income. Valuation allowances are established,
when necessary, to reduce deferred tax assets to amounts which are more likely
than not to be realized. The provision for income taxes consists of the taxes
payable or refundable for the period plus or minus the change during the
period in deferred income tax assets and liabilities.

                                      F-8
<PAGE>


                               ITERIS, INC.

                      (a subsidiary of Odetics, Inc.)

          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Stock-Based Compensation

   The Company has elected to follow Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees (APB 25) and related
Interpretations in accounting for its employee stock options because the
alternative fair value accounting provided for under FASB Statement No. 123,
Accounting for Stock-Based Compensation, requires use of option valuation
models that were not developed for use in valuing employee stock options. Under
APB 25, if the exercise price of the Company's employee stock options equals
the market price of the underlying stock on the date of grant, no compensation
expense is recognized.

Earnings (Loss) Per Share

   Basic and diluted earnings (loss) per share is computed using the weighted
average number of shares of common stock outstanding during the year and
excludes the anti-dilutive effects of options.

   The following table sets forth the computation of loss per share:

<TABLE>
<CAPTION>
                                                               Nine months ended
                               Years ended March 31               December 31
                         ----------------------------------  -----------------------
                            1997        1998        1999        1998         1999
                         ----------  ----------  ----------  -----------  ----------
                                                             (Unaudited)
                         (In thousands, except share and per share information)
<S>                      <C>         <C>         <C>         <C>          <C>
Numerator: Net loss..... $   (4,506) $   (7,247) $   (7,041) $   (4,655)  $   (5,291)
                         ==========  ==========  ==========  ==========   ==========
Denominator: Weighted-
 average shares
 outstanding............ 11,254,000  11,254,000  11,646,900  11,494,100   12,081,300
                         ==========  ==========  ==========  ==========   ==========
Basic and diluted loss
 per share.............. $     (.40) $     (.64) $     (.60) $     (.40)  $     (.44)
                         ==========  ==========  ==========  ==========   ==========
</TABLE>

Research and Development Expenditures

   Research and development expenditures are charged to expense in the period
incurred. The Company does not create computer software pursuant to a pre-
established detail program design. Accordingly, computer software costs
eligible for capitalization have been historically insignificant.

Advertising Expenses

   The Company expenses advertising costs as incurred. Advertising expenses
totaled $16,000, $79,000, $261,000 and $266,000 in the years ended March 31,
1997, 1998 and 1999, and in the nine months ended December 31, 1999,
respectively.

Interim Financial Information

   The financial statements for the nine months ended December 31, 1998 are
unaudited and condensed, but include all adjustments (consisting of only normal
recurring adjustments) which the Company considers necessary for a fair
statement of the financial position, operating results and cash flows for the
interim period.

   Results for the nine month period ended December 31, 1999 are not
necessarily indicative of results to be expected for the entire fiscal year.

                                      F-9
<PAGE>


                               ITERIS, INC.

                      (a subsidiary of Odetics, Inc.)

          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

(2) Transactions with Parent

   The Company and its Parent have entered into an agreement whereby the
Company is charged for certain corporate general and administrative functions
performed by the Parent. These charges are included in the caption "Charges
allocated by Parent" in the accompanying statements of operations and consist
of significant management functions and services, including treasury,
accounting, tax, internal audit, legal, human resources, marketing and other
support services. Charges are allocated to the Company based on actual amounts
incurred on behalf of the Company as well as a proportionate amount of the
Parent's general and administrative expenses determined based on a weighted
average of the Company's revenue, payroll and fixed assets as compared to the
Parent's other subsidiaries and divisions. While Company management has no
practical means to estimate the costs that would have been incurred for such
services if it was a stand-alone company, management of the Company believes
the amount of such allocations are reasonable.


   The Parent also manages domestic cash flows. Pursuant to this cash
management program the Company transfers any accumulated cash surplus to the
Parent's accounts and the Parent funds cash disbursements, as needed, to
maintain minimum account balances. The Company and its Parent have entered into
an agreement whereby the Parent charges the Company interest based on the
Company's net payable to the Parent balance calculated using the Parent's cost
of related borrowed funds (10.50% at December 31, 1999). The amounts due under
the payable are not due until after December 31, 2000, except in the case of an
initial public offering of the Company's common stock, which may accelerate the
repayment of certain amounts payable to the Parent. (Note 7)

   The net payable to Parent represents the net of the following transactions:
cash advances to and from the Parent in connection with cash management policy;
the value of equity securities issued by the Parent in connection with the
Company's acquisitions; proceeds from sales to affiliates; payments for
purchases from affiliates; and corporate charges for rent, general corporate
overhead and interest.

(3) Assumption of Contracts

   On June 20, 1997, the Company assumed certain contracts and acquired certain
assets from Rockwell Collins, Inc. (Rockwell). Revenues and costs related to
contracts assumed from Rockwell are included in the accompanying statement of
operations since the date of assumption. The total payment to Rockwell
associated with the assumption of contracts was approximately $2.2 million in
cash. Additionally, a total of $1.3 million of assets were acquired, and a $5.0
million provision for anticipated losses on a contract with the Michigan
Department of Transportation (MDOT), was assumed. Also, Rockwell agreed to
reimburse the Company for losses incurred on certain phases of the MDOT
contract. At December 31, 1999, the remaining provision for contract losses
totaled $3.3 million, which the Company expects to incur over the next two
years.

(4) Business Combinations

   On October 16, 1998 the Company acquired MMA, a provider of transportation
engineering and planning services. Pursuant to the terms of the merger
agreement, the Company purchased all of the issued and outstanding shares of
common stock of MMA for $4.3 million by issuing 810,479 shares of the Company's
common stock (after giving effect to the purchase price adjustment required by
the merger agreement) and 55,245 shares of the Parent's Class A common stock
valued at $250,000. The value of the shares issued by the Parent is repayable
to the Parent and is included in "Payable to Parent" in the accompanying
balance sheet. The acquisition was accounted for as a purchase and,
accordingly, the results of operations for MMA are included in the Company's
consolidated results of operations from the date of acquisition.

                                      F-10
<PAGE>


                               ITERIS, INC.

                      (a subsidiary of Odetics, Inc.)

          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

   The merger agreement provides for MMA shareholders to receive additional
shares of the Parent's Class A common stock with a then market value of
$250,000 at each of April 16, 1999, October 16, 1999, April 16, 2000, October
16, 2000, and April 16, 2001 if an initial public offering of the Company's
common stock does not occur by each and any of those dates. In April and
October 1999, the Parent issued an additional 25,740 and 20,986 shares of its
Class A common stock to the MMA shareholders pursuant to this provision, which
was recorded by the Company as additional goodwill and an increase in the
Payable to Parent. In addition, if the Company does not complete its initial
public offering by October 2001, then the holders of the Company's common stock
issued in this transaction will have the right to require the Parent to
repurchase the Company's common stock for a purchase price of $10 per share.

   On January 19, 1999 the Company acquired certain assets and assumed certain
liabilities of Viggen Corporation (Viggen), a provider of transportation
engineering and planning services, for an aggregate purchase price of $275,000
evidenced by the issuance of 27,603 shares of the Parent's Class A common
stock. The value of the shares issued is repayable by the Company and is
included in the "Payable to Parent" in the accompanying balance sheet. The
acquisition was accounted for as a purchase and accordingly, the results of
operations for Viggen are included in the Company's consolidated results of
operations from the date of acquisition.

   The purchase price of the MMA and Viggen acquisitions was allocated to the
assets acquired and liabilities assumed as follows (in thousands):

<TABLE>
<CAPTION>
                                                                 MMA    Viggen
                                                               -------  -------
   <S>                                                         <C>      <C>
   Current assets............................................. $ 1,720  $ 1,045
   Equipment, furniture and fixtures..........................      84       77
   Goodwill...................................................   3,870      746
   Current liabilities........................................  (1,155)  (1,593)
                                                               -------  -------
                                                               $ 4,519  $   275
                                                               =======  =======
</TABLE>

   The excess of cost over the fair value of net assets has been recorded as
goodwill and is being amortized over its expected benefit period of 15 years.

   The following unaudited pro forma financial information presents the
consolidated results of operations as if the MMA acquisition had occurred at
the beginning of the year presented, and does not purport to be indicative of
the results that would have occurred had the acquisition occurred at such date
or of results which may occur in the future.

<TABLE>
<CAPTION>
                                                                Years ended
                                                                 March 31
                                                              ----------------
                                                               1998     1999
                                                              -------  -------
   <S>                                                        <C>      <C>
   Net revenue............................................... $10,067  $16,282
   Net loss.................................................. $(6,814) $(7,449)
   Net loss per share of common stock--basic and diluted..... $  (.56) $  (.62)
</TABLE>

   Pro forma information for the Viggen acquisition is not material.

                                      F-11
<PAGE>


                               ITERIS, INC.

                      (a subsidiary of Odetics, Inc.)

          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

(5) Costs and Estimated Earnings on Uncompleted Contracts

   Costs incurred, estimated earnings and billings on uncompleted long-term
contracts are as follows:

<TABLE>
<CAPTION>
                                                     March 31
                                                  ---------------  December 31,
                                                   1998     1999       1999
                                                  -------  ------  ------------
                                                        (In thousands)
   <S>                                            <C>      <C>     <C>
   Costs incurred on uncompleted contracts....... $ 3,214  $6,410    $ 9,575
   Estimated earnings............................   1,021   2,051      2,910
                                                  -------  ------    -------
                                                    4,235   8,461     12,485
   Less billings to date.........................   4,528   7,635     11,368
                                                  -------  ------    -------
                                                  $ (293)  $  826    $ 1,117
                                                  =======  ======    =======
   Included in accompanying balance sheets:
     Costs and estimated earnings in excess of
      billings on uncompleted contracts.......... $   790  $1,159    $ 1,726
     Billings in excess of costs and estimated
      earnings on uncompleted contracts..........  (1,083)   (333)       609
                                                  -------  ------    -------
                                                  $  (293) $  826    $ 1,117
                                                  =======  ======    =======
</TABLE>

   Costs and estimated earnings in excess of billings at March 31, 1998 and
1999 and at December 31, 1999 include $388,000, $182,000 and $702,000,
respectively, that were not billable as certain milestone objectives specified
in the contracts had not been attained.

   Substantially all costs and estimated earnings in excess of billings at
December 31, 1999 are expected to be billed and collected during the year
ending December 31, 2000.

(6) Income Taxes

   As a result of its tax sharing agreement with the Parent (Note 1), the
Company has received no tax benefit from its losses because it has not paid or
accrued federal or state income taxes. The Company's taxable losses from
inception through December 31, 1999 have been assumed by the Parent under the
Tax Sharing Arrangement and as a result are not available to the Company to
provide any tax benefit in future periods. If the Company had filed separate
tax returns, it would have had approximately $26.5 million of net operating
loss carryforwards that could have been used to reduce future taxable income.

                                      F-12
<PAGE>


                               ITERIS, INC.

                      (a subsidiary of Odetics, Inc.)

          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

   The components of the Company's deferred taxes are as follows:

<TABLE>
<CAPTION>
                                                       March 31
                                                      ------------  December 31,
                                                      1998   1999       1999
                                                      -----  -----  ------------
                                                           (In thousands)
   <S>                                                <C>    <C>    <C>
   Deferred tax assets
     Goodwill amortization........................... $  89  $ 161     $ 216
     Vacation pay/sick pay accrual...................    87    188       216
     Inventory reserve...............................    93     28        53
     Warranty reserve................................   206     38        38
     Bad debt reserve................................    --     53       130
     Other...........................................     4     16        17
                                                      -----  -----     -----
       Total deferred tax assets.....................   479    484       670
                                                      -----  -----     -----
   Deferred tax liability
     Cash to accrual adjustment......................    --   (484)     (323)
                                                      -----  -----     -----
       Total deferred tax liability..................    --   (484)     (323)
                                                      -----  -----     -----
     Valuation allowance.............................  (479)    --      (347)
                                                      -----  -----     -----
   Net deferred tax asset (liability)................ $  --  $  --     $  --
                                                      =====  =====     =====
</TABLE>

   Due to the Company's historical pattern of tax losses, management has
determined that a 100% valuation allowance against the Company's net deferred
tax assets is required. All changes in the valuation allowance result from this
determination.

   The Company's effective tax rate differs from the U.S. statutory tax rate of
35% because of the establishment of the valuation allowance.

(7) Equity

   In December 1999, in anticipation of an initial public offering of the
Company's common stock, and a concurrent spin-off of the Parent's investment in
the Company to the Parent's shareholders, the Company and the Parent entered
into a Separation and Distribution Agreement (Agreement), whereby the Parent
transferred the net assets and liabilities of its ITS division to the Company
in a transaction accounted for as a transfer between entities under common
control. Accordingly, such net assets and operations are reflected in the
Company's consolidated financial statements for all periods presented at the
historical amounts reported by the Parent in its consolidated financial
statements.

   In addition to the transfer of assets, the Agreement requires the Company to
repay $10 million of its Payable to Parent immediately upon receipt of proceeds
from an initial public offering of the Company's common stock. The Agreement
also provides that all shares of the Company's common stock that the Parent may
distribute to its shareholders be restricted as to its transferability for a
period of 180 days from the effectiveness of the Company's registration
statement.

   On January 25, 2000, the Company entered into an agreement with
DaimlerChrysler Venture GmbH (DaimlerChrysler Venture), pursuant to which
DaimlerChrysler Venture purchased a Subordinated Convertible Promissory Note
(Note) in the amount of $3.75 million. The Note is convertible into 435,470
shares of the Company's common stock either at the option of DaimlerChrysler
Venture at any time prior to the maturity, or automatically upon an initial
public offering of the Company's common stock or a change in control event, as
defined in the agreement. The number of shares issuable upon conversion is
subject to

                                      F-13
<PAGE>


                               ITERIS, INC.

                      (a subsidiary of Odetics, Inc.)

          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

adjustment for changes in the fair value of the Company's common stock from $12
per share. The Note matures on January 25, 2002 and bears interest at 8 per
cent per annum, which is to be forgiven if the conversion feature is triggered.

   In January 2000, the Company reincorporated as a Delaware corporation and
changed its name to Iteris, Inc. Formerly the Company was known as Odetics ITS,
Inc. The Company also effected a 1.875675-to-1 common stock split. All share
and per share information in the accompanying financial statements have been
restated to reflect this common stock split.

(8) Associates Incentive Programs

   Under the terms of the Parent's Profit Sharing Plan, the Company contributes
to a trust fund such amounts as are determined annually by the Company's Board
of Directors. No contributions were made in the years ended March 31, 1998 or
1999 and in the nine months ended December 31, 1999. The Company's associates
participate in the Parent's 401(k) Plan. Under the 401(k) Plan, eligible
associates voluntarily contribute to the plan up to 15% of their salary through
payroll deductions. The Company matches 50% of contributions up to a stated
limit. Under the provisions of the 401(k) Plan, associates have four investment
choices, one of which is the purchase of Odetics' Class A common stock at
market price. Company matching contributions were approximately $40,000,
$114,000, $120,000 and $191,000 in the years ended March 31, 1997, 1998 and
1999, and in the nine months ended December 31, 1999, respectively.

   The Company's employees with more than six months of eligible service
participate in the Parent's noncontributory Associate Stock Ownership Plan
(ASOP). The ASOP provides that Company contributions, which are determined
annually by the Board of Directors, may be in the form of cash or shares of the
Parent's stock. The Company contributions to the ASOP were approximately
$25,000, $51,000, $69,000 and none in the years ended March 31, 1997, 1998 and
1999 and in the nine months ended December 31, 1999, respectively.

   Certain executives of the Company participate in the Parent's Executive
Deferral Plan under which a portion of their annual compensation may be
deferred. Compensation charged to operations and deferred under the plan
totaled $12,000, $12,000, $12,000 and $9,000 for the years ended March 31,
1997, 1998 and 1999 and in the nine months ended December 31, 1999,
respectively.

(9) Stock Options

   In September 1997, the Company granted options to purchase up to 900,324
shares of common stock to certain members of senior management at an exercise
price of $1.07 per share. The options granted vested ratably at 25% on each of
the first four anniversaries of the grant date.

   Subsequently, the Company's Board of Directors and its Parent adopted and
approved the 1998 Stock Incentive Plan (the "Plan"), authorized 2,813,513
shares of the Company's common stock for issuance under the Plan, and granted
thereunder options to purchase 1,732,184 shares of common stock at exercise
prices of $1.60 to $9.06 per share, the fair value of the underlying common
stock as of the date of grant as determined by the Board of Directors. Under
terms of the Plan, eligible key employees, directors and consultants can
receive options to purchase shares of the Company's common stock at prices not
less than 100% for incentive stock options and not less than 85% for
nonqualified stock options of the fair value on the date of grant as determined
by the Board of Directors. Options expire ten years after date of grant or 90
days after termination of employment. The options granted vested ratably at 25%
on each of the first four anniversaries of the grant date.

                                      F-14
<PAGE>


                               ITERIS, INC.

                      (a subsidiary of Odetics, Inc.)

          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

   A summary of all Company stock option activity is as follows:

<TABLE>
<CAPTION>
                                           Year ended March 31
                            --------------------------------------------------
                                                                               Nine months ended
                                  1997             1998             1999       December 31, 1999
                            ---------------- ---------------- ---------------- -------------------
                                    Weighted         Weighted         Weighted           Weighted
                                    Average          Average          Average             Average
                                    Exercise         Exercise         Exercise           Exercise
                            Options  Price   Options  Price   Options  Price   Options     Price
                            ------- -------- ------- -------- ------- -------- --------  ---------
                                  (In thousands, except per share data)
   <S>                      <C>     <C>      <C>     <C>      <C>     <C>      <C>       <C>
   Options outstanding at
    beginning of year......    --     $--       --    $  --      900   $1.07       2,416  $   1.86
     Granted...............    --      --      900     1.07    1,516    2.34         216      3.62
     Exercised.............    --      --       --       --       --      --          --        --
     Canceled..............    --      --       --       --       --      --          --        --
                              ---     ---      ---    -----    -----   -----    --------  --------
   Options outstanding at
    end of year............    --     $--      900    $1.07    2,416   $1.86       2,632  $   2.01
                              ===     ===      ===    =====    =====   =====    ========  ========
   Exercisable at end of
    year...................    --               --               225                 773
                              ===              ===             =====            ========
   Available for grant at
    end of year............    --               --             1,297               1,081
                              ===              ===             =====            ========
</TABLE>

   During the nine month period ended December 31, 1999, the Company issued
158,000 options to employees for which the exercise price of the options was
less than the fair value of the Company's common stock at the date of grant. As
a result, the Company will incur compensation charges of $218,000, which will
be charged to operations over the four year vesting period of the options. In
the nine months ended December 31, 1999 the Company recorded $20,000 of expense
related to such options.

Pro Forma Disclosures of the Effect of Stock-Based Compensation Plans

   Pro forma information regarding results of operations and net loss per share
is required by Statement No. 123 for stock-based awards to employees as if the
Company had accounted for such awards using a valuation method permitted under
Statement No. 123.

                                      F-15
<PAGE>


                               ITERIS, INC.

                      (a subsidiary of Odetics, Inc.)

          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

   Stock-based awards to employees under the Plan during the years ended March
31, 1999 and 1998, and for the nine months ended December 31, 1999, were valued
using the minimum value method, assuming no expected dividends and the
following weighted-averages:

<TABLE>
<CAPTION>
                                                 Years ended
                                                  March 31,
                                                 ------------  Nine months ended
                                                 1998   1999   December 31, 1999
                                                 -----  -----  -----------------
   <S>                                           <C>    <C>    <C>
   Weighted Average:
     Remaining contractual life--years..........  9.50   8.87         8.42
     Expected life--years.......................  5.50   4.87         4.42
     Risk-free interest rate....................  5.88%  5.45%        6.39%
     Fair value of options granted.............. $0.59  $0.74        $2.10
</TABLE>

   Should the Company complete an initial public offering of its common stock,
stock-based awards granted thereafter will be valued using the Black-Scholes
option pricing model. In addition to the factors used to estimate the fair
value of stock options issued using the minimum value method, the Black-Scholes
model considers the expected volatility of the Company's stock price,
determined in accordance with Statement No. 123, in arriving at an estimated
fair value. The minimum value method does not consider stock price volatility.

   For purposes of pro forma disclosures, the estimated minimum value of the
Company's stock-based awards to employees is amortized over the options'
vesting period. The results of applying Statement No. 123 to the Company's
stock-based awards to employees would approximate the following (in thousands,
except per share data):

<TABLE>
<CAPTION>
                                                           Nine months ended
                                Years ended March 31,        December 31,
                               -------------------------  -------------------
                                1997     1998     1999       1998      1999
                               -------  -------  -------  ----------- -------
                                                          (unaudited)
   <S>                         <C>      <C>      <C>      <C>         <C>
   Pro forma:
     Net loss................. $(4,506) $(7,257) $(7,103)  $( 6,016)  $(6,812)
     Basic and diluted loss
      per share............... $  (.40) $  (.64) $  (.61)  $   (.52)  $  (.56)
</TABLE>

(10) Commitments and Contingencies

   The Company and its Parent are co-borrower and cross-guarantor under a loan
agreement with the Parent's banks. Virtually all of the Company's assets have
been pledged as collateral under the agreement. The maximum credit facility is
$17.0 million of which $11.0 million and no amount was outstanding at March 31,
1999 and December 31, 1999, respectively. The loan agreement expires December
31, 2000.

   The Company has lease commitments for facilities in various locations
throughout the United States. The commitment under these noncancelable
operating leases at December 31, 1999 is as follows (in thousands):

<TABLE>
<CAPTION>
   Fiscal Year
   -----------
   <S>                                                                  <C>
    2000............................................................... $ 91,000
    2001...............................................................  307,000
    2002...............................................................  194,000
    2003...............................................................   17,000
    2004...............................................................       --
                                                                        --------
                                                                        $609,000
                                                                        ========
</TABLE>


                                      F-16
<PAGE>


                               ITERIS, INC.

                      (a subsidiary of Odetics, Inc.)

          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

   Rent expense under operating leases totaled $42,000, $319,000, $424,000 and
$553,000, of which amounts charged under an agreement with the Parent were
$41,000, $138,000, $223,000 and $161,000, respectively for the years ended
March 31, 1997, 1998 and 1999 and in the nine months ended December 31, 1999.

(11) Significant Customer Information

   Sales to major customers in the years ended March 31, 1997, 1998 and 1999
and the nine months ended December 31, 1999, and the related accounts
receivable balances at December 31, 1999 are as follows:

<TABLE>
<CAPTION>
                                          Sales
                       -------------------------------------------
                                                      Nine Months   Receivable
                                                         Ended      Balance at
                                                      December 31, December 31,
Customer                 1997      1998       1999        1999         1999
- --------               -------- ---------- ---------- ------------ ------------
<S>                    <C>      <C>        <C>        <C>          <C>
 A.................... $     -- $1,946,000 $1,903,000  $1,962,000    $330,000
 B....................       --         --  1,579,000          --          --
 C....................       --    995,000         --          --          --
 D....................       --    656,000  2,497,000   2,058,000     265,000
 E....................  294,000         --         --          --          --
 F....................  111,000         --         --          --          --
</TABLE>

   No other customer represented more than 10% of the Company's annual sales.

(12) Business Segment and Geographic Information

   Effective April 1, 1998, the Company adopted the FASB Statement Financial
No. 131, Disclosure about Segments of an Enterprise and Related Information
(Statement 131). Statement No. 131 establishes standards for the way that
public business enterprises report information about operating segments both
for annual and interim financial periods. Operating segments are components of
an enterprise about which separate financial information is available that is
regularly evaluated by the chief operating decision maker in deciding how to
allocate resources and in assessing performance. Statement 131 also establishes
standards for related disclosures about products and services, geographic
areas, and major customers. The adoption of Statement 131 did not affect
results of operations or financial position, but did affect the following
disclosure of segment information.

   The Company operates in two reportable segments: sensor and systems. The
accounting policies of the reportable segments are the same as those described
in the summary of significant accounting policies except that certain expenses,
such as interest, amortization of certain intangibles and certain corporate
expenses are not allocated to the segments. In addition, the Company's net
assets are not allocated to the segments.

   The reportable segments are each managed separately because they manufacture
and distribute distinct products or services.

                                      F-17
<PAGE>


                               ITERIS, INC.

                      (a subsidiary of Odetics, Inc.)

          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

   Selected financial information for the Company's reportable segments for the
periods indicated are as follows:

<TABLE>
<CAPTION>
                                                     Sensors  Systems   Total
                                                     -------  -------  -------
                                                         (In thousands)
   <S>                                               <C>      <C>      <C>
   Year ended March 31, 1997
    Revenue from external customers................. $   538  $    --  $   538
    Depreciation and amortization...................      64       --       64
    Segment income (loss)...........................  (3,721)      --   (3,721)
   Year ended March 31, 1998
    Revenue from external customers................. $ 1,607  $ 4,234  $ 5,841
    Depreciation and amortization...................     103      411      514
    Segment income (loss)...........................  (5,750)     305   (5,445)
   Year ended March 31, 1999
    Revenue from external customers................. $ 4,339  $10,241  $14,580
    Depreciation and amortization...................     173      639      812
    Segment income (loss)...........................  (4,514)     521   (3,993)
   Nine months ended December 31, 1998 (unaudited)
    Revenue from external customers................. $ 3,051  $ 7,349  $10,400
    Depreciation and amortization...................     116      445      561
    Segment income (loss)...........................  (2,390)    (153)  (2,543)
   Nine months ended December 31, 1999
    Revenue from external customers................. $ 5,880  $11,567  $17,447
    Depreciation and amortization...................     189      733      922
    Segment income (loss)...........................  (2,278)     235   (2,043)
</TABLE>

   The following reconciles segment income to consolidated income before income
taxes:

<TABLE>
<CAPTION>
                                                           Nine months ended
                                 Year ended March 31          December 31
                               -------------------------  -------------------
                                1997     1998     1999       1998      1999
                               -------  -------  -------  ----------- -------
                                                          (Unaudited)
                                             (In thousands)
   <S>                         <C>      <C>      <C>      <C>         <C>
   Total profit or loss for
    reportable segments....... $(3,721) $(5,445) $(3,993)   $(2,543)  $(2,043)
   Unallocated amounts:
     Corporate and other
      expenses................    (105)    (458)    (881)      (562)   (1,057)
     Interest expense.........    (680)  (1,344)  (2,167)    (1,550)   (2,191)
                               -------  -------  -------    -------   -------
   Income before income
    taxes..................... $(4,506) $(7,247) $(7,041)   $(4,655)  $(5,291)
                               =======  =======  =======    =======   =======
</TABLE>

   Segment assets are not presented because the Company does not segregate its
assets by segment.

                                      F-18
<PAGE>


                               ITERIS, INC.

                      (a subsidiary of Odetics, Inc.)

          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

   Selected financial information for the Company's operations by geographic
segment is as follows:

<TABLE>
<CAPTION>
                                            Years ended      Nine months ended
                                             March 31           December 31
                                        ------------------- -------------------
                                        1997  1998   1999      1998      1999
                                        ---- ------ ------- ----------- -------
                                                            (Unaudited)
                                                    (In thousands)
   <S>                                  <C>  <C>    <C>     <C>         <C>
   Geographic Area Revenue
   United States....................... $538 $5,841 $13,002   $ 8,822   $17,361
   Asia Pacific Rim....................   --     --   1,578     1,578        86
                                        ---- ------ -------   -------   -------
   Total net revenue................... $538 $5,841 $14,580   $10,400   $17,447

   Geographic Area Long-Lived Assets
   United States....................... $264 $7,134 $11,353   $10,555   $11,120
   Asia Pacific Rim....................  622    422      --        --        --
                                        ---- ------ -------   -------   -------
   Total long-lived assets............. $886 $7,556 $11,353   $10,555   $11,120
                                        ==== ====== =======   =======   =======
</TABLE>

(13) Supplemental Cash Flow Information

<TABLE>
<CAPTION>
                                                             Nine months ended
                                    Years ended March 31        December 31
                                    ----------------------  -------------------
                                    1997    1998    1999       1998      1999
                                    -----  ------  -------  ----------- -------
                                                            (Unaudited)
                                                 (In thousands)
   <S>                              <C>    <C>     <C>      <C>         <C>
   Net cash used in changes in
    operating assets and
    liabilities:
     Increase in accounts
      receivable..................  $ (26) $ (499) $(1,242)   $  (825)  $  (470)
     (Increase) decrease in net
      costs and estimated earnings
      in excess of billings.......     62     293     (653)      (963)     (291)
     (Increase) decrease in
      inventories.................   (248) (1,290)   1,255      1,438      (431)
     (Increase) decrease in
      prepaid expenses and other
      assets......................   (716)    (56)     570        458       (33)
     Increase (decrease) in
      accounts payable and accrued
      expenses....................    117   1,173   (2,044)    (1,614)     (958)
                                    -----  ------  -------    -------   -------
   Changes in operating assets and
    liabilities...................  $(811) $ (379) $(2,114)   $(1,506)  $(2,183)
                                    =====  ======  =======    =======   =======
   Non-cash transaction during the
    year:
     Purchase of MMA for stock and
      payable to Parent...........  $  --  $   --  $ 4,638    $    --   $   500
                                    =====  ======  =======    =======   =======
   Purchase of Viggen for payable
    to Parent.....................  $  --  $   --  $   275    $    --   $    --
                                    =====  ======  =======    =======   =======
   MMA purchase price adjustment..  $  --  $   --  $    --    $    --   $   249
                                    =====  ======  =======    =======   =======
</TABLE>

                                      F-19
<PAGE>

                         REPORT OF INDEPENDENT AUDITORS

Shareholders and Board of Directors
Meyer, Mohaddes Associates, Inc.:

   We have audited the accompanying balance sheets of Meyer, Mohaddes
Associates, Inc. (the Company), as of December 31, 1997 and October 16, 1998
and the related statements of income, shareholders' equity, and cash flows for
the year ended December 31, 1997 and the period from January 1, 1998 to October
16, 1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.

   We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.

   In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Meyer, Mohaddes Associates,
Inc. at December 31, 1997 and October 16, 1998, and the results of its
operations and cash flows for the year ended December 31, 1997 and the period
from January 1, 1998 to October 16, 1998, in conformity with accounting
principles generally accepted in the United States.

                                          /s/ Ernst & Young LLP

Orange County, California

November 11, 1998

                                      F-20
<PAGE>

                        MEYER, MOHADDES ASSOCIATES, INC.

                              BALANCE SHEETS


<TABLE>
<CAPTION>
                                                       December 31,  October
                                                           1997      16, 1998
                                                       ------------ ----------
<S>                                                    <C>          <C>
ASSETS
Current assets:
  Cash................................................  $       --          --
  Trade accounts receivable, net of allowance for
   doubtful accounts of $22,000 at December 31, 1997
   and $27,000 at October 16, 1998....................     960,000   1,466,000
  Costs and estimated earnings in excess of billings
   on uncompleted contracts (Note 2)..................     580,000     420,000
                                                        ----------  ----------
    Total current assets..............................   1,540,000   1,886,000

Equipment, furniture and fixtures:
  Equipment...........................................     154,000     185,000
  Furniture and fixtures..............................      28,000      28,000
  Allowances for depreciation.........................    (147,000)   (160,000)
                                                        ----------  ----------
                                                            35,000      53,000
Other assets..........................................      28,000      32,000
                                                        ----------  ----------
Total assets..........................................  $1,603,000  $1,971,000
                                                        ==========  ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
  Line of credit......................................  $  100,000          --
  Trade accounts payable..............................     301,000     237,000
  Bank overdraft......................................       8,000     167,000
  Deferred tax liabilities............................     470,000     581,000
  Accrued payroll and related.........................      82,000     140,000
  Accrued expenses....................................      16,000      81,000
                                                        ----------  ----------
    Total current liabilities.........................     977,000   1,206,000
Commitments and contingencies (Note 6)
Shareholders' equity:
  Common stock, no par value:
    Authorized shares 100,000
    Issued and outstanding shares 2,160 at December
     31, 1997 and October 16, 1998....................      22,000      22,000
  Retained earnings...................................     604,000     743,000
                                                        ----------  ----------
Total shareholder's equity............................     626,000     765,000
                                                        ----------  ----------
Total liabilities and shareholders' equity............  $1,603,000  $1,971,000
                                                        ==========  ==========
</TABLE>

                            See accompanying notes.

                                      F-21
<PAGE>

                        MEYER, MOHADDES ASSOCIATES, INC.

                           STATEMENTS OF INCOME


<TABLE>
<CAPTION>
                                                               Period From
                                             Year ended     January 1, 1998 to
                                          December 31, 1997  October 16, 1998
                                          ----------------- ------------------
<S>                                       <C>               <C>
Contract revenue.........................    $3,625,000         $3,151,000
Cost of contract revenue.................     1,910,000          1,467,000
                                             ----------         ----------
Gross profit.............................     1,715,000          1,684,000
Selling, general and administrative
 expenses................................     1,457,000          1,432,000
                                             ----------         ----------
Income from operations...................       258,000            252,000
Interest expense.........................       (10,000)            (1,000)
Other income.............................        19,000                 --
                                             ----------         ----------
Income before income taxes...............       267,000            251,000
Income taxes.............................       119,000            112,000
                                             ----------         ----------
Net income...............................    $  148,000         $  139,000
                                             ==========         ==========
</TABLE>



                            See accompanying notes.

                                      F-22
<PAGE>

                        MEYER, MOHADDES ASSOCIATES, INC.

                    STATEMENTS OF SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                Common stock
                                               -------------- Retained
                                               Shares Amount  earnings  Total
                                               ------ ------- -------- --------
<S>                                            <C>    <C>     <C>      <C>
Balance at December 31, 1996.................. 2,160  $22,000 $456,000 $478,000
  Net income..................................    --       --  148,000  148,000
                                               -----  ------- -------- --------
Balance at December 31, 1997.................. 2,160   22,000  604,000  626,000
  Net income..................................    --       --  139,000  139,000
                                               -----  ------- -------- --------
Balance at October 16, 1999................... 2,160  $22,000 $743,000 $765,000
                                               =====  ======= ======== ========
</TABLE>






                            See accompanying notes.

                                      F-23
<PAGE>

                        MEYER, MOHADDES ASSOCIATES, INC.

                         STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                   Period from
                                                                   January 1,
                                                                      1998
                                                       Year ended      to
                                                      December 31, October 16,
                                                          1997        1998
                                                      ------------ -----------
<S>                                                   <C>          <C>
Operating activities:
Net income...........................................  $ 148,000    $139,000
Adjustments to reconcile net income to net cash
 provided by operating activities:
  Depreciation and amortization......................     25,000      17,000
  Provision for losses on accounts receivable........     22,000       5,000
  Provision for deferred income taxes................    118,000     111,000
  Changes in operating assets and liabilities (Note
   8)................................................   (280,000)   (141,000)
                                                       ---------    --------
Net cash provided by operating activities............     33,000     131,000

Investing activities:
Purchases of equipment, furniture and fixtures.......     (2,000)    (31,000)

Financing activities:
Net payments on line of credit and note payable......   (110,000)   (100,000)
                                                       ---------    --------
Decrease in cash.....................................    (79,000)         --

Cash at beginning of year............................     79,000          --
                                                       ---------    --------
Cash at end of year..................................  $      --    $     --
                                                       =========    ========
</TABLE>


                            See accompanying notes.

                                      F-24
<PAGE>

                        MEYER, MOHADDES ASSOCIATES, INC.

                         NOTES TO FINANCIAL STATEMENTS

                               December 31, 1997

(1) Summary of Significant Accounting Policies

 The Company

   Meyer, Mohaddes Associates, Inc. (the Company), a California corporation,
provides transportation engineering and planning services to the public and
private sectors. The Company's customers consist mainly of state and local
government and related agencies, mainly in California.

 Use of Estimates

   The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Significant estimates made in preparing the financial statements include the
allowance for doubtful accounts, and costs to complete long-term contracts.

 Revenue Recognition

   Contract revenue is derived primarily from long-term contracts with
governmental agencies. Contract revenue includes costs incurred plus a portion
of estimated fees or profits determined on the percentage of completion method
of accounting 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 cost and revenue and are recognized in the period in
which the revisions are determined. Profit incentives are included in revenue
when their realization is reasonably assured.

 Equipment, Furniture and Fixtures

   Equipment, furniture and fixtures are recorded at cost and are depreciated
principally by the declining balance method over their estimated useful lives
(four to eight years).

 Concentration of Credit Risk

   The Company performs periodic credit evaluations of its customers' financial
condition and generally does not require collateral. Credit losses have been
within management's expectations and within amounts provided through the
allowances for doubtful accounts. At December 31, 1997 and October 16, 1998,
accounts receivable from governmental agencies and prime government contractors
were approximately $764,000 and 1,120,000, respectively.

                                      F-25
<PAGE>

                        MEYER, MOHADDES ASSOCIATES, INC.

                   NOTES TO FINANCIAL STATEMENTS--(Continued)
(2) Costs and Estimated Earnings on Uncompleted Contracts

   Costs and estimated earnings in excess of billings at December 31, 1997 and
October 16, 1998 include $127,000 and $147,000, respectively, that were not
billable as certain milestone objectives specified in the contracts had not
been attained. Substantially all costs and estimated earnings in excess of
billings at October 16, 1998 are expected to be billed and collected within one
year.

(3) Line of Credit

   On April 3, 1997, the Company entered into a line of credit agreement with a
bank collateralized by substantially all of the Company's assets. Under the
terms of the agreement, the Company is required to comply with certain
financial covenants. The Company may borrow up to $300,000 with interest at the
bank's reference rate plus two percent (10.5% as of December 31, 1997 and
October 16, 1998). At December 31, 1997 and October 16, 1998, $100,000 and $0,
respectively, was outstanding. The agreement expires on March 1, 1999.

   In addition, the Company entered into a loan agreement with a bank
collateralized by substantially all of the Company's assets. Under the terms of
the agreement, the Company is required to comply with certain financial
covenants. The Company may borrow up to $100,000 with interest at the bank's
reference rate plus three percent (11.5% as of December 31, 1997). The Company
had no borrowings outstanding under this agreement at December 31, 1997 and
October 16, 1998.

(4) Income Taxes

   The Company utilizes the liability method of accounting for income taxes as
set forth in Statement of Financial Accounting Standards No. 109, Accounting
for Income Taxes. Under the liability method, deferred taxes are determined
based on the difference between the financial statement and tax bases of assets
and liabilities using enacted tax rates.

   The components of the provision (benefit) for income taxes are as follows
for the year ended December 31, 1997 and the period from January 1, 1998 to
October 16, 1998:

<TABLE>
<CAPTION>
                                                                     Period from
                                                                     January 1,
                                                         Year ended    1998 to
                                                        December 31, October 16,
                                                            1997        1998
                                                        ------------ -----------
   <S>                                                  <C>          <C>
   Current:
    Federal............................................   $     --    $     --
    State..............................................      1,000       1,000
                                                          --------    --------
                                                             1,000       1,000
   Deferred:
    Federal............................................     92,000      84,000
    State..............................................     26,000      27,000
                                                          --------    --------
                                                           118,000     111,000
                                                          --------    --------
   Provision for income taxes..........................   $119,000    $112,000
                                                          ========    ========
</TABLE>

                                      F-26
<PAGE>

                        MEYER, MOHADDES ASSOCIATES, INC.

                   NOTES TO FINANCIAL STATEMENTS--(Continued)

   The reconciliation of the income tax provision to taxes computed at the U.S.
federal statutory rate of 35% is as follows at December 31, 1997 and for the
period from January 1, 1998 to October 16, 1998:

<TABLE>
<CAPTION>
                                                                    Period from
                                                                    January 1,
                                                        Year ended    1998 to
                                                       December 31, October 16,
                                                           1997        1998
                                                       ------------ -----------
   <S>                                                 <C>          <C>
    Income tax at statutory rates.....................   $ 93,000    $ 88,000
    State income taxes, net of federal tax benefit....     17,000      18,000
    Other.............................................      9,000       5,000
                                                         --------    --------
                                                         $119,000    $112,000
                                                         ========    ========
</TABLE>

   The Company's deferred tax liabilities consists of an accrual to cash
conversion of $470,000 and $581,000, respectively at December 31, 1997 and
October 16, 1998.

   The Company has federal and California net operating loss carryforwards of
approximately $7,000 and $2,000 respectively which begin to expire in 2011 and
2001, respectively.

(5) Employee Incentive Programs

   The Company sponsors a 401(k) Plan in which all employees are eligible to
participate. Under the 401(k) Plan, eligible employees voluntarily contribute
to the plan up to 5% of their salary through payroll deductions. The Company
matches 45% of contributions up to a stated limit. Under the provisions of the
401(k) Plan, employees have six investment choices. Company matching
contributions were approximately $35,000 and $112,000, respectively, in the
year ended December 31, 1997 and in the period from January 1, 1998 to October
16, 1998.

   Employees also participate in the Company's bonus program. The Company paid
approximately $134,000 and $250,000, respectively, in the year ended December
31, 1997 and in the period from January 1, 1998 to October 16, 1998.

(6) Commitments and Contingencies

   The Company has entered into an operating leases for certain equipment and
facilities with varying terms and escalation clauses. Future minimum payments
under noncancelable operating losses with initial terms of one year or more are
as follows: $111,000 in 1999, $90,000 in 2000, $57,000 in 2001 and $45,000 in
2002.

   Rent expense for the year ended December 31, 1997 and the period from
January 1, 1998 to October 16, 1999 aggregated $164,000 and $115,000,
respectively.

(7) Supplemental Cash Flow Information

<TABLE>
<CAPTION>
                                                                    Period from
                                                                    January 1,
                                                        Year ended    1998 to
                                                       December 31, October 16,
                                                           1997        1998
                                                       ------------ -----------
   <S>                                                 <C>          <C>
   Changes in operating assets and liabilities:
    (Increase) decrease in accounts receivable.......   $  35,000    $(511,000)
    Increase in net costs and estimated earnings in
     excess of billings..............................    (297,000)     160,000
    (Increase) decrease in prepaid expenses and other
     assets..........................................       8,000       (8,000)
    Increase (decrease) in accounts payable and
     accrued expenses................................     (26,000)     218,000
                                                        ---------    ---------
   Net cash used by changes in operating assets and
    liabilities......................................   $(280,000)    (141,000)
                                                        =========    =========
   Cash paid during the year:
    Interest.........................................   $  10,000    $   1,000
    Income taxes paid................................       1,000        1,000
</TABLE>

                                      F-27
<PAGE>


                               ITERIS, INC.

                UNAUDITED PRO FORMA STATEMENT OF OPERATIONS

                         Year ended March 31, 1999

   On October 16, 1998, the Company acquired Meyer, Mohaddes Associates, Inc.,
a provider of transportation engineering and planning services. Pursuant to the
terms of the merger agreement, the Company purchased all of the issued and
outstanding shares of common stock of MMA for $4.3 million by issuing 810,479
shares of the Company's common stock (after giving effect to the purchase price
adjustment required by the merger agreement) and 55,245 shares of the Parent's
Class A common stock valued at $250,000. The value of the shares issued by the
Parent is repayable to the Parent. The acquisition was accounted for as a
purchase and, accordingly, the results of operations for MMA are included in
the Company's consolidated financial statements from the date of acquisition.
The following unaudited pro forma statement of operations presents the combined
results of the Company and of MMA as if the acquisition had occurred as of
April 1, 1998.

<TABLE>
<CAPTION>
                              Iteris           MMA
                            Year ended   April 1, 1998 to  Pro Forma
                          March 31, 1999 October 16, 1998 Adjustments   Pro Forma
                          -------------- ---------------- -----------   ----------
                            (in thousands, except share and per share amounts)
<S>                       <C>            <C>              <C>           <C>
Revenue:
  Sensor................    $    4,339        $             $           $    4,339
  Systems...............        10,241         1,702                        11,943
                            ----------        ------                    ----------
      Total revenue.....        14,580         1,702                        16,282
Costs of sales:
  Sensors...............         3,129                                       3,129
  Systems...............         7,195           857                         8,052
                            ----------        ------                    ----------
      Total costs of
       sales............        10,324           857                        11,181
                            ----------        ------                    ----------
Gross profit............         4,256           845                         5,101
Operating expenses:
  Research and
   development..........         2,152                                       2,152
  Selling, general and
   administrative.......         5,729         1,099                         6,828
  Charges allocated by
   Parent (Note 2)......           881                                         881
  Other expenses........           368                         140 (a)         508
                            ----------        ------        ------      ----------
Total operating
 expenses...............         9,130         1,099           140          10,369
                            ----------        ------        ------      ----------
Loss from operations....        (4,874)         (254)         (140)         (5,268)
Interest charge
 allocated by Parent....         2,167                          14 (b)       2,181
                            ----------        ------        ------      ----------
Loss before income
 taxes..................        (7,041)         (254)         (154)         (7,449)
Income taxes (Note 6)...            --          (113)          113 (c)          --
                            ----------        ------        ------      ----------
Net loss................    $   (7,041)       $ (141)       $ (267)     $   (7,449)
                            ==========        ======        ======      ==========
Net loss per share of
 common stock--basic and
 diluted................    $    (0.60)                                 $    (0.64)
                            ==========                                  ==========
Shares used in
 computation of net loss
 per share..............    11,647,000                      42,400 (d)  11,689,400
                            ==========                      ======      ==========
</TABLE>

                                      F-28
<PAGE>


                               ITERIS, INC.

           NOTES TO UNAUDITED PRO FORMA STATEMENT OF OPERATIONS

  (a) Pro forma amortization expense for period from April 1, 1999 to October
      16, 1999 of $3.8 million of goodwill arising from acquisition based on
      expected benefit period of 15 years.

  (b) Pro forma interest expense for period from April 1, 1999 to October 16,
      1999 on $250,000 of MMA purchase price paid by Parent. This amount is
      included in "Payable to Parent" in the Company's consolidated balance
      sheet at March 31, 1999. Interest expense is calculated at 10.5%, the
      Parent's cost of related borrowed funds.

  (c) Elimination of tax benefit recognized by MMA.

  (d) Inclusion of 810,479 shares of the Company's common stock, which were
      issued in the acquisition of MMA, in the weighted average number of
      shares outstanding for the entire year used in calculating net income
      (loss) per share.

  (e) The merger agreement provides for the MMA shareholders to receive
      additional shares from the Parent with a then market value of $250,000
      at each of April 16, 1999, October 16, 1999, April 16, 2000, October
      16, 2000 and April 16, 2001 if an initial public offering of the
      Company's common stock does not occur by each and any of those dates.
      In April 1999 and October 1998, the Parent issued an additional 25,740
      and 20,986 shares of its Class A common stock valued $250,000 to the
      MMA shareholders pursuant to this provision, which was recorded by the
      Company as additional goodwill and an increase in the payable to
      Parent.

                                      F-29
<PAGE>




                       [LOGO OF ITERIS(TM) APPEARS HERE]
<PAGE>

                                    PART II

                     INFORMATION NOT REQUIRED IN PROSPECTUS

Item 13. Other Expenses of Issuance and Distribution

   The following table sets forth all costs and expenses, other than
underwriting discounts and commissions, payable by us in connection with the
sale of the common stock being registered hereunder. All of the amounts shown
are estimates except for the SEC registration fee, the Nasdaq National Market
application fee and the NASD filing fee.

<TABLE>
   <S>                                                                 <C>
   SEC registration fee............................................... $ 16,925
   NASD filing fee....................................................    6,911
   Nasdaq National Market application fee.............................   95,000
   Accounting fees and expenses.......................................  325,000
   Legal fees and expenses ...........................................  250,000
   Printing and engraving.............................................  150,000
   Transfer agent fees and expenses...................................   15,000
   Miscellaneous......................................................   41,164
                                                                       --------
     Total............................................................ $900,000
                                                                       ========
</TABLE>

Item 14. Indemnification of Directors and Officers

   (a) As permitted by Delaware law, our certificate of incorporation
eliminates the liability of directors to us or our stockholders for monetary
damages for breach of fiduciary duty as directors, except to the extent
otherwise required by Delaware law.

   (b) Our certificate of incorporation provides that we will indemnify each
person who was or is made a party to any proceeding by reason of the fact that
such person is or was a director or officer of the company against all expense,
liability and loss reasonably incurred or suffered by such person in connection
therewith to the fullest extent authorized by Delaware law. Our bylaws provide
for a similar indemnity to our directors and officers to the fullest extent
authorized by Delaware law.

   (c) Our certificate of incorporation also gives us the ability to enter into
indemnification agreements with each of our directors and officers. We have
entered into indemnification agreements with certain of our directors and
officers, which provide for the indemnification of our directors or officers
against any and all expenses, judgments, fines, penalties and amounts paid in
settlement, to the fullest extent permitted by law.

Item 15. Recent Sale of Unregistered Securities

   The following is a summary of transactions by us from November 30, 1996
through the date hereof involving sales of our securities that were not
registered under the Securities Act of 1933, as amended.

   On October 16, 1998, we issued 857,183 shares of our common stock in
connection with our acquisition of Meyer, Mohaddes Associates, Inc. In July
1999, 46,704 of these shares were cancelled due to a purchase price adjustment.
The sales of the securities listed above were deemed to be exempt from
registration under the Securities Act in reliance on Section 4(2) of the
Securities Act, or Regulation D promulgated thereunder.

   Since December 31, 1997, we have granted options to purchase an aggregate of
2,625,945 shares of common stock to employees and directors. The issuance of
these options was deemed to be exempt from registration under the Securities
Act in reliance on Rule 701 promulgated under Section 3(b) of the Securities
Act as transactions by an issuer not involving a public offering transaction
pursuant to compensatory benefit plans and contracts relating to compensation.

                                      II-1
<PAGE>


   On January 25, 2000 we entered into a Subordinated Convertible Note Purchase
Agreement with DaimlerChrysler Venture GmbH, pursuant to which DaimlerChrysler
purchased a Subordinated Convertible Promissory Note in the principal amount of
$3,750,000. The Promissory Note will automatically convert into shares of our
common stock immediately prior to the closing of our initial public offering of
common stock under this prospectus. The issuance of the Promissory Note and the
shares of common stock upon conversion are exempt from registration under the
Securities Act in reliance upon Regulation S promulgated thereunder.

   We did not employ any underwriters, brokers or finders in connection with
these transactions.

   The recipients of securities in each such transaction represented their
intentions to acquire the securities for investment only and not with a view to
or for sale in connection with any distribution thereof and appropriate legends
were affixed to the instruments representing such securities issued in such
transactions. All recipients had adequate access, through their relationships
with us, to information about us.

Item 16. Exhibits and Financial Statement Schedules

   (a) Exhibits

<TABLE>
 <C>      <S>
  1.1*    Form of Underwriting Agreement.

  2.1**   Agreement and Plan of Reorganization, dated October 16, 1998, by and
          among the Registrant, Odetics, Inc., MMA Acquisition Corp., and
          Meyer, Mohaddes Associates, Inc. and its shareholders.

  3.1**   Certificate of Incorporation of Registrant.

  3.2     Bylaws of Registrant.

  4.1     Specimen common stock certificate.

  4.2**   Registration Rights Agreement between the Registrant and Abbas
          Mohaddes, Michael Meyer, Viggen Davidian and Gary Hamrick, dated
          October 16, 1998.

  4.3     Registration Rights Agreement between Registrant and DaimlerChrysler
          GmbH dated January 25, 2000.

  5.1*    Opinion of Stradling Yocca Carlson & Rauth, a Professional
          Corporation.

 10.1**   1998 Stock Incentive Plan.

 10.2**   Form of 1998 Stock Option Agreement.

 10.3**   Form of Indemnification Agreement.

 10.4**   Form of Employee Stock Purchase Plan.

 10.5     Separation and Distribution Agreement between Registrant and Odetics,
          dated December 31, 1999.

 10.6     Form of Tax Allocation Agreement between Registrant and Odetics.

 10.7     Form of Services Agreement between Registrant and Odetics.

 10.8     Form of Promissory Note between Registrant and Odetics.

 10.9     Form of Technology License Agreement between Registrant and Odetics.

 10.10**  Employment Agreement between Abbas Mohaddes, Meyer, Mohaddes
          Associates, Inc., and Registrant, dated October 16, 1998.

 10.11+   Cooperative Development Agreement between Registrant and Daimler-Benz
          Aktlengesellschaft, dated July 22, 1998.

 10.12+** Agreement between Freightliner Corporation and Registrant, dated
          January 1, 1999.

 10.13**  Federal Highway Administration Agreement between the U.S. Department
          of Transportation and Registrant, dated September 30, 1996.

 10.14**  Contract for Maintenance Services between the Michigan Department of
          Transportation and Registrant, dated June 17, 1999.

 10.15+** Firm Fixed Price Agreement for Odetics Services for MDOT ATMS/ATIS
          Operational Deployment, Final Acceptance and Initial Two-Year
          Warranty, between Rockwell Collins, Inc. and Registrant dated
          November 6, 1998.
</TABLE>


                                      II-2
<PAGE>

<TABLE>
 <C>     <S>
 10.16** Contract for ITS On-Call Technical Services Consultant Contract Number
         699-WB between the Virginia Department of Transit and Registrant,
         dated December 15, 1998.

 10.17   Subordinated Convertible Note Purchase Agreement between Registrant
         and DaimlerChrysler GmbH, dated January 25, 2000.

 10.18   Subordinated Convertible Note between Registrant and DaimlerChrysler
         GmbH, dated January 25, 2000.

 21.1**  List of Subsidiaries.

 23.1*   Consent of Stradling Yocca Carlson & Rauth, a Professional Corporation
         (included in exhibit 5.1).

 23.2    Consent of Independent Auditors.

 24.1**  Power of Attorney.

 27.1    Financial Data Schedule.
</TABLE>
- --------
*  To be filed by amendment.

** Previously filed.
+  Portions of this exhibit are omitted and were filed separately with the
   Securities and Exchange Commission pursuant to the Company's application
   requesting confidential treatment under Rule 406 of the Securities Act of
   1933.

(b) Financial Statement Schedules

   Report of Independent Auditors on Financial Statement Schedule

   Schedule II--Valuation And Qualifying Accounts

   Other schedules are omitted because they are not applicable or because the
information is included in the financial statements or the related notes.

Item 17. Undertakings

   Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.

   The undersigned registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreement certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.

   The undersigned registrant hereby undertakes:

   (1) That, for purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.

   (2) That, for the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.

                                      II-3
<PAGE>

                                   SIGNATURES

   Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment No. 1 to the registration statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Anaheim, State of California, on the 27th day of January 2000.

                                          ITERIS, INC.

                                                    /s/ Jack Johnson
                                          By: _________________________________
                                                        Jack Johnson
                                               President and Chief Executive
                                                          Officer


   Pursuant to the requirements of the Securities Act of 1933, this amendment
to the registration statement has been signed by the following persons in the
capacities and on the dates indicated.

<TABLE>
<CAPTION>
              Signature                             Title                     Date
              ---------                             -----                     ----

<S>                                    <C>                             <C>
         /s/ Jack Johnson              Chief Executive Officer,         January 27, 2000
______________________________________  President and Director
             Jack Johnson               (Principal Executive Officer)

        /s/ Victor Rumana              Chief Financial Officer and      January 27, 2000
______________________________________  Vice President (Principal
            Victor Rumana               Financial and Accounting
                                        Officer)

        /s/ Joel Slutzky*              Chairman                         January 27, 2000
______________________________________
             Joel Slutzky

     /s/ Andrew H. Card, Jr.*          Director                         January 27, 2000
______________________________________
         Andrew H. Card, Jr.

       /s/ Gary Hernandez*             Director                         January 27, 2000
______________________________________
            Gary Hernandez

      /s/ Gregory A. Miner*            Director                         January 27, 2000
______________________________________
           Gregory A. Miner

      /s/ Samuel K. Skinner*           Director                         January 27, 2000
______________________________________
          Samuel K. Skinner

    /s/ William M. Spreitzer*          Director                         January 27, 2000
______________________________________
         William M. Spreitzer

       /s/ Paul E. Wright*             Director                         January 27, 2000
______________________________________
            Paul E. Wright


      /s/ Jack Johnson                                                  January 27, 2000
*By: _______________________
        Jack Johnson
     (Attorney-in-fact)
</TABLE>

                                      II-4
<PAGE>

         REPORT OF INDEPENDENT AUDITORS ON FINANCIAL STATEMENT SCHEDULE

Stockholders and Board of Directors
Iteris, Inc.

   We have audited the financial statements of Iteris, Inc. as of March 31,
1998 and 1999 and December 31, 1999, and for each of the three years in the
period ended March 31, 1999 and the nine months ended December 31, 1999, and
have issued our report thereon dated January 25, 2000, except for the last
paragraph of Note 7, as to which the date is      (included elsewhere in this
Registration Statement). Our audits also included the financial statement
schedule listed in Item 16(b) of this Registration Statement. This schedule is
the responsibility of the Company's management. Our responsibility is to
express an opinion based on our audits.

   In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.

                                          Ernst & Young LLP

Orange County, California

January 25, 2000 except for the last paragraph of Note 7

as to which the date is

   The foregoing report is in the form that will be signed upon the
effectiveness of the 1.875675-for-1 stock split described in Note 7 to the
consolidated financial statements.

                                          /s/ Ernst & Young LLP

Orange County, California

January 25, 2000

                                      II-5
<PAGE>

                                  ITERIS, INC.

                                  SCHEDULE II

                       VALUATION AND QUALIFYING ACCOUNTS
                                 (in thousands)

<TABLE>
<CAPTION>
                                Balance at Additions to
                                beginning    costs and             Balance at
                                 of year     expense    Deductions end of year
                                ---------- ------------ ---------- -----------


<S>                             <C>        <C>          <C>        <C>
Year ended March 31, 1997:
  Accounts receivable
   allowance...................      $0          $0         $0          $0


Year ended March 31, 1998:
  Accounts receivable
   allowance...................      $0          $0         $0          $0


Year ended March 31, 1999:
  Accounts receivable
   allowance...................      $0        $252         $0        $252


Nine months ended December 31,
 1999:
  Accounts receivable
   allowance...................    $252         $75         $0        $327
</TABLE>

                                      II-6
<PAGE>

                                 EXHIBIT INDEX

<TABLE>
<CAPTION>
 Exhibit
   No.    Description
 -------  -----------
 <C>      <S>
  1.1*    Form of Underwriting Agreement.

  2.1**   Agreement and Plan of Reorganization, dated October 16, 1998, by and
          among the Registrant, Odetics, Inc., MMA Acquisition Corp., and
          Meyer, Mohaddes Associates, Inc. and its shareholders.

  3.1**   Certificate of Incorporation of Registrant.

  3.2     Bylaws of Registrant.

  4.1     Specimen common stock certificate.

  4.2**   Registration Rights Agreement between the Registrant and Abbas
          Mohaddes, Michael Meyer, Viggen Davidian and Gary Hamrick, dated
          October 16, 1998.

  4.3     Investor Rights Agreement between Registrant and DaimlerChrysler
          GmbH, dated January 25, 2000.

  5.1*    Opinion of Stradling Yocca Carlson & Rauth, a Professional
          Corporation.

 10.1**   1998 Stock Incentive Plan.

 10.2**   Form of 1998 Stock Option Agreement.

 10.3**   Form of Indemnification Agreement.

 10.4**   Form of Employee Stock Purchase Plan.

 10.5     Separation and Distribution Agreement between Registrant and Odetics,
          dated December 31, 1999.

 10.6     Form of Tax Allocation Agreement between Registrant and Odetics.

 10.7     Form of Services Agreement between Registrant and Odetics.

 10.8     Form of Promissory Note between Registrant and Odetics.

 10.9     Form of Technology License Agreement between Registrant and Odetics.

 10.10**  Employment Agreement and Noncompetition Agreement between Abbas
          Mohaddes, Meyer, Mohaddes Associates, Inc., and Registrant, dated
          October 16, 1998.

 10.11+   Cooperative Development Agreement between Registrant and Daimler-Benz
          Aktlengesellschaft, dated July 22, 1998.

 10.12+** Agreement between Freightliner Corporation and Registrant, dated
          January 1, 1999.

 10.13**  Federal Highway Administration Agreement between the U.S. Department
          of Transportation and Registrant, dated September 30, 1996.

 10.14**  Contract for Maintenance Services between the Michigan Department of
          Transportation and Registrant, dated June 17, 1999.

 10.15+** Firm Fixed Price Agreement for Odetics Services for MDOT ATMS/ATIS
          Operational Deployment, Final Acceptance and Initial Two-Year
          Warranty, between Rockwell Collins, Inc. and Registrant dated
          November 6, 1998.

 10.16**  Contract for ITS On-Call Technical Services Consultant Contract
          Number 699-WB between the Virginia Department of Transit and
          Registrant, dated December 15, 1998.

 10.17    Subordinated Convertible Note Purchase Agreement between Registrant
          and DaimlerChrysler GmbH, dated January 25, 2000.

 10.18    Subordinated Convertible Note between Registrant and DaimlerChrysler
          GmbH, dated January 25, 2000.

 21.1**   List of Subsidiaries.

 23.1*    Consent of Stradling Yocca Carlson & Rauth, a Professional
          Corporation (included in exhibit 5.1).

 23.2     Consent of Independent Auditors.

 24.1**   Power of Attorney.

 27.1     Financial Data Schedule.
</TABLE>
- -------
*  To be filed by amendment.

** Previously filed.
+  Portions of this exhibit are omitted and were filed separately with the
   Securities and Exchange Commission pursuant to the Company's application
   requesting confidential treatment under Rule 406 of the Securities Act of
   1933.

<PAGE>

                                                                     EXHIBIT 3.2


                                    BYLAWS

                                      OF

                                 ITERIS, INC.

                            a Delaware corporation



                       As Effective on December 17, 1999
<PAGE>

                                    BYLAWS
                                      OF
                                 ITERIS, INC.
                            a Delaware corporation

                                   ARTICLE I
                                    OFFICES

     Section 1.  Registered Office.  The address of the registered office of the
Corporation in the State of Delaware is 1013 Centre Road, Wilmington, Delaware
19805.  The name of the Corporation's registered agent at that address is
Corporation Service Company.

     Section 2.  Other Offices.  The Corporation may also have offices at such
other places, both within and without the State of Delaware, as the Board of
Directors may from time to time determine or the business of the Corporation may
require.

     Section 3.  Books.  The books of the Corporation may be kept within or
without the State of Delaware as the Board of Directors may from time to time
determine or the business of the Corporation may require.

                                  ARTICLE II
                           MEETINGS OF STOCKHOLDERS

     Section 1.  Place of Meetings.  All meetings of stockholders for the
election of directors shall be held at such place either within or without the
State of Delaware as may be fixed from time to time by the Board of Directors,
or at such other place either within or without the State of Delaware as shall
be designated from time to time by the Board of Directors and stated in the
notice of the meeting.  Meetings of stockholders for any other purpose may be
held at such time and place, within or without the State of Delaware, as shall
be stated in the notice of the meeting or in a duly executed waiver of notice
thereof.

     Section 2.  Annual Meetings.  Annual meetings of stockholders shall be held
at a time and date designated by the Board of Directors for the purpose of
electing directors and transacting such other business as may properly be
brought before the meeting.

     Section 3.  Special Meetings.  A special meeting of stockholders may be
called at any time by the Board of Directors, or by a majority of the Board of
Directors or by a committee of the Board of Directors which has been duly
designated by the Board of Directors and whose powers and authority, as provided
in a resolution of the Board of Directors, include the power to call such
meetings, but such special meetings may not be called by any other person or
persons.  The stockholders may not call a special meeting.

     Section 4.  Notification of Business to be Transacted at Meeting.  To be
properly brought before a meeting, business must be (a) specified in the notice
of meeting (or any supplement thereto) given by or at the direction of the Board
of Directors, (b) otherwise properly brought before the meeting by or at the
direction of the Board of Directors, or (c) otherwise properly brought before
the meeting by a stockholder entitled to vote at the meeting.

                                       1
<PAGE>

     Section 5.  Notice; Waiver of Notice.  Whenever stockholders are required
or permitted to take any action at a meeting, a written notice of the meeting
shall be given which shall state the place, date and hour of the meeting, and,
in the case of a special meeting, the purpose or purposes for which the meeting
is called.  Unless otherwise required by law, such notice shall be given not
less than 10 nor more than 60 days before the date of the meeting to each
stockholder of record entitled to vote at such meeting.  If mailed, such notice
shall be deemed to be given when deposited in the mail, postage prepaid,
directed to the stockholder at his address as it appears on the records of the
Corporation.  A written waiver of any such notice signed by the person entitled
thereto, whether before or after the time stated therein, shall be deemed
equivalent to notice.  Attendance of a person at a meeting shall constitute a
waiver of notice of such meeting, except when the person attends the meeting for
the express purpose of objecting, at the beginning of the meeting, to the
transaction of any business because the meeting is not lawfully called or
convened.

     Section 6.  Quorum; Adjournment.  Except as otherwise required by law, or
provided by the Certificate of Incorporation or these Bylaws, the holders of a
majority of the capital stock issued and outstanding and entitled to vote
thereat, present in person or represented by proxy, shall constitute a quorum
for the transaction of business at all meetings of the stockholders.  A meeting
at which a quorum is initially present may continue to transact business,
notwithstanding the withdrawal of enough votes to leave less than a quorum, if
any action taken is approved by at least a majority of the required quorum to
conduct that meeting.  If, however, such quorum shall not be present or
represented at any meeting of the stockholders, the chairman of the meeting
shall have power to adjourn the meeting from time to time, without notice other
than announcement at the meeting of the time and place of the adjourned meeting,
until a quorum shall be present or represented.  At such adjourned meeting at
which a quorum shall be present or represented, any business may be transacted
which might have been transacted at the meeting as originally noticed.  If the
adjournment is for more than 30 days, or if after the adjournment a new record
date is fixed for the adjourned meeting, a notice of the adjourned meeting shall
be given to each stockholder entitled to vote at the meeting.

     Section 7.  Voting.  Except as otherwise required by law, or provided by
the Certificate of Incorporation or these Bylaws, any question brought before
any meeting of stockholders at which a quorum is present shall be decided by the
vote of the holders of a majority of the stock represented and entitled to vote
thereat.  Unless otherwise provided in the Certificate of Incorporation, each
stockholder represented at a meeting of stockholders shall be entitled to cast
one vote for each share of the capital stock entitled to vote thereat held by
such stockholder.  Such votes may be cast in person or by proxy, but no proxy
shall be voted on or after three years from its date, unless such proxy provides
for a longer period.  Elections of directors need not be by ballot unless the
Chairman of the meeting so directs or unless a stockholder demands election by
ballot at the meeting and before the voting begins.

     Section 8.  Stockholder Action by Written Consent Without a Meeting.  The
stockholders may not take action by written consent.

     Section 9.  Record Date for Stockholder Notice and Voting.  For purposes of
determining the holders entitled to notice of any meeting or to vote, the Board
of Directors may fix, in advance, a record date, which shall not be more than 60
days nor less than 10 days prior to the date of any such meeting, and in such
case only stockholders of record on the date so fixed are entitled to notice and
to vote, notwithstanding any transfer of any shares on the books of the
Corporation after

                                       2
<PAGE>

the record date fixed as aforesaid, except as otherwise provided in the Delaware
General Corporation Law. If the Board of Directors does not so fix a record
date, the record date for determining stockholders entitled to notice of or to
vote at a meeting of stockholders shall be at the close of business on the
business day next preceding the day on which notice is given or, if notice is
waived, at the close of business on the business day next preceding the day on
which the meeting is held.

     Section 10.  Stock Ledger.  The stock ledger of the Corporation shall be
the only evidence as to who are the stockholders entitled to examine the stock
ledger, the list required by Section 9 of this Article II or the books of the
Corporation, or to vote in person or by proxy at any meeting of stockholders.

     Section 11.  Inspectors of Election.  In advance of any meeting of
stockholders, the Board of Directors may appoint one or more persons (who shall
not be candidates for office) as inspectors of election to act at the meeting or
any adjournment thereof.  If an inspector or inspectors are not so appointed, or
if an appointed inspector fails to appear or fails or refuses to act at a
meeting, the Chairman of any meeting of stockholders may, and on the request of
any stockholder or his proxy shall, appoint an inspector or inspectors of
election at the meeting.  The duties of such inspector(s) shall include:
determining the number of shares outstanding and the voting power of each; the
shares represented at the meeting; the existence of a quorum; the authenticity,
validity and effect of proxies; receiving votes, ballots or consents; hearing
and determining all challenges and questions in any way arising in connection
with the right to vote; counting and tabulating all votes or consents;
determining the result; and such acts as may be proper to conduct the election
or vote with fairness to all stockholders.  In the event of any dispute between
or among the inspectors, the determination of the majority of the inspectors
shall be binding.

     Section 12.  Organization.  At each meeting of stockholders the Chairman of
the Board of Directors, if one shall have been elected, (or in his absence or if
one shall not have been elected, the President) shall act as Chairman of the
meeting.  The Secretary (or in his absence or inability to act, the person whom
the Chairman of the meeting shall appoint Secretary of the meeting) shall act as
Secretary of the meeting and keep the minutes thereof.

     Section 13.  Order of Business.

     (A)  Annual Meetings of Stockholders.

     (1)  Nominations of persons for election to the Board of Directors of the
Corporation and the proposal of business to be considered by the stockholders
may be made at an annual meeting of stockholders (a) pursuant to the
Corporation's notice of meeting, (b) by or at the direction of the Board of
Directors or (c) by any stockholder of the Corporation who was a stockholder of
record at the time of giving of notice provided for in this Bylaw, who is
entitled to vote at the meeting and who complies with the notice procedures set
forth in this Bylaw.

     (2)  For nominations or other business to be properly brought before an
annual meeting by a stockholder pursuant to clause (c) of paragraph (A)(1) of
this Bylaw, the stockholder must have given timely notice thereof in writing to
the Secretary of the Corporation and such other business must otherwise be a
proper matter for stockholder action. To be timely, a stockholder's notice shall
be delivered to the Secretary at the principal executive offices of the
Corporation not less than the close of business on the 120th calendar day in
advance of the first anniversary of the date the

                                       3
<PAGE>

Corporation's proxy statement was released to stockholders in connection with
the preceding year's annual meeting; provided, however, that if no annual
meeting was held in the previous year or the date of the annual meeting has been
changed by more than 30 calendar days from the date contemplated at the time of
the previous year's proxy statement, a proposal shall be received by the
Corporation no later than the close of business on the tenth day following the
day on which notice of the date of the meeting was mailed or public announcement
of the date of the meeting was made, whichever comes first. In no event shall
the public announcement of an adjournment of an annual meeting commence a new
time period for the giving of a stockholder's notice as described above. Such
stockholder's notice shall set forth (a) as to each person whom the stockholder
proposes to nominate for election or reelection as a director all information
relating to such person that is required to be disclosed in solicitations of
proxies for election of directors in an election contest, or is otherwise
required, in each case pursuant to applicable federal securities laws,
including, without limitation, Regulation 14A under the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), and Rule 14a-11 thereunder (including
such person's written consent to being named in the proxy statement as a nominee
and to serving as a director if elected); (b) as to any other business that the
stockholder proposes to bring before the meeting, a brief description of the
business desired to be brought before the meeting, the reasons for conducting
such business at the meeting and any material interest in such business of such
stockholder and the beneficial owner, if any, on whose behalf the proposal is
made; and (c) as to the stockholder giving the notice and the beneficial owner,
if any, on whose behalf the nomination or proposal is made (i) the name and
address of such stockholder, as they appear on the Corporation's books, and of
such beneficial owner and (ii) the class and number of shares of the Corporation
which are owned beneficially and of record by such stockholder and such
beneficial owner.

     (B) Special Meetings of Stockholders.

     Only such business shall be conducted at a special meeting of stockholders
as shall be brought before the meeting pursuant to the Corporation's notice of
meeting.

     A stockholder's nomination of one or more persons for election to the Board
of Directors shall only be permitted to be made at a special meeting of
stockholders if: (i) the Corporation's notice of such meeting specified that
directors are to be elected at such special meeting; (ii) such stockholder was a
stockholder of record entitled to vote at the meeting at the time of giving of
notice provided for in this Bylaw; and (iii) if such stockholder complies with
the notice procedures set forth in this Bylaw.  In the event the Corporation
calls a special meeting of stockholders for the purpose of electing one or more
directors to the Board of Directors, any such stockholder may nominate a person
or persons (as the case may be), for election to such position(s) as specified
in the Corporation's notice of meeting, if the stockholder's notice required by
paragraph (A)(2) of this Bylaw shall be delivered to the Secretary at the
principal executive offices of the Corporation not earlier than the close of
business on the 90th day prior to such special meeting and not later than the
close of business on the later of the 60th day prior to such special meeting or
the 10th day following the day on which public announcement is first made of the
date of the special meeting and of the nominees proposed by the Board of
Directors to be elected at such meeting. In no event shall the public
announcement of an adjournment of a special meeting commence a new time period
for the giving of a stockholder's notice as described above.

     (C)  General.

                                       4
<PAGE>

     (1)  Only such persons who are nominated in accordance with the procedures
set forth in this Bylaw shall be eligible to serve as directors.  Except as
otherwise provided by law, the Certificate of Incorporation or these Bylaws, the
chairman of the meeting shall have the power and authority to determine the
procedures of a meeting of stockholders, including, without limitation, the
authority to determine whether a nomination or any other business proposed to be
brought before the meeting was made or proposed, as the case may be, in
accordance with the procedures set forth in this Bylaw and, if any proposed
nomination or business is not in compliance with this Bylaw, to declare that
such defective proposal or nomination shall be disregarded.

     (2)  For purposes of this Bylaw, "public announcement" shall mean
disclosure in a press release reported by the Dow Jones News Service, Associated
Press or comparable national news service or in a document publicly filed by the
Corporation with the Securities and Exchange Commission pursuant to Section 13,
14 or 15(d) of the Exchange Act.

     (3)  Notwithstanding the foregoing provisions of this Bylaw, a stockholder
shall also comply with all applicable requirements of the Exchange Act and the
rules and regulations thereunder with respect to the matters set forth in this
Bylaw. Nothing in this Bylaw shall be deemed to affect any rights (i) of
stockholders to request inclusion of proposals in the Corporation's proxy
statement pursuant to Rule 14a-8 under the Exchange Act or (ii) of the holders
of any series of preferred stock, if any, to elect directors under certain
circumstances.

                                  ARTICLE III
                                   DIRECTORS

     Section 1.  Powers.  Except as otherwise required by law or provided by the
Certificate of Incorporation, the business and affairs of the Corporation shall
be managed by or under the direction of the Board of Directors.

     Section 2.  Number and Election of Directors.  The number of directors of
this Corporation shall be not less than one nor more than nine in number.  The
exact number of directors shall be fixed from time to time by a resolution
adopted by a majority of the directors.  Until otherwise fixed by the directors,
the number of directors constituting the entire Board of Directors shall be
eight.  Directors shall be elected at each annual meeting of the stockholders to
replace the directors whose terms then expire, and each director elected shall
hold office until his successor is duly elected and qualified, or until his
earlier death, resignation or removal.  The Board of Directors shall be
classified as set forth in the Certificate of Incorporation.

     Section 3.  Vacancies.  Subject to the limitations in the Certificate of
Incorporation, vacancies in the Board of Directors resulting from death,
resignation, removal or otherwise and newly created directorships resulting from
any increase in the authorized number of directors may be filled by a majority
of the directors then in office, although less than a quorum, or by a sole
remaining director.  Each director so selected shall hold office for the
remainder of the full term of office of the former director which such director
replaces and until his successor is duly elected and qualified, or until his
earlier death, resignation or removal.  No decrease in the authorized number of
directors constituting the Board of Directors shall shorten the term of any
incumbent directors.

                                       5
<PAGE>

     Section 4.  Time and Place of Meetings.  The Board of Director's shall hold
its meetings at such place, either within or without the State of Delaware, and
at such time as may be determined from time to time by the Board of Directors.

     Section 5.  Annual Meeting.  The Board of Directors shall meet for the
purpose of organization, the election of officers and the transaction of other
business, as soon as practicable after each annual meeting of stockholders, on
the same day and at the same place where such annual meeting shall be held.
Notice of such meeting need not be given.  In the event such annual meeting is
not so held, the annual meeting of the Board of Directors may be held at such
place, either within or without the State of Delaware, on such date and at such
time as shall be specified in a notice thereof given as hereinafter provided in
Section 7 of this Article III or in a waiver of notice thereof.

     Section 6.  Regular Meetings.  Regular meetings of the Board of Directors
may be held at such places within or without the State of Delaware at such date
and time as the Board of Directors may from time to time determine and, if so
determined by the Board of Directors, notices thereof need not be given.

     Section 7.  Special Meetings.  Special meetings of the Board of Directors
may be called by the Chairman of the Board, the President, the Secretary or by
any director.  Notice of the date, time and place of special meetings shall be
delivered personally or by telephone to each director or sent by first-class
mail or telegram, charges prepaid, or by electronic mail, addressed to each
director at the director's address as it is shown on the records of the
Corporation.  In case the notice is mailed, it shall be deposited in the United
States mail at least four days before the time of the holding of the meeting.
In case the notice is delivered personally, by telephone or telegram, or by
electronic mail, it shall be delivered personally, by telephone or to the
telegraph company, or by electronic mail, at least 24 hours before the time of
the holding of the meeting.  The notice need not specify the purpose of the
meeting.  A written waiver of any such notice signed by the person entitled
thereto, whether before or after the time stated therein, shall be deemed
equivalent to notice.  Attendance of a person at a meeting shall constitute a
waiver of notice of such meeting, except when the person attends the meeting for
the express purpose of objecting, at the beginning of the meeting, to the
transaction of any business because the meeting is not lawfully called or
convened.

     Section 8.  Quorum; Vote Required for Action; Adjournment.  Except as
otherwise required by law, or provided in the Certificate of Incorporation or
these Bylaws, a majority of the directors shall constitute a quorum for the
transaction of business at all meetings of the Board of Directors and the
affirmative vote of not less than a majority of the directors present at any
meeting at which there is a quorum shall be the act of the Board of Directors.
If a quorum shall not be present at any meeting of the Board of Directors, the
directors present thereat may adjourn the meeting, from time to time, without
notice other than announcement at the meeting, until a quorum shall be present.
A meeting at which a quorum is initially present may continue to transact
business, notwithstanding the withdrawal of directors, if any action taken is
approved by at least a majority of the required quorum to conduct that meeting.
When a meeting is adjourned to another time or place (whether or not a quorum is
present), notice need not be given of the adjourned meeting if the time and
place thereof are announced at the meeting at which the adjournment is taken.
At the adjourned meeting, the Board of Directors may transact any business which
might have been transacted at the original meeting.

                                       6
<PAGE>

     Section 9.  Action by Written Consent.  Unless otherwise restricted by the
Certificate of Incorporation, any action required or permitted to be taken at
any meeting of the Board of Directors or of any committee thereof may be taken
without a meeting if all the members of the Board of Directors or committee, as
the case may be, consent thereto in writing, and the writing or writings are
filed with the minutes of proceedings of the Board of Directors or committee.

     Section 10.  Telephone Meetings.  Unless otherwise restricted by the
Certificate of Incorporation, members of the Board of Directors of the
Corporation, or any committee designated by the Board of Directors, may
participate in a meeting of the Board of Directors or such committee, as the
case may be, by conference telephone or other communications equipment by means
of which all persons participating in the meeting can hear each other.
Participation in a meeting pursuant to this Section 10 shall constitute presence
in person at such meeting.

     Section 11.  Committees.  The Board of Directors may, by resolution passed
unanimously by the entire Board, designate one or more committees, each
committee to consist of one or more of the directors of the Corporation.  The
Board of Directors may designate one or more directors as alternate members of
any such committee, who may replace any absent or disqualified member at any
meeting of the committee.  In the event of absence or disqualification of a
member of a committee, and in the absence of a designation by the Board of
Directors of an alternate member to replace the absent or disqualified member,
the committee member or members present at any meeting and not disqualified from
voting, whether or not he or they constitute a quorum, may unanimously appoint
another member of the Board of Directors to act at the meeting in the place of
the absent or disqualified member.  Any committee, to the extent allowed by law
and as provided in the resolution establishing such committee, shall have and
may exercise all the power and authority of the Board of Directors in the
management of the business and affairs of the Corporation, but no such committee
shall have the power or authority in reference to amending the Certificate of
Incorporation, adopting an agreement of merger or consolidation, recommending to
the stockholders the sale, lease or exchange of all or substantially all of the
Corporation's property and assets, recommending to the stockholders a
dissolution of the Corporation or a revocation of a dissolution, or amending the
Bylaws of the Corporation; and, unless the resolution or the Certificate of
Incorporation expressly so provides, no such committee shall have the power or
authority to declare a dividend or to authorize the issuance of stock.  Each
committee shall keep regular minutes of its meetings and report to the Board of
Directors when required.

     Section 12.  Compensation.  The directors may be paid such compensation for
their services as the Board of Directors shall from time to time determine.

     Section 13.  Interested Directors.  No contract or transaction between the
Corporation and one or more of its directors or officers, or between the
Corporation and any other Corporation, partnership, association, or other
organization in which one or more of its directors or officers are directors or
officers, or have a financial interest, shall be void or voidable solely for
this reason, or solely because the director or officer is present at or
participates in the meeting of the Board of Directors or the committee thereof
which authorizes the contract or transaction, or solely because his of their
votes are counted for such purpose if: (i) the material facts as to his or their
relationship or interest and as to the contract or transaction are disclosed or
are known to the Board of Directors or the committee, and the Board of Directors
or committee in good faith authorizes the contract or transaction by the
affirmative votes of a majority of the disinterested directors, even though the
disinterested directors be less than a quorum; or (ii) the material facts as to
his or their relationship or

                                       7
<PAGE>

interest and as to the contract or transaction are disclosed or are known to the
stockholders entitled to vote thereon, and the contract or transaction is
specifically approved in good faith by vote of the stockholders; or (iii) the
contract or transaction is fair as to the Corporation as of the time it is
authorized, approved or ratified, by the Board of Directors, a committee
thereof, or the stockholders. Common or interested directors may be counted in
determining the presence of a quorum at a meeting of the Board of Directors or
of a committee which authorizes the contract or transaction.

     Section 14.  Removal of Directors.  Any director or the entire Board of
Directors may be removed with cause, by the holders of a majority of the shares
then entitled to vote at an election of directors.

                                  ARTICLE IV

                                   OFFICERS

     Section 1.  Officers.  The officers of the Corporation shall be a
President, a Secretary and a Chief Financial Officer.  The Corporation may also
have, at the discretion of the Board of Directors, a Chairman of the Board, a
Vice Chairman of the Board, a Chief Executive Officer, one or more Vice
Presidents, one or more Assistant Financial Officers and Treasurers, one or more
Assistant Secretaries and such other officers as may be appointed in accordance
with the provisions of Section 3 of this Article IV.

     Section 2.  Appointment of Officers.  The officers of the Corporation,
except such officers as may be appointed in accordance with the provisions of
Section 3 or Section 5 of this Article IV, shall be appointed by the Board of
Directors, and each shall serve at the pleasure of the Board, subject to the
rights, if any, of an officer under any contract of employment.

     Section 3.  Subordinate Officers.  The Board of Directors may appoint, and
may empower the Chief Executive Officer or President to appoint, such other
officers as the business of the Corporation may require, each of whom shall hold
office for such period, have such authority and perform such duties as are
provided in the Bylaws or as the Board of Directors may from time to time
determine.

     Section 4.  Removal and Resignation of Officers.  Subject to the rights of
an officer under any contract, any officer may be removed at any time, with or
without cause, by the Board of Directors or, except in case of an officer chosen
by the Board of Directors, by any officer upon whom such power of removal may be
conferred by the Board of Directors.  Any officer may resign at any time by
giving written notice to the Corporation.  Any resignation shall take effect at
the date of the receipt of that notice or at any later time specified in that
notice; and, unless otherwise specified in that notice, the acceptance of the
resignation shall not be necessary to make it effective.  Any resignation shall
be without prejudice to the rights of the Corporation under any contract to
which the officer is a party.

     Section 5.  Vacancies in Offices.  A vacancy in any office because of
death, resignation, removal, disqualification or any other cause shall be filled
in the manner prescribed in these Bylaws for regular appointments to that
office.

                                       8
<PAGE>

     Section 6.  Chairman of the Board.  The Chairman of the Board, if such an
officer is elected, shall, if present, preside at meetings of the stockholders
and of the Board of Directors, unless otherwise determined by the Board of
Directors.  He shall, in addition, perform such other functions (if any) as may
be prescribed by the Bylaws or the Board of Directors.

     Section 7.  Vice Chairman of the Board.  The Vice Chairman of the Board, if
such an officer is elected, shall, in the absence or disability of the Chairman
of the Board, perform all duties of the Chairman of the Board and when so acting
shall have all the powers of and be subject to all of the restrictions upon the
Chairman of the Board.  The Vice Chairman of the Board shall have such other
powers and duties as may be prescribed by the Board of Directors or the Bylaws.

     Section 8.  Chief Executive Officer.  The Chief Executive Officer of the
Corporation shall, subject to the control of the Board of Directors, have
general supervision, direction and control of the business and the officers of
the Corporation.  He shall exercise the duties usually vested in the chief
executive officer of a Corporation and perform such other powers and duties as
may be assigned to him from time to time by the Board of Directors or prescribed
by the Bylaws.  In the absence of the Chairman of the Board and any Vice
Chairman of the Board, the Chief Executive Officer shall preside at all meetings
of the stockholders and of the Board of Directors.

     Section 9.  President.  The President of the Corporation shall, subject to
the control of the Board of Directors and the Chief Executive Officer of the
Corporation, if there be such an officer, have general powers and duties of
management usually vested in the office of president of a Corporation and shall
have such other powers and duties as may be prescribed by the Board of Directors
or the Bylaws or the Chief Executive Officer of the Corporation.  In the absence
of the Chairman of the Board, Vice Chairman of the Board and Chief Executive
Officer, the President shall preside at all meetings of the Board of Directors
and stockholders.

     Section 10.  Vice President.  In the absence or disability of the
President, the Vice Presidents, if any, in order of their rank as fixed by the
Board of Directors or, if not ranked, a Vice President designated by the Board
of Directors, shall perform all the duties of the President, and when so acting
shall have all the powers of, and subject to all the restrictions upon, the
President.  The Vice Presidents shall have such other powers and perform such
other duties as from time to time may be prescribed for them respectively by the
Board of Directors or the Bylaws, and the President, or the Chairman of the
Board.

     Section 11.  Secretary.  The Secretary shall keep or cause to be kept, at
the principal executive office or such other place as the Board of Directors may
direct, a book of minutes of all meetings and actions of directors, committees
of directors, and stockholders, with the time and place of holding, whether
regular or special, and, if special, how authorized, the notice given, the names
of those present at directors' meetings or committee meetings, the number of
shares present or represented at stockholders' meetings, and a summary of the
proceedings.

     The Secretary shall keep, or cause to be kept, at the principal executive
office or at the office of the Corporation's transfer agent or registrar, as
determined by resolution of the Board of Directors, a share register, or a
duplicate share register, showing the names of all stockholders and their
addresses, the number and classes of shares held by each, the number and date of
certificates issued for the same, and the number and date of cancellation of
every certificate surrendered for cancellation.

                                       9
<PAGE>

     The Secretary shall give, or cause to be given, notice of all meetings of
the stockholders and of the Board of Directors required by the Bylaws or by law
to be given, and he shall keep or cause to be kept the seal of the Corporation
if one be adopted, in safe custody, and shall have such powers and perform such
other duties as may be prescribed by the Board of Directors or by the Bylaws.

     Section 12.  Chief Financial Officer.  The Chief Financial Officer shall
keep and maintain, or cause to be kept and maintained, adequate and correct
books and records of accounts of the properties and business transactions of the
Corporation.  The Chief Financial Officer shall deposit all moneys and other
valuables in the name and to the credit of the Corporation with such
depositories as may be designated by the Board of Directors.  He shall make such
disbursements of the funds of the Corporation as are authorized and shall render
from time to time an account of all of his transactions as Chief Financial
Officer and of the financial condition of the Corporation.  The Chief Financial
Officer shall also have such other powers and perform such other duties as may
be prescribed by the Board of Directors or the Bylaws.

                                   ARTICLE V
                                     STOCK

     Section 1.  Form of Certificates.  Every holder of stock in the Corporation
shall be entitled to have a certificate signed by, or in the name of the
Corporation (i) by the Chairman or Vice Chairman of the Board of Directors, or
the President or a Vice President and (ii) by the Chief Financial Officer or the
Treasurer or an Assistant Treasurer, or the Secretary or an Assistant Secretary
of the Corporation, certifying the number of shares owned by such stockholder in
the Corporation.

     Section 2.  Signatures.  Any or all of the signatures on the certificate
may be a facsimile.  In case any officer, transfer agent or registrar who has
signed or whose facsimile signature has been placed upon a certificate shall
have ceased to be such officer, transfer agent or registrar before such
certificate is issued, it may be issued by the Corporation with the same effect
as if he were such officer, transfer agent or registrar at the date of issue.

     Section 3.  Lost Certificates.  The Corporation may issue a new certificate
to be issued in place of any certificate theretofore issued by the Corporation,
alleged to have been lost, stolen or destroyed, upon the making of an affidavit
of that fact by the person claiming the certificate to be lost, stolen or
destroyed.  The Corporation may, in the discretion of the Board of Directors and
as a condition precedent to the issuance of such new certificate, require the
owner of such lost, stolen, or destroyed certificate, or his legal
representative, to give the Corporation a bond (or other security) sufficient to
indemnify it against any claim that may be made against the Corporation
(including any expense or liability) on account of the alleged loss, theft or
destruction of any such certificate or the issuance of such new certificate.

     Section 4.  Transfers.  Stock of the Corporation shall be transferable in
the manner prescribed by law and in these Bylaws or in any agreement with the
stockholder making the transfer.  Transfers of stock shall be made on the books
of the Corporation only by the person named in the certificate or by his
attorney lawfully constituted in writing and upon the surrender of the
certificate therefor, which shall be cancelled before a new certificate shall be
issued.

                                       10
<PAGE>

     Section 5.  Restrictions of Transfer.  Each share of Common Stock of this
Corporation issued to Odetics, Inc. shall be subject to restrictions on transfer
to the effect that such shares of Common Stock shall not be transferred to
stockholders of Odetics, Inc. in connection with a spin-off of this Corporation
unless such spun-off shares are marked with a legend restricting the transfer of
such shares by the Odetics, Inc. stockholders pursuant to this Section 5 of
Article V.  Holders of shares of this Corporation's Common Stock distributed to
stockholders of Odetics, Inc. in a spin-off transaction of this Corporation may
not sell, offer or agree to sell, grant any option for the sale of, pledge, make
any short sale or enter into any other arrangement that transfers to another, in
whole or in part, the economic consequences of the ownership of such shares of
Common Stock, except for privately negotiated transactions, transfers by gift,
transfers that do not effect a change in beneficial ownership or transfers
according to a will or the laws of descent and distribution, for a period ending
180 days after the date of a prospectus of this Corporation delivered in
connection with this Corporation's underwritten initial public offering of
originally issued shares by this Corporation registered under the Securities Act
of 1933, as amended.  Any subsequent transferees of these restricted shares of
Common Stock pursuant to the exceptions listed above shall be similarly bound
and the certificates evidencing ownership thereof shall be marked with a legend
to such effect.  To enforce this restriction, this Corporation shall be entitled
to instruct its transfer agent, if any, to mark its books and records with a
stop transfer order during the restriction period provided above for all shares
of Common Stock subject to this provision.

     Section 6.  Record Holders.  The Corporation shall be entitled to recognize
the exclusive right of a person registered on its books as the record holder of
shares to receive dividends, and to vote as such record holder, and to hold
liable for calls and assessments a person registered on its books as the record
holder of shares, and shall not be bound to recognize any equitable or other
claim to or interest in such share or shares on the part of any other person,
whether or not it shall have express or other notice thereof, except as
otherwise required by law.

                                  ARTICLE VI
                                INDEMNIFICATION

     Section 1.  Right to Indemnification.  Each person who was or is made a
party or is threatened to be made a party to or is otherwise involved in any
action, suit or proceeding, whether civil, criminal, administrative or
investigative (hereinafter a "proceeding"), by reason of the fact that he or she
is or was a director or officer of the Corporation or is or was serving at the
request of the Corporation as a director or officer of another Corporation or of
a partnership, joint venture, trust or other enterprise, including service with
respect to employee benefit plans (hereinafter an "indemnitee"), whether the
basis of such proceeding is alleged action in an official capacity as a director
or officer or in any other capacity while serving as a director or officer,
shall be indemnified and held harmless by the Corporation to the fullest extent
authorized by the Delaware General Corporation Law, as the same exists or may
hereafter be amended (but, in the case of any such amendment, only to the extent
that such amendment permits the Corporation to provide broader indemnification
rights than such law permitted the Corporation to provide prior to such
amendment), against all expense, liability and loss (including attorneys' fees,
judgments, fines, ERISA excise taxes or penalties and amounts paid in
settlement) reasonably incurred or suffered by such indemnitee in connection
therewith and such indemnification shall continue as to an indemnitee who has
ceased to be a director or officer and shall inure to the benefit of the
indemnitee's heirs, executors and administrators; provided, however, that,
except as provided in Section 2 of this Article VI with

                                       11
<PAGE>

respect to proceedings to enforce rights to indemnification, the Corporation
shall indemnify any such indemnitee in connection with a proceeding (or part
thereof) initiated by such indemnitee only if such proceeding (or part thereof)
was authorized by the Board of Directors of the Corporation. The right to
indemnification conferred in this Section shall be a contract right and shall
include the right to be paid by the Corporation the expenses incurred in
defending any such proceeding in advance of its final disposition (hereinafter
an "advancement of expenses"); provided, however, that, if the Delaware General
Corporation Law requires, an advancement of expenses incurred by an indemnitee
in his or her capacity as a director or officer (and not in any other capacity
in which service was or is rendered by such indemnitee, including without
limitation, service to an employee benefit plan) shall be made only upon
delivery to the Corporation of an undertaking, by or on behalf of such
indemnitee, to repay all amounts so advanced if it shall ultimately be
determined that such indemnitee is not entitled to be indemnified for such
expenses under this Article VI or otherwise (hereinafter an "undertaking").

     Section 2.  Right of Indemnitee to Bring Suit.  If a claim under Section 1
of this Article VI is not paid in full by the Corporation within 45 days after a
written claim has been received by the Corporation, the indemnitee may at any
time thereafter bring suit against the Corporation to recover the unpaid amount
of the claim.  If successful in whole or part in any such suit or in a suit
brought by the Corporation to recover an advancement of expenses pursuant to the
terms of an undertaking, the indemnitee shall be entitled to be paid also the
expense of prosecuting or defending such suit.  In (i) any suit brought by the
indemnitee to enforce a right to indemnification hereunder (but not in a suit
brought by the indemnitee to enforce a right to an advancement of expenses) it
shall be a defense that, and (ii) any suit by the Corporation to recover an
advancement of expenses pursuant to the terms of an undertaking the Corporation
shall be entitled to recover such expenses upon a final adjudication that, the
indemnitee has not met the applicable standard of conduct set forth in the
Delaware General Corporation Law.  Neither the failure of the Corporation
(including its Board of Directors, independent legal counsel, or its
stockholders) to have made a determination prior to the commencement of such
suit that indemnification of the indemnitee is proper in the circumstances
because the indemnitee has met the applicable standard of conduct set forth in
the Delaware General Corporation Law, nor an actual determination by the
Corporation (including its Board of Directors, independent legal counsel, or its
stockholders) that the indemnitee has not met such applicable standard of
conduct, shall create a presumption that the indemnitee has not met the
applicable standard of conduct or, in the case of such a suit brought by
indemnitee, be a defense to such suit.  In any suit brought by the indemnitee to
enforce a right hereunder, or by the Corporation to recover an advancement of
expenses pursuant to the terms of an undertaking, the burden of proving that the
indemnitee is not entitled to be indemnified or to such advancement of expenses
under this Article VI or otherwise shall be on the Corporation.

     Section 3.  Non-Exclusivity of Rights.  The rights of indemnification and
to the advancement of expenses conferred in this Article VI shall not be
exclusive of any other right which any person may have or hereafter acquire
under any statute, provision of the Certificate of Incorporation, Bylaw,
agreement, vote of stockholders or disinterested directors or otherwise.

     Section 4.  Insurance.  The Corporation may maintain insurance, at its
expense, to protect itself and any director, officer, employee or agent of the
Corporation or another Corporation, partnership, joint venture, trust or other
enterprise against any expense, liability or loss, whether or not the
Corporation would have the power to indemnify such person against such expense,
liability or loss under the Delaware General Corporation Law.

                                       12
<PAGE>

     Section 5.  Indemnification of Employees or Agents of the Corporation.  The
Corporation may, to the extent authorized from time to time by the Board of
Directors, grant rights to indemnification and to the advancement of expenses,
to any employee or agent of the Corporation to the fullest extent of the
provisions of this Article VI with respect to the indemnification and
advancement of expenses of directors or officers of the Corporation.

     Section 6.  Indemnification Contracts.  The Board of Directors is
authorized to enter into a contract with any director, officer, employee or
agent of the Corporation, or any person serving at the request of the
Corporation as a director, officer, employee or agent of another Corporation,
partnership, joint venture, trust or other enterprise, including employee
benefit plans, providing for indemnification rights equivalent to or, if the
Board of Directors so determinates, greater than, those provided for in this
Article VI.

     Section 7.  Effect of Amendment.  Any amendment, repeal or modification of
any provision of this Article VI by the stockholders or the directors of the
Corporation shall not adversely affect any right or protection of a director or
officer of the Corporation existing at the time of such amendment, repeal or
modification.

                                  ARTICLE VII
                              GENERAL PROVISIONS

     Section 1.  Dividends.  Subject to limitations contained in the General
Corporation Law of the State of Delaware and the Certificate of Incorporation,
the Board of Directors may declare and pay dividends upon the shares of capital
stock of the Corporation, which dividends may be paid either in cash, securities
of the Corporation or other property.

     Section 2.  Disbursements.  All checks or demands for money and notes of
the Corporation shall be signed by such officer or officers or such other person
or persons as the Board of Directors may from time to time designate.

     Section 3.  Fiscal Year.  The fiscal year of the Corporation shall be fixed
by resolution of the Board of Directors.

     Section 4.  Corporate Seal.  The Corporation shall have a corporate seal in
such form as shall be prescribed by the Board of Directors.

     Section 5.  Record Date.  In order that the Corporation may determine the
stockholders entitled to notice of or to vote at any meeting of stockholders or
any adjournment thereof, or entitled to receive payment of any dividend or other
distribution or allotment of any rights, or entitled to exercise any rights in
respect of any change, conversion or exchange of stock, or for the purpose of
any other lawful action, the Board of Directors may fix, in advance, a record
date, which shall not be more than 60 days nor less than 10 days before the date
of such meeting, nor more than 60 days prior to any other action.  A
determination of stockholders of record entitled to notice of or to vote at a
meeting of stockholders shall apply to any adjournment of the meeting; provided,
however, that the Board of Directors may fix a new record date for the adjourned
meeting.  Stockholders on the record date are entitled to notice and to vote or
to receive the dividend, distribution or allotment of rights or to exercise the
rights, as the case may be, notwithstanding any transfer of any shares on the
books of

                                       13
<PAGE>

the Corporation after the record date, except as otherwise provided by agreement
or by applicable law.

     Section 6.  Voting of Stock Owned by the Corporation.  The Chairman of the
Board, the Chief Executive Officer, the President and any other officer of the
Corporation authorized by the Board of Directors shall have power, on behalf of
the Corporation, to attend, vote and grant proxies to be used at any meeting of
stockholders of any corporation (except this Corporation) in which the
Corporation may hold stock.

     Section 7.  Construction and Definitions.  Unless the context requires
otherwise, the general provisions, rules of construction and definitions in the
General Corporation Law of the State of Delaware shall govern the construction
of these Bylaws.

     Section 8.  Amendments.   The Bylaws, or any of them, may be rescinded,
altered, amended or repealed, and new Bylaws may be made (i) by the Board of
Directors, by vote of a majority of the number of directors then in office as
directors, acting at any meeting of the Board of Directors, or (ii) by the
stockholders, by the vote of the holders of 66 2/3% of the outstanding voting
stock of the Corporation, at any annual or special meeting of stockholders,
provided that notice of such proposed amendment, modification, repeal or
adoption is given in the notice of the annual or special meeting; provided,
however, that the Bylaws can only be amended if such amendment would not
conflict with the Certificate of Incorporation. Any Bylaw made or altered by the
requisite number of stockholders may be altered or repealed by the Board of
Directors or may be altered or repealed by the requisite number of stockholders.

                                       14

<PAGE>


                                                                     EXHIBIT 4.1

<TABLE>
<S>                                                                <C>
- ----------------------------------------------------------------   ----------------------------------------------------------------
               AMERICAN BANK NOTE COMPANY                             PRODUCTION COORDINATOR: STEVE KOWALSKI: 215-754-8620
                  55th and Sansom Street                                           PROOF OF JANUARY 10, 2000
                PHILADELPHIA, PA 18139                                                  ITERIS INC.
                                                                                        H 64922 FC
- ----------------------------------------------------------------   ----------------------------------------------------------------
               SALES:    D. REGAN 352-989-2330                             OPERATOR:                     hj
- ----------------------------------------------------------------   ----------------------------------------------------------------
               home zip 55th /5/ ITERIS 64922                                                 NEW
- ----------------------------------------------------------------   ----------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
                                                                                                       COMMON STOCK
NUMBER                                                                                                     SHARES
- -------------                                                                                 ----------------------------------

- -------------                                                                                 ----------------------------------
<S>                                                           <C>
                                                                                              SEE REVERSE FOR CERTAIN DEFINITIONS

                                                                                                    CUSIP 46564P 10 5

                                                                             INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
                                                              THIS CERTIFICATE IS TRANSFERABLE IN THE CITIES OF BOSTON OR NEW YORK

- -----------------------------------------------------------------------------------------------------------------------------------
This Certifies that

is the record holder of
- -----------------------------------------------------------------------------------------------------------------------------------


                           FULLY PAID AND NONASSESSABLE SHARES OF THE COMMON STOCK, $.001 PAR VALUE, OF
_____________________________________________________________ITERIS, INC.__________________________________________________________

                                                         CERTIFICATE STOCK

transferable on the books of the Corporation by the holder thereby in person or by duly authorized attorney, upon surrender of this
Certificate property endorsed. This Certificate is not valid until countersigned by the Transfer Agent and registered by the
Registrar.

     WITNESS the seal of the Corporation and the facsimile signatures of the duly authorized officers.
Dated:


                                                            [SEAL]
SECRETARY                                                                                                               PRESIDENT

                                                                                                       COUNTERSIGNED AND REGISTERED;
                                                                                                   THE FIRST NATIONAL BANK OF BOSTON
                                                                                                        TRANSFER AGENT AND REGISTRAR
                                                                                                                 BY
                                                                                                                AUTHORIZED SIGNATURE
</TABLE>

<PAGE>

     The Corporation will furnish without charge to each stockholder who so
requests the powers, designations, preferences and relative, participation,
optional, or other special rights of each class of stock or series thereof and
the qualifications, limitations or restrictions of such preferences and/or
rights. Such requests shall be made to the Corporation's Secretary at the
principal office of the Corporation.

     KEEP THIS CERTIFICATE IN A SAFE PLACE. IF IT IS LOST, STOLEN, OR DESTROYED
THE CORPORATION WILL REQUIRE A BOND OF INDEMNITY AS A CONDITION TO THE ISSUANCE
OF A REPLACEMENT CERTIFICATE.

     The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations.

<TABLE>
     <S>                                                       <C>
     TEN COM   - as tenants in common                               UNIF GIFT MIN ACT- _________ Custodian _______
     TEN ENT   - as tenants by the entireties                                            (Cust)             (Minor)
     JT TEN    - as joint tenants with right of                                        Under Uniform Gifts to Minors
                 survivorship and not as tenants                                       Act ______________________
                 in common                                                                        (State)

                                                                UNIF TRF MIN ACT- _____________ Custodian (until age ___________)
                                                                                 _______________________ under Uniform Transfers
                                                                                         (Minor)
                                                                                 to Minors Act _________________________________
                                                                                                          (State)
</TABLE>

      Additional abbreviations may also be used though not in above list.

    FOR VALUE RECEIVED, _______________________ hereby sell, assign and transfer
unto

PLEASE INSERT SOCIAL SECURITY OR OTHER
    IDENTIFYING NUMBER OF ASSIGNEE
- --------------------------------------

- --------------------------------------

________________________________________________________________________________
 (PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)

________________________________________________________________________________

________________________________________________________________________________

_________________________________________________________________________ Shares
of the common stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint _____________________________________________

_________________________________________ Attorney to transfer the said stock on
the books of the within named Corporation with full power of substitution in the
premises.

Dated ______________________


                                 X _____________________________________________

                                 X _____________________________________________
                           NOTICE: THE SIGNATURE(S) TO THIS ASSIGNMENT MUST
                                   CORRESPOND WITH THE NAME(S) AS WRITTEN UPON
                                   THE FACE OF THE CERTIFICATE IN EVERY
                                   PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT
                                   OR ANY CHANGE WHATEVER.


Signature(s) Guaranteed


By ____________________________________________________
THE SIGNATURE(S) MUST BE GUARANTEED BY AN ELIGIBLE
GUARANTOR INSTITUTION (BANKS, STOCKHOLDERS, SAVINGS AND
LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP
IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM),
PURSUANT TO S.E.C. RULE 17A4-15.

<TABLE>
- ---------------------------------------------        ---------------------------------------------------------
<S>                                                  <C>
       AMERICAN BANK NOTE COMPANY                    PRODUCTION COORDINATOR: STEVE KOWALSKI: 215-754-4820
         55th and Sansom Street                                 PROOF OF JANUARY 19, 2000
         PHILADELPHIA, PA 19139                                       ITERIS, INC.
                                                                      H 64922 bk
- ----------------------------------------------       ---------------------------------------------------------
       SALES: D. REGAN:                                   OPERATOR:                       h)
- ----------------------------------------------       ---------------------------------------------------------
      home zip 55th /5/ ITERIS 84922                                     NEW
- ----------------------------------------------       ---------------------------------------------------------
</TABLE>

<PAGE>

                                                                     EXHIBIT 4.3


                         REGISTRATION RIGHTS AGREEMENT

     THIS REGISTRATION RIGHTS AGREEMENT (the "Agreement") is entered into as of
January 25, 2000 by and between Iteris, Inc., a Delaware corporation (the
"Company"), and DaimlerChrysler Venture GmbH (the "Holder").

                                    RECITALS

     A.   The Company has agreed to issue a Subordinated Convertible Note, dated
of even date herewith (the "Note"), to the Holder that shall automatically
convert into shares of Common Stock of the Company upon certain events described
in the Note.

     B.   In connection with the issuance of the Note, the Company and the
Holder desire to enter into this Agreement whereby the Holder will be granted
the rights herein.

                                   AGREEMENT

     NOW THEREFORE, in consideration of the premises and the mutual agreements,
covenants and conditions and releases contained herein, the Company and the
Holder hereby agree as follows:

     1.   Registration Rights.  The Company hereby grants to the Holder the
registration rights set forth in this Section 1, with respect to the Registrable
Shares (as defined below) owned by the Holder.  The Company and the Holder agree
that the registration rights provided herein set forth the sole and entire
agreement on the subject matter between the Company and the Holder.

          1.1  Definitions.  As used in this Section 1:
               (a)  The term "Holder" means any person owning or having the
right to acquire Registrable Shares or any assignee thereof in accordance with
Section 1.9 hereof.

               (b)  The terms "register," "registered," and "registration" refer
to a registration effected by preparing and filing a registration statement in
compliance with the Securities Act and the applicable rules and regulations
thereunder, and the declaration or ordering of the effectiveness of such
registration statement.

               (c)  The term "Registrable Shares" means and includes (i) the
shares of Common Stock of the Company issued or issuable upon conversion of the
Note and (ii) any Common Stock of the Company issued, or issuable upon the
conversion or exercise of any warrant, right or other security which is issued,
as a result of a stock split, dividend or other distribution with respect to or
in exchange for or in replacement of the shares referenced in (i) above,
excluding in all cases, however, any Registrable Shares sold by a person in a
transaction in which his or her rights under Section 1 are not assigned and any
Registrable Shares which may be sold under Rule 144(k) of the Securities Act, or
any successor rule thereto.

               (d)  The term "Securities Act" means the Securities Act of 1933,
as amended.

               (e)  The term "Public Offering" means and includes the closing of
an underwritten public offering by the Company of shares of its Common Stock
pursuant to an effective
<PAGE>

registration statement under the Securities Act, other than a registration
relating solely to a transaction under Rule 145 thereof (or any successor
thereto) or to an employee benefit plan of the Company, which results in
aggregate proceeds to the Company of at least $10 million.

               (f)  The term "Form S-3" means such form under the Securities Act
as in effect on the date hereof or any successor form under the Securities Act.

          1.2  "Piggy Back" Registration.

               (a)  If the Company shall determine to register under the
Securities Act any of its Common Stock (other than a registration relating
solely to the sale of securities pursuant to a merger or acquisition transaction
or to participants in a Company employee benefit plan, a registration on any
form which does not include substantially the same information as would be
required to be included in a registration statement covering the sale of the
Registrable Shares, a registration in which the only Common Stock being
registered is common stock issuable upon conversion of debt securities which are
also being registered or a registration relating to the Company's initial Public
Offering), the Company shall (i) promptly give the Holder written notice of such
registration in accordance with Section 3.5; and (ii) use its commercially
reasonable best efforts to include in such registration statement all or any
part of the Registrable Shares that the Holder requests to be registered as
specified in a written request made by the Holder and received by the Company
within 10 days after the written notice from the Company described in clause (i)
above is mailed by the Company.

               (b)  Notwithstanding any other provision of this Section 1.2, if
the underwriter determines that marketing factors require a limitation on the
number of shares to be underwritten, the underwriter may limit the number of
Registrable Shares to be included in the registration and underwriting, or may
exclude Registrable Shares entirely from such registration and underwriting
subject to the terms of this Section 1.2. In such event, the Company shall so
advise the Holder of securities requesting registration, and the number of
shares of such securities, including Registrable Shares, that may be included in
the registration and underwriting shall be allocated in the following manner:
first, all shares requested to be included in such registration by other
stockholders pursuant to demand registration rights granted to such persons or
by the Company pursuant to a registration initiated by the Company, and second,
all shares requested to be included by the Holder and other stockholders having
piggyback registration rights, pro rata based on the number of shares that each
such person is entitled to request registration. For purposes of the preceding
apportionment, for any selling stockholder who is a holder of Registrable Shares
and is a partnership or corporation, the partners, retired partners and
stockholders of such holder, or the estates and family members of any such
partners and retired partners and any trusts for the benefit of any of the
foregoing persons shall be deemed to be a single "selling stockholder," and any
pro rata reduction with respect to such "selling stockholder" shall be based
upon the aggregate amount of shares carrying registration rights owned by all
entities and individuals included in such "selling stockholder," as defined in
this sentence.

          1.3  Registration on Form S-3. In case the Company shall receive a
written request or requests from the Holder that the Company effect a
registration on Form S-3 (or any similar form promulgated by the Securities and
Exchange Commission) and any related qualification or compliance with respect to
all or a part of the Registrable Shares owned by the Holder, the Company will:

                                       2
<PAGE>

               (a)  as soon as practicable, use its commercially reasonable best
efforts to effect such registration and all such qualifications and compliances
as may be so requested and as would permit or facilitate the sale and
distribution of all or such portion of the Holder's Registrable Shares as are
specified in such request; provided, however, that the Company shall not be
obligated to effect any such registration, qualification or compliance, pursuant
to this Section 1.3: (1) if Form S-3 is not available for such offering by the
Holder; (2) if the Company shall furnish to the Holder a certificate signed by
the President of the Company stating that in the good faith judgment of the
Board of Directors of the Company, it would be seriously detrimental to the
Company and its stockholders for such Form S-3 Registration to be effected at
such time, in which event the Company shall have the right to defer the filing
of the Form S-3 registration statement for a period of not more than 180 days
after receipt of the request of the Holder under this Section 1.3; provided,
however, that the Company shall not utilize this right more than twice in any
twelve month period; (3) if such Form S-3 Registration covers an offering of
less than $2,000,000 of Registrable Shares; (4) if the Company has, within the
12 month period preceding the date of such request, already effected two
registrations of Form S-3 for the Holder pursuant to this Section 1.3; (5) if
the Company has already affected four registrations on Form S-3 for the Holder
pursuant to this Section 1.3; or (6) in any particular jurisdiction in which the
Company would be required to qualify to do business or to execute a general
consent to service of process in effecting such registration, qualification or
compliance.

               (b)  Subject to the foregoing, the Company shall file a
registration statement covering the Registrable Shares and other securities so
requested to be registered as soon as practicable after receipt of the request
or requests of the Holder.

          1.4  Obligations of the Company. Whenever required under this Section
1 to effect the registration of any Registrable Shares, the Company shall, as
expeditiously as reasonably possible:

               (a)  Prepare and file with the SEC a registration statement with
respect to such Registrable Shares and use its commercially reasonable best
efforts to cause such registration statement to become effective, and, upon the
request of the Holder, keep such registration statement effective for a period
of up to 9 months or until the distribution contemplated in the Registration
Statement has been completed, provided, however, that (i) such 9 month period
shall be extended for a period of time equal to the period the Holder refrains
from selling any securities included in such registration at the request of an
underwriter of Common Stock (or other securities) of the Company; and (ii) in
the case of any registration of Registrable Shares on Form S-3 which are
intended to be offered on a continuous or delayed basis, such 9 month period
shall be extended, if necessary, to keep the registration statement effective
until the earlier to occur of (A) 18 months following the effectiveness of the
registration statement, or (B) all such Registrable Shares are sold, provided
that Rule 415, or any successor rule under the Securities Act, permits an
offering on a continuous or delayed basis, and provided further that applicable
rules under the Securities Act governing the obligation to file a post-effective
amendment permit, in lieu of filing a post-effective amendment which (I)
includes any prospectus required by Section 10(a)(3) of the Securities Act or
(II) reflects facts or events representing a material or fundamental change in
the information set forth in the registration statement, the incorporation by
reference of information required to be included in (I) and (II) above to be
contained in periodic reports filed pursuant to Section 13 or 15(d) of the
Exchange Act in the registration statement.

                                       3
<PAGE>

               (b)  Prepare and file with the SEC such amendments and
supplements to such registration statement and the prospectus contained therein
as and to the extent necessary to comply with the Securities Act and any
applicable state securities statute or regulation.

               (c)  Furnish to the Holder such copies of each preliminary and
final prospectus, and such other documents as the Holder may reasonably request
to facilitate the disposition of Registrable Shares owned by the Holder.

               (d)  Use its commercially reasonable best efforts to register and
qualify the securities covered by such registration statement under such other
securities or blue sky laws of such jurisdictions as shall be reasonably
requested by the Holder; provided, however, that the Company shall not be
required in connection therewith or as a condition thereto to qualify to do
business or to file a general consent to service of process in any such states
or jurisdictions except as may be required by the Securities Act.

               (e)  In the event of any underwritten public offering, enter into
and perform its obligations under an underwriting agreement, in usual and
customary form, with the managing underwriter of such offering. The Holder shall
also enter into and perform its obligations under such an agreement.

               (f)  Notify the Holder of Registrable Shares covered by such
registration statement at any time when a prospectus relating thereto is
required to be delivered under the Securities Act of the happening of any event
as a result of which the prospectus included in such registration statement, as
then in effect includes an untrue statement of a material fact or omits to state
a material fact required to be stated therein or necessary to make the
statements therein not misleading in the light of the circumstances then
existing.

               (g)  Cause all such Registrable Shares registered pursuant
hereunder to be listed on each securities exchange on which similar securities
issued by the Company are then listed.

               (h)  Provide a transfer agent and registrar for all Registrable
Shares registered pursuant hereunder and a CUSIP number for all such Registrable
Shares, in each case not later than the effective date of such registration.

               (i)  Use its commercially reasonable best efforts to furnish, at
the request of the Holder requesting registration of Registrable Shares pursuant
to this Section 1, on the date that such Registrable Shares are delivered to the
underwriters for sale in connection with a registration pursuant to this Section
1, if such securities are being sold through underwriters, or, if such
securities are not being sold through underwriters, on the date that the
registration statement with respect to such securities becomes effective:

                    (i)  an opinion, dated such date, of the counsel
representing the Company for the purposes of such registration, in form and
substance as is customarily given to underwriters in an underwritten public
offering, addressed to the underwriters, if any, and to the Holder; and

                    (ii) a letter dated such date, from the independent
certified public accountants of the Company, in form and substance as is
customarily given by independent certified public accountants to underwriters in
an underwritten public offering,

                                       4
<PAGE>

addressed to the underwriters, if any, and to the Holder; provided that the
applicable professional accounting rules and regulations permit such a letter to
be delivered.

               (j)  Permit the Holder or its counsel or other representatives to
inspect and copy such corporate documents and records as may reasonably be
requested by them; and

               (k)  Furnish the Holder, upon request, a copy of all documents
filed and all correspondence from or to the Securities and Exchange Commission
(the "SEC") in connection with any such offering unless confidential treatment
of such information has been requested of the SEC.

          1.5  Information by the Holder. It shall be a condition precedent to
the obligations of the Company to take any action pursuant to this Section 1
with respect to the Registrable Shares of the Holder that the Holder shall
furnish to the Company such information regarding itself, the Registrable Shares
held by it, and the intended method of disposition of such securities as shall
be required to effect the registration of the Holder's Registrable Shares.

          1.6  Indemnification.

               (a)  Indemnification of Holder. In the event that the Company
registers any of the Registrable Shares under the Securities Act, to the extent
permitted by law, the Company will indemnify and hold harmless the Holder and
each underwriter of the Registrable Shares so registered (including any broker
or dealer through whom such shares may be sold) and each person, if any, who
controls the Holder or any such underwriter within the meaning of Section 15 of
the Securities Act from and against any and all losses, claims, damages,
expenses or liabilities (or any action in respect thereof), joint or several, to
which they or any of them become subject under the Securities Act or other
federal or state law or at common law or otherwise, and, except as hereinafter
provided, will reimburse the Holder, each such underwriter and each such
controlling person, if any, for any legal or other expenses reasonably incurred
by them or any of them, as such expenses are incurred, in connection with
investigating or defending any actions whether or not resulting in any
liability, insofar as such losses, claims, damages, expenses, liabilities or
actions arise out of or are based upon (i) any untrue statement or alleged
untrue statement of a material fact contained in the registration statement, in
any preliminary or final prospectus contained therein (or the registration
statement or prospectus as from time to time amended or supplemented by the
Company); (ii) arise out of or are based upon the omission or alleged omission
to state therein a material fact required to be stated therein or necessary in
order to make the statements therein not misleading; or (iii) any violation by
the Company of the Securities Act, the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), a state securities law or any rule or regulation
under the Securities Act, the Exchange Act or any state securities law;
provided, however, that the indemnity contained in this Section 1.6(a) will not
apply where such untrue statement or omission was made in such registration
statement, preliminary or amended, preliminary prospectus or prospectus in
reliance upon and in conformity with information furnished in writing to the
Company in connection therewith by the Holder of Registrable Shares, any such
underwriter or any such controlling person expressly for use therein. Promptly
after receipt by the Holder of Registrable Shares, any underwriter or any
controlling person of notice of the commencement of any action in respect of
which indemnity may be sought against the Company, the Holder of Registrable
Shares, or such underwriter or such controlling person, as the case may be, will
notify the Company in writing of the commencement thereof, and, subject to the
provisions hereinafter stated, the Company shall assume the defense of such
action (including the employment of counsel, who shall be counsel reasonably
satisfactory to

                                       5
<PAGE>

the Holder of Registrable Shares, such underwriter or such controlling person,
as the case may be), and the payment of expenses insofar as such action shall
relate to any alleged liability in respect of which indemnity may be sought
against the Company. The Holder of Registrable Shares, any such underwriter or
any such controlling person shall have the right to employ separate counsel in
any such action and to participate in the defense thereof in the event the
representation of the Holder, underwriter or controlling person by counsel
retained by or on the behalf of the Company would be inappropriate due to
conflicts of interest between any such person and any other party represented by
such counsel in such proceeding or action, in which case the Company shall pay,
as incurred, the fees and expenses of such separate counsel. The Company shall
not be liable to indemnify any person under this Section 1.6(a) for any
settlement of any such action effected without the Company's consent (which
consent shall not be unreasonably withheld). The Company shall not, except with
the approval of each party being indemnified under this Section 1.6(a) (which
approval will not be unreasonably withheld), consent to entry of any judgment or
enter into any settlement that does not include as an unconditional term thereof
the giving by the claimant or plaintiff to the parties being so indemnified of a
release from all liability in respect to such claim or litigation.

               (b)  Indemnification of Company. In the event that the Company
registers any of the Registrable Shares under the Securities Act, to the extent
permitted by law, the Holder of the Registrable Shares so registered will
indemnify and hold harmless the Company, each of its directors, each of its
officers who have signed the registration statement, each underwriter of the
Registrable Shares so registered (including any broker or dealer through whom
any of such shares may be sold) and each person, if any, who controls the
Company within the meaning of Section 15 of the Securities Act from and against
any and all losses, claims, damages, expenses or liabilities (or any action in
respect thereof), joint or several, to which they or any of them may become
subject under the Securities Act or under any other statute or at common law or
otherwise, and, except as hereinafter provided, will reimburse the Company and
each such director, officer, underwriter or controlling person for any legal or
other expenses reasonably incurred by them or any of them, as such expenses are
incurred, in connection with investigating or defending any actions whether or
not resulting in any liability, insofar as such losses, claims, damages,
expenses, liabilities or actions arise out of or are based upon any untrue
statement or alleged untrue statement of a material fact contained in the
registration statement, in any preliminary or amended preliminary prospectus or
in the prospectus (or the registration statement or prospectus as from time to
time amended or supplemented) or arise out of or are based upon the omission or
alleged omission to state therein a material fact required to be stated therein
or necessary in order to make the statements therein not misleading, but only
insofar as any such statement or omission was made in reliance upon and in
conformity with information furnished in writing to the Company in connection
therewith by the Holder, expressly for use therein; provided, however, that the
Holder's obligations hereunder shall be limited to an amount equal to the
proceeds to the Holder of the Registrable Shares sold in such registration.
Promptly after receipt of notice of the commencement of any action in respect of
which indemnity may be sought against the Holder of Registrable Shares, the
Company will notify the Holder of Registrable Shares in writing of the
commencement thereof, and the Holder of Registrable Shares shall, subject to the
provisions hereinafter stated, assume the defense of such action (including the
employment of counsel, who shall be counsel satisfactory to the Company) and the
payment of expenses insofar as such action shall relate to the alleged liability
in respect of which indemnity may be sought against the Holder of Registrable
Shares. The Company and each such director, officer, underwriter or controlling
person shall have the right to employ separate counsel in any such action and to
participate in the defense thereof in the event the representation of the
Company, any of its officers or directors or any underwriter or controlling
person by counsel retained by or on the behalf of the Holder would be
inappropriate due to conflicts of interest between any such person and any

                                       6
<PAGE>

other party represented by such counsel in such proceeding or action, in which
case the Holder shall pay, as incurred, the fees and expenses of such separate
counsel. Notwithstanding the two preceding sentences, if the action is one in
which the Company may be obligated to indemnify the Holder of Registrable Shares
pursuant to Section 1.6, the Company shall have the right to assume the defense
of such action, subject to the right of the Holder to participate therein as
permitted by Section 1.6. The Holder shall not be liable to indemnify any person
for any settlement of any such action effected without the Holder's consent
(which consent shall not be unreasonably withheld). The Holder shall not, except
with the approval of the Company (which approval shall not be unreasonably
withheld), consent to entry of any judgment or enter into any settlement that
does not include as an unconditional term thereof the giving by the claimant or
plaintiff to the party being so indemnified of a release from all liability in
respect to such claim or litigation.

               (c)  Contribution. If the indemnification provided for in Section
1.6 is held by a court of competent jurisdiction to be unavailable to an
indemnified party with respect to any loss, liability, claim, damage, or expense
referred to therein, then the indemnifying party, in lieu of indemnifying such
indemnified party hereunder, shall contribute to the amount paid or payable by
such indemnified party as a result of such loss, liability, claim, damage, or
expense in such proportion as is appropriate to reflect the relative fault of
the indemnifying party on the one hand and of the indemnified party on the other
in connection with the statements or omissions that resulted in such loss,
liability, claim, damage, or expense as well as any other relevant equitable
considerations. The relative fault of the indemnifying party and of the
indemnified party shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission to state a material fact relates to information supplied by the
indemnifying party or by the indemnified party and the parties' relative intent,
knowledge, access to information, and opportunity to correct or prevent such
statement or omission.

          1.7  Exchange Act Registration. With a view to making available to the
Holder the benefits of Rule 144 promulgated under the Securities Act and any
other rule or regulation of the SEC that may at any time permit the Holder to
sell securities of the Company to the public without registration or pursuant to
a registration on Form S-3, the Company agrees to:

               (a)  use its commercially reasonable best efforts to make and
keep public information available, as those terms are understood and defined in
SEC Rule 144, at all times after 90 days after the effective date of the first
registration statement filed by the Company for the offering of its securities
to the general public;

               (b)  take such reasonable action, including the voluntary
registration of its common stock under Section 12 of the Exchange Act, as is
necessary to enable the Holder to utilize Form S-3 for the sale of their
Registrable Shares, such action to be taken as soon as practicable after the end
of the fiscal year in which the first registration statement filed by the
Company for the offering of its securities to the general public is declared
effective;

               (c)  file on a timely basis with the SEC all information that the
Commission may require under either of Section 13 or Section 15(d) of the
Exchange Act and, so long as it is required to file such information, take all
action that may be required as a condition to the availability of Rule 144 under
the Securities Act (or any successor exemptive rule hereinafter in effect) with
respect to the Company's common stock;

                                       7
<PAGE>

               (d)  furnish to the Holder, so long as the Holder owns any
Registrable Shares, forthwith upon request (i) a written statement by the
Company as to its compliance with the reporting requirements of Rule 144, (ii) a
copy of the most recent annual or quarterly report of the Company as filed with
the SEC, and (iii) any other reports and documents that the Holder may
reasonably request in availing itself of any rule or regulation of the SEC
allowing the Holder to sell any such Registrable Shares without registration.

          1.8  Expenses. In the case of a registration under Sections 1.2 or 1.3
the Company shall bear all costs and expenses in connection with registrations,
filings or qualifications pursuant to each such registration, including, but not
limited to, printing, legal and accounting expenses, SEC filing fees and "blue
sky" fees and expenses (including reasonable fees and disbursements of counsel
for the Company in its capacity as counsel to the Holder hereunder; provided,
however, if Company counsel does not make itself available for this purpose, the
Company will pay the reasonable fees and disbursements of one special counsel
for the Holder selected by Holder); provided, however, that the Company shall
have no obligation to pay or otherwise bear (i) any portion of the underwriter's
commissions or discounts or stock transfer taxes attributable to the Registrable
Shares being offered and sold by the Holder of Registrable Shares, or (ii) any
of such expenses if the payment of such expenses by the Company is prohibited by
the laws of a state in which such offering is qualified and only to the extent
so prohibited; provided, however, that the Company shall not be required to pay
for any expenses of any registration proceeding begun pursuant to Section 1.3 if
the registration request is subsequently withdrawn at the request of the Holder.

          1.9  Transfer of Registration Rights. The registration rights of the
Holder of Registrable Shares under this Agreement may be transferred to any
transferee provided (a) that the transferee receives all of the Registrable
Shares held by the Holder; (b) the transferee is bound by the terms of this
Agreement; and (c) the Company is given prompt written notice of such transfer.
Notwithstanding the foregoing, the registration rights of the Holder under this
Agreement may not be transferred to an entity, or a person controlled by, under
common control with or controlling such entity, which is a direct competitor of
the Company.

          1.10  Market Stand-Off Agreement. Provided that the Holder is treated
equally and all officers and directors of the Company are also so bound, the
Holder shall, to the extent requested by the Company or any managing underwriter
of the Company, sell or otherwise transfer or dispose of (other than to donees
who agree to be similarly bound) any Registrable Shares during a period (the
"Stand-Off Period") equal to 180 days following the effective date of a
registration statement of the Company filed under the Securities Act (or such
shorter period as the Company or managing underwriter may authorize) or 120 days
in the case of secondary offerings, except for securities sold as part of the
offering covered by such registration statement in accordance with the
provisions of this Agreement. In order to enforce the foregoing covenant, the
Company may impose stock transfer restrictions with respect to the Registrable
Shares of the Holder until the end of the Stand-Off Period.

     Notwithstanding the foregoing, the obligations described in this Section
1.10 shall not apply to a registration relating solely to employee benefit plans
on Form S-1 or Form S-8 or similar forms which may be promulgated in the future,
or a registration relating solely to an SEC Rule 145 transaction on Form S-4 or
similar forms which may be promulgated in the future.

          1.11  Termination of Registration Rights. The obligations of the
Company to register any Holder's Registrable Shares pursuant to this Section 1
shall terminate on the earlier of

                                       8
<PAGE>

(i) five years after the Company's first underwritten public offering, or (ii)
with respect to any Holder of registration rights, at such time as all
Registrable Shares of the Holder may be sold within a three month period
pursuant to Rule 144 or (iii) at such time as the Holder holds Registrable
Shares constituting less than one percent of the outstanding voting stock of the
Company.

     2.   Miscellaneous

          2.1  Assignability. Except as otherwise provided herein, this
Agreement shall be binding upon and inure to the benefit of the respective
heirs, successors and assigns of the parties hereto. Nothing in this Agreement
express or implied, is intended to confer upon any party other than the parties
hereto or their respective successors and assigns any rights, remedies,
obligations, or liabilities under or by reason of this Agreement, except as
expressly provided in this Agreement.

          2.2  Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of the State of California.

          2.3  Amendment. Any term of this Agreement may be amended and the
observance of any term of this Agreement may be waived (either generally or in a
particular instance and either retroactively or prospectively), only with the
written consent of the Company and the Holder of a majority of the Registrable
Shares then outstanding. Any amendment or waiver effected in accordance with
this paragraph shall be binding upon each holder of any Registrable Shares then
outstanding, each future holder of all such Registrable Shares, and the Company.

          2.4  Counterparts.  This Agreement may be executed in any number of
counterparts, each of which shall be an original, but all of which together
shall constitute one instrument.

          2.5  Notice. Unless otherwise provided, any notice required or
permitted under this Agreement shall be in writing, shall be effective upon
receipt or, if earlier, (i) five (5) days after deposit with the U.S. postal
service or other applicable postal service, if delivered by first class mail,
postage prepaid, (ii) upon delivery, if delivered by hand, (iii) one (1)
business day after the day of deposit with Federal Express or similar overnight
courier, freight prepaid, if delivered by overnight courier or (iv) one (1)
business day after the day of facsimile transmission, if delivered by facsimile
transmission with copy by first class mail, postage prepaid, and shall be
addressed as follows:

If to Holder, to:                             Alexander Nediger
                                              DaimlerChrysler Venture GmbH
                                              ___________________________
                                              ___________________________

     with a copy to:                          Klaus Burmeister
                                              Baker & MacKenzie
                                              ___________________________
                                              ___________________________

                                       9
<PAGE>

If to the Company, to:                    Jack Johnson
                                          Iteris, Inc.
                                          1515 S. Mancester Avenue
                                          Anaheim, CA 92802
                                          Fax:  (714) 780-7857

     with a copy to:                      K.C. Schaaf, Esq.
                                          Stradling Yocca Carlson & Rauth
                                          660 Newport Center Drive, Suite 1600
                                          Newport Beach, CA  92660
                                          Fax:  (949) 725-4100

          Each of the parties herewith shall be entitled to specify another
address by giving notice as aforesaid to each of the other parties hereto.

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

          2.7  Severability. If one or more provisions of this Agreement are
held to be unenforceable under applicable law, such provision shall be excluded
from this Agreement and the balance of the Agreement shall be interpreted as if
such provision were so excluded and shall be enforceable in accordance with its
terms.

          2.8  Aggregation of Stock. All Registrable Shares held or acquired by
affiliated entities or persons shall be aggregated together for the purpose of
determining the availability of any rights under this Agreement.

          2.9  Entire Agreement.  This Agreement constitutes the full and entire
understanding and agreement between the parties with regard to the subjects
hereof and thereof.

                                       10
<PAGE>

     IN WITNESS WHEREOF, the parties hereto have caused this Registration Rights
Agreement to be executed by their respective officers thereunto duly authorized,
as of the date first above written.

                         ITERIS, INC.

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

                         "HOLDER"

                         DAIMLERCHRYSLER VENTURE GMBH

                         By:  /s/ Dr. Marianne Tumpen
                              --------------------------------------
                              Dr. Marianne Tumpen, Managing Director


                                      S-1



<PAGE>

                                                                    EXHIBIT 10.5

                     SEPARATION AND DISTRIBUTION AGREEMENT

     THIS AGREEMENT is made and entered into this 31/st/ day of December, 1999,
by and between ODETICS, INC., a Delaware corporation ("Odetics"), and ITERIS,
INC., a Delaware corporation ("Iteris").

     WHEREAS, Odetics is the owner of approximately 93% of the outstanding
capital stock of Iteris;

     WHEREAS, Iteris is engaged in the business of designing, developing and
marketing software based products and services to improve the safety and
efficiency of vehicle transportation, including video sensor products and
transportation management and traveler information systems for the intelligent
transportation systems industry (the "Business").

     WHEREAS, Odetics' Board of Directors has determined that it is in the best
interests of Odetics and Iteris stockholders to, subject to certain conditions,
distribute to Odetics' stockholders all of the outstanding stock of Iteris owned
by Odetics through a spinoff, which will result in the total and complete
separation of the Business and Iteris from Odetics at the time of the
Distribution; provided, however, that the shares distributed by Odetics shall
not be publicly transferable for 180 days after the date of the prospectus
relating to the IPO and that Odetics may continue to provide services to Iteris
pursuant to services agreements after the Distribution Date;

     WHEREAS, Iteris shall complete the IPO immediately after the Distribution;

     WHEREAS, Odetics has received a private letter ruling from the Internal
Revenue Service to the effect that the Distribution will qualify as a tax-free
distribution for federal income tax purposes under Section 355 of the Code;

     WHEREAS, in furtherance of the foregoing, it is appropriate and desirable
to transfer the assets of Iteris held by Odetics to Iteris and for Iteris to
assume the liabilities related to the Business; and

     NOW, THEREFORE, in consideration of the promises and the mutual
representations, warranties, covenants and agreements, and upon the terms and
subject to the conditions hereinafter set forth, the parties do hereby agree as
follows:

                                   ARTICLE I
                                  DEFINITIONS

     1.1  Affiliate of any Person means a Person that controls, is controlled
          ---------
by, or is under common control with such Person. As used herein, "control" means
the possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of such entity, whether through
ownership of voting securities or other interests, by contract or otherwise.

     1.2  Ancillary Agreements shall mean the Promissory Note, the Services
          --------------------
Agreement and the Tax Allocation Agreement to be entered into between Iteris and
Odetics in connection with the Distribution.

                                       1
<PAGE>

     1.3  Assets means assets, properties and rights (including goodwill),
          ------
wherever located (including in the possession of vendors or other third parties
or elsewhere), whether real, personal or mixed, tangible, intangible or
contingent, in each case whether or not recorded or reflected or required to be
recorded or reflected on the books and records or financial statements of any
Person, including the following:

          (a)  all accounting and other books, records and files whether in
paper, microfilm, microfiche, computer tape or disc, magnetic tape or any other
form;

          (b)  all apparatus, computers and other electronic data processing
equipment, fixtures, machinery, equipment, furniture, office equipment,
automobiles, trucks, rolling stock, vessels, motor vehicles and other
transportation equipment, special and general tools, test devices, prototypes
and models and other tangible personal property;

          (c)  all inventories of materials, parts, raw materials, supplies,
work-in-process and finished goods, prototypes and products;

          (d)  all interests in real property of whatever nature, including
easements, whether as owner, lessor, sublessor, lessee, sublessee or otherwise;

          (e)  all interests in any capital stock or other equity interests of
any Subsidiary or any other Person, all bonds, notes, debentures or other
securities issued by any Subsidiary or any other Person, all loans, advances or
other extensions of credit or capital contributions to any Subsidiary or any
other Person and all other investments in securities of any Person;

          (f)  all license agreements, leases of personal property, open
purchase orders for raw materials, supplies, parts or services, unfilled orders
for the manufacture and sale of products and other contracts, agreements or
commitments;

          (g)  all deposits, letters of credit and performance and surety bonds;

          (h)  all written technical information, data, specifications, research
and development information, engineering drawings, operating and maintenance
manuals, and materials and analyses prepared by consultants and other third
parties;

          (i)  all domestic and foreign patents, copyrights, trade names,
trademarks, service marks and registrations and applications for any of the
foregoing, mask works, trade secrets, inventions, other proprietary information
and licenses from third Persons granting the right to use any of the foregoing,
including, without limitation, rights to damages and payments arising from past
or future infringement or misappropriations of the foregoing, the right to sue
for past, present or future infringements or misappropriations of any of the
foregoing and the right to all goodwill associated with any of the foregoing;

          (j)  all computer applications, programs and other software, including
operating software, network software, firmware, middleware, design software,
design tools, algorithms, systems documentation and instructions;

          (k)  all cost information, sales and pricing data, customer prospect
lists, supplier records, customer and supplier lists, customer and vendor data,
correspondence and lists, product literature, artwork, design, development and
manufacturing files, vendor and customer drawings,

                                       2
<PAGE>

formulations and specifications, quality records and reports and other books,
records, studies, surveys, reports, plans and documents;

          (l)  all prepaid expenses, trade accounts and other accounts and notes
receivables;

          (m)  all rights under contracts or agreements, all claims or rights
against any Person arising from the ownership of any Asset, all rights in
connection with any bids or offers and all related claims, choices in action or
similar rights, whether accrued or contingent;

          (n)  all rights as a named insured under insurance policies and all
rights in the nature of insurance, indemnification or contribution; all
licenses, permits, approvals and authorizations;

          (p)  cash or cash equivalents, bank accounts, lock boxes and other
     deposit agreements; and

          (q)  interest rate, currency, commodity or other swap, collar, cap or
     other hedging or similar agreements or arrangements.

     1.4  Business means the business of Iteris as defined in the recitals.
          --------

     1.5  Code means the Internal Revenue Code of 1986, as amended.
          ----

     1.6  Distribution means the distribution by Odetics on a pro rata basis to
          ------------
holders of Odetics Common Stock of all of the outstanding shares of Iteris
Common Stock owned by Odetics.

     1.7  Distribution Agent means the agent appointed by Odetics to effect the
          ------------------
Distribution of the Iteris shares.

     1.8  Distribution Date means the date on which the Distribution occurs.
          -----------------

     1.9  Exchange Act means the Securities Exchange Act of 1934, as amended,
          ------------
together with the rules and regulations promulgated thereunder.

     1.10 Intentionally omitted.

     1.11 Form 10 Registration Statement means the registration statement on
          ------------------------------
Form 10 filed under the Exchange Act, pursuant to which Iteris Common Stock will
be registered under the Exchange Act following the Distribution, together with
all amendments thereto.

     1.12 Information Statement means the Information Statement forming a
          ---------------------
part of the Form 10 Registration Statement to be mailed to holders of Odetics
Common Stock in connection with the Distribution.

     1.13 Insurance Policies means the insurance policies written by insurance
          ------------------
carriers unaffiliated with Odetics pursuant to which Iteris or one or more of
its Subsidiaries (or their respective officers or directors) will be insured
parties after the Distribution Date.

     1.14 Insurance Proceeds means those monies:
          ------------------

                                       3
<PAGE>

          (a)  received by an insured from an insurance carrier;

          (b)  paid by an insurance carrier on behalf of the insured; or

          (c)  received (including by way of set off) from any third party in
the nature of insurance, contribution or indemnification in respect of any
Liability;

     in any such case net of any applicable premium adjustments (including
reserves and retrospectively rated premium adjustments) and net of any costs or
expenses (including allocated costs of in-house counsel and other personnel)
incurred in the collection thereof.

     1.15 IPO means the initial public offering of Iteris Common Stock in an
          ---
underwritten public offering registered under the Securities Act of 1933, as
amended.

     1.16 IPO Registration Statement means the Registration Statement on Form
          --------------------------
S-1 filed by Iteris with the Securities and Exchange Commission in connection
with the IPO.

     1.17 Iteris Assets means those Iteris Assets described in Section 2.2.
          -------------

     1.18 Iteris Balance Sheet means the audited consolidated balance sheet of
          --------------------
Iteris, including the notes thereto, as of December 31, 1999.

     1.19 Iteris Contracts means contracts and agreements to which Odetics or
          ----------------
any of its Affiliates is a party or by which any of their respective Assets is
bound, whether as of the date hereof or prior to or at the Distribution Date,
and whether or not in writing, relating to the Business and set forth on
Schedule 1.19.
- -------------

     1.20 Iteris Group means Iteris, each Subsidiary of Iteris and each other
          ------------
Person that is contemplated to be controlled directly or indirectly by Iteris as
of the Distribution Date.

     1.21 Iteris Liabilities means those Iteris Liabilities described in Section
          ------------------
2.3(a).

     1.22 Liabilities means any and all losses, claims, charges, debts, demands,
          -----------
actions, causes of action, suits, damages, obligations, payments, costs and
expenses, sums of money, accounts, bonds, indemnities and similar obligations,
covenants, contracts, controversies, agreements, promises, guarantees, and
similar obligations, and other liabilities, including all contractual
obligations, whether absolute or contingent, matured or unmatured, liquidated or
unliquidated, accrued or unaccrued, known or unknown, whenever arising
(including the costs and expenses and reasonable attorneys' fees).

     1.23 License Agreement means that License Agreement to be entered into by
          -----------------
and between Iteris and Odetics substantially in the form of Exhibit A.
                                                            ---------

     1.24 Odetics Group means Odetics and each Person (other than any member of
          -------------
the Iteris Group) that is an Affiliate of Odetics immediately after the
Distribution Date.

     1.25 Person means an individual, a general or limited partnership, a
          ------
corporation, a trust, a joint venture, an unincorporated organization, a limited
liability entity or any other entity.

                                       4
<PAGE>

     1.26 Promissory Note means that Promissory Note made by Iteris payable to
          ---------------
Odetics in substantially the form attached hereto as Exhibit B.
                                                     ---------

     1.27 Record Date means the close of business on the date determined by the
          -----------
Odetics Board of Directors as the record date for determining stockholders of
Odetics entitled to receive shares of Iteris Common Stock in the Distribution.

     1.28 Services Agreement means that certain Services Agreement to be entered
          ------------------
into by and between Odetics and Iteris substantially in the form of Exhibit C.
                                                                    ---------

     1.29 Subsidiary of any Person means any corporation or other organization
          ----------
whether incorporated or unincorporated of which at least a majority of the
securities or interests having by the terms thereof ordinary voting power to
elect at least a majority of the board of directors or others performing similar
functions with respect to such corporation or other organization is directly or
indirectly owned or controlled by such Person or by any one or more of Iteris
Subsidiaries, or by such Person and one or more of Iteris Subsidiaries;
provided, however that no Person that is not directly or indirectly wholly owned
by any other Person shall be a Subsidiary of such other Person unless such other
Person controls, or has the right, power or ability to control, that Person.

     1.30 Tax Allocation Agreement means that certain Tax Allocation Agreement
          ------------------------
to be entered into by and between Odetics and Iteris substantially in the form
of Exhibit D.
   ---------

     1.31 Underwriting Agreement shall mean the Underwriting Agreement to be
          ----------------------
entered into among Iteris and the underwriters underwriting the sale of Iteris
Common Stock in the IPO.

                                  ARTICLE II
                                 THE TRANSFER

     2.1  Transfer of Assets.
          ------------------
          (a)  Effective as of the date of this Agreement, Odetics hereby
assigns, transfers, conveys and delivers to Iteris, and agrees to cause its
applicable Subsidiaries to assign, transfer, convey and deliver to Iteris, and
Iteris hereby accepts from Odetics and its Subsidiaries, all of Odetics' and its
applicable Subsidiaries' respective right, title and interest in all Iteris
Assets. This assignment, transfer, conveyance and delivery is unconditional,
notwithstanding other provisions in this Agreement.

          (b)  Iteris hereby assumes and agrees faithfully to perform, satisfy,
discharge and fulfill all the Iteris Liabilities in accordance with their
respective terms. Iteris shall be responsible for all Iteris Liabilities,
regardless of when or where such Liabilities arose or arise or whether the facts
on which they are based occurred prior to or subsequent to the date hereof,
regardless of where or against whom such Liabilities are asserted or determined
or whether asserted or determined prior to the date hereof, except those
Liabilities arising from or alleged to arise from recklessness, violation of
law, fraud or misrepresentation (whether based on tort, contract, statute or
otherwise) by any member of the Odetics Group or any of its directors, officers,
employees, agents, Subsidiaries or Affiliates.

          (c)  In the event that at any time or from time to time (whether prior
to or after the Distribution Date) any party hereto (or any member of such
party's respective Group), shall receive

                                       5
<PAGE>

or otherwise possess any Asset that is allocated to any other Person pursuant to
this Agreement or any Ancillary Agreement, such party or member shall promptly
transfer, or cause to be transferred, such Asset to the Person so entitled
thereto. Prior to any such transfer, the Person receiving or possessing such
Asset shall hold such Asset in trust for any such other Person.

     2.2  Iteris Assets.  For purposes of this Agreement, "Iteris Assets" shall
          -------------
mean (without duplication):

          (a)  all Assets reflected in the Iteris Balance Sheet as Assets of
Iteris and its Subsidiaries, subject to any dispositions of any such Assets
subsequent to the date of the Iteris Balance Sheet and all Assets relating to
the Business that are or have been developed, owned, licensed or otherwise held
by Odetics or any member of the Odetics Group;

          (b)  all Assets acquired by or for the exclusive benefit of Iteris
subsequent to the date of the Iteris Balance Sheet and prior to the Distribution
Date that would have been reflected in the Iteris Balance Sheet as Assets of
Iteris had they been owned on the date of the Iteris Balance Sheet;

          (c)  any rights of any member of the Iteris Group under any of the
Insurance Policies, including any rights thereunder arising after the
Distribution Date in respect of any Insurance Policies that are occurrence
policies; (A) any Assets that any Ancillary Agreement contemplates will be
transferred to any member of the Iteris Group, (B) any Iteris Contracts and (C)
all issued and outstanding capital stock of the Subsidiaries of Iteris; and

          (e)  all rights to all intellectual property used in the Iteris
Business, including but not limited to patents, trademarks and service marks
(registered and common law), trade dress, copyrights and trade secrets, all
registrations or applications for registration related to the foregoing and all
rights to claims of infringement or misappropriation, whether arising prior to
or after this Agreement.

     2.3  Iteris Liabilities.  For the purposes of this Agreement, "Iteris
          ------------------
Liabilities" shall mean (without duplication):

          (a)  any and all Liabilities that are expressly contemplated by this
Agreement or any Ancillary Agreement (or the Schedules hereto or thereto) as
Liabilities to be assumed by Iteris or any member of the Iteris Group and all
agreements, obligations and Liabilities of any member of the Iteris Group under
this Agreement or any of the Ancillary Agreements;

          (b)  all Liabilities relating to, arising out of, or resulting from:

               (i)   the operation of the Iteris Business as conducted at any
time prior to, at or after the Distribution Date (including any Liability
relating to, arising out of or resulting from the design, manufacture and sale
of products or services of the Iteris Business); or

               (ii)  any Iteris Assets (including any Iteris Contracts and
leasehold interests) or ownership of any Iteris Assets at any time prior to, at
or after the Distribution Date.

          (c)  all Liabilities relating to, arising out of or resulting from the
Promissory Note.

                                       6
<PAGE>

          (d)  all Liabilities reflected as Liabilities or obligations of Iteris
in the Iteris Balance Sheet, subject to any discharge of such Liabilities
subsequent to the date of the Iteris Balance Sheet, and all Liabilities or
obligations of Iteris incurred subsequent to the date of the Iteris Balance
Sheet that would have been reflected in the Iteris Balance Sheet had they been
incurred as of the date of the Iteris Balance Sheet; and

          (e)  any Liabilities relating to, arising out of or resulting from any
infringement of any intellectual property of any third party, including but not
limited to patent rights, trademark and service mark rights (registered and
common law), trade dress rights, copyrights, misappropriation of trade secret,
based upon or resulting from the operation of the Iteris Business and regardless
of whether said infringement occurred prior to, on or after the Distribution
Date;

     2.4  Documents Further Evidencing Transfers of Assets and Assumption of
          ------------------------------------------------------------------
Liabilities.  In furtherance of the assignment, transfer and conveyance of
- -----------
Iteris Assets and the assumption of Iteris Liabilities set forth in Section
2.1(a) and (b), simultaneously with the execution and delivery hereof or as
promptly as practicable thereafter, (i) upon the reasonable request of Iteris,
Odetics shall execute and deliver, and shall cause its Subsidiaries to execute
and deliver, such further bills of sale, stock powers, certificates of title,
assignments of contracts and other instruments of transfer, conveyance and
assignment as and to the extent necessary to fully evidence the transfer,
conveyance and assignment of all of Odetics' and its Subsidiaries' right, title
and interest in and to the Iteris Assets to Iteris and (ii) upon the reasonable
request of Odetics, Iteris shall execute and deliver to Odetics and its
Subsidiaries such further assumptions of contracts and other instruments of
assumption as and to the extent necessary to fully evidence the valid and
effective assumption of the Iteris Liabilities by Iteris.

     2.5  Elimination of Intercompany Account Balances.  Effective as of the
          --------------------------------------------
Distribution Date, Odetics, on behalf of itself and each member of the Odetics
Group, and Iteris, on behalf of itself and each member of the Iteris Group,
shall settle and eliminate all intercompany receivables, payables and other
account balances between Odetics and/or any Odetics Subsidiary and Iteris and/or
any Iteris Subsidiary.  Any account balances owed by Iteris and/or its
Subsidiary to Odetics and any other member of the Odetics Group shall be
evidenced by the Promissory Note to be delivered by Iteris to Odetics on the
Distribution Date pursuant to Section 7.6.  Except for obligations under the
Promissory Note and any other obligations arising under any of the Ancillary
Agreements, Iteris and its Subsidiary shall have no obligations to Odetics or
any member of the Odetics Group.

     2.6  Consideration.  The consideration for the Iteris Assets has been
          -------------
included in the intercompany account balance payable by Iteris to Odetics and
will be included in the principal amount of the Promissory Note, cancelled as a
result of a contribution to the capital of Iteris pursuant to Section 7.7,
and/or paid from the proceeds of the IPO.

                                  ARTICLE III
                   REPRESENTATIONS AND WARRANTIES OF ODETICS

     Odetics represents and warrants to Iteris as follows:

     3.1  Power and Authority; Effect of Agreement.  Odetics is a corporation
          ----------------------------------------
duly organized, validly existing and in good standing under the laws of
Delaware, has requisite corporate power and authority to execute, deliver and
perform this Agreement and to consummate the transactions contemplated hereby.
The execution, delivery and performance by it of this Agreement and the

                                       7
<PAGE>

consummation by it of the transactions contemplated hereby have been duly
authorized by all necessary corporate action on its part. This Agreement has
been duly and validly executed and delivered by it and constitutes its legal,
valid and binding obligation enforceable against it in accordance with its
terms. Except to the extent that such enforceability may be limited by
bankruptcy, insolvency, reorganization, moratorium or other similar laws
relating to creditors' rights generally. The execution, delivery and performance
by it of this Agreement and the consummation by it of the transactions
contemplated hereby do not, and will not, with or without the giving of notice
or the lapse of time, or both: (i) violate any provision of law, rule or
regulation to which it is subject; (ii) violate any order, judgment or decree
applicable to it; (iii) conflict with, or result in a breach or default under,
its Certificate of Incorporation or its Bylaws; or (iv) conflict with, or result
in a breach or default under, any contract to which it is a party; except, in
each case, for violations, conflicts, breaches or defaults which in the
aggregate would not materially hinder or impair the consummation of the
transactions contemplated hereby or have a material adverse effect on the
Business.

     3.2  Stock of Transferred Subsidiary.  Odetics is the owner, beneficially
          -------------------------------
and of record of 6,000,000 shares of Iteris Common Stock, representing
approximately 93% of all issued and outstanding stock of Iteris, free and clear
of all liens, encumbrances, security agreements, options, claims, charges and
restrictions.

     3.3  Consents.  No consent, approval or authorization of, or exemption
          --------
from, or filing with any governmental or regulatory authority or any other third
party is required in connection with the execution, delivery or performance by
Odetics of the terms of this Agreement or the taking by it of any other action
required to effectuate the transactions contemplated hereby.

                                  ARTICLE IV
                   REPRESENTATIONS AND WARRANTIES OF ITERIS

     Iteris represents and warrants to Odetics as follows:

     4.1  Iteris' Power and Authority.  Iteris is a corporation duly organized
          ---------------------------
validly existing and in good standing under the laws of Delaware, and has all
requisite corporate power and authority to carry on the Business as it is now
being conducted and as proposed to be conducted.

     4.2  Due Authorization, Execution and Delivery; Effect of Agreement.
          --------------------------------------------------------------
Iteris has all requisite corporate power and authority to execute, deliver and
perform this Agreement and to consummate the transactions contemplated hereby.
The execution, delivery and performance by Iteris of this Agreement and the
consummation by Iteris of the transactions contemplated hereby have been duly
authorized by all necessary corporate action on the part of Iteris. This
Agreement has been duly and validly executed and delivered by Iteris and
constitutes the legal, valid and binding obligation of Iteris, enforceable
against Iteris in accordance with its terms, except to the extent that such
enforceability may be limited by bankruptcy, insolvency, reorganization,
moratorium or other similar laws relating to creditors' rights generally. The
execution, delivery and performance by Iteris of this Agreement and the
consummation by Iteris of the transactions contemplated hereby do not, and will
not, with or without the giving of notice or the lapse of time, or both: (i)
violate any provision of law, rule or regulation to which Iteris is subject;
(ii) violate any order, judgment or decree applicable to Iteris; (iii) conflict
with, or result in a breach or default under, the Certificate of Incorporation
or Bylaws of Iteris; or (iv) conflict with, or result in a breach or default
under, any contract to which it is a party; except, in each case, for
violations, conflicts, breaches or defaults

                                       8
<PAGE>

which in the aggregate would not materially hinder or impair the consummation of
the transactions contemplated hereby or have a material adverse effect on the
Business.

     4.3  Consents.  No consent, approval or authorization of, or exemption
          --------
from, or filing with, any governmental or regulatory authority or any other
third party is required in connection with the execution, delivery or
performance by Iteris of this Agreement or the taking by of any other action
required to effectuate the transactions contemplated hereby.

                                   ARTICLE V
                             COVENANTS OF ODETICS

     5.1  Cooperation.  Odetics agrees to cooperate with Iteris, both before and
          -----------
after the Distribution, to enable Iteris to implement the IPO and to perform its
obligations hereunder.  Such cooperation will include but not be limited to
preparing and submitting required financial reports after the Distribution Date
which may relate to periods whether before or after the Distribution Date and
executing such documents and doing such other acts and things as may be
necessary to carry out the intent of this Agreement as it relates to the IPO.

     5.2  Books and Records; Personnel.  For a period of six years after the
          ----------------------------
Distribution Date (or such longer period as maybe required by any law or
regulation, any governmental agency, any ongoing litigation or class of
connection with any administrative proceeding):

          (a)  Odetics shall not dispose of or destroy any of the business
records and files of the Business retained by it or any of its Subsidiaries (the
"Retained Records"). If Odetics wishes to dispose of or destroy such records and
files after that time, it shall use reasonable efforts to first give 30 days'
prior written notice to Iteris and Iteris shall have the right, at its option
and expense, upon prior written notice to Odetics within such 30 day period, to
take possession of the Retained Records within 60 days after the date of Iteris'
notice to Odetics.

          (b)  Odetics shall allow Iteris and its representatives reasonable
access to all Retained Records during regular business hours and upon reasonable
notice. Odetics shall maintain the Retained Records in a manner and at locations
that reasonably facilitates retrieval and review by Iteris. Iteris shall have
the right, at its own expense, to make copies of any such records and files and
Odetics shall provide convenient duplication facilities for such purpose,
provided, however, that any such access or copying shall be had or done in such
manner so as not to unreasonably interfere with the normal conduct of Odetics'
business or operations; and

          (c)  Odetics shall make reasonably available to Iteris, upon written
request and at Iteris' expense: (i) personnel to assist in locating and
obtaining records and files maintained by it (including those created after the
date hereof, to the extent necessary and appropriate in connection with pending
and future claims against Iteris relating to the Business) and (ii) any of
Iteris personnel whose assistance or participation (including as a witness
during depositions or at trial) is reasonably required by Iteris in anticipation
of, or preparation for or during, existing or future litigation or other matters
in which Iteris or any of its Affiliates is involved and which is related to the
Business.

                                       9
<PAGE>

                                  ARTICLE VI
                              COVENANTS OF ITERIS

     6.1  Cooperation.  Iteris agrees to cooperate with Odetics, both before and
          -----------
after the Distribution Date, to enable Odetics to implement the Distribution and
to perform its obligations hereunder.  Such cooperation will include but not be
limited to preparing and submitting required financial reports after the
Distribution Date which may relate to periods whether before or after the
Distribution Date and executing such documents and doing such other acts and
things as may be necessary to carry out the intent of this Agreement as it
relates to the Distribution.

     6.2  Books and Records; Personnel.  For a period of six years after the
          ----------------------------
Distribution Date (or such longer period as may be required by any law or
regulation, any governmental agency, any ongoing litigation or class of
litigation, or in connection with any administrative proceeding):

          (a)  Iteris shall not dispose of or destroy of the business records
and files of the Business that are transferred to it or any of its subsidiaries
in carrying out the transactions contemplated hereby (the "Transferred
Records"). If Iteris wishes to dispose of or destroy such records and files
after that time, it shall use reasonable efforts to first give 30 days' prior
written notice to Odetics and Odetics shall have the right at its option and
expense, upon prior written notice to Iteris within such 30 day period, to take
possession of the Transferred Records within 60 days after the date of Odetics'
notice to Iteris;

          (b)  Iteris shall allow Odetics and its representatives reasonable
access to all Transferred Records during regular business hours and upon
reasonable notice. Iteris shall maintain the Transferred Records in a manner and
at locations that reasonably facilitates retrieval and review by Odetics.
Odetics shall have the right at its own expense, to make copies of any such
records and files and Iteris shall provide convenient duplication facilities for
such purposes provided, however, that any such access or copying shall be had or
done in such a manner so as not to unreasonably interfere with the normal
conduct of Iteris' business or operations; and

          (c)  Iteris shall make reasonably available to Odetics upon written
request and at Odetics' expense: (i) personnel to assist in locating and
obtaining records and files maintained by it (including those created after the
date hereof, to the extent necessary and appropriate in connection with pending
and future claims against Odetics relating to the Business), and (ii) any of
Iteris personnel whose assistance or participation (including as a witness
during depositions or at trial) is reasonably required by Odetics in
anticipation of, or preparation for or during, existing or future litigation or
other matters in which Odetics or any of its Affiliates is involved.

                                  ARTICLE VII
                               THE DISTRIBUTION

     7.1  The Distribution.
          ----------------
          (a)  Subject to the conditions specified in Section 7.3 hereof, on or
prior to the Distribution Date, Odetics will deliver to the Distribution Agent
for the benefit of holders of record of Odetics Common Stock on the Record Date,
a single stock certificate, endorsed by Odetics in blank, representing all of
the outstanding shares of Iteris Common Stock then owned by Odetics, and shall
cause the Distribution Agent to distribute on the Distribution Date the
appropriate number of such shares of Iteris Common Stock to each such holder or
designated transferee or transferees of

                                       10
<PAGE>

such holder. Subject to Section 7.4, each holder of Odetics Common Stock on the
Record Date (or such holder's designated transferee or transferees) will be
entitled to receive in the Distribution a number of shares of Iteris Common
Stock equal to the number of shares of Odetics Common Stock held by such holder
on the Record Date multiplied by a fraction the numerator of which is the number
of shares of Iteris Common Stock beneficially owned by Odetics on the Record
Date and the denominator of which is the number of shares of Odetics Common
Stock outstanding on the Record Date.

          (b)  Iteris and Odetics, as the case may be, will provide to the
Distribution Agent all share certificates and any information required in order
to complete the Distribution on the basis specified above.

     7.2  Actions Prior to the Distribution.
          ---------------------------------

          (a)  Odetics and Iteris shall prepare and mail, prior to the
Distribution Date, to the holders of Odetics Common Stock, the Information
Statement, which shall include information concerning Iteris, its business,
operations and management, the Distribution and such other matters as Odetics
shall reasonably determine and as may be required by law. Odetics and Iteris
will prepare, and Iteris will, to the extent required under applicable law, file
with the Commission the Form 10 and any such other documentation which Odetics
and Iteris determine are necessary or desirable to effectuate the Distribution
and Odetics and Iteris shall each use its reasonable best efforts to obtain all
necessary approvals from the Commission with respect thereto as soon as
practicable.

          (b)  Odetics and Iteris shall take all such action as may be necessary
or appropriate under the securities or blue sky laws of each of the states of
the United States (and any comparable laws under any foreign jurisdiction) in
connection with the Distribution.

          (c)  Odetics and Iteris shall take all reasonable steps necessary and
appropriate to cause the conditions set forth in Section 7.3 to be satisfied and
to effect the Distribution on the Distribution Date.

          (d)  Iteris shall prepare and file, and shall use its reasonable best
efforts to have approved, an application for the listing of the Iteris Common
Stock to be distributed in the Distribution on the Nasdaq National Market,
subject to official notice of distribution.

     7.3  Conditions to Distribution.  Odetics shall consummate the
          --------------------------
Distribution as promptly as practicable following the satisfaction or waiver of
the following conditions:

          (a)  declaration by the Securities and Exchange Commission of the
effectiveness of the Form 10 Registration Statement and the IPO Registration
Statement;

          (b)  any material governmental approvals and consents or consents
required under material contracts necessary to consummate the Distribution shall
have been obtained and be in full force and effect;

          (c)  no order, injunction or decree issued by any court or agency of
competent jurisdiction or other legal restraint or prohibition preventing the
consummation of the Distribution shall be in effect and no other event outside
the control of Odetics shall have occurred or failed to occur that prevents the
consummation of the Distribution; and

                                       11
<PAGE>

          (d)  no other events or developments shall have occurred subsequent to
the date hereof that, in the judgment of the Board of Directors of Odetics,
would result in the Distribution having a material adverse effect on Odetics or
on the stockholders of Odetics.

The foregoing conditions are for the sole benefit of Odetics and shall not give
rise to or create any duty on the part of Odetics or the Odetics Board of
Directors to waive or not waive any such conditions.

     7.4  Fractional Shares.  As soon as practicable after the Distribution
          -----------------
Date, Odetics shall direct the Distribution Agent to determine the number of
whole shares and fractional shares of Iteris Common Stock allocable to each
holder of record or beneficial owner of Odetics Common Stock as of the Record
Date and to aggregate all such fractional shares. In lieu of selling such shares
in open market transactions, Odetics shall cause the transfer agent to cancel
the whole shares obtained thereby, deposit with the Distribution Agent an amount
equal to the aggregate fair market value of such shares based upon the initial
public offering price per share in the IPO, and to cause to be distributed to
each such holder or for the benefit of each such beneficial owner, in lieu of
any fractional share, such holder's or owner's ratable share of the amount
deposited with the Distribution Agent for the cancelled shares, after making
appropriate deductions of any amount required to be withheld for federal income
tax purposes and after deducting an amount equal to all brokerage charges,
commissions and transfer taxes attributed to the cancellation of such shares.
Odetics and the Distribution Agent shall use their reasonable best efforts to
aggregate the shares of Odetics Common Stock that may be held by any beneficial
owner thereof through more than one account in determining the fractional share
allocable to such beneficial owner.

     7.5  Restrictions on Transfer.  Each stock certificate evidencing
          ------------------------
ownership of Iteris Common Stock shall be marked with a legend that restricts
the transfer of such shares, except for privately negotiated transactions,
transfers by gift, transfers that do not effect a change in beneficial ownership
or transfers according to the laws of descent and distribution, for a period of
180 days after the date of the Prospectus, which restrictions shall be set forth
in the Bylaws of Iteris. To enforce this restriction, Iteris shall instruct its
transfer agent to mark its books and records with a stop transfer order during
the 180 day period for all shares of Common Stock distributed in the
Distribution.

     7.6  Ancillary Agreements.  On the Distribution Date, Odetics and Iteris
          --------------------
will execute and deliver each of the Ancillary Agreements to which it is a
party.

     7.7  Contribution to Capital.  On the Distribution Date, Odetics shall
          -----------------------
cancel a portion of the debt owed by Iteris to Odetics as of such date and such
amount shall be treated as a contribution to the capital of Iteris. The amount
of debt to be cancelled shall be determined by the mutual agreement of the
parties hereto on or prior to the Distribution Date.

                                 ARTICLE VIII
                      THE IPO AND ACTIONS PENDING THE IPO

     8.1  The IPO.
          -------
          (a)  Odetics and Iteris shall use their reasonable best efforts to
consummate the IPO immediately following the Distribution. Actions required to
so consummate the IPO shall include, but shall not necessarily be limited to,
those specified in this Section 8.1.

                                       12
<PAGE>

          (b)  Iteris shall file the IPO Registration Statement, and such
amendments or supplements thereto, as may be necessary in order to cause the
same to become and remain effective as required by law or by the underwriters,
including, but not limited to, filing such amendments to the IPO Registration
Statement as may be required by the Underwriting Agreement, the Securities and
Exchange Commission or federal, state or foreign securities laws.

          (c)  Iteris shall enter into the Underwriting Agreement, in form and
substance reasonably satisfactory to Iteris and shall comply with its
obligations thereunder.

          (d)  Odetics and Iteris shall consult with each other and the
Underwriters regarding the timing, pricing and other material matters with
respect to the IPO.

          (e)  Iteris shall use its reasonable best efforts to take all such
action as may be necessary or appropriate under state securities and blue sky
laws of each of the states of the United States (and any comparable laws under
any foreign jurisdictions) in connection with the IPO.

          (f)  Iteris shall prepare, file and use reasonable best efforts to
seek to make effective, an application for listing of the Iteris Common Stock
issued in the IPO on the Nasdaq National Market, subject to official notice of
issuance.

          (g)  Iteris shall participate in the preparation of materials and
presentations as the underwriters shall deem necessary or desirable.

          (h)  Iteris shall pay all third party costs, fees and expenses
relating to the IPO, all of the reimbursable expenses of the Underwriters
pursuant to the Underwriting Agreement, all of the costs of producing, printing,
mailing and otherwise distributing the Prospectus, as well as the underwriters'
discount as provided in the Underwriting Agreement.

     8.2  Conditions Precedent to Consummation of the IPO. As soon as
          -----------------------------------------------
practicable after the date of this Agreement, the parties hereto shall use their
reasonable best efforts to satisfy the following conditions to the consummation
of the IPO. The obligations of the parties to consummate the IPO shall be
conditioned on the satisfaction, or waiver by Odetics, of the following
conditions:

          (a)  The IPO Registration Statement shall have been declared effective
by the Securities and Exchange Commission, and there shall be no stop-order in
effect with respect thereto.

          (b)  The actions and filings with regard to state securities and blue
sky laws of each of the states of the United States (and any comparable laws
under any foreign jurisdictions) described in Section 8.1 shall have been taken
and, where applicable, have become effective or been accepted.

          (c)  The Iteris Common Stock to be issued in the IPO shall have been
accepted for listing on the Nasdaq National Market, on official notice of
issuance.

          (d)  Iteris shall have entered into the Underwriting Agreement and all
conditions to the obligations of Iteris and the underwriters shall have been
satisfied or waived.

          (e)  The Distribution shall have been consummated.

                                       13
<PAGE>

          (f)  No order, injunction or decree issued by any court or agency of
competent jurisdiction or other legal restraint or prohibition preventing the
consummation of the IPO or any of the other transactions contemplated by this
Agreement or any Ancillary Agreement shall be in effect.

          (g)  Such other actions as the parties hereto may, based upon the
advice of counsel, reasonably request to be taken prior to the Distribution and
the IPO in order to assure the successful completion of the Distribution and the
IPO and the other transactions contemplated by this Agreement shall have been
taken.

          (h)  This Agreement shall not have been terminated.

          (i)  A pricing committee of Iteris directors designated by the Board
of Directors of Iteris shall have determined that the terms of the IPO are
acceptable to Iteris.

                                  ARTICLE IX
                       MUTUAL RELEASES; INDEMNIFICATION

     9.1  Release of Pre-Closing Claims.
          -----------------------------
          (a)  Except as provided in Section 9.1(c), effective as of the
Distribution Date, Iteris does hereby, for itself and each of its affiliates,
successors and assigns, and all persons who at any time prior to the
Distribution Date have been shareholders, directors, officers, agents or
employees of Iteris (in each case, in their respective capacities as such),
remise, release and forever discharge each of Odetics and its Affiliates,
successors and assigns, and all persons who at any time prior to the
Distribution Date have been shareholders, directors, officers, agents or
employees of Odetics (in each case, in their respective capacities as such), and
their respective heirs, executors, administrators, successors and assigns, from
any and all Liabilities whatsoever, whether at law or in equity (including any
right of contribution), whether arising under any contract or agreement, by
operation of law or otherwise, existing or arising from any acts or events
occurring or failing to occur or alleged to have occurred or to have failed to
occur or any conditions existing or alleged to have existed on or before the
Distribution Date, including in connection with the transactions and all other
activities to implement the IPO and the Distribution.

          (b)  Except as provided in Section 9.1(c), effective as of the
Distribution Date, Odetics does hereby, for itself and its Affiliates,
successors and assigns, and all persons who at any time prior to the
Distribution Date have been shareholders, directors, officers, agents or
employees of Odetics (in each case, in their respective capacities as such),
remise, release and forever discharge Iteris, and its Affiliates, successors and
assigns, and all persons who at any time prior to the Distribution Date have
been shareholders, directors, officers, agents or employees of Iteris (in each
case, in their respective capacities as such), and their respective heirs,
executors, administrators, successors and assigns, from any and all Liabilities
whatsoever, whether at law or in equity (including any right of contribution),
whether arising under any contract or agreement, by operation of law or
otherwise, existing or arising from any acts or events occurring or failing to
occur or alleged to have occurred or to have failed to occur or any conditions
existing or alleged to have existed on or before the Distribution Date,
including in connection with the transactions and all other activities to
implement the IPO and the Distribution.

          (c)  Nothing contained in Section 9.1(a) or (b) shall impair any right
of any person to enforce this Agreement, any Ancillary Agreement or any
agreements, arrangements,

                                       14
<PAGE>

commitments or understandings that are specified herein or in the Schedules and
Exhibits hereto not to terminate as of the Distribution Date, in each case in
accordance with its terms. Nothing contained in Section 9.1(a) or (b) shall
release any person from:

               (i)   any liability provided in or resulting from any agreement
between Odetics and Iteris that is specified herein or the Schedules and
Exhibits hereto as not to terminate as of the Distribution Date, or any other
liability specified as not to terminate as of the Distribution Date;

               (ii)  any liability, contingent or otherwise, assumed,
     transferred, assigned or allocated to such person;

               (iii) any liability that the parties may have with respect to
indemnification or contribution pursuant to this Agreement for claims brought
against the parties by third Persons, which liability shall be governed by this
Article IX and, if applicable, the appropriate provisions of the Ancillary
Agreements.

          (d)  Iteris shall not make, any claim or demand, or commence any
action asserting any claim or demand, including any claim of contribution or any
indemnification, against Odetics, or any other person released pursuant to
Section 9.1(a), with respect to any Liabilities released pursuant to Section
9.1(a). Odetics shall not make any claim or demand, or commence any action
asserting any claim or demand, including any claim of contribution or any
indemnification, against Iteris or any other person released pursuant to Section
9.1(b), with respect to any liabilities released pursuant to Section 9.1(b).

          (e)  It is the intent of each of Odetics and Iteris by virtue of the
provisions of this Section 9.1 to provide for a full and complete release and
discharge of all liabilities existing or arising from all acts and events
occurring or failing to occur or alleged to have occurred or to have failed to
occur and all conditions existing or alleged to have existed on or before the
Distribution Date, between or among Iteris and its Affiliates on the one hand,
and Odetics and its Affiliates on the other hand (including any contractual
agreements or arrangements existing or alleged to exist between or among any
such persons on or before the Distribution Date), except as expressly set forth
in Section 9.1(c). At any time, at the request of any other party, each party
shall execute and deliver releases reflecting the provisions hereof.

     9.2  Indemnification by Iteris.  Except as provided in Section 9.4,
          -------------------------
Iteris shall indemnify, defend and hold harmless Odetics, and each of its
directors, officers and employees, and each of the heirs, executors, successors
and assigns of any of the foregoing (collectively, the "Odetics Indemnitees"),
from and against any and all Liabilities of the Odetics Indemnitees relating to,
arising out of or resulting from any of the following items:

          (a)  the failure of Iteris or any other person to pay, perform or
otherwise promptly discharge any Iteris Liabilities or Iteris Contract in
accordance with their respective terms, whether prior to or after the
Distribution Date or the date hereof;

          (b)  the Business, any Iteris Liability or any Iteris Contract;

          (c)  any breach by Iteris or its Affiliates of this Agreement or any
of the Ancillary Agreements; and

                                       15
<PAGE>

          (d)  any untrue statement or alleged untrue statement of a material
fact or omission or alleged omission to state a material fact required to be
stated therein or necessary to make the statements therein not misleading, with
respect to all information contained in any IPO Registration Statement or
Prospectus.

     9.3  Indemnification by Odetics.  Odetics shall indemnify, defend and hold
          --------------------------
harmless Iteris, and each of its directors, officers and employees, and each of
the heirs, executors, successors and assigns of any of the foregoing
(collectively, the "Iteris Indemnitees"), from and against any and all
Liabilities of the Iteris Indemnitees relating to, arising out of or resulting
from any of the following items:

          (a)  the failure of Odetics or any other person to pay, perform or
otherwise promptly discharge any liabilities of Odetics other than the Iteris
Liabilities whether prior to or after the Distribution Date or the date hereof;

          (b)  activities conducted by Odetics, excluding the Business, or any
Liability of Odetics other than the Iteris Liabilities;

          (c)  any breach by Odetics or any of its Affiliates of this Agreement
or any of the Ancillary Agreements; and

          (d)  any untrue statement or alleged untrue statement of a material
fact provided by Odetics to Iteris in writing for inclusion in the IPO
Registration Statement or Prospectus.

     9.4  Indemnification Obligations Net of Insurance Proceeds and Other
          ---------------------------------------------------------------
Amounts.
- -------

          (a)  The parties intend that any Liability subject to indemnification
or reimbursement pursuant to this Article IX will be net of Insurance Proceeds
that actually reduce the amount of the Liability. Accordingly, the amount which
any party (an "Indemnifying Party") is required to pay to any person entitled to
indemnification hereunder (an "Indemnitee") will be reduced by any Insurance
Proceeds theretofore actually recovered by or on behalf of the Indemnitee in
reduction of the related Liability. If an Indemnitee receives a payment (an
"Indemnity Payment") required by this Agreement from an Indemnifying Party in
respect of any liability and subsequently receives Insurance Proceeds, then the
Indemnitee will pay to the Indemnifying Party an amount equal to the excess of
the Indemnity Payment received over the amount of the Indemnity Payment that
would have been due if the insurance proceeds recovery had been received,
realized or recovered before the Indemnity Payment was made.

          (b)  An insurer who would otherwise be obligated to pay any claim
shall not be relieved of the responsibility with respect thereto or, solely by
virtue of the indemnification or the assumption of Liability provisions hereof,
have any subrogation rights with respect thereto, it being expressly understood
and agreed that no insurer or any other third party shall be entitled to a
benefit such insurer or other third party would not be entitled to receive in
the absence of the indemnification and assumption of Liability provisions
hereof.

     9.5  Procedures for Indemnification of Third Party Claims.
          ----------------------------------------------------

          (a)  If an Indemnitee shall receive notice or otherwise learn of the
assertion by any person other than the parties hereto (a "Third Party Claim")
with respect to which an

                                       16
<PAGE>

Indemnifying Party may be obligated to provide indemnification to such
Indemnitee pursuant to Section 9.2 or 9.3, or any other Section of this
Agreement or any Ancillary Agreement, such Indemnitee shall give such
Indemnifying Party written notice thereof within 20 days after becoming aware of
such Third Party Claim. Any such notice shall describe the Third Party Claim in
reasonable detail. Notwithstanding the foregoing, the failure of any Indemnitee
or other Person to give notice as provided in this Section 9.5(a) shall not
relieve the related Indemnifying Party of its obligations under this Article IX,
except to the extent that such Indemnifying Party is actually prejudiced by such
failure to give notice.

          (b)  An Indemnifying Party may elect to defend (and, unless the
Indemnifying Party has specified any reservations or exceptions, to seek to
settle or compromise), at such Indemnifying Party's own expense and by such
Indemnifying Party's own counsel, any Third Party Claim. Within 30 days after
the receipt of notice from an Indemnitee in accordance with Section 9.5(a), the
Indemnifying Party shall notify the Indemnitee of Iteris election whether the
Indemnifying Party will assume responsibility for defending such Third Party
Claim, which election shall specify any reservations or exceptions. After notice
from an Indemnifying Party to an Indemnitee of Iteris election to assume the
defense of a Third Party Claim, such Indemnitee shall have the right to employ
separate counsel and to participate in (but not control) the defense,
compromise, or settlement thereof, but the fees and expenses of such counsel
shall be the expense of such Indemnitee except as set forth in the next
sentence. In the event that the Indemnifying Party has elected to assume the
defense of the Third Party Claim but has specified, and continues to assert, any
reservations or exceptions in such notice, then, in any such case, the
reasonable fees and expenses of one separate counsel for all Indemnitees shall
be borne by the Indemnifying Party.

          (c)  If an Indemnifying Party elects not to assume responsibility for
defending a Third Party Claim, or fails to notify an Indemnitee of its election
as provided in Section 9.5(b), such Indemnitee may defend such Third Party Claim
at the cost and expense of the Indemnifying Party.

          (d)  Unless the Indemnifying Party has failed to assume the defense of
the Third Party Claim in accordance with the terms of this Agreement, no
Indemnitee may settle or compromise any Third Party Claim without the consent of
the Indemnifying Party.

          (e)  No Indemnifying Party shall consent to entry of any judgment or
enter into any settlement of the Third Party Claim without the consent of the
Indemnitee if the effect thereof is to permit any injunction, declaratory
judgment, other order or other nonmonetary relief to be entered, directly or
indirectly, against any Indemnitee.

          (f)  The provisions of this Section 9.5 shall not apply to taxes
(which are covered by the Tax Allocation Agreement).

                                   ARTICLE X
                 INTERIM OPERATIONS AND CERTAIN OTHER MATTERS

     10.1 Insurance Matters.
          -----------------
          (a)  Iteris agrees that it will reimburse Odetics for Iteris
proportionate share of premiums paid or accrued, from the date hereof until the
Distribution Date, in respect of Insurance Policies under which Iteris will
continue to have coverage following the date hereof. Odetics and Iteris agree to
cooperate in good faith to provide for an orderly transition of insurance
coverage from

                                       17
<PAGE>

the date hereof through the Distribution Date and for the treatment of any
Insurance Policies that will remain in effect following the Distribution Date on
a mutually agreeable basis. In no event shall Odetics, or any Odetics Indemnitee
have liability or obligation whatsoever to Iteris in the event that any
Insurance Policy or other contract or policy of insurance shall be terminated or
otherwise cease to be in effect for any reason, shall be unavailable or
inadequate to cover any liability of Iteris for any reason whatsoever or shall
not be renewed or extended beyond the current expiration date.

          (b)  (i)  Except as otherwise provided in any Ancillary Agreement, the
parties intend by this Agreement that Iteris and its Affiliates be
successors-in-interest to all rights that any may have as of the Distribution
Date as a subsidiary or Affiliate of Odetics prior to the Distribution Date
under any policy of insurance issued to Odetics by any insurance carrier or
under any agreements related to such policies executed and delivered prior to
the Closing Date, including any rights Iteris and its Affiliates may have, as an
insured or additional named insured, subsidiary or Affiliate to avail itself of
any such policy of insurance or any such agreements related to such policies as
in effect prior to the Closing Date. At the request of Iteris, Odetics shall
take all reasonable steps, including the execution and delivery of any
instruments, to effect the foregoing; provided however that Odetics shall not be
required to pay any amounts, waive any rights or incur any liabilities in
connection therewith.

               (ii)  Except as otherwise contemplated by any Ancillary
Agreement, after the Distribution Date, neither of Odetics or Iteris shall,
without the consent of the other, provide any such insurance carrier with a
release, or amend, modify or waive any rights under any such policy or
agreement, if such release, amendment, modification or waiver would adversely
affect any rights or potential rights of the other hereunder; provided, however,
that the foregoing shall not (A) preclude either from presenting any claim or
from exhausting any policy limit, (B) require either to pay any premium or other
amount or to incur any liability, or (C) require either to renew, extend or
continue any policy in force. Each of Iteris and Odetics will share such
information as is reasonably necessary in order to permit the other to manage
and conduct Iteris insurance matters in an orderly fashion.

          (c)  This Agreement shall not be considered as an attempted assignment
of any policy of insurance or as a contract of insurance and shall not be
construed to waive any right or remedy of either Odetics or Iteris in respect of
any insurance policy or any other contract or policy of insurance.

          (d)  Iteris does hereby, for itself and its Affiliates, agree that
neither Odetics nor any Odetics Indemnitee shall have any liability whatsoever
as a result of the insurance policies and practices of Odetics and its
Affiliates as in effect at any time prior to the Distribution Date, including as
a result of the level or scope of any such insurance, the creditworthiness of
any insurance carrier, the terms and conditions of any policy, the adequacy or
timeliness of any notice to any insurance carrier with respect to any claim or
potential claim or otherwise.

                                  ARTICLE XI
                                 MISCELLANEOUS

     11.1 Counterparts.  This Agreement may be executed in one or more
          ------------
counterparts, all of which shall be considered one and the same agreement, and
shall become effective when one or more counterparts have been signed by each of
the parties and delivered to the other party.

                                       18
<PAGE>

     11.2  Entire Agreement. This Agreement, and the Ancillary Agreements and
           ----------------
the Exhibits, and Schedules hereto and thereto contain the entire agreement
between the parties with respect to the subject matter hereof, supersede all
previous agreements, negotiations, discussions, writings, understandings,
commitments and conversations with respect to such subject matter and there are
no agreements or understandings between the parties other than those set forth
or referred to herein or therein.

     11.3  Governing Law.  This Agreement shall be governed by and construed and
           -------------
interpreted in accordance with the laws of the State of California.

     11.4  Assignability. This Agreement and each shall be binding upon and
           -------------

inure to the benefit of the parties hereto and thereto, respectively, and their
respective successors and assigns; provided, however, that no party hereto or
thereto may assign its respective rights or delegate its respective obligations
under this Agreement without the express prior written consent of the other
parties hereto or thereto. Notwithstanding the foregoing, Iteris may assign its
rights and obligations under this Agreement in the event of a merger to effect
the reincorporation of Iteris.

     11.5  Third Party Beneficiaries. Except for the indemnification rights
           -------------------------
under this Agreement of any Odetics Indemnitee or Iteris Indemnitee in their
respective capacities as such, (a) the provisions of this Agreement and each
Ancillary Agreement are solely for the benefit of the parties and are not
intended to confer upon any person except the parties any rights or remedies
hereunder, and (b) there are no third party beneficiaries of this Agreement or
any Ancillary Agreement and neither this Agreement nor any Ancillary Agreement
shall provide any third person with any remedy, claim, liability, reimbursement,
claim of action or other right in excess of those existing without reference to
this Agreement or any Ancillary Agreement.

     11.6  Notices. All notices, requests, claims and other communications
           -------
hereunder shall be in writing and shall be given or made (and shall be deemed to
have been duly given or made upon receipt) by delivery by hand, by reputable
overnight courier service, by facsimile transmission, or by registered or
certified mail (postage prepaid, return receipt requested) to the respective
parties at the addresses (or at such other address for a party as shall be
specified in a notice given in accordance with this Section 11.6) listed below:

           Odetics, Inc.
           1515 Manchester Avenue
           Anaheim, California 92802
           Attn:
           Facsimile: (714) 780-7246

           Iteris, Inc.
           1575 Manchester Avenue
           Anaheim, California 92802
           Attn: Jack Johnson
           Facsimile: (714) 780-7246

or to such other address as any party may, from time to time, designate in a
written notice given in a like manner. Notice given by hand shall be deemed
delivered when received by the recipient. Notice given by mail as set out above
shall be deemed delivered five (5) calendar days after the date the same is
mailed. Notice given by reputable overnight courier shall be deemed delivered on
the next

                                      19
<PAGE>

following business day after the same is sent. Notice given by facsimile
transmission shall be deemed delivered on the day of transmission provided
telephone confirmation of receipt is obtained promptly after completion of
transmission.

     11.7  Severability.  If any provision of this Agreement or the application
           ------------
thereof to any Person or circumstance is determined by a court of competent
jurisdiction to be invalid, void or unenforceable, the remaining provisions
hereof or thereof, or the application of such provision to Persons or
circumstances or in jurisdictions other than those as to which it has been held
invalid or unenforceable, shall remain in full force and effect and shall in no
way be affected, impaired or invalidated thereby, so long as the economic or
legal substance of the transactions contemplated hereby or thereby, as the case
may be, is not affected in any manner adverse to any party.  Upon such
determination, the parties shall negotiate in good faith in an effort to agree
upon such a suitable and equitable provision to effect the original intent of
the parties.

     11.8  Force Majeure. No party shall be deemed in default of this Agreement
           -------------
or any Ancillary Agreement to the extent that any delay or failure in the
performance of its obligations under this Agreement or any Ancillary Agreement
results from any cause beyond its reasonable control and without its fault or
negligence, such as acts of God, acts of civil or military authority, embargoes,
epidemics, war, riots, insurrections, fires, explosions, earthquakes, floods,
unusually severe weather conditions, labor problems or unavailability of parts,
or, in the case of computer systems, any failure in electrical or air
conditioning equipment. In the event of any such excused delay, the time for
performance shall be extended for a period equal to the time lost by reason of
the delay.

     11.9  Publicity.  Prior to the Distribution, each of Iteris and Odetics
           ---------
shall consult with the other prior to issuing any press releases or otherwise
making public statements with respect to the IPO, the Distribution or any of the
other transactions contemplated hereby and prior to making any filings with any
governmental authority with respect thereto.

     11.10  Headings. The article, section and paragraph headings contained in
            --------
this Agreement are for reference purposes only and shall not affect in any way
the meaning or interpretation of this Agreement.

     11.11  Waivers of Default.  Waiver by any party of any default by the other
            ------------------
party of any provision of this Agreement shall not be deemed a waiver by the
waiving party of any subsequent or other default, nor shall it prejudice the
rights of the other party.

     11.12  Specific Performance.  In the event of any actual or threatened
            --------------------
default in, or breach of, any of the terms, conditions and provisions of this
Agreement or any Ancillary Agreement, the party or parties who are or are to be
thereby aggrieved shall have the right to specific performance and injunctive or
other equitable relief of its rights under this Agreement or such Ancillary
Agreement, in addition to any and all other rights and remedies at law or in
equity, and all such rights and remedies shall be cumulative. The parties agree
that the remedies at law for any breach or threatened breach, including monetary
damages, are inadequate compensation for any loss and that any defense in any
action for specific performance that a remedy at law would be adequate is
waived. Any requirements for the securing or posting of any bond with such
remedy are waived.

                                      20
<PAGE>

     11.13  Amendments.
            ----------

            (a)  No provisions of this Agreement shall be deemed waived,
amended, supplemented or modified by any party, unless such waiver, amendment,
supplement or modification is in writing and signed by the authorized
representative of the party against whom it is sought to enforce such waiver,
amendment, supplement or modification.

     Without limiting the foregoing, the parties anticipate that, prior to the
Distribution Date, some or all of the Schedules to this Agreement may be amended
or supplemented and, in such event, such amended or supplemented Schedules shall
be attached hereto in lieu of the original Schedules.

                                      21
<PAGE>

     IN WITNESS WHEREOF, the parties have caused this Separation and
Distribution Agreement to be executed by their duly authorized representatives.

                              ODETICS, INC.



                              /s/ Gregory A. Miner
                              ----------------------------------
                              Gregory A. Miner
                              Chief Financial Officer



                              ITERIS, INC.



                              /s/ Jack Johnson
                              ----------------------------------
                              Jack Johnson
                              Chief Executive Officer

                                      22
<PAGE>

                                 SCHEDULE 1.19

                           CONTRACTS AND AGREEMENTS
                           RELATING TO THE BUSINESS
                      TO BE ASSIGNED BY ODETICS TO ITERIS


 .    Consultant Services Agreement between the City of Fontana and Odetics, Inc.
     dated November 24, 1997.

 .    Agreement between San Diego Association of Governments and Odetics, Inc.,
     as amended September 8, 1999.

 .    Engineering Services Contract between the State of Utah and Odetics, Inc.,
     as amended May 10, 1999.

                                      23
<PAGE>

                                   EXHIBIT A

                               License Agreement

                                      24

                          [Included as Exhibit 10.9]
<PAGE>

                                   EXHIBIT B

                                Promissory Note

                                      25

                           [Included as Exhibit 10.8]
<PAGE>

                                   EXHIBIT C

                              Services Agreement

                                      26

                          [Included as Exhibit 10.7]
<PAGE>

                                   EXHIBIT D

                           Tax Allocation Agreement


                                      27

                          [Included as Exhibit 10.6]

<PAGE>

                                                                    EXHIBIT 10.6

                           TAX ALLOCATION AGREEMENT

     THIS TAX ALLOCATION AGREEMENT (the "Agreement"), dated as of ___________
2000, is made by and between Odetics, Inc., a Delaware corporation ("Odetics")
on behalf of itself and each member of the Odetics Consolidated Group, and
Iteris, Inc., a Delaware corporation ("Iteris").

     WHEREAS, Odetics has determined to effect the Distribution pursuant to the
Distribution Agreement;

     WHEREAS, the IRS has issued an IRS Letter Ruling dated September 30, 1999
("IRS Ruling"), which states the tax treatment of the Distribution; and

     WHEREAS, the parties are entering into this Agreement to document the
method established for allocating the consolidated tax liability of the Odetics
Consolidated Group, the filing of Tax Returns along with the payment of Taxes
shown due and payable thereon, the retention and maintenance of relevant
records, the conduct of audits, examinations, and proceedings by appropriate
government entities which could result in a redetermination of Taxes, and the
cooperation of all parties with one another in order to fulfill their duties and
responsibilities under this Agreement and under the Code and other applicable
law.

     NOW, THEREFORE, in consideration of the mutual promises, covenants, and
conditions contained in this Agreement, and intending to be legally bound
hereby, the parties hereto agree as follows:

                                   ARTICLE I
                                  DEFINITIONS

     SECTION 1.1. DEFINITIONS. For the purposes of this Agreement, the following
terms shall have the following meanings (such meanings to be equally applicable
to both the singular and plural of the terms involved):

     ADJUSTMENT means any final change in the Tax Liability of a taxpayer.

     AGREEMENT means this Tax Allocation Agreement.

     ODETICS CONSOLIDATED GROUP means, as of any relevant date, Odetics and its
Subsidiaries, determined as of such date.

     CODE means the Internal Revenue Code of 1986, as amended, and the Treasury
Regulations promulgated thereunder.

     COMBINED RETURN shall mean all income tax returns which Odetics files on a
combined or unitary basis with respect to some or all of its Subsidiaries.

     DISTRIBUTION means the distribution of Iteris common stock to the
stockholders of Odetics pursuant to the Distribution Agreement.

                                       1
<PAGE>

     DISTRIBUTION AGREEMENT means the Separation and Distribution Agreement
between Odetics and Iteris dated as of December 31, 1999.

     EFFECTIVE DATE means the date on which the Distribution occurs.

     PERSON means any natural person, corporation, limited liability company,
business trust, joint venture, association, company, partnership or government,
or any agency or political subdivision thereof.

     POST-DISTRIBUTION PERIOD means any taxable period that begins after the
Effective Date.

     PRE-DISTRIBUTION PERIOD means any taxable period that ends on or before the
Effective Date.

     ITERIS GROUP means: (i) as of any relevant date after the Effective Date,
Iteris and its Subsidiaries determined as of such date; and (ii) as of any
relevant date on or before the Effective Date, Iteris and those businesses which
become part of Iteris or its Subsidiaries as contemplated by the Distribution
Agreement, whether or not such Persons or businesses were Subsidiaries of Iteris
before the Distribution.

     STRADDLE PERIOD means any taxable period with respect to a Tax Return, that
begins on or before the Effective Date and ends after the Effective Date.

     SUBSIDIARY means with respect to Odetics or Iteris, any Person of which
Odetics or Iteris, respectively, controls or owns, directly or indirectly, more
than 50% of the stock or other equity interest entitled to vote on the election
of members to the board of directors or similar governing body.

     TAXES means all federal, state, local and foreign gross or net income,
gross receipts, withholding, payroll, franchise, transfer, sales, use, value
added, estimated or other taxes of any kind whatsoever or similar charges and
assessments, such as customs, duties and the like, or other amounts paid in
respect thereof, including all interest, penalties and additions imposed with
respect to such amounts.

     TAX LIABILITY means the net amount of Taxes due and paid or payable for any
taxable period, determined after applying all tax credits and all applicable
carrybacks or carryovers for net operating losses, net capital losses, unused
general business tax credits, or any other Tax items arising from a prior or
subsequent taxable period, and all other relevant adjustments.

     TAX RETURNS means all reports, estimates, declarations of estimated tax,
information statements and returns relating to or required to be filed in
connection with any Taxes, including information returns or reports with respect
to backup withholding and other payments to third parties, and including returns
whereby Taxes are computed on a consolidated basis.

                                       2
<PAGE>

                                  ARTICLE II
                  FILING OF TAX RETURNS AND PAYMENT OF TAXES

     SECTION 2.1.  TAX RETURNS REQUIRED TO BE FILED PRIOR TO EFFECTIVE DATE.
Odetics shall prepare and file or cause to be filed when due all Combined
Returns and Tax Returns that relate to Odetics, any member of the Odetics
Consolidated Group and the Odetics Consolidated Group that are or were required
to be filed (after giving effect to any valid extension of time in which to make
such filings) prior to the Effective Date and shall pay or cause to be paid any
Tax Liability due with respect to such Combined Returns and Tax Returns.
Odetics and the Odetics Consolidated Group shall be liable for and indemnify
Iteris and the Iteris Group for all Taxes (including, without limitation, any
obligation to contribute to the payment of a tax determined on a consolidated,
combined or unitary basis with respect to a group of corporations that includes
or included Iteris and the Iteris Group, and Taxes resulting from the Iteris and
the Iteris Group ceasing to be a member of the Odetics Consolidated Group (i)
imposed on Odetics and the Odetics Consolidated Group (other than the Iteris
Group ) for any taxable year prior to the Effective Date and (ii) imposed on
Iteris and the Iteris Group or for which Iteris and the Iteris Group may
otherwise be liable for any taxable year or period that ends on or before the
Effective Date and, with respect to any Straddle Period, the portion of such
taxable year ending on and including the Effective Date.

     SECTION 2.2. TAX ALLOCATIONS AND RETURNS FOR PRE-DISTRIBUTION PERIODS.

     (a)  Odetics and Iteris agree that the Tax Liability of the Odetics
Consolidated Group for each year, determined in accordance with Regulation
Section 1.502-2, shall be apportioned among them in accordance with Code Section
1552(a)(1). For purposes of this Agreement, the Tax Liability of the Odetics
Consolidated Group shall include any liability for alternative minimum tax. In
applying the Code, the Tax Liability for a given tax year shall be apportioned
only among the members of the Odetics Consolidated Group with separate company
taxable income for that tax year. The Tax Liability will be allocated to these
profit members in the same ratio as each member's separate company taxable
income bears to the total of the separate company taxable incomes of all profit
members. No Tax Liability will be allocated to a member of the Odetics
Consolidated Group with a current year taxable loss. Further, no benefit will be
provided to a loss member for utilization of its net operating loss by another
member. For purposes of allocating alternative minimum tax, alternative minimum
taxable income amounts shall be substituted for taxable income amounts in this
calculation.

     (b)  Payment of the Tax Liability of the Odetics Consolidated Group for a
taxable period shall include the payment of estimated tax installments due for
such taxable period. Each Subsidiary shall pay to Odetics its share of each
payment within 30 days of receiving notice of such payment from Odetics, but in
no event later than the due date for each such payment. Any amounts paid by a
Subsidiary on account of a separate return or separate estimated tax payments
that are credited against the Tax Liability of the Odetics Consolidated Group
shall be included in determining the payments due from such Subsidiary. Any
overpayment of estimated tax should be refunded to the Subsidiaries in
accordance with their amounts paid toward such estimated tax.

     (c)  Odetics shall prepare or cause to be prepared, for Pre-Distribution
Periods, all (i) Combined Returns and (ii) Tax Returns required to be filed on a
separate return basis by any member of the Odetics Consolidated Group, in each
case, which Tax Returns are not required to be (after giving effect to any valid
extensions), and are not, filed on or prior to the Effective Date and, subject

                                       3
<PAGE>

to 2.2(a), shall pay or cause to be paid any Tax Liability due with respect to
such Tax Returns.

     SECTION 2.3. TAX RETURNS FOR POST-DISTRIBUTION PERIODS. Iteris shall (i)
prepare and file or cause to be prepared and filed all Tax Returns required to
be filed by any member of the Iteris Group for any Post-Distribution Period and
(ii) pay or cause to be paid any Tax Liability due with respect to such Tax
Returns.

     SECTION 2.4. TAX RETURNS FOR STRADDLE PERIOD. Odetics shall prepare and
file all Combined Returns and all Tax Returns of or which include any member of
the Iteris Group for a Straddle Period. Odetics shall pay or cause to be paid
and shall defend, indemnify and hold Odetics and members of the Iteris Group
harmless against the Tax Liabilities attributable to the affected member or
members of the Iteris Group for the portion of the Straddle Period ending on the
Effective Date and Iteris shall pay or cause to be paid and shall defend,
indemnify, and hold Odetics and members of the Odetics Consolidated Group
harmless against the Tax Liabilities attributable to the affected member or
members of the Iteris Group for the remainder of the Straddle Period beginning
with the day after the Effective Date.

                                  ARTICLE III
                TAX RETURN INFORMATION; AUDITS AND ADJUSTMENTS

     SECTION 3.1. TAX RETURN INFORMATION; MANNER OF FILING

     (a)  Iteris shall, and shall cause each appropriate member of the Iteris
Group to, provide Odetics with all information and other assistance reasonably
requested by Odetics to enable the members of the Odetics Consolidated Group to
prepare and file Tax Returns required to be filed by the Odetics Consolidated
Group pursuant to this Agreement.

     (b)  Odetics shall, and shall cause each appropriate member of the Odetics
Consolidated Group to, provide Iteris with all information and other assistance
reasonably requested by Iteris to enable the members of the Iteris Group to
prepare and file Tax Returns required to be filed by the Iteris Group pursuant
to this Agreement.

     (c)  Combined Returns and Tax Returns to be prepared and filed by Odetics
or any member of the Odetics Consolidated Group pursuant to this Agreement shall
be (in the absence of a controlling change in law, facts or circumstances)
prepared on a basis that is consistent with the IRS Ruling.

     SECTION 3.2. AUDITS AND ADJUSTMENTS

     (a)  Odetics shall have full control over and absolute discretion with
respect to all matters relating to any Tax Return required to be filed by
Odetics relating to Pre-Distribution Periods and Iteris shall have full control
and absolute discretion with respect to all Tax Returns required to be filed by
Iteris relating to Post-Distribution Periods.

     (b)  Each party agrees to cooperate with the other in the negotiation,
settlement, and litigation of or other proceeding regarding any liability for or
refund of Taxes of any member.

     (c)  Odetics will promptly notify Iteris in writing of any Adjustment
involving a change in the tax basis of any asset of Iteris, specifying the
nature of the change so that the Iteris Group will

                                       4
<PAGE>

be able to reflect the revised basis in its tax books and records for periods
beginning on or after the Effective Date.

                                  ARTICLE IV
                 RETENTION OF RECORDS; STATUTES OF LIMITATIONS

     SECTION 4.1. RETENTION OF RECORDS.  Odetics and Iteris agree to retain the
appropriate records which may affect the determination of the liability for
Taxes of any member of the Odetics Consolidated Group or the Iteris Group,
respectively, until such time as there has been a final resolution with respect
to such liability for Taxes. A party may satisfy its obligations under the
preceding sentence by allowing the other party to duplicate records at such
second party's expense.

     SECTION 4.2. STATUTE OF LIMITATIONS.  Odetics and Iteris will notify each
other in writing of any waivers or extensions of the applicable statute of
limitations that may affect the period for which any materials, records, or
documents must be retained.

                                   ARTICLE V
                          COVENANTS; INDEMNIFICATION

     SECTION 5.1. ITERIS AGREEMENTS. Iteris covenants and agrees that it will
not take any action, and it will cause each member of the Iteris Group to
refrain from taking any action which may be inconsistent with the tax treatment
of the Distribution as contemplated by the IRS Ruling (any such action is
referred to as an "Iteris Tainting Act"), unless (i) Iteris either (A) obtains a
ruling with respect to the Tainting Act from the IRS or other applicable tax
authority that is reasonably satisfactory to Odetics (except that neither Iteris
nor any member of the Iteris Group shall submit any such ruling request if
Odetics determines in good faith that filing such request might have a
materially adverse effect upon Odetics), or (B) obtains an unqualified opinion
of independent nationally recognized tax counsel acceptable to Odetics, on a
basis of assumed facts and representations consistent with the facts at the time
of such action, that such Tainting Act will not adversely affect the tax
treatment of the Distribution as contemplated in the IRS Ruling, or (ii) Odetics
consents in writing to such Tainting Act, which consent shall be granted or
withheld in the sole and absolute discretion of Odetics.

     Without limiting the foregoing, during the two-year period following the
Distribution, unless clause (i) or (ii) of the preceding paragraph is satisfied
with respect to the applicable action, Iteris will not (i) directly or through
any Subsidiary, redeem, purchase or otherwise reacquire any outstanding shares
of Iteris common stock other than through stock purchases meeting the
requirements of Revenue Procedure 96-30, (ii) liquidate or merge with or into
any other corporation, (iii) dispose of the assets of Iteris, except in the
ordinary course of business or otherwise in accordance with Section 355 of the
Code, (iv) discontinue or cause to be discontinued the active conduct of the
Iteris business, or (v) issue stock possessing, in the aggregate, 50% or more of
the combined voting power of all classes of stock of Iteris or 50% or more of
the total value of all classes of stock of Iteris.

     SECTION 5.2 NO INCONSISTENT PLAN OR INTENT. Iteris represents and warrants
that neither Iteris nor any of the members of the Iteris Group has any plan or
intent to take any action which is inconsistent with any factual statements or
representations in the IRS Ruling . Regardless of any change in circumstances,
Iteris covenants and agrees that Iteris will not take, and it will cause the
members of the Iteris Group to refrain from taking, any such inconsistent action
on or before the

                                       5
<PAGE>

second anniversary of the Distribution, other than as permitted in this
Article 5.

     SECTION 5.3. ITERIS INDEMNITY. Notwithstanding anything to the contrary in
this Agreement, Iteris shall be solely liable for, and shall indemnify and hold
harmless Odetics and its directors, officers, employees, agents and
representatives from any Taxes imposed on, or other amounts paid by them or
Odetics' stockholders resulting from an Iteris Tainting Act by Iteris or the
members of the Iteris Group, unless clause (i) or (ii) of Section 5.1 was
satisfied with respect to such Tainting Act.

     SECTION 5.4. EXCLUSION FROM INDEMNITY. Notwithstanding the provisions of
this Article 5, Iteris shall have no liability for, and shall not be obligated
to indemnify and hold harmless Odetics its directors, officers, employees,
agents and representatives from any Taxes imposed on, or other amounts paid by
them or Odetics' stockholders which result solely and directly from and then
only to the extent attributable to, (i) any errors or omissions in the factual
statements or representations made in the IRS Ruling relating to Odetics or
members of the Odetics Consolidated Group, excluding the Iteris Group, or (ii)
the taking, or the failure to take, by Odetics of any action which is
inconsistent with any factual statements or representations relating to Odetics
in the IRS Ruling (any error or omission in clause (ii) being referred to herein
as an "Odetics Tainting Act"). Iteris shall be relieved of its liability for, or
its obligation to indemnify hereunder only if, or to the extent that, Iteris
would have had no liability, or its liability would have been reduced, had no
Odetics Tainting Act occurred.

                                  ARTICLE VI
                                    GENERAL

     SECTION 6.1. EFFECTIVE DATE; TERMINATION OF PRIOR AGREEMENTS. This
Agreement shall be effective as of the Effective Date. Immediately prior to the
Effective Date, any written or oral agreement or any other arrangements relating
to the allocation of Taxes existing between Odetics and/or the Odetics
Consolidated Group on the one hand, and Iteris and/or the Iteris Group on the
other shall be terminated, and no such persons shall thereafter have any
liability or obligation (whether in respect of past or future Taxes) to any
other such persons under any prior tax agreement.

     SECTION 6.2. ADDITIONAL GROUP MEMBERS. If during a consolidated return
period, Odetics or any Subsidiary acquires or organizes another corporation that
is required to be included in the consolidated return, then such corporation
shall join in and be bound by this Agreement.

     SECTION 6.3. ASSIGNMENT. Neither of the parties may assign or delegate any
of its rights or duties under this Agreement without the prior written consent
of the other party; provided that Iteris may assign its rights and obligations
under this Agreement in the event of a sale of all or substantially all of its
assts or a merger in which Iteris is not the surviving entity. This Agreement
shall be binding upon, and shall inure to the benefit of, the parties hereto and
their respective successors and permitted assigns, by merger, acquisition of
assets or otherwise.

     SECTION 6.4. FURTHER ASSURANCES. Subject to the provisions hereof, the
parties hereto shall make, execute, acknowledge, and deliver such other
instruments and documents, and take all such other actions, as may be reasonably
required in order to effectuate the purposes of this Agreement and to consummate
the transactions contemplated hereby. Subject to the provisions hereof, each of
the parties shall, in connection with entering into this Agreement, performing
its

                                       6
<PAGE>

obligations hereunder and taking any and all actions relating hereto, comply
with all applicable laws, regulations, orders, and decrees, and promptly provide
the other parties with all such information as they may reasonably request in
order to be able to comply with the provisions of this Agreement.

     SECTION 6.5.  COUNTERPARTS. For the convenience of the parties, any number
of counterparts of this Agreement may be executed by the parties hereto, and
each such executed counterpart shall be, and shall be deemed to be, an original
instrument.

     SECTION 6.6.  NOTICES. All notices, requests, claims and other
communications hereunder shall be in writing and shall be given or made (and
shall be deemed to have been duly given or made upon receipt) by delivery by
hand, by reputable overnight courier service, by facsimile transmission, or by
registered or certified mail (postage prepaid, return receipt requested) to the
respective parties at the addresses (or at such other address for a party as
shall be specified in a notice given in accordance with this Section 6.5) listed
below:

                         Odetics, Inc.
                         1515 Manchester Avenue
                         Anaheim, California 92802
                         Attn:  Gregory Miner
                         Facsimile: (714) 780-7246

                         Iteris, Inc.
                         1575 Manchester Avenue
                         Anaheim, California 92802
                         Attn: Jack Johnson
                         Facsimile: (714) 780-7246

or to such other address as any party may, from time to time, designate in a
written notice given in a like manner. Notice given by hand shall be deemed
delivered when received by the recipient. Notice given by mail as set out above
shall be deemed delivered five (5) calendar days after the date the same is
mailed. Notice given by reputable overnight courier shall be deemed delivered on
the next following business day after the same is sent. Notice given by
facsimile transmission shall be deemed delivered on the day of transmission
provided telephone confirmation of receipt is obtained promptly after completion
of transmission.

     SECTION 6.7.  COSTS AND EXPENSES. Unless otherwise specifically provided
herein, each party agrees to pay its own costs and expenses resulting from the
fulfillment of its respective obligations hereunder.

     SECTION 6.8.  AMENDMENT. This Agreement may not be amended or modified
except by an instrument in writing signed by, or on behalf of, the parties.

     SECTION 6.9.  SUCCESSORS. This Agreement shall be binding upon and inure
solely to the benefit of the parties hereto and their respective present and
future Subsidiaries, and nothing herein, express or implied, is intended to or
shall confer upon any third parties any legal or equitable right, benefit or
remedy of any nature whatsoever under or by reason of this Agreement.

     SECTION 6.10. GOVERNING LAW: CONSENT TO JURISDICTION. This Agreement shall
be governed by and construed and interpreted in accordance with the laws of the
State of

                                       7
<PAGE>

California as to all matters.

     SECTION 6.11. SEVERABILITY. If any term or other provision of this
Agreement is invalid, illegal or incapable of being enforced by any law or
public policy, all other terms and provisions of this Agreement shall
nevertheless remain in full force and effect so long as the economic or legal
substance of the transactions contemplated hereby is not affected in any manner
materially adverse to any party. Upon such determination that any term or other
provision is invalid, illegal or incapable of being enforced, the parties hereto
shall negotiate in good faith to modify this Agreement so as to effect the
original intent of the parties as closely as possible in an acceptable manner in
order that the transactions contemplated hereby are consummated as originally
contemplated to the greatest extent possible.

                                       8
<PAGE>

     IN WITNESS WHEREOF, the undersigned have caused this Agreement to be duly
executed by their respective officers, each of whom is duly authorized, as of
the date first written above.

                              ODETICS, INC.


                              By: __________________________________________
                                  Gregory Miner
                                  Chief Financial Officer and Chief Operating
                                  Officer


                              ITERIS, INC.


                              By: __________________________________________
                                  Jack Johnson
                                  Chief Executive Officer

                                       9

<PAGE>

                                                                    EXHIBIT 10.7

                              SERVICES AGREEMENT

     This SERVICES AGREEMENT is made and entered into as of this ______ day of
__________, 2000 by and between ODETICS, INC., a Delaware corporation
("Odetics") and ITERIS, INC., a Delaware corporation ("Iteris").

                                   RECITALS

     WHEREAS, Odetics and Iteris have entered into a Separation and Distribution
Agreement pursuant to which Odetics will distribute all of its shares of Iteris
common stock to Odetics stockholders pursuant to a tax free spinoff under
Internal Revenue Code (S)355 (the "Distribution") and Iteris will issue
additional shares of its authorized but unissued common stock in a registered
and underwritten initial public offering (the "IPO"); and

     WHEREAS, Iteris desires Odetics to perform certain business, information
and facilities services on Iteris' behalf following the Distribution;

     NOW, THEREFORE, the parties hereto do hereby agree as follows:

     1.   Business Services. During the term of this Agreement, Odetics shall
provide to Iteris the services set forth in Exhibit A attached hereto (the
"Services") in substantially the same manner and to the same extent as currently
and heretofore provided.

     2.   PERFORMANCE OF SERVICES.

     2.1  Services to be provided by Odetics may, at Odetics's sole discretion,
be provided, in whole or in part, by affiliates of Odetics. Odetic's shall not
be obligated to acquire new or additional assets, or hire new or additional
employees, to perform the Services. In addition, Odetics may contract with one
or more third parties for the performance of all or any part of the Services
provided (i) the costs to Iteris for the Services to be provided by the third
party do not exceed the amounts that would have been charged by Odetics, (ii)
the level of service provided by the third party is at least substantially
equivalent to that provided by Odetics hereunder, and (iii) such third party is
reasonably acceptable to Iteris. It is currently contemplated that the Services
will generally continue to be provided by the organization that is providing
such Services as of the date hereof. Iteris agrees that all third parties
currently providing any Services are acceptable third parties to provide
Services.

     2.2  The Services to be provided by Odetics shall be provided to Iteris as
appropriate to reflect the organizational and operational structure of Iteris;
provided, however, that Odetics shall not be required to provide any Services to
the extent that the performance of such Services becomes more expensive for
Odetics as a result of an organizational or operations change by Iteris.

     2.3  Iteris shall provide to Odetics on a timely basis any and all
information which is necessary for Odetics to provide the Services. Iteris shall
be solely responsible for the timely delivery of such information, and the
accuracy and completeness thereof. Iteris shall have no right to obtain any
confidential or proprietary information of Odetics, and any such information so
obtained by Iteris shall be deemed to be confidential and treated in accordance
with the provisions of Section 7 hereof.

                                       1
<PAGE>

     3.   LIMITATION OF SERVICES.

     3.1  Odetics shall not be required to provide any Service in a volume or
quantity which substantially exceeds that provided currently, at the date of
this Agreement.

     3.2  Odetics shall not be required to perform any information system
services to the extent such services would result in the breach of any software
license or other applicable contract. If Odetics believes it is unable to
provide any information systems services pursuant to the foregoing, Odetics
shall promptly notify Iteris. If requested by Iteris, Odetics shall use
reasonable efforts to obtain the rights necessary to provide such information
system services, including obtaining any appropriate consents from third
parties. Iteris shall be responsible for all additional costs and expenses
incurred by Odetics in order to allow Odetics to provide such information system
services, provided that Iteris approves such expenses in advance.

     3.3  Odetics shall not be required to provide any Services to the extent
the performance of such Services becomes impractical as a result of a cause or
causes outside the reasonable control of Odetics or to the extent the
performance of such Services would require Odetics to violate any applicable
laws, rules or regulations.

     3.4  ODETICS MAKES NO REPRESENTATIONS OR WARRANTIES, EXPRESS OR IMPLIED,
AND ODETICS SPECIFICALLY DISCLAIMS ANY IMPLIED WARRANTIES OF MERCHANTABILITY AND
FITNESS FOR A PARTICULAR PURPOSE WITH RESPECT TO THE SERVICES TO BE PROVIDED
HEREUNDER.

     4.   FEES.

     4.1  Iteris shall pay to Odetics, as fees for the Services performed by
Odetics pursuant to this Agreement, the amounts set forth in Exhibit A. In
addition, Iteris shall reimburse Odetics for all direct third party costs
incurred by Odetics in connection with providing the Services, provided that
such third party costs have been approved in advance by Iteris.

     4.2  Odetics shall submit to Iteris, on a monthly basis, Odetics' invoice
for Services performed under this Agreement in the preceding month. Each invoice
shall be payable net thirty (30) days after the date of the invoice; however, in
the event that Iteris in good faith, questions any invoiced item, payment of
that item shall be made only after the satisfactory resolution of those
questions. Iteris shall pay a service charge of ____% per month for all overdue
amounts.

     5.   TERM.

     5.1  Unless terminated earlier as provided in this Section, this Agreement
shall terminate as of a date eighteen (18) months after the date of this
Agreement.

     5.2  Iteris may terminate any of the Services, in whole or in part, upon 30
days written notice to Odetics.

     5.3  This Agreement may be terminated at any time upon the mutual consent
of the parties.

                                       2
<PAGE>

     5.4  Either party may terminate this Agreement if the other party is in
material default under this Agreement and fails to correct such default within
60 days after receiving written notice of such default.

     5.5  The parties acknowledge that the purpose of this Agreement is to
provide the Services on an interim basis to permit Iteris to obtain alternative
sources for the Services. Iteris shall use its commercially reasonable best
efforts to obtain alternative sources for the Services as soon as practicable.

     6.   INDEMNIFICATION.

     6.1  Iteris shall indemnify and hold harmless Odetics, its affiliates, and
their officers, directors, employees, and agents from and against all claims,
liabilities, obligations, suits, causes of action, or expenses (including
reasonable attorneys fees) (collectively "Claims") claimed to have resulted,
directly or indirectly, from the performance of Services by Odetics, provided,
however, that Iteris shall not be required to indemnify or hold harmless any
indemnitee to the extent the Claims are caused by the gross negligence or
willful misconduct of such indemnitee.

     6.2  An indemnitee shall provide written notice to Iteris of any Claims
with respect to which it seeks indemnification, and Iteris shall assume the
defense of such Claims with counsel reasonably satisfactory to the indemnitee.
If such defense is assumed by Iteris with counsel so selected, Iteris will not
be subject to any liability for any settlement of such Claims made by an
indemnified party without Iteris' consent (such consent to not be unreasonably
withheld or delayed). No indemnified party will be subject to any liability for
any settlement of such Claims made by Iteris without such party's consent (which
consent is not to be unreasonably withheld), and such settlement shall include
an unconditional release of all indemnitees from all liability on such Claims.
If an indemnified party desires to retain separate counsel, such indemnified
party shall have the right to do so, but Iteris will not be obligated to pay the
fees and expenses of such separate counsel. The parties hereto agree to
cooperate fully with each other in connection with the defense, negotiation or
settlement of any legal proceeding, claim or demand and to engage in no action
that would result in or increase liability on the part of another party.

     6.3  The provisions of this Section 6 shall survive termination of the
Agreement.

     7.   CONFIDENTIALITY.

     7.1  In the course of performance of this Agreement, either party
("Receiving Party") may acquire information that other party ("Disclosing
Party") deems confidential, including trade secrets and unpublished technical
information and data to which the Disclosing Party (or companies affiliated with
the Disclosing Party) has proprietary rights. Confidential information shall
also include information of a third party which the Disclosing Party is under an
obligation to maintain in confidence. All such information is referred to
hereinafter as "Disclosed Information."

     7.2  The Receiving Party shall retain Disclosed Information in strict
confidence and shall not communicate it to others without the Disclosing Party's
prior written agreement. Notwithstanding the foregoing, Odetics shall be allowed
to disclose Disclosed Information of Iteris to third parties as necessary to
perform the Services, provided such third parties have undertaken
confidentiality obligations substantially similar to those set forth in this
Section 7.

                                       3
<PAGE>

     7.3  Nothing in this Agreement shall prevent the communication to others of
any Disclosed Information which the Receiving Party can show was known to it or
its representatives prior to its receipt hereunder, was lawfully received by the
Receiving Party and its representatives other than directly or indirectly from
the Disclosing Party or became public knowledge through no fault of the
Receiving Party.

     7.4  The provisions of this section 7 shall survive termination of this
Agreement for a period of three years.

     8.   MISCELLANEOUS.

     8.1  NOTICES. All notices, requests, claims and other communications
hereunder shall be in writing and shall be given or made (and shall be deemed to
have been duly given or made upon receipt) by delivery by hand, by reputable
overnight courier service, by facsimile transmission, or by registered or
certified mail (postage prepaid, return receipt requested) to the respective
parties at the addresses (or at such other address for a party as shall be
specified in a notice given in accordance with this Section 8.1) listed below:

          Odetics, Inc.
          1515 Manchester Avenue
          Anaheim, California   92802
          Attn:  Gregory Miner
          Facsimile:  (714) 780-7246

          Iteris, Inc.
          1575 Manchester Avenue
          Anaheim, California   92802
          Attn:  Jack Johnson
          Facsimile:  (714) 780-7246

or to such other address as any party may, from time to time, designate in a
written notice given in a like manner. Notice given by hand shall be deemed
delivered when received by the recipient. Notice given by mail as set out above
shall be deemed delivered five (5) calendar days after the date the same is
mailed. Notice given by reputable overnight courier shall be deemed delivered on
the next following business day after the same is sent. Notice given by
facsimile transmission shall be deemed delivered on the day of transmission
provided telephone confirmation of receipt is obtained promptly after completion
of transmission.

     8.2  FURTHER ASSURANCES. Subject to the provisions hereof, the parties
hereto shall make, execute, acknowledge, and deliver such other instruments and
documents, and take all such other actions, as may be reasonably required in
order to effectuate the purposes of this Agreement and to consummate the
transactions contemplated hereby. Subject to the provisions hereof, each of the
parties shall, in connection with entering into this Agreement, performing its
obligations hereunder and taking any and all actions relating hereto, comply
with all applicable laws, regulations, orders, and decrees, and promptly provide
the other parties with all such information as they may reasonably request in
order to be able to comply with the provisions of this Agreement.

     8.3  LIMITATION OF LIABILITY. In no event shall Odetics be liable to Iteris
for indirect, consequential, incidental or special damages, including but not
limited to lost profits, arising

                                       4
<PAGE>

from or relating to any breach of this Agreement, regardless of any notice of
such damages. Nothing in this Section is intended to limit or restrict the
indemnification rights or obligations of either party.

     8.4  ENTIRETY OF AGREEMENT. This Agreement shall constitute the entire
agreement between the parties hereto with respect to the subject matter hereof
and shall supersede all prior agreements and undertakings, both written and
oral, between the parties with respect to the subject matter hereof. This
Agreement may not be amended or modified except by an instrument in writing
signed by, or on behalf of, the parties.

     8.5  WAIVER.  The failure of either party in any one or more instances to
insist upon strict performance of any of the terms and conditions of this
Agreement shall not be construed as a waiver or relinquishment to any extent, of
the right to assert or rely upon any such terms or conditions on any future
occasion.

     8.6  DISCLAIMER OF AGENCY.  This Agreement shall not constitute either
party the legal representative or agent of the other, nor shall either party
have the right or authority to assume, create, or incur any third-party
liability or obligation of any kind, express or implied, against or in the name
of or on behalf of the other party except as expressly set forth in this
Agreement. The relationship of Odetics and Iteris shall be solely that of
contracting parties and no partnership joint venture or other arrangement of any
nature shall be deemed to be created hereby.

     8.7  SEVERABILITY. If any term or other provision of this Agreement is
invalid, illegal or incapable of being enforced by any law or public policy, all
other terms and provisions of this Agreement shall nevertheless remain in full
force and effect so long as the economic or legal substance of the transactions
contemplated hereby is not affected in any manner materially adverse to any
party. Upon such determination that any term or other provision is invalid,
illegal or incapable of being enforced, the parties hereto shall negotiate in
good faith to modify this Agreement so as to effect the original intent of the
parties as closely as possible in an acceptable manner in order that the
transactions contemplated hereby are consummated as originally contemplated to
the greatest extent possible.

     8.8  GOVERNING LAW.  This Agreement shall be governed by and construed and
interpreted in accordance with the laws of the State of California as to all
matters.

     8.9  ASSIGNMENT.  Neither of the parties may assign or delegate any of its
rights or duties under this Agreement without the prior written consent of the
other party; provided that Iteris may assign its rights and obligations under
this Agreement in the event of a sale of all or substantially all of its assets
or a merger in which Iteris is not the surviving entity. This Agreement shall be
binding upon, and shall inure to the benefit of, the parties hereto and their
respective successors and permitted assigns, by merger, acquisition of assets or
otherwise.

     This Agreement is executed by the parties as of the date indicated above.

ITERIS, INC.                             ODETICS, INC.

By:___________________________           By:_______________________________
Name:  Jack Johnson                      Name:  Gregory Miner
Title: Chief Executive Officer           Title: Chief Financial Officer and
                                         Chief Operating Officer

                                       5
<PAGE>

                                   EXHIBIT A

Description of Services                                  Calculation of Fees
- -----------------------                                  -------------------

                                       6

<PAGE>

                                                                    EXHIBIT 10.8

                                PROMISSORY NOTE

$_______                                                        _________ , 2000
                                                             Anaheim, California

          FOR VALUE RECEIVED, Iteris, Inc., a Delaware corporation ("Borrower"),
promises to pay to the order of Odetics, Inc., a Delaware corporation
("Lender"), at Anaheim, California, or at such other place as the holder of this
Note may from time to time designate in writing, the principal amount of
__________ dollars ($________), with interest on the principal amount from the
date of disbursement of the principal amount at the rate per annum set forth in
this Note, to be paid as set forth in this Note.

          The principal amount of this Note shall bear interest at the rate per
annum equal to Lender's cost of borrowing from Lender's principal bank during
the term of the Note, but shall not exceed the maximum rate of interest
permitted by applicable law.

          Borrower shall pay interest only for one year following the date of
this Note and shall subsequently pay the principal amount of this Note and
interest thereon in sixteen (16) equal quarterly installments at the end of each
calendar quarter commencing March 31, 2001 and continuing until all principal
and interest have been fully paid.  Each payment of principal shall be
accompanied by a payment equal to all interest accrued on the outstanding
principal amount of the Note.

          Borrower shall have the right to prepay the principal sum of this
Note, or any part thereof or interest thereon, at any time without penalty or
prepayment charge.

          Both principal and interest shall be paid by Borrower in lawful money
of the United States of America in cash or in the form of a cashier's or
certified check.

          If Borrower shall default in the timely making of any payment of
principal and/or interest due hereunder and if the same remains unpaid for
fifteen (15) days following receipt by Borrower of written notice of such
default Lender may declare the entire remaining indebtedness owing hereunder,
including any accrued interest, to become immediately due and payable.

          Upon the occurrence of any of the following, Lender may declare the
entire remaining indebtedness owing hereunder, including any accrued interest,
to become immediately due and payable: (i) the acquisition, directly or
indirectly, by any person or group (within the meaning of Section 13(d)(3) of
the Securities Exchange Act of 1934, as amended) of the beneficial ownership of
securities of the Borrower possessing more than fifty percent (50%) of the total
combined voting power of all outstanding securities of the Borrower; (ii) a
merger or consolidation in which the Borrower is not the surviving entity,
except for a transaction in which the holders of the outstanding voting
securities of the Borrower immediately prior to such merger or consolidation
hold, in the aggregate, securities possessing more than fifty percent (50%) of
the total combined voting power of all outstanding voting securities of the
surviving entity immediately after such merger or consolidation; (iii) a reverse
merger in which the Borrower is the surviving entity but in which securities
possessing more than fifty percent (50%) of the total combined voting power of
all outstanding voting securities of the Borrower are transferred to or acquired
by a person or persons different from the persons holding those securities
immediately prior to such merger; (iv) the sale, transfer or other disposition
(in one transaction or a series of related transactions) of all or

                                       1
<PAGE>

substantially all of the assets of the Borrower; or (v) the approval by the
stockholders of the Borrower of a plan or proposal for the liquidation or
dissolution of the Borrower.

          Notwithstanding anything to the contrary in this Note, the total
liability of Borrower for payments in the nature of interest shall not exceed
the limits applicable to this Note or imposed by the usury laws of the United
States of America or the State of California.  If any payment in the nature of
interest made by Borrower or received by the holder of this Note is determined
to be in excess of  any limit applicable to this Note imposed by such usury
laws, then the amount of such excess shall constitute and be considered a
payment of principal, not interest, and such amount shall be applied to reduce
the principal sum so that the total liability of the Borrower for payments in
the nature of interest does not exceed the applicable limits, if any, imposed by
such usury laws.  In the event and to the extent such excess amount of interest
exceeds the outstanding unpaid principal balance hereunder, any such excess
amount shall be immediately returned to Borrower by Lender.

          No delay or omission on the part of the Lender hereof in exercising
any right hereunder shall operate as a waiver of such right or of any other
right under this Note.

          Neither this Note nor any term hereof may be waived, amended,
discharged, modified, changed, or terminated orally, nor shall any waiver of any
provision hereof be effective except by an instrument in writing signed by
Borrower and Lender.

          Whenever used herein, the words "Borrower" and "Lender" shall be
deemed to include their respective successors and assigns.

          All notices, requests, claims and other communications hereunder shall
be in writing and shall be given or made (and shall be deemed to have been duly
given or made upon receipt) by delivery by hand, by reputable overnight courier
service, by facsimile transmission, or by registered or certified mail (postage
prepaid, return receipt requested) to the respective parties at the addresses
(or at such other address for a party as shall be specified in a notice given in
accordance with this provision) listed below:

                         Odetics, Inc.
                         1515 Manchester Avenue
                         Anaheim, California 92802
                         Attn:  Gregory Miner
                         Facsimile: (714) 780-7246

                         Iteris, Inc.
                         1575 Manchester Avenue
                         Anaheim, California 92802
                         Attn:  Jack Johnson
                         Facsimile: (714) 780-7246

or to such other address as any party may, from time to time, designate in a
written notice given in a like manner. Notice given by hand shall be deemed
delivered when received by the recipient. Notice given by mail as set out above
shall be deemed delivered five (5) calendar days after the date the same is
mailed. Notice given by reputable overnight courier shall be deemed delivered on
the next following business day after the same is sent. Notice given by
facsimile transmission shall be deemed

                                       2
<PAGE>

delivered on the day of transmission provided telephone confirmation of receipt
is obtained promptly after completion of transmission.

          There are no oral agreements between Lender and Borrower relating to
this Note.  If any provision of this Note is held to be invalid or
unenforceable, it shall not affect the validity and enforceability of the other
provisions of this Note.   This Note has been executed and delivered in the
State of California and is to be governed by and construed according to the laws
thereof.

          IN WITNESS WHEREOF, the Borrower has executed this Note as of the date
first hereinabove written.

                              Iteris, Inc.


                              By:  ___________________________
                                   Jack Johnson
                                   Chief Executive Officer

                                       3

<PAGE>
                                                                 EXHIBIT 10.9

                         TECHNOLOGY LICENSE AGREEMENT

     THIS TECHNOLOGY LICENSE AGREEMENT (the "Agreement") is made between Iteris,
Inc., a Delaware corporation ("Licensor"), and Odetics, Inc., a Delaware
corporation ("Licensee"), effective as of ______, 2000 (the "Effective Date").

                                   RECITALS

     WHEREAS, Licensor is engaged in the business of designing, developing and
marketing software based products and services to improve the safety and
efficiency of vehicle transportation, including, without limitation, video
sensor products and transportation management and traveler information systems
for the intelligent transportation systems industry ("Licensor's Business"); and

     WHEREAS, Licensor and Licensee have entered into a Separation and
Distribution Agreement (the "Separation and Distribution Agreement") pursuant to
which Licensee will spin-off its ownership interest in Licensor to Licensee's
stockholders (the "Spin-Off") and has transferred to Licensor all of the assets
relating to Licensor's Business, including, without limitation, all intellectual
property relating to Licensor's business; and

     WHEREAS, Licensee desires to obtain and Licensor desires to grant a
nonexclusive perpetual, worldwide, royalty-free license to use, manufacture,
publish, reproduce, publicly display, publicly perform, modify, enhance,
distribute, sell, sublicense, market and otherwise exploit by any means or
methods now or hereafter known, the intellectual property relating to Licensor's
Business, subject to the limitations set forth herein; and

     WHEREAS, the parties desire to confirm herein their license arrangements
and their respective ownership rights.

                                   AGREEMENT

     NOW THEREFORE, in consideration of the premises hereof, and the mutual
obligations herein, the parties hereto, intending to be legally bound, hereby
agree as follows:

     1.  License; Delivery.

         1.1 License. Subject to the terms and conditions of this Agreement,
             -------
Licensor hereby grants to Licensee, and Licensee accepts from Licensor, a
nonexclusive perpetual, worldwide, royalty-free license to use, manufacture,
publish, reproduce, publicly display, publicly perform, modify, enhance,
distribute, sell, sublicense, market and otherwise exploit by any means or
methods now or hereafter known, all domestic and foreign patents, copyrights,
software (in object code and source code form) mask works, trade secrets,
inventions and other proprietary rights relating to Licensor's Business that
were transferred to Licensor by Licensee pursuant to the Separation and
Distribution Agreement (the "Technology") and all manuals and other related
documentation then prepared by or on behalf of Licensor, under the trade marks
or trade names designated by Licensee, in its sole and absolute discretion. The
Technology specifically excludes all trademarks, service marks and tradenames of
Licensor.

         1.2 License Restrictions. Notwithstanding the license granted pursuant
             --------------------
to Section 1.1 of this Agreement, the license shall not include and Licensee
shall be prohibited from using the
<PAGE>

Technology in any manner whatsoever that is related to the Licensor's Business
or the intelligent transportation systems industry, either directly or
indirectly, without the express written consent of Licensor. The license shall
be nonexclusive and Licensor retains the right to use, publish, reproduce,
modify, enhance, distribute, sell, sublicense, market and otherwise exploit the
Technology in any manner whatsoever.

         1.3 On a periodic basis to be mutually agreed, Licensee shall report
its utilization of the Technology to Licensor.

     2.  Title and Ownership Rights. All right, title and interest in and to the
         --------------------------
Technology and all related documentation, and all copyrights, patents,
trademarks, service marks or other intellectual property or proprietary rights
related thereto, are and shall remain solely with Licensor.  Licensee
acknowledges that no such title to the Technology and related documentation is
granted under this Agreement, and that no such assertion shall be made by
Licensee.  Licensee is granted only licenses and rights to the Technology as set
forth herein.

     3.  Indemnification; Limitation of Liability.
         ----------------------------------------

         3.1 Indemnification. Licensee agrees to indemnify and hold Licensor,
             ---------------
its subsidiaries and affiliates, harmless against any claim, loss, liability or
damage arising out of any claim, whether now existing or hereinafter arising,
related to the use of the Technology by Licensee or to any enhancements,
modifications, updates or derivative works of the Technology developed by
Licensee, including, but not limited to, claims of product defect, whether or
not under warranty.

         3.2 Defense of Claims. The indemnifying party shall have the right to
             -----------------
have sole control of the defense of any such action and all negotiations for its
settlement or compromise; provided, however, that in the event the indemnifying
party notifies the party to be indemnified that it does not intend to conduct
such defense or the indemnifying party fails to conduct such defense on a
diligent and timely basis, the party to be indemnified may conduct the defense
with counsel of its choosing and shall be indemnified by the indemnifying party
for reasonable expenses related thereto. Neither party shall settle any such
claim without the prior written consent of the other, which will not be
unreasonably withheld. Each party agrees to cooperate with the other in the
defense of any claims.

         3.3 Limitation of Liability. EACH PARTY DISCLAIMS ALL WARRANTIES,
             -----------------------
EXPRESS OR IMPLIED, INCLUDING THE IMPLIED WARRANTIES OF MERCHANTABILITY AND
FITNESS FOR A PARTICULAR PURPOSE AND, WITH RESPECT TO THE TECHNOLOGY EXISTING AS
OF THE DATE HEREOF ONLY, ANY AND ALL WARRANTIES OF INFRINGEMENT OR TITLE.
NEITHER PARTY SHALL BE LIABLE TO THE OTHER FOR ANY INDIRECT, SPECIAL, INCIDENTAL
OR CONSEQUENTIAL DAMAGES ARISING OUT OF THIS AGREEMENT OR ANY PERFORMANCE
HEREUNDER, EVEN IF SUCH PARTY HAS ADVANCE NOTICE OF THE POSSIBILITY OF SUCH
DAMAGES.

     4.  Confidentiality.
         ---------------

         4.1 Protection of Confidential Information. Each party will refrain
             --------------------------------------
from using the other party's Confidential Information except as contemplated
herein, and from disclosing such Confidential Information to any third party
except to employees who participate directly in the

                                       2
<PAGE>

performance of the receiving party's obligations hereunder. Each party shall
protect and safeguard the Confidential Information of the other party using at
least the same degree of care such party uses to protect its own Confidential
Information of like importance. Each party agrees that all employees and
subcontractors to whom Confidential Information is disclosed will have signed a
confidentiality agreement in form and substance reasonably acceptable to the
disclosing party, copies of which will be provided upon request. Each party
shall be responsible for any breach of this provision by any of its officers,
directors, employees, representatives or agents.

         4.2  Confidential Information Defined.  For purposes of this Agreement,
              --------------------------------
Confidential Information includes any information and data which is, or should
be reasonably understood to be, confidential or proprietary to the disclosing
party, which may include, without limitation, proprietary technical, financial,
personnel, marketing, pricing, sales and/or commercial information with respect
to the products and services of the parties, as well as ideas, concepts,
designs, computer programs (including source code and object code) and
inventions and all record bearing media containing or disclosing such
Confidential Information which are disclosed pursuant to this Agreement.
Confidential Information does not include information (a) already rightfully
known to the receiving party without an obligation to maintain its
confidentiality, (b) independently developed by the receiving party without the
use of any Confidential Information, as evidenced by the written records of the
receiving party, (c) generally known to the public without restriction through
no fault of the receiving party, (d) obtained without restriction from any third
party rightfully empowered to disclose such information, or (e) required to be
disclosed by court order provided diligent efforts are undertaken to limit
disclosure.

         4.3  Irreparable Harm.  Each party agrees that the unauthorized use or
              ----------------
disclosure of the other party's Confidential Information may cause irreparable
injury to the party concerned. Accordingly, both parties agree that the remedy
at law for any breach of this Section may be inadequate and, in recognition
thereof, agree that the party suffering from the unauthorized use or disclosure
shall be entitled to injunctive relief to prevent any such breach or the threat
of such a breach.

     5.  Term and Termination.
         --------------------

         5.1  Term. The term of this Agreement shall commence on the date hereof
              ----
and continue until terminated by mutual agreement of the parties or by either
party as provided herein.

         5.2  Termination for Material Default.  Either party may terminate this
              --------------------------------
Agreement in the event of a breach by the other party of a material
representation, warranty or covenant made in this Agreement by the other party
and such breach is not cured within thirty (30) days after receipt by the other
party of written notice thereof.

         5.3 Effect of Termination. Upon termination of the Agreement, Licensee
             ---------------------
shall promptly return to Licensor any and all tangible forms of the Technology,
including source code and object code, if applicable, and all related
documentation. The provisions of Sections 2, 3, 4 and 5 of this Agreement shall
survive any termination.

                                       3
<PAGE>

6.  Miscellaneous.
    -------------

    6.1  NOTICES. All notices, requests, claims and other communications
hereunder shall be in writing and shall be given or made (and shall be deemed to
have been duly given or made upon receipt) by delivery by hand, by reputable
overnight courier service, by facsimile transmission, or by registered or
certified mail (postage prepaid, return receipt requested) to the respective
parties at the addresses (or at such other address for a party as shall be
specified in a notice given in accordance with this Section 7.1) listed below:

    If to Licensee:
    Odetics, Inc.
    1515 South Manchester Avenue
    Anaheim, California   92802
    Attn:  Chief Operating Officer
    Facsimile:  (714) 780-7857
    Telephone:  (714)  774-5000

    If to Licensor:
    Iteris, Inc.
    1515 South Manchester Avenue
    Anaheim, California   92802
    Attn:  Chief Executive Officer
    Facsimile:  (714) 780-7246
    Telephone:  (714) 758-0200

or to such other address or person as any party may, from time to time,
designate in a written notice given in a like manner. Notice given by hand shall
be deemed delivered when received by the recipient. Notice given by mail as set
out above shall be deemed delivered five (5) calendar days after the date the
same is mailed. Notice given by reputable overnight courier shall be deemed
delivered on the next following business day after the same is sent. Notice
given by facsimile transmission shall be deemed delivered on the day of
transmission provided telephone confirmation of receipt is obtained promptly
after completion of transmission.

    6.2  FURTHER ASSURANCES.  Subject to the provisions hereof, the parties
hereto shall make, execute, acknowledge, and deliver such other instruments and
documents, and take all such other actions, as may be reasonably required in
order to effectuate the purposes of this Agreement and to consummate the
transactions contemplated hereby. Subject to the provisions hereof, each of the
parties shall, in connection with entering into this Agreement, performing its
obligations hereunder and taking any and all actions relating hereto, comply
with all applicable laws, regulations, orders, and decrees, and promptly provide
the other parties with all such information as they may reasonably request in
order to be able to comply with the provisions of this Agreement.

    6.3  ENTIRETY OF AGREEMENT.  This Agreement shall constitute the entire
agreement between the parties hereto with respect to the subject matter hereof
and shall supersede all prior agreements and undertakings, both written and
oral, between the parties with respect to the subject matter hereof. This
Agreement may not be amended or modified except by an instrument in writing
signed by, or on behalf of, the parties.

                                       4
<PAGE>

    6.4  WAIVER.  The failure of either party in any one or more instances to
insist upon strict performance of any of the terms and conditions of this
Agreement shall not be construed as a waiver or relinquishment to any extent, of
the right to assert or rely upon any such terms or conditions on any future
occasion.

    6.5  DISCLAIMER OF AGENCY.  This Agreement shall not constitute either
party the legal representative or agent of the other, nor shall either party
have the right or authority to assume, create, or incur any third-party
liability or obligation of any kind, express or implied, against or in the name
of or on behalf of the other party except as expressly set forth in this
Agreement. The relationship of Licensee and Licensor shall be solely that of
contracting parties and no partnership joint venture or other arrangement of any
nature shall be deemed to be created hereby.

    6.6  SEVERABILITY. If any term or other provision of this Agreement is
invalid, illegal or incapable of being enforced by any law or public policy, all
other terms and provisions of this Agreement shall nevertheless remain in full
force and effect so long as the economic or legal substance of the transactions
contemplated hereby is not affected in any manner materially adverse to any
party. Upon such determination that any term or other provision is invalid,
illegal or incapable of being enforced, the parties hereto shall negotiate in
good faith to modify this Agreement so as to effect the original intent of the
parties as closely as possible in an acceptable manner in order that the
transactions contemplated hereby are consummated as originally contemplated to
the greatest extent possible.

    6.7  GOVERNING LAW.  This Agreement shall be governed by and construed and
interpreted in accordance with the laws of the State of California as to all
matters.

    6.8  ASSIGNMENT.  Neither of the parties may assign or delegate any of its
rights or duties under this Agreement without the prior written consent of the
other party; provided that either party or any of its sublicensees may assign
its rights and obligations under this Agreement in the event of a sale of all or
substantially all of its assets or a merger in which that party or sublicensee
is not the surviving entity. This Agreement shall be binding upon, and shall
inure to the benefit of, the parties hereto and their respective successors and
permitted assigns, by merger, acquisition of assets or otherwise.

    6.9  ATTORNEY'S FEES.  In the event of any legal proceeding between the
parties arising under this Agreement, the prevailing party in any action shall
be entitled to recover, in addition to any other relief awarded or grants, its
costs and expenses (including reasonable attorney's fees) incurred in any such
proceeding.

    6.10  DISPUTE RESOLUTION.  If the parties are unable, after good faith
negotiations, which each hereby covenants to undertake, to resolve any dispute
arising between them within fifteen (15) days after notice is given of such
dispute, then the dispute will be referred to arbitration (which the parties
agree is the exclusive means of resolving any such dispute) before one (1)
arbitrator in Orange County, California, or any other place mutually agreed upon
by the parties hereto, in accordance with the applicable rules then in effect of
the Judicial Arbitration and Mediation Service (or any other form of arbitration
mutually acceptable to the parties).  Such arbitrator shall be selected by the
mutual agreement of Licensor and Licensee, or if no mutual agreement can be
reached within ten (10) days after the termination of the fifteen day period
referenced above, then such arbitrator shall be appointed by the arbitration
service.  The civil discovery statutes of the State of California shall apply to
such arbitration.  The determination made

                                       5
<PAGE>

in accordance with the rules of JAMS (or such other form of arbitration as the
parties may mutually agree) shall be delivered in writing to the parties hereto
and shall be final, binding and conclusive on the parties hereto, and the amount
of the claim, if any, determined to exist shall be a valid claim and no further
remedy shall be available to either party with respect to such dispute and
judgment may be entered upon such decision in accordance with applicable law in
any court having jurisdiction thereof. The arbitration shall include a provision
that the losing party pay the fees and expenses of the arbitrator.

                                       6
<PAGE>

     This Agreement is executed by the parties as of the date indicated above.

LICENSOR:                                  LICENSEE:

ITERIS, INC.                               ODETICS, INC.

By:_____________________________           By:________________________________
Name:  Jack Johnson                        Name:  Gregory A. Miner
Title:  Chief Executive Officer            Title:  Chief Operating Officer

                                       7

<PAGE>

                                                                   EXHIBIT 10.11

                      Confidential Treatment Requested.
                     Confidential Portion Has Been Filed
                      Separately With The Securities and
                             Exchange Commission.

                    COOPERATIVE DEVELOPMENT AGREEMENT FOR A
                         LANE DEPARTURE DETECTION AND
                                WARNING SYSTEM

between

     Odetics, Inc.
     Intelligent Transportation Systems
     1515 S. Manchester Avenue
     Anaheim, CA 92802-2907
     USA

     - hereinafter called "Odetics"

and

     Daimler-Benz Aktlengesellschaft
     D210
     70546 Stuttgart
     Germany

     - hereinafter called "Daimler-Benz"

                                   Preamble

Odetics and Daimler-Benz ("Party" or "Parties") are currently developing
products for the purpose of providing lane departure detection and [*] by means
of image processing. Odetics is developing and producing a vision sensor product
to detect changes in images from road scenes (lane markings), to host Daimler-
Benz software, and to control vehicle warning devices based upon outputs from
the software. Daimler-Benz (through Daimler-Benz Research) is developing a
software product for processing image information from the sensor and other
inputs to determine driver conditions and provide outputs for use in operating
vehicle warning devices. Odetics and Daimler-Benz desire to integrate these
products in such a manner as to produce a single product that detects a
potentially threatening lane departure of a vehicle at an early stage and
provides a warning to the vehicle driver. The initial production version of the
System will exclude the [*] function which will be included in later production
versions as a product change or modification. Odetics and Daimler-Benz also
desire that the System be cost-oriented and suitable for use in vehicles, and
that such a System be manufactured and sold by Odetics for use in vehicles
manufactured by Daimler-Benz, or its affiliates, and after a period of
exclusivity for sale in vehicles manufactured by other Odetics Customers.

Therefore, the Parties agree as follows:

_________________
[*] Confidential Treatment Requested for Redacted Portion

                                       1
<PAGE>

                                   Article 1
                             Subject of Agreement

1.1  The subject of this Agreement is the joint development of a Lane Departure
     Detection and Warning System.

1.2  The design and development target for the System is described in the System
     Requirements Document attached to this Agreement as Annex 1; the
     interfaces between Odetics Operating System Software and Daimler-Benz
     Application Software are described in the Software Interface Control
     Document attached as Annex 2; the System cost targets including tooling and
     sample cost targets are described in the System Cost Goals Document
     attached as Annex 3; and the target development schedule is described in
     the System Schedule attached as Annex 4. These documents may only be
     changed by mutual agreement. A proposed change to any of these documents
     proposed by one Party must identify the impact (if any) to each of the
     other three documents and shall be submitted to the other Party for written
     concurrence. The current version of each of these documents, as evidenced
     by the authorized signature of each Party shall be the valid one in each
     case.

                                   Article 2
                                  Definitions

2.1  "Product", "Lane Tracking System", "Lane Departure Detection and Warning
     System", or "System" are equivalent names for the System specified in Annex
     1 of this Agreement. It is comprised of the physical assembly that includes
     the vision sensor, the imbedded Application Software and Operating System
     Software, the electronic module that provides the host processor and
     internal electronic circuits/devices that receive inputs and provide
     outputs, and the external interface connector with harness tail. It does
     not include external detectors providing vehicle inputs such as steering
     wheel angle or motion detectors.

2.2  "Application Software" shall mean software which operates in the selected
     host operating system environment that implements algorithms to determine
     lane departure and/or [*] conditions from vision sensor and other inputs
     and that provides warning outputs based upon these determined conditions,
     developed by Daimler-Benz prior to and during this Agreement and modified
     for use in the System under this Agreement.

2.3  "Operating System Software" shall mean software developed and provided by
     Odetics that operates the System processor and that hosts the Application
     Software.

_________________
[*] Confidential Treatment Requested for Redacted Portion

                                       2
<PAGE>

2.4  "Background Technology" shall mean drawings, data, know-how, inventions,
     software, and other technical information owned or possessed by a Party
     prior to the start of cooperation between the parties in December 1995. In
     the case of Odetics, Background Technology shall include, but not be
     limited to Odetics' vision sensor product to detect changes in images of
     highway lane markings, process detected images, and provide outputs to
     vehicle warning devices.

2.5  "Foreground Technology" shall means all drawings, data, know-how,
     inventions, software and other technical information developed subsequent
     to the start of cooperation between the parties in December 1995.

2.6  "Developed" shall mean developed, invented, authored, or created.

2.7  "Predecessor" as used in relation to Odetics in this agreement shall refer
     to the prior owner of Odetics' Background Technology, Rockwell
     International Corporation, and/or its business segments.

                                   Article 3
                              Performance of Work

3.1  The Parties shall carry out the development work in close collaboration
     with each other.

3.2  The responsibilities of the Parties for development work in accordance with
     Annex 1 through 4 shall be as follows:

     a.   Joint

          (1)  Finalize concept

          (2)  Determine final System level requirements and interfaces;
               document in systems requirements and interface documents

     b.   Odetics

          (1)  Develop hardware to host the Operating System Software and
               Application Software and to interface with the Mercedes vehicle

          (2)  Select and provide Operating System Software

          (3)  Module qualification

          (4)  Provide support to Daimler-Benz:

                                       3
<PAGE>

               (a)       For Application Software, provide Operating System
                         Software interface and integration support

               (b)       For System level integration and test, vehicle
                         qualification, and field testing, provide technical
                         support

     c.   Daimler-Benz

          (1)  Develop and provide an algorithm for determining [*] and lane
               departure warning from sensor and other inputs and for providing
               warning outputs. Provide to Odetics the source code,
               documentation, and object code of Application Software
               incorporating algorithm.

          (2)  Provide integration and test of System in Mercedes-Benz motor
               vehicles

          (3)  Vehicle qualification in Mercedes-Benz vehicles

          (4)  Field testing in Mercedes-Benz vehicles

          (5)  Provide support to Odetics:

               (a)       For Operating System Software, provide software
                         interface requirements and Application Software
                         integration support

3.3  The development results which have to be generated by Odetics shall be
     presented at the premises of Daimler-Benz in Stuttgart/Germany.

3.4  The Parties shall exchange any information and provide any technical
     support required by the other Party to carry out the work. In addition, the
     Parties shall keep each other mutually informed with regard to the results
     of development carried out.

3.5  The contact persons are:

     Odetics

     Project/Technical   Francis G. Memole, Product Manager, Vision Products
                         Intelligent Transportation Systems
                         1515 S. Manchester Avenue
                         Anaheim, CA 92802-2907
                         Telephone (714) 780-7265
                         Facsimile (714) 780-7246

_________________
[*] Confidential Treatment Requested for Redacted Portion

                                       4
<PAGE>

Contract            Dan Gilliam, Principal Contracts Administrator
                    Intelligent Transportation Systems
                    1515 S. Manchester Avenue
                    Anaheim, CA 92802-2907
                    Telephone    (714) 780-7259
                    Facsimile    (714) 780-7246

Daimler-Benz

Project/Technical   Heinz Rieker
                    D210
                    D-70546 Stuttgart
                    Germany
                    Telephone    49-711-17-58339
                    Facsimile    49-711-17-34081

Contract            Peter Ebel
                    D210
                    D-70546 Stuttgart
                    Germany
                    Telephone    49-711-17-57755
                    Facsimile    49-711-17-34081

Purchasing          Oliver Dajeng
                    MEN 22
                    D-76742 Worth
                    Germany
                    Telephone    49-7271-71-4025
                    Telefax      49-7271-71-4984

                                   Article 4
                                     Dates

The dates agreed for the performance of development work, including the
completion date and the deadlines for the individual development stages
(milestones), are attached to this Agreement as Annex 4. This schedule shall be
updated by the Parties by mutual agreement in accordance with the procedure in
Article 1.

                                       5

<PAGE>

                                   Article 5
                           Responsibility for Costs

5.1  Except as specified in Articles 5.2 and 5.3, each Party shall bear all the
     costs and expenses that it incurs in connection with responsibilities
     listed in Article 3.2 above. Neither Party shall be liable for these costs
     incurred by the other.

5.2  Odetics Costs Payable by Daimler-Benz

     a.   Odetics and Daimler-Benz shall enter into separate contractual
          agreements or purchase orders for procurement of the following items
          by Daimler-Benz from Odetics in accordance with the mutually agreed
          prices, schedule, terms and conditions stated in the separate
          agreements or purchase orders. Target prices for these items shall be
          as identified in Annex 3, System Cost Goals Document.

          (1)  System(s) to be used for vehicle qualification

          (2)  Hardware and software tooling for prototype systems development
               to be used for vehicle qualification and field testing

          (3)  Support equipment required for integration and field testing

          (4)  Tooling for initial production quantities for each Mercedes
               vehicle platform

     b.   Both, Odetics and Daimler-Benz pay for their own design costs (Letter
          of Intend from 31.01.1996).

                                       6
<PAGE>

5.3  Daimler-Benz Costs Payable by Odetics

     Odetics will provide up to 20 C-samples for the purpose of Daimler-Benz
     customer field testing. (Exact quantity of C-samples to be provided by
     Odetics for this purpose is to be mutually agreed prior to assembly and
     delivery.)

                                       7
<PAGE>

                                   Article 6
                         Relationship Between Parties

Except as otherwise provided in this Agreement and to the maximum extent
permitted by law, Odetics and Daimler-Benz agree to work exclusively with each
other for the specific tasks necessary to develop the System in accordance with
Annexes 1 through 4, to encourage the open exchange and protection of commercial
and proprietary technical information, and to avoid diluting either Party's
capabilities and efforts.

Nothing herein shall be deemed to restrict either Party from offering to sell or
selling to any other party any of its standard products or services, even though
such items or services may be contemplated by this Agreement.

This Agreement shall relate only. to activity performed in connection with the
System and to no other effort undertaken by the Parties jointly or separately.
It shall not constitute, create, give effect to or otherwise be construed as
a joint venture, pooling arrangement, partnership or formal business
organization of any kind. The Parties shall be deemed to be independent
contractors and the employees of one shall not be deemed to be employees or
agents of the other. Nothing in this Agreement shall be construed as providing
for the sharing of profits or losses arising out of the efforts of either or
both of the Parties.

                                   Article 7
                                    Secrecy

7.1  During the term of this Agreement and after its termination, the Parties
     shall not utilize or disclose to third parties any business or industrial
     secrets of the other Party which were confided to them or of which they
     gained knowledge on occasion of the cooperation.

7.2  Any technical information, in particular intentions, experience, findings
     or designs to which the Parties gain access or which they receive within
     the framework of the cooperation under this Agreement, shall be used within
     the framework of the cooperation only, and shall be treated as confidential
     and shall not be disclosed to third parties for a period of three years
     after the termination of this Agreement. The rights of the Parties
     contained in the provisions of Art. 8 are not affected hereby. Affiliated
     companies of DB as well as companies reproducing products of DB with its
     consent are not considered to be third parties provided that such companies
     will enter into similar confidentiality obligations.

7.3  The secrecy obligation does not apply to information which can be proved

     a)   to have been know to the receiving Party prior to the cooperation
          under this Agreement,

                                       8
<PAGE>

     b)   to have been handed over to the receiving Party legitimately by third
          parties,

     c)   to have already been publicly known when the cooperation under this
          Agreement was started or to have become publicly known subsequently
          without any violation of the obligations under this Agreement,

     d)   by the receiving Party to have been developed independently of
          confidential information received from the other Party.

7.4  The Parties shall impose the same obligations on their employees or any
     eventual subcontractors who obtain knowledge of confidential information as
     far as legally possible even for the time after the termination of
     employment.

                                   Article 8
              Results of R & D Work, Intellectual Property Rights

The following provisions shall apply to the rights and obligations of the
Parties with respect to the results of the development work:

8.1  Know-how
     --------

     (1)  Know-how acquired during the development work by one or both Parties
          is available to both Parties free of charge for all purposes, even for
          purposes outside the scope of this Contract.

     (2)  Know-how which one of the Parties has acquired outside this
          cooperation shall be available to the other Party free of charge if
          the know-how is utilized in the results of the development work and if
          the know-how is required to utilize the results of the development
          work.

8.2  Inventions
     ----------

     (1)  If inventions made in the course of the development work under this
          Agreement can give rise to patents, then that Party whose employees
          produced the invention is the owner and is entitled to register the
          patent. The Parties to the Contract shall inform each other of patent
          applications which are submitted.

     (2)  If employees of both Parties jointly make inventions resulting from
          the development work under this Agreement, then the Parties are joint
          owners, and it shall be separately agreed on a case by case basis by
          which of them and where any patent applications shall be made, who
          shall bear the costs of them and who has which rights. Unless
          otherwise agreed, any license to third parties is granted jointly; the
          Parties shall agree on the joint licensing case by case.

                                       9
<PAGE>

          In the case of joint inventions or joint proprietary rights, each
          Party is entitled at any time to relinquish its notional share thereof
          in favor of the other Party. Rights of use, especially rights of use
          already accrued to it, shall however be retained by the relinquishing
          Party. The relinquishing Party shall take all timely precautions and
          measures to enable the other Party to protect its interests.

     (3)  Each Party shall grant to the other Party unlimited, non-exclusive
          rights to use its inventions and proprietary rights resulting from the
          development work under this Agreement

          -    free of charge in the area of the System,

          -    against reasonable conditions in other cases.

          Furthermore, each Party receives rights of use against reasonable
          conditions, to inventions or proprietary rights of the other Party
          which have arisen outside the scope of this Agreement and are
          necessary for the exploitation of the results of the development work.

     8.3  Copyrights
          ----------

          The provisions contained in Art. 8.2 apply mutatis mutandis to results
          protected by copyright (e.g. software).

     8.4  If DB is granted rights of use under Art. 8, such rights shall include
          (only for use in vehicles manufactured by Daimler-Benz or its
          affiliates)the utilization by affiliated companies of DB as well as
          those companies which manufacture products of DB with its consent.

     8.5  In the case of any license fees to be paid under Art. 8, the Parties
          shall accordingly take into account the contribution made to the
          development by the Party who is licensee.

                                   Article 9
                                  Deliveries

9.1  If Daimler-Benz decides by July 31, 1998 to use the system as a optional
     equipment on Actros series production trucks, Odetics undertakes until July
     1, 2000 to not supply without prior approval from Daimler-Benz to any third
     party any product for installation in series production which contains
     wholly or in part any results of the development work carried out under
     this Agreement. Odetics shall have the right to work with third parties
     including OEMs other than Daimler-Benz or its affiliates to develop or test
     (before July

                                      10
<PAGE>

     1, 2000) or produce (after July 1, 2000) systems incorporating the results
     of the development work (including the Application Software) for sale and
     delivery in series production to these third parties.

9.2  Daimler-Benz undertakes to procure its total demand of the System from
     Odetics within the period of time stipulated under 9.1, provided that
     Odetics is able to supply at competitive conditions in respect of quality,
     price and delivery dates. With respect to such conditions reference is made
     to Annex 3.

9.3  If the procurement obligation laid down in 9.2 ceases to apply, Odetics
     shall enable Daimler-Benz to procure the system from third parties, as far
     as Odetics is legally able to do so.

9.4  Odetics shall pay Daimler-Benz a royalty for use of the Daimler-Benz
     Application Software in the amount of three percent (3%) of the net sales
     price for each System, or portion thereof, sold to a third party for the
     purpose of sale in vehicles of OEMs other than Daimler-Benz or its
     affiliates in the period between July 1, 1999 and July 1, 2002. Thereafter,
     sales of Systems to third parties shall be royalty-free. Net sales price
     will not include shipping costs, sales and excise taxes, export duties or
     fees, sales commissions, or the cost of parts purchased from Odetics. Such
     royalties will be payable semi-annually on or before thirty (30) days after
     June 30 and December 31.

                                  Article 10
                                   Liability

10.1 The Parties to this Agreement shall be liable vis-a-vis each other only in
     case of intent and gross negligence. Any liability for indirect or
     consequential damages shall be excluded.

10.2 The liability limitations contained in Art. 10.1 do not apply in case
     of violation of major contractual obligations.

                                  Article 11
                               Term of Agreement

11.1 This Agreement shall come into effect on December 1, 1995, and remains in
     force until terminated upon the earliest of the conditions of termination
     listed in Article 11.2. The provisions contained in Articles 6, 7, 8 and 9
     remain in effect even after the termination of this Agreement.

11.2 Conditions of Termination

                                       11
<PAGE>

     a.   Completion of work in accordance with the schedule provided as Annex 4
          as amended by mutual agreement;

                                       12
<PAGE>

     b.   Mutual agreement of the Parties;

     c.   Upon ninety (90) days written notice by either Party to the other
          of its intent to terminate for its convenience provided over such 90
          day period that the terminating Party continues performance in
          compliance with this Agreement and further provided at the end of such
          90 day period the terminating Party grants to the other Party, free
          of charge or royalty, full and unfettered rights to all intellectual
          property addressed in Article 8 whether independently or jointly
          developed as part of this Agreement or developed outside this
          Agreement but necessary for exploitation of the results of this
          development work;

     d.   Upon the inability of the Parties, negotiating in good faith and
          within a reasonable time period, to agree upon changes to Annex 1,
          System Requirements Document, Annex 2, System Interface Document,
          Annex 3, System Cost Goals Document, or Annex 4, Schedule. If
          agreement has not been reached within ninety (90) days from the
          initiation of negotiations or such additional time as may be mutually
          agreed upon, it will be deemed that the Parties were unable in good
          faith to reach agreement; or,

     e.   Upon notice in writing by one Party to the other if:

          (1)  the other Party fails to perform or observe any term of this
               Agreement and, in the case of a remedial breach, fails to remedy
               such breach within fifteen (15) days of receipt of notification
               requiring it to do so;

          (2)  the other Party ceases to carry on its business for more than 30
               consecutive days (other than during annual holidays); or

          (3)  any action, application or proceeding is taken in respect to the
               other Party for (a) a voluntary arrangement or composition or
               reconstruction of its debts; (b) the presentation of an
               administrative petition; (c) its winding up or dissolution; (d)
               the appointment of a liquidator, trustee, receiver,
               administrative receiver or similar officer; (e) a petition for a
               bankruptcy order or an application for a voluntary arrangement;
               or (1) any similar action, application or proceeding in any
               jurisdiction to which it is subject.

                                  Article 12
                           Miscellaneous Provisions

12.1 This Agreement shall not be amended or modified, nor shall any waiver of
     any right hereunder be effective unless set forth in a document executed by
     duly authorized representatives of both Parties. The failure of a Party to
     insist on strict performance of

                                       13
<PAGE>

     any term, covenant or condition herein contained shall not be deemed to be
     a waiver of such term, covenant or condition or of any subsequent breach
     of the same.

12.2 Should any one or several of the provisions of this Agreement be or become
     invalid, illegal, unenforceable, or in conflict with any law this shall not
     affect the validity of the other provisions. The Parties agree to replace
     the legally invalid provision, if possible, by an effective provision whose
     economic effect is as similar as possible to the original provision, and
     the Parties agree that this new provision shall be deemed to have been
     agreed upon from the time when the original provision became invalid.

12.3 This Agreement shall be interpreted and enforced in accordance with the
     laws of the country of Germany, but specifically excluding the provisions
     of the 1980 U.N. Convention on Contracts for the International Sale of
     Goods. Each Party's obligations hereunder shall be subject to the export
     control regulations of the United States and Germany and each Party agrees
     not export any item resulting from this Agreement for ultimate delivery to
     those areas to which delivery would be forbidden if directly exported from
     the United States and/or Germany.

12.4 This Agreement is based on mutual trust and confidence. The Parties to this
     agreement shall try to settle any disputes amicably through their
     management representatives. The managers of the signatory Parties to the
     Agreement shall first meet in person and make a good faith attempt to
     resolve any such dispute. If after such good faith attempt, the managers
     cannot otherwise settle or resolve the claim or controversy, the senior
     management representatives of each Party shall meet in person and make a
     good faith attempt to resolve or settle the matter.

     In the event that the dispute cannot otherwise be settled by the managers
     or senior management of the Parties good faith attempt, the Parties agree
     to submit the dispute for resolution by independent binding arbitration.
     The arbitration shall take place in Stuttgart, Germany in accordance with
     the arbitration rules of the International Chamber of Commerce. All
     information relating to or disclosed by any Party in connection with the
     arbitration of any dispute relating to this Agreement shall be treated by
     the Parties and the arbitration panel as Confidential.

12.5 Neither this Agreement nor any interest herein may be assigned, in whole or
     in part, by either Party hereto without the prior written consent of the
     other Party hereto, except that without securing such prior consent, either
     Party hereto shall have the right to assign this Agreement to any successor
     or to such Party by way of merger or consolidation or the acquisition
     of substantially all of the business and assets of such Party relating to
     the subject matter of this Agreement, provided that such successor shall
     expressly assume all of the obligations and liabilities of such Party under
     this Agreement, and provided further, that such Party shall remain liable
     and responsible to the other Party hereto for the performance and
     observance of all such obligations.

                                       14
<PAGE>

12.6 Any news release, public announcement, advertisement or publicity proposed
     to be released by either Party concerning the activities of the other Party
     in connection with this Agreement shall be subject to the approval of the
     other Party prior to release.

12.7 This Agreement, including Annexes 1 through 4, constitutes the entire
     understanding and agreement of and between the Parties with respect to the
     subject matter hereof and supersedes all prior representations and
     agreements. It shall not be varied by any oral agreements or
     representations or otherwise except by an instrument in writing of
     subsequent date hereto duly executed by authorized representatives of the
     Parties. The section and paragraph headings herein are for convenience only
     and shall not limit in any way the scope of any provision of this
     Agreement

IN WITNESS, WHEREOF, the Parties hereto have executed this Agreement in
duplicate as of the date herein above indicated.

Daimler-Benz Aktlengesellschaft              Odetics, Inc.

By:    /s/ Marwitz                           By:      /s/ Jack Johnson
       --------------------------                   --------------------------

Name:    Marwitz                             Name:  Jack Johnson
       --------------------------                   --------------------------

Title:   Direktor Entwicklung                Title: President, ITS Division
       --------------------------                   --------------------------

Date:    22.07.1998                          Date:  June 1, 1998
       --------------------------                   --------------------------


By:    /s/ Czaja
       --------------------------

Name:    Czaja
       --------------------------

Title:   Direktor Einkauf
       --------------------------

Date:    22.07.1998
       --------------------------

<PAGE>

                                                                   EXHIBIT 10.17



                                  ITERIS,INC.


                           SUBORDINATED CONVERTIBLE
                            NOTE PURCHASE AGREEMENT

                                January 25, 2000
<PAGE>

                                 ITERIS, INC.

               SUBORDINATED CONVERTIBLE NOTE PURCHASE AGREEMENT

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

                                   RECITALS

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

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

                                   AGREEMENT

                                  SECTION 1.
                        AUTHORIZATION AND SALE OF NOTE

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

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

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

                                  Section 2.
                            CLOSING DATE & DELIVERY

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

                                       1
<PAGE>

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

                                  Section 3.
                 REPRESENTATIONS AND WARRANTIES OF THE COMPANY

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

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

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

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

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

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

                                       2
<PAGE>

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

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

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

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

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

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

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

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

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

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

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

                                       3
<PAGE>

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

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

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

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

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

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

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

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

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

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

                                       4
<PAGE>

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

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

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

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

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

                                       5
<PAGE>

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

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

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

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

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

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

                                       6
<PAGE>

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

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

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

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

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

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

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

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

                                       7
<PAGE>

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

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

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

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

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

                                       8
<PAGE>

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

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

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

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

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

                                  Section 4.
                REPRESENTATIONS AND WARRANTIES OF THE PURCHASER

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

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

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

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

                                       9
<PAGE>

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

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

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

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

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

                                       10
<PAGE>

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

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

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

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

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

                                  Section 5.
                    CONDITIONS TO CLOSING OF THE PURCHASER

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

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

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

                                       11
<PAGE>

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

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

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

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

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

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

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

                                  Section 6.
                       CONDITIONS TO CLOSING OF COMPANY

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

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

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

                                       12
<PAGE>

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

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

                                  Section 7.
            AFFIRMATIVE COVENANTS OF THE COMPANY AND THE PURCHASER

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

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

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

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

                                       13
<PAGE>

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

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

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

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

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

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

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

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

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

                                       14
<PAGE>

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

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

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

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

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

                                       15
<PAGE>

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

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

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

                                  Section 9.
                                 MISCELLANEOUS

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

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

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

                                       16
<PAGE>

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

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

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

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

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

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

                                       17
<PAGE>

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

ITERIS, INC.                            DAIMLERCHRYSLER VENTURE
                                        GMBH


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

                                       18

<PAGE>

                                                                   EXHIBIT 10.18

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

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

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


                                 ITERIS, INC.

                   Subordinated Convertible Promissory Note


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


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

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

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

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

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

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

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

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

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

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

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

          (i)  [Intentionally Omitted]

                                       2
<PAGE>

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

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

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

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

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

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

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

                                       3
<PAGE>

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

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

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

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

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

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

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

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

                                       4
<PAGE>

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

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

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

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

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

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

                                       5
<PAGE>

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

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

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

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

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

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

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

                                       6
<PAGE>

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

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

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

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

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

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

                                       7
<PAGE>

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

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

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

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

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

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

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

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

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

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

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

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

                                       8
<PAGE>

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

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

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

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

                                       9
<PAGE>

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

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

          (i)  Conversion Procedure.

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

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

                                       10
<PAGE>

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

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

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

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

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

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

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

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

                                       11
<PAGE>

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

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

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

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

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

                                       12
<PAGE>

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


                                        ITERIS, INC.
                                        a Delaware corporation



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

                                       13

<PAGE>

                                                                    EXHIBIT 23.2

                        Consent of Independent Auditors

We consent to the reference to our firm under the captions "Experts" and
"Selected Consolidated Financial Data" and to the use of our reports dated
January 25, 2000, except for the last paragraph of Note 7, as to which the date
is ____________, with regard to the financial statements and schedule of Iteris,
Inc. as of March 31, 1998 and 1999 and for each of the three years in the period
ended March 31, 1999 and as of and for the nine month period ended December 31,
1999, and our report dated November 11, 1998 with regard to the financial
statements of Meyer, Mohaddes Associates, Inc. as of and for the year ended
December 31, 1997 and as of October 16, 1998 and for the period from January 1,
1998 to October 16, 1998, in Amendment No. 1 to the Registration Statement (Form
S-1, No. 333-93035) and related Prospectus of Iteris, Inc. for the registration
of 4,288,240 shares of its common stock.

                                         Ernst & Young LLP


Orange County, California
January 25, 2000


The foregoing consent is in the form that will be signed upon the effectiveness
of the 1.875675-to-1 stock split discussed in Note 7 to the consolidated
financial statements.

                                         /s/ Ernst & Young LLP

Orange County, California
January 25, 2000

<TABLE> <S> <C>

<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS INCLUDED ELSEWHERE IN THIS
REGISTRATION STATEMENT.
</LEGEND>
<MULTIPLIER> 1,000

<S>                             <C>                     <C>
<PERIOD-TYPE>                   12-MOS                   9-MOS
<FISCAL-YEAR-END>                          MAR-31-1999             DEC-31-1999
<PERIOD-START>                             APR-01-1998             APR-01-1999
<PERIOD-END>                               MAR-31-1999             DEC-31-1999
<CASH>                                               1                       1
<SECURITIES>                                         0                       0
<RECEIVABLES>                                    4,723                   5,268
<ALLOWANCES>                                       252                     327
<INVENTORY>                                        863                   1,294
<CURRENT-ASSETS>                                 6,643                   8,128
<PP&E>                                           2,162                   2,584
<DEPRECIATION>                                     697                   1,095
<TOTAL-ASSETS>                                  17,996                  19,248
<CURRENT-LIABILITIES>                            6,739                   6,059
<BONDS>                                              0                       0
                                0                       0
                                          0                       0
<COMMON>                                             1                       1
<OTHER-SE>                                    (18,716)                (24,236)
<TOTAL-LIABILITY-AND-EQUITY>                    17,996                  19,248
<SALES>                                         14,580                  17,447
<TOTAL-REVENUES>                                14,580                  17,447
<CGS>                                           10,324                  11,747
<TOTAL-COSTS>                                    9,130                   8,800
<OTHER-EXPENSES>                                     0                       0
<LOSS-PROVISION>                                     0                       0
<INTEREST-EXPENSE>                               2,167                   2,191
<INCOME-PRETAX>                                (7,041)                 (5,291)
<INCOME-TAX>                                         0                       0
<INCOME-CONTINUING>                                  0                       0
<DISCONTINUED>                                       0                       0
<EXTRAORDINARY>                                      0                       0
<CHANGES>                                            0                       0
<NET-INCOME>                                   (7,041)                 (5,291)
<EPS-BASIC>                                      (.60)                   (.44)
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