**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

**FORM 10-Q**

**x**                              QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934

**Forthe quarterly period ended December 31, 2006**

**or**

**o**                                 TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934

**Forthe transition period from                         to                         **

**CommissionFile Number 001-08123**

**QUIXOTE CORPORATION**

(Exact name of registrantas specified in its charter)

| **Delaware**                                                     | **36-2675371**                           |
|------------------------------------------------------------------|------------------------------------------|
| (State or other  jurisdiction of  incorporation or organization) | (I.R.S. Employer  Identification Number) |
| **35 East Wacker Drive  Chicago, Illinois**                      | **60601**                                |
| (Address of  principal executive offices)                        | (Zip Code)                               |
| **(312) 467-6755**                                               |
| (Registrant’s telephone number, including area code)        |

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.  x YES  o NO

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer. See definition of “accelerated filer and largeaccelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer o | Accelerated filer  x | Non-accelerated filer o |
|---------------------------|----------------------|-------------------------|

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act). o YES  x NO

Indicatethe number of shares outstanding of each of the issuer’s classes of commonstock, as of the latest practicable date: 8,923,037 shares of the Company’sCommon Stock ($.01-2/3 par value) were outstanding as of January 31,2007.

 

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**PART I—FINANCIALINFORMATION**

**ITEM1.**                FINANCIALSTATEMENTS

**QUIXOTE CORPORATIONAND SUBSIDIARIESConsolidated Statements of Operations(Unaudited)**

| ** **                                 | ** ** | **Six Months Ended December 31,** | ** ** |
|--------------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                                 | ** ** | **2006**                                              | ** ** | **2005** | ** ** |
| Net sales                                  |       | $                                                     | 64,816,000 |   | $ | 78,577,000 |   |
| Cost of sales                              |       | 45,803,000                                            |       | 56,417,000 |   |
| Gross profit                               |       | 19,013,000                                            |       | 22,160,000 |   |
| Operating expenses:                        |       |                                                  |       |   |   |
| Selling & administrative          |       | 17,382,000                                            |       | 17,874,000 |   |
| Research & development            |       | 2,627,000                                             |       | 2,804,000 |   |
| Gain on legal settlement                   |       |                                                  |       | (633,000 | ) |
| Gain on sale of assets                     |       | (593,000                                              | )          |   |   |
| Restructuring costs                        |       | 7,655,000                                             |       |   |   |
|                                       |       | 27,071,000                                            |       | 20,045,000 |   |
| Operating profit (loss)                    |       | (8,058,000                                            | )          | 2,115,000 |   |
| Other income  (expense):                   |       |                                                  |       |   |   |
| Interest income                            |       | 17,000                                                |       | 1,000 |   |
| Interest expense                           |       | (2,291,000                                            | )          | (2,289,000 | ) |
|                                       |       | (2,274,000                                            | )          | (2,288,000 | ) |
| Loss before  income taxes                  |       | (10,332,000                                           | )          | (173,000 | ) |
| Income tax  benefit                        |       | (3,926,000                                            | )          | (66,000 | ) |
| Net loss                                   |       | $                                                     | (6,406,000 | ) | $ | (107,000 | ) |
| Per share data—basic:                 |       |                                                  |       |   |   |
| Net loss                                   |       | $                                                     | (0.72      | ) | $ | (0.01 | ) |
| Weighted average common shares outstanding |       | 8,907,015                                             |       | 8,864,263 |   |
| Per share data—diluted:               |       |                                                  |       |   |   |
| Net loss                                   |       | $                                                     | (0.72      | ) | $ | (0.01 | ) |
| Weighted average common shares outstanding |       | 8,907,015                                             |       | 8,864,263 |   |
| Cash dividends declared  per common share  |       | $                                                     | 0.19       |   | $ | 0.18 |   |

 

See Notes to Consolidated Financial Statements.

2

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**QUIXOTE CORPORATIONAND SUBSIDIARIESConsolidated Statements of Operations(Unaudited)**

| ** **                                 | ** ** | **Three Months Ended December 31,** | ** ** |
|--------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                 | ** ** | **2006**                                                | ** ** | **2005** | ** ** |
| Net sales                                  |       |                                                    | $          | 30,655,000 |   |   | $ | 39,186,000 |   |
| Cost of sales                              |       |                                                    | 19,671,000 |   |   | 27,972,000 |   |
| Gross profit                               |       |                                                    | 10,984,000 |   |   | 11,214,000 |   |
| Operating expenses:                        |       |                                                    |       |   |   |   |   |
| Selling & administrative          |       |                                                    | 7,392,000  |   |   | 9,352,000 |   |
| Research & development            |       |                                                    | 1,261,000  |   |   | 1,374,000 |   |
| Gain on sale of assets                     |       |                                                    | (96,000    | ) |   |   |   |
| Restructuring costs                        |       |                                                    | 2,060,000  |   |   |   |   |
|                                       |       |                                                    | 10,617,000 |   |   | 10,726,000 |   |
|                                       |       |                                                    |       |   |   |   |   |
| Operating profit                           |       |                                                    | 367,000    |   |   | 488,000 |   |
|                                       |       |                                                    |       |   |   |   |   |
| Other income (expense):                    |       |                                                    |       |   |   |   |   |
| Interest income                            |       |                                                    | 2,000      |   |   |   |   |
| Interest expense                           |       |                                                    | (1,193,000 | ) |   | (1,106,000 | ) |
|                                       |       |                                                    | (1,191,000 | ) |   | (1,106,000 | ) |
| Loss before  income taxes                  |       |                                                    | (824,000   | ) |   | (618,000 | ) |
| Income tax benefit                         |       |                                                    | (313,000   | ) |   | (235,000 | ) |
| Net loss                                   |       |                                                    | $          | (511,000 | ) |   | $ | (383,000 | ) |
| Per share data—basic:                 |       |                                                    |       |   |   |   |   |
| Net loss                                   |       |                                                    | $          | (0.06 | ) |   | $ | (0.04 | ) |
| Weighted average common shares outstanding |       |                                                    | 8,911,721  |   |   | 8,820,890 |   |
| Per share data—diluted:               |       |                                                    |       |   |   |   |   |
| Net loss                                   |       |                                                    | $          | (0.06 | ) |   | $ | (0.04 | ) |
| Weighted average common shares outstanding |       |                                                    | 8,911,721  |   |   | 8,820,890 |   |
| Cash dividends declared  per common share  |       |                                                    | $          | 0.19 |   |   | $ | 0.18 |   |

 

See Notes to Consolidated Financial Statements.

3

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**QUIXOTE CORPORATIONAND SUBSIDIARIESConsolidated Balance Sheets(Unaudited)**

| ** **                                                                                                                    | ** ** | **December 31,** | ** **  | **June 30,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|-------------|-------------------|------------|
| ** **                                                                                                                    | ** ** | **2006**              | ** **  | **2006**          | ** ** |
| ASSETS                                                                                                                        |       |                  |        |              |       |
| Current assets:                                                                                                               |       |                  |        |              |       |
| Cash and cash equivalents                                                                                                     |       | $                     | 71,000      |              | $          | 869,000 |   |
| Accounts receivable, net of allowance for doubtful accounts  of $2,258,000 at December 31 and $1,816,000 at June 30 |       | 26,253,000            |        | 36,481,000        |       |
| Refundable income taxes                                                                                                       |       | 2,612,000             |        | 238,000           |       |
| Inventories, net:                                                                                                             |       |                  |        |              |       |
| Raw materials                                                                                                                 |       | 9,488,000             |        | 10,356,000        |       |
| Work in process                                                                                                               |       | 4,741,000             |        | 6,642,000         |       |
| Finished goods                                                                                                                |       | 9,473,000             |        | 8,467,000         |       |
|                                                                                                                          |       | 23,702,000            |        | 25,465,000        |       |
| Deferred income tax assets                                                                                                    |       | 3,824,000             |        | 3,824,000         |       |
| Other current assets                                                                                                          |       | 1,582,000             |        | 952,000           |       |
| Total current  assets                                                                                                         |       | 58,044,000            |        | 67,829,000        |       |
| Property, plant and equipment, at cost                                                                                        |       | 41,895,000            |        | 46,714,000        |       |
| Less accumulated  depreciation                                                                                                |       | (24,039,000           | )           | (27,179,000       | )          |
|                                                                                                                          |       | 17,856,000            |        | 19,535,000        |       |
| Goodwill                                                                                                                      |       | 17,385,000            |        | 17,385,000        |       |
| Intangible  assets, net                                                                                                       |       | 6,375,000             |        | 6,467,000         |       |
| Deferred income  tax assets                                                                                                   |       | 13,343,000            |        | 11,844,000        |       |
| Other assets                                                                                                                  |       | 1,787,000             |        | 2,143,000         |       |
|                                                                                                                          |       | $                     | 114,790,000 |              | $          | 125,203,000 |   |

 

See Notes to Consolidated Financial Statements.

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**QUIXOTE CORPORATIONAND SUBSIDIARIESConsolidated Balance Sheets (Continued)(Unaudited)**

| ** **                                                                                                                             | ** ** | **December 31,** | ** **  | **June 30,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|-------------|-------------------|------------|
| ** **                                                                                                                             | ** ** | **2006**              | ** **  | **2006**          | ** ** |
| LIABILITIES AND  SHAREHOLDERS’ EQUITY                                                                                             |       |                  |        |              |       |
| Current  liabilities:                                                                                                                  |       |                  |        |              |       |
| Current portion of long-term debt                                                                                                      |       | $                     | 360,000     |              | $          | 465,000 |   |
| Accounts payable                                                                                                                       |       | 5,778,000             |        | 13,234,000        |       |
| Dividends payable                                                                                                                      |       | 1,693,000             |        | 1,688,000         |       |
| Accrued restructuring costs                                                                                                            |       | 2,586,000             |        | 497,000           |       |
| Accrued expenses                                                                                                                       |       | 7,226,000             |        | 8,164,000         |       |
| Total current  liabilities                                                                                                             |       | 17,643,000            |        | 24,048,000        |       |
| Long-term debt, net of current portion                                                                                                 |       | 54,000,000            |        | 51,122,000        |       |
| Other long-term  liabilities                                                                                                           |       | 1,562,000             |        | 1,087,000         |       |
|                                                                                                                                   |       | 73,205,000            |        | 76,257,000        |       |
| Commitments and  contingent liabilities (Note 9)                                                                                       |       |                  |        |              |       |
| Shareholders’  equity:                                                                                                            |       |                  |        |              |       |
| Preferred stock, no par value; authorized 100,000  shares; none issued                                                                 |       |                  |        |              |       |
| Common stock, par value $.01-2/3; authorized 30,000,000  shares; issued 10,904,678 shares at December 31 and at June 30 |       | 182,000               |        | 182,000           |       |
| Capital in excess of par value of common stock                                                                                         |       | 63,005,000            |        | 62,434,000        |       |
| Retained earnings                                                                                                                      |       | 2,127,000             |        | 10,226,000        |       |
| Accumulated other comprehensive income                                                                                                 |       | 168,000               |        | 227,000           |       |
| Treasury stock, at cost, 1,988,656 shares at December 31  and 2,008,636 shares at June 30                               |       | (23,897,000           | )           | (24,123,000       | )          |
| Total shareholders’ equity                                                                                                        |       | 41,585,000            |        | 48,946,000        |       |
|                                                                                                                                   |       | $                     | 114,790,000 |              | $          | 125,203,000 |   |

 

See Notes to Consolidated Financial Statements.

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**QUIXOTE CORPORATIONAND SUBSIDIARIESConsolidated Statements of Cash Flows(Unaudited)**

| ** **                                                                                                               | ** ** | **Six Months Ended December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                                                                                                               | ** ** | **2006**                                              | ** ** | **2005** | ** ** |
| Operating activities:                                                                                                    |       |                                                  |       |   |   |
| Net loss                                                                                                                 |       | $                                                     | (6,406,000 | ) | $ | (107,000 | ) |
| Adjustments to  reconcile net earnings to net cash provided by (used in) operating activities  of continuing operations: |       |                                                  |       |   |   |
| Depreciation                                                                                                             |       | 1,878,000                                             |       | 2,578,000 |   |
| Amortization                                                                                                             |       | 847,000                                               |       | 865,000 |   |
| Non-cash  inventory disposal                                                                                             |       | 3,620,000                                             |       |   |   |
| Gain on sale of  assets                                                                                                  |       | (593,000                                              | )          |   |   |
| Provisions for  losses on accounts receivable                                                                            |       | 238,000                                               |       | (63,000 | ) |
| Common stock  issued for 401K plan                                                                                       |       | 360,000                                               |       | 538,000 |   |
| Stock-based  compensation expense                                                                                        |       | 437,000                                               |       | 470,000 |   |
| Changes in operating assets and liabilities:                                                                             |       |                                                  |       |   |   |
| Accounts  receivable                                                                                                     |       | 9,990,000                                             |       | (3,448,000 | ) |
| Inventories                                                                                                              |       | (1,857,000                                            | )          | (1,412,000 | ) |
| Other assets                                                                                                             |       | (602,000                                              | )          | (1,346,000 | ) |
| Income taxes                                                                                                             |       | (3,873,000                                            | )          | (79,000 | ) |
| Accounts payable and accrued expenses                                                                                    |       | (5,936,000                                            | )          | 256,000 |   |
| Other long-term liabilities                                                                                              |       | (15,000                                               | )          | 7,000 |   |
| Net cash used in  operating activities                                                                                   |       | (1,912,000                                            | )          | (1,741,000 | ) |
| Investing  activities:                                                                                                   |       |                                                  |       |   |   |
| Capital expenditures                                                                                                     |       | (1,386,000                                            | )          | (1,193,000 | ) |
| Patent expenditures                                                                                                      |       | (486,000                                              | )          | (150,000 | ) |
| Proceeds from sale of assets                                                                                             |       | 1,901,000                                             |       |   |   |
| Net cash provided  by (used in) investing activities.                                                                    |       | 29,000                                                |       | (1,343,000 | ) |
| Financing  activities:                                                                                                   |       |                                                  |       |   |   |
| Proceeds from revolving credit agreement                                                                                 |       | 15,400,000                                            |       | 20,100,000 |   |
| Payments on revolving credit agreement                                                                                   |       | (12,400,000                                           | )          | (12,600,000 | ) |
| Payments on notes payable                                                                                                |       | (227,000                                              | )          | (103,000 | ) |
| Payment of semi-annual cash dividend                                                                                     |       | (1,688,000                                            | )          | (1,595,000 | ) |
| Purchase of treasury stock                                                                                               |       |                                                  |       | (3,105,000 | ) |
| Proceeds from exercise of common stock options                                                                           |       |                                                  |       | 837,000 |   |
| Net cash provided  by financing activities                                                                               |       | 1,085,000                                             |       | 3,534,000 |   |
| Increase  (decrease) in cash and cash equivalents.                                                                       |       | (798,000                                              | )          | 450,000 |   |
| Cash and cash equivalents at beginning of period                                                                         |       | 869,000                                               |       | 156,000 |   |
| Cash and cash  equivalents at end of period                                                                              |       | $                                                     | 71,000     |   | $ | 606,000 |   |

 

See Notes to Consolidated Financial Statements.

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**QUIXOTE CORPORATIONAND SUBSIDIARIESNotes to Consolidated Financial Statements(Unaudited)**

**1.    **The accompanyingunaudited consolidated financial statements present information in accordancewith generally accepted accounting principles for interim financial informationand applicable rules of Regulation S-X. Accordingly, they do not includeall information or footnotes required by generally accepted accountingprinciples for complete financial statements. The June 30, 2006consolidated balance sheet as presented was derived from the audited financialstatements. The interim financial statements and notes should be read inconjunction with the consolidated financial statements and notes theretoincluded in our Annual Report on Form 10-K for the year ended June 30,2006. Management believes the financial statements include all normal recurringadjustments necessary for a fair presentation of the results for the interimperiods presented.

*Recently IssuedAccounting Pronouncements*

In September 2006, the Financial AccountingStandards Board (FASB) issued SFAS No. 157, “Fair Value Measurements”(SFAS No.157). This statement clarifies the definition of fair value,establishes a framework for measuring fair value, and expands the disclosureson fair value measurements. SFAS No. 157 is effective for fiscalyears beginning after November 15, 2007. We do not expect the adoption ofthis statement to have a material affect on our results of operations orfinancial position.

In July 2006,the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48(FIN 48), “Accounting for Uncertainty in Income Taxes—an interpretation of FASBStatement No. 109”. FIN 48 clarifies the accounting for uncertainty inincome taxes recognized in an entity’s financial statements in accordance withFASB Statement No. 109, “Accounting for Income Taxes”. FIN 48 prescribes arecognition threshold and measurement attribute for financial statementdisclosure of tax positions taken or expected to be taken on a tax return. Additionally,FIN 48 provides guidance on derecognition, classification, interest andpenalties, accounting in interim periods, disclosure and transition. FIN 48will be effective for our 2008 fiscal year. We are evaluating the impact thatthis statement will have on our results of operations and financial position.

**2.    **In December 2004,the FASB issued SFAS No. 123 (revised 2004) (SFAS No. 123(R)), “Share-BasedPayment”. We adopted the provisions of SFAS No. 123(R) as of July 1,2005 using the modified prospective method. Under this transition method,share-based compensation cost recognized in the periods ended December 31,2006 and 2005 includes compensation cost for all share-based awards which wereunvested as of July 1, 2005 as well as compensation cost for all share-basedawards granted subsequent to July 1, 2005, based on the grant date fairvalue estimated in accordance with the provisions of SFAS No. 123(R). Thefair value of the options granted is being amortized on a straight-line basisover the requisite service period, which is generally the vesting period. Wehave two current share-based compensation plans, which are described below.

*Plan Descriptions*

Our 2001 Employee Stock Incentive Plan (the Plan),which is shareholder-approved, permits the grant of share options andrestricted shares to our employees for up to 1,125,000 shares, of which 150,000shares were reserved for the grant of restricted stock awards. We believe thatgrants of stock options to employees generate an increased incentive for theemployees to contribute to our future success and prosperity, thus enhancingour value for the benefit of our shareholders. The Plan provides for grants ofstock options and restricted stock for employees as may be determined by theCompensation Committee of the Board of 

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Directors. No grantee mayreceive option grants in excess of 100,000 shares per year. The stock optionsare granted with an exercise price equal to or greater than the fair marketvalue of our stock on the date of grant. Employee options granted under thePlan expire not more than ten years from the grant date with vesting determinedby the Committee. For grants currently outstanding, vesting is over a threeyear period, with one-third of the grant becoming exercisable at the end ofeach of the three years. Option awards provide for accelerated vesting if thereis a change in control, as defined in the Plan.

Our 2001 Non-Employee Directors Stock Option Plan (theDirector Plan), which is also shareholder-approved, permits the grant of shareoptions to our non-employee directors for up to 135,000 shares. We believe thatgrants of stock options to non-employee directors encourage the directors toacquire a long term proprietary interest in our growth and performance, andgenerate an increased incentive for the directors to contribute to our futuresuccess and prosperity, thus enhancing the value of the Company for the benefitof its shareholders. The Director Plan provides for an annual grant of stockoptions for directors based on a fixed amount, which is currently 5,000 stockoptions per each non-employee director annually. The stock options are grantedwith an exercise price equal to the fair market value of our stock on the dateof grant. Options granted under the Director Plan expire not more than sevenyears from the grant date. Vesting is over not less than a six-month period. Asdefined in the Director Plan, option awards provide for accelerated vesting ifthere is a change in control and upon the death of a director optionee.

Shares issued as a result of stock option exercises orrestricted stock grants may be issued as new shares, funded from Treasury stockor may be shares purchased on the open market. We believe that we currentlyhave adequate Treasury and authorized unissued shares to meet any requirementsto issue shares during fiscal 2007. For both the Plan and the Director plan,the current share authorization for issuance of grants terminates on November 1,2011.

We also have a retirementstock award program for certain key executives that was originally authorizedunder the 1993 Long-Term Stock Ownership Incentive Plan. This retirement stockaward program is further described in Note 10 to the consolidated financialstatements in our Annual Report on Form 10-K for the year ended June 30,2006.

*Share-basedCompensation Expense*

The share-based compensation cost that has beencharged against income for our plans was $437,000 and $470,000 for the sixmonths ended December 31, 2006 and 2005, respectively. The total incometax benefit recognized in the income statement for share-based compensationarrangements was $77,000 and $85,000 for those periods, and the net expenserecorded was $360,000 and $385,000, which was $0.04 per basic and diluted shareoutstanding for both periods.

As of December 31, 2006,the total compensation cost related to unvested share-based awards grantedunder our stock option plans not yet recognized was approximately $1,071,000. Thiscost will be amortized on a straight-line basis over a weighted average periodof approximately 1.2 years and will be adjusted for subsequent changes inestimated forfeitures. The 298,799 unvested options outstanding at December 31,2006 had a weighted-average fair value of $5.69.

*Determining FairValue*

The fair value of stock options granted is estimatedusing the Black-Scholes option-pricing model that uses the assumptions notedbelow for the first six months of fiscal years 2007 and 2006. Expectedvolatilities are based on historical volatility of our stock. We use historicaldata to estimate option exercise patterns, employee termination and forfeiturerates within the valuation model; separate groups of optionees that havesimilar historical exercise behavior are considered separately for valuationpurposes. The expected term of options granted is derived from the output ofthe option valuation model and represents the period of time that optionsgranted are expected to be outstanding; the range given below 

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results from certaingroups of employees exhibiting different behavior. The risk-free rate forperiods within the contractual life of the option is based on the U.S. Treasuryyield curve in effect at the time of the grant. The expected dividend yield isdetermined by dividing the current level of per share dividend by the grantdate stock price. We do not incorporate changes in dividends anticipated bymanagement unless those changes have been communicated to marketplaceparticipants.

| ** **                              | ** ** | **2007 YTD**     | ** ** | **2006 YTD**     | ** ** |
|-----------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| Risk free  interest rate                |       | 4.7%                  |       | 4.1%                  |       |
| Expected dividend  yield                |       | 2.28%                 |       | 1.73%                 |       |
| Weighted average  expected volatility   |       | 39%                   |       | 42%                   |       |
| Expected term                           |       | 3.9  – 5.8 years |       | 3.7  – 6.0 years |       |
| Weighted average  expected term         |       | 4.4  years            |       | 4.5  years            |       |
| Weighted average grant  date fair value |       | $4.95                 |       | $7.32                 |       |

 

*Stock OptionActivity*

Informationwith respect to stock option activity under our plans is as follows:

| ** **                             | ** ** | **Common Shares** | ** ** | **Weighted-Average  Exercise  Price** | ** ** | **Weighted-  Average  Remaining  Contractual  Term** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
|----------------------------------------|------------|------------------------|------------|---------------------------------------|------------|------------------------------------------------------|------------|---------------------------------|------------|
| Outstanding at  July 1, 2005      |       |                   | 1,009,971  |                                  |       |                                                 | $          | 18.19                           |       |   |   |   |   |   |   |   |
| Granted                                |       |                   | 114,200    |                                  |       |                                                 | $          | 21.02                           |       |   |   |   |   |   |   |   |
| Exercised                              |       |                   | (102,648   | )                                     |       |                                                 | $          | 15.87                           |       |   |   |   |   |   |   |   |
| Cancelled or  expired                  |       |                   | (6,566     | )                                     |       |                                                 | $          | 21.73                           |       |   |   |   |   |   |   |   |
| Outstanding at  December 31, 2005 |       |                   | 1,014,957  |                                  |       |                                                 | $          | 18.72                           |       |   |   | 3.8 Years |   |   | $ | 2,702,000 |   |
| Outstanding at July 1, 2006       |       |                   | 944,902    |                                  |       |                                                 | $          | 18.98                           |       |   |   |   |   |   |   |   |
| Granted                                |       |                   | 187,000    |                                  |       |                                                 | $          | 18.65                           |       |   |   |   |   |   |   |   |
| Exercised                              |       |                   | —     |                                  |       |                                                 | —     |                            |       |   |   |   |   |   |   |
| Cancelled or  expired                  |       |                   | (144,333   | )                                     |       |                                                 | $          | 24.73                           |       |   |   |   |   |   |   |   |
| Outstanding at  December 31, 2006 |       |                   | 987,569    |                                  |       |                                                 | $          | 18.07                           |       |   |   | 3.5 Years |   |   | $ | 2,526,000 |   |
| Vested at  December 31, 2006      |       |                   | 688,770    |                                  |       |                                                 | $          | 17.56                           |       |   |   | 2.9 Years |   |   | $ | 2,293,000 |   |

 

Options outstanding at December 31,2006 are exercisable as follows: 688,770 currently, 162,543 within one year,82,256 in two years and 54,000 thereafter. At December 31, 2005, 751,268options were exercisable. As of December 31, 2006, we have 508,287 commonshares reserved for our option and award plans available for future grants.

Duringthe six months ended December 31, 2006 and 2005, the following activityoccurred under our plans:

| ** **                                        | ** ** | **Six Months Ended  December 31,** | ** ** |
|---------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                        | ** ** | **2006**                                          | ** ** | **2005** | ** ** |
| Total intrinsic  value of stock options exercised |       | —                                            |       | $ | 673,000 |   |
| Total fair value of  stock options vested         |       | $                                                 | 583,000    |   | $ | 685,000 |   |
|                                                   |            |                                                   |            |  |  |  |  |

 

**3.    **Theincome tax benefit for the current quarter is based upon the estimatedeffective income tax rate for the full fiscal year.

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**4.    **Operatingresults for the first six months of fiscal 2007 are not necessarily indicativeof the performance for the entire year. Our business is historically seasonalwith a higher level of sales in the fourth fiscal quarter.

**5.    **The computation of basicand diluted earnings per share is as follows:

| ** **                                              | ** ** | **Six Months Ended  December 31,** | ** ** | **Three Months Ended  December 31,** | ** ** |
|---------------------------------------------------------|------------|---------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                              | ** ** | **2006**                                          | ** ** | **2005**                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
| *Numerator:*                                            |       |                                              |       |                                                |       |   |   |   |   |
| Net loss  available to common shareholders              |       | $                                                 | (6,406,000 | )                                                   | $          | (107,000 | ) | $ | (511,000 | ) | $ | (383,000 | ) |
| *Denominator:*                                          |       |                                              |       |                                                |       |   |   |   |   |
| Weighted average  shares outstanding—basic         |       | 8,907,015                                         |       | 8,864,263                                           |       | 8,911,721 |   | 8,820,890 |   |
| Effect of dilutive securities—common stock options |       |                                              |       |                                                |       |   |   |   |   |
| Weighted average shares outstanding—diluted        |       | 8,907,015                                         |       | 8,864,263                                           |       | 8,911,721 |   | 8,820,890 |   |
| *Net  loss per share of common stock:*                  |       |                                              |       |                                                |       |   |   |   |   |
| Basic                                                   |       | $                                                 | (0.72      | )                                                   | $          | (0.01 | ) | $ | (0.06 | ) | $ | (0.04 | ) |
| Diluted                                                 |       | $                                                 | (0.72      | )                                                   | $          | (0.01 | ) | $ | (0.06 | ) | $ | (0.04 | ) |

 

Therewere outstanding options to purchase common stock at prices that exceeded theaverage market price for the income statement periods. These options have beenexcluded from the computation of diluted earnings per share for the three andsix-month periods ended December 31, 2006 and 2005 and are as follows:

| ** **                        | ** ** | **Six Months Ended  December 31,** | ** ** | **Three Months Ended  December 31,** | ** ** |
|-----------------------------------|------------|---------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                        | ** ** | **2006**                                          | ** ** | **2005**                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
| Average exercise  price per share |       | $                                                 | 21.29      |                                                | $          | 24.00 |   | $ | 21.41 |   | $ | 24.00 |   |
| Number of shares                  |       | 544,000                                           |       | 374,000                                             |       | 519,000 |   | 374,000 |   |
|                                   |            |                                                   |            |                                                     |            |  |  |  |  |  |  |  |  |

 

In addition,employee stock options totaling 76,725 and 89,950 shares, respectively, for thesix and three month periods ended December 31, 2006 and 138,127 and125,123 shares, respectively, for the six and three month periods ending December 31,2005 were not included in the diluted weighted average shares calculationbecause the effects of these securities were anti-dilutive.

**6.    **Accumulated othercomprehensive income consists of the following:

| ** **                                 | ** ** | **December 31,  2006** | ** ** | **December 31,  2005** | ** ** |
|--------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Unrealized gain on  derivative instrument: |       |                        |       |                        |       |   |   |   |   |
| Beginning balance—July 1         |       |                        | 227,000    |                        |       |   | 345,000 |   |   |
| Amortization to earnings                   |       |                        | (59,000    | )                           |       |   | (59,000 | ) |   |
| Total accumulated  comprehensive income    |       |                        | 168,000    |                        |       |   | $ | 286,000 |   |   |
|                                            |            |                             |            |                             |            |  |  |  |  |  |

** **

**7.    **Duringthe third quarter of fiscal 2006, we expanded the number of reportable segmentsfrom two to three segments. The segment financial data presented hereinpresents our three reportable segments—the manufacture and sale of productswhich Protect and Direct; the manufacture and sale of products which Inform;and the manufacture and sale of Intersection Control products. The primaryproduct lines within the Protect and Direct segment include energy-absorbingproducts such as crash cushions, truck-mounted attenuators, sand-filledbarrels, barriers and highway delineators. The products 

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within this segment absorband dissipate the force of impact in collisions between vehicles and fixedroadside objects as well as prevent collisions and help to control the flow oftraffic by directing or guiding. The primary product lines within the Informsegment include highway advisory radio systems; advanced sensing products whichmeasure distance, count and classify vehicles; weather sensing systems andother transportation equipment. The products within this segment provideinformation to prevent collisions from occurring and to ease trafficcongestion. The primary product lines within the Intersection Control segmentinclude intelligent intersection control systems, pedestrian signals, videodetection equipment and other transportation equipment. The products withinthis segment control traffic and ease traffic congestion, primarily related tointersections. Our segments are discussed in further detail in our AnnualReport on Form 10-K for the year ended June 30, 2006.

Thefollowing table presents financial information about reported segments for thesix-month and three-month periods ended December 31, 2006 and 2005 alongwith the items necessary to reconcile the segment information to the totalsreported in the consolidated financial statements.

| ** **                        | ** ** | **Protect and  Direct** | ** ** | **Inform** | ** ** | **Intersection  Control** | ** ** | **Unallocated  Corporate** | ** ** | **Total**   | ** ** |
|-----------------------------------|------------|------------------------------|------------|------------|------------|---------------------------|------------|----------------------------|------------|-------------|------------|
| *2006*                            |       |                         |       |       |       |                      |       |                       |       |        |       |
| SIX MONTHS                        |       |                         |       |       |       |                      |       |                       |       |        |       |
| Net sales from external customers |       | $                            | 36,528,000 |       | $          | 11,710,000                |       | $                          | 16,578,000 |        |       |   | $ | 64,816,000 |   |
| Operating profit (loss)           |       | 6,939,000                    |       | 1,567,000  |       | (12,761,000               | )          | $                          | (3,803,000 | )           | (8,058,000 | ) |
| Unallocated interest and other    |       |                         |       |       |       |                      |       | (2,274,000                 | )          | (2,274,000  | )          |
| Total income (loss) before taxes  |       | 6,939,000                    |       | 1,567,000  |       | (12,761,000               | )          | (6,077,000                 | )          | (10,332,000 | )          |
| Identifiable assets               |       | 52,484,000                   |       | 21,650,000 |       | 18,378,000                |       | 22,278,000                 |       | 114,790,000 |       |
| THREE MONTHS                      |       |                         |       |       |       |                      |       |                       |       |        |       |
| Net sales from external customers |       | $                            | 17,852,000 |       | $          | 5,614,000                 |       | $                          | 7,189,000  |        |       |   | $ | 30,655,000 |   |
| Operating profit (loss)           |       | 3,648,000                    |       | 781,000    |       | (2,048,000                | )          | $                          | (2,014,000 | )           | 367,000    |   |
| Unallocated interest and other    |       |                         |       |       |       |                      |       | (1,191,000                 | )          | (1,191,000  | )          |
| Total income (loss) before taxes  |       | 3,648,000                    |       | 781,000    |       | (2,048,000                | )          | (3,205,000                 | )          | (824,000    | )          |
| *2005*                            |       |                         |       |       |       |                      |       |                       |       |        |       |
| SIX MONTHS                        |       |                         |       |       |       |                      |       |                       |       |        |       |
| Net sales from external customers |       | $                            | 36,199,000 |       | $          | 12,469,000                |       | $                          | 29,909,000 |        |       |   | $ | 78,577,000 |   |
| Operating profit (loss)           |       | 6,005,000                    |       | 1,197,000  |       | (1,396,000                | )          | $                          | (3,691,000 | )           | 2,115,000  |   |
| Unallocated interest and other    |       |                         |       |       |       |                      |       | (2,288,000                 | )          | (2,288,000  | )          |
| Total income (loss) before taxes  |       | 6,005,000                    |       | 1,197,000  |       | (1,396,000                | )          | (5,979,000                 | )          | (173,000    | )          |
| Identifiable assets               |       | 51,713,000                   |       | 23,056,000 |       | 53,104,000                |       | 13,555,000                 |       | 141,428,000 |       |
| THREE MONTHS                      |       |                         |       |       |       |                      |       |                       |       |        |       |
| Net sales from external customers |       | $                            | 18,379,000 |       | $          | 6,037,000                 |       | $                          | 14,770,000 |        |       |   | $ | 39,186,000 |   |
| Operating profit (loss)           |       | 3,111,000                    |       | 615,000    |       | (1,213,000                | )          | $                          | (2,025,000 | )           | 488,000    |   |
| Unallocated interest and other    |       |                         |       |       |       |                      |       | (1,106,000                 | )          | (1,106,000  | )          |
| Total income  (loss) before taxes |       | 3,111,000                    |       | 615,000    |       | (1,213,000                | )          | (3,131,000                 | )          | (618,000    | )          |

 

Identifiable assetsof the Intersection Control segment as of December 31, 2006 decreased to$18,378,000 from $53,104,000 as of December 31, 2005 due to $13,374,000 innon-cash asset impairment charges made in the fourth quarter of the fiscal yearended June 30, 2006 as well as due to the sale and write off of assets aspart of the restructuring of this segment over the last three quarters.

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**8.    **Intangibleassets consist of the following:

| ** **                    | * * | **December 31, 2006** | * *   | **June 30, 2006**   | * *  |
|-------------------------------|----------|---------------------------------|------------|-------------------------------|-----------|
| ** **                    | * * | **Gross  Carrying  Amount**     | * *   | **Accumulated  Amortization** | * *  | **Net  Intangible  Assets** | * * | **Gross  Carrying  Amount** | * * | **Accumulated  Amortization** | * * | **Net  Intangible  Assets** | * * |
| Amortized intangible assets:  | * * | * *                        | * *   |                          | * *  | * * | * * | * * | * * | * * | * * |   | * * | * * | * * | * * | * * |
| Patents and licenses          | * * | $                               | 3,621,000  | * *                      |      | $ | 1,829,000 | * * | * * | $ | 1,792,000 | * * | $ | 3,135,000 | * * |   | $ | 1,758,000 | * * | * * | $ | 1,377,000 | * * |
| Technology and installed base | * * | 2,491,000                       | * *   |                          | 1,197,000 | * * | * * | 1,294,000 | * * | 2,491,000 | * * |   | 1,097,000 | * * | * * | 1,394,000 | * * |
| Customer relationships        | * * | 3,807,000                       | * *   |                          | 1,963,000 | * * | * * | 1,844,000 | * * | 3,807,000 | * * |   | 1,698,000 | * * | * * | 2,109,000 | * * |
| Trade names                   | * * | 2,250,000                       | * *   |                          | 805,000   | * * | * * | 1,445,000 | * * | 2,250,000 | * * |   | 663,000 | * * | * * | 1,587,000 | * * |
| Other                         | * * | 640,000                         | * *   |                          | 640,000   | * * | * * | — | * * | 640,000 | * * |   | 640,000 | * * | * * | — | * * |
| Total                         | * * | $                               | 12,809,000 | * *                      |      | $ | 6,434,000 | * * | * * | $ | 6,375,000 | * * | $ | 12,323,000 | * * |   | $ | 5,856,000 | * * | * * | $ | 6,467,000 | * * |

 

During the secondquarter of fiscal 2007, we paid $459,000 for a patent relating to a sensorproduct line in the Inform segment. Intangible amortization expense was$578,000 and $597,000 for the six months ended December 31, 2006 and 2005,respectively. The estimated amortization expense for this fiscal year ended June 30,2007 and for the four fiscal years subsequent to 2007 is as follows:  $1,180,000, $1,130,000, $919,000, $806,000and $707,000. The carrying amount of goodwill consists of $9,246,000 for theInform segment and $8,139,000 for the Protect and Direct segment as of December 31,2006 and June 30, 2006. For the Intersection Control segment, theremaining goodwill of $11,397,000 was written off in the fourth quarter offiscal 2006.

**9.    **Disclosures regardingguarantees, commitments and contingencies are provided below.

*Lease Commitments*

We use various leasedfacilities and equipment in our operations. The terms for these leased assetsvary depending on the lease agreements. These operating leases may includeoptions for renewal and we may guarantee the performance of our obligationsunder the leases. Annual minimum future rental payments for lease commitmentswill be approximately $3,238,000 in fiscal year 2007, $3,814,000 in fiscalyears 2008 to 2009, $1,192,000 in fiscal years 2010 to 2011 and $3,854,000thereafter, for an aggregate of $12,098,000. The annual minimum future rentalsinclude lease obligations related to our Sante Fe Springs, California facility,for which we have accrued $1,331,000 as part of our restructuring accrual as ofDecember 31, 2006.

*Product WarrantyLiability*

We warrant to the original purchaser of our productsthat we will, at our option, repair or replace, without charge, such productsif they fail due to a manufacturing defect. The term of these warrantiestypically varies (30 days to 1 year) by product. We accrue for productwarranties when based on available information, it is probable that customerswill make claims under warranties relating to products that have been sold, anda reasonable estimate of the costs can be made. Our estimated product warrantyliability for the six-month periods ended December 31 is as follows:

| ** **                            | ** ** | **2006** | ** ** | **2005** | ** ** |
|---------------------------------------|------------|----------|------------|----------|------------|
| Beginning  Balance—July 1   |       | $        | 927,000    |     | $          | 2,510,000 |   |
| Current provisions, net               |       | (117,000 | )          | (102,000 | )          |
| Expenditures and settlements          |       | (374,000 | )          | (313,000 | )          |
| Ending  balance—December 31 |       | $        | 436,000    |     | $          | 2,095,000 |   |

 

*Legal*

We are involved in severalpending judicial proceedings for product liability claims and other damagesarising out of the conduct of our business. We record loss contingencies whereappropriate within the 

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guidelinesestablished by Statement of FAS No. 5 “Accounting for Contingencies”. Whilethe outcome of litigation is subject to uncertainties, we believe, afterconsultation with counsel, that the outcome of these proceedings, based oncurrent available information and after taking into account the availabilityand limits of our insurance coverage, will not have a material effect on ourconsolidated financial condition and results of operations.

*ExecutiveAgreements*

We have agreements with certain executives which aredesigned to retain the services of key employees and to provide for continuityof management in the event of a termination other than for cause or resultingfrom an actual or threatened change in control of the Company. Upon occurrenceof a termination or a triggering event after a change in control, as defined,we would be liable for payment of benefits under these agreements, to a maximumamount of $4,886,000.

We have by-laws andagreements under which we indemnify our directors and officers from liabilityfor certain events or occurrences while the directors or officers are, or were,serving at the Company’s request in such capacities.  The term of the indemnification period is forthe director’s or officer’s lifetime. We believe that any obligations relatingto this indemnification are predominantly covered by insurance subject tocertain exclusions and deductibles. Historically, we have not made paymentsunder these executive agreements, and no amount has been accrued in theaccompanying consolidated financial statements.

*Indemnification ofLenders and Agents Under Credit Facilities*

Under our creditfacilities, we have agreed to indemnify our lenders under such facilitiesagainst costs or losses resulting from changes in laws and regulations whichwould increase the lenders’ costs, and from any legal action brought againstthe lenders related to the use of loan proceeds. These indemnificationsgenerally extend for the term of the credit facilities and do not provide forany limit on the maximum potential liability.  Historically, we have not made any significantindemnification payments under such agreements and no amount has been accruedin the accompanying consolidated financial statements with respect to theseindemnification guarantees.

*Bid and PerformanceBonds*

We have entered into bidand performance related bonds associated with various contracts. Potentialpayments due under these bonds are related to our performance under theapplicable contract. The total amount of bid and performance related bonds thatwere available and undrawn was $1,026,000 at December 31, 2006 and$3,028,000 at June 30, 2006. Historically, customers have not drawn uponthese instruments due to non-performance, and no amount has been accrued in theaccompanying consolidated financial statements.

*Other Commitments*

We have standby letters of credit covering potentialworkers’ compensation liabilities and other liabilities. The total amount ofstandby letters of credit that were outstanding was $1,294,000 and $1,144,000at December 31, 2006 and June 30, 2006, respectively. We haveincluded $1,314,000 in accrued liabilities for potential workers’ compensationliabilities as of December 31, 2006.

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We have certainnon-cancelable royalty agreements, which contain certain minimum payments inthe aggregate of $2,210,000 through fiscal year 2012. We have included $443,000in accrued liabilities for current obligations relating to royalty agreementsas of December 31, 2006.

**10.  **Wesold our automated traffic enforcement product line to Traffipax, Inc.during the first quarter of fiscal 2007 for maximum cash proceeds of $800,000of which we received $345,000 through December 31, 2006. We aretransferring to Traffipax city and county contracts to provide red lightenforcement and speed enforcement services, as well as related assets. Severalof our employees are being hired by Traffipax to service the transferred contracts.During the first six months of fiscal 2007, we recognized a net gain of$223,000 on the sale of assets of the automated traffic enforcement productline.

During the second quarter of fiscal 2007, we receivedcontingent proceeds of $134,000 of a maximum of $285,000 relating to the saleof the weather forecasting product line in the Inform segment in the fourthquarter of fiscal 2006.

During the first quarter of fiscal 2007, we sold aformer captive manufacturing facility of the Protect and Direct segment locatedin South Bend, Indiana to Elkhart Plastics, Inc. Since June 30, 2005,we had been renting the facility to the buyer. Our net proceeds from the saleof this facility were $1,423,000 and we recognized a gain on the sale of assetsof $236,000.

During September 2005,we settled all claims arising from the 2003 acquisition of the Peek TrafficCorporation business with the Peek Traffic Group Limited and its affiliates(the Sellers) for $633,000 in cash, net of legal expenses. Also, as part of thesettlement, the Sellers sold us 150,603 shares of our common stock for$3,105,000, or $20.62 per share. We had claimed damages from the Sellers of thePeek Traffic business arising from the Sellers’ breaches of representations andwarranties in the asset purchase agreement and from certain liabilities of thePeek Traffic business that we did not specifically assume or weremisrepresented to us.

**11.  **Duringthe second quarter of fiscal 2007, we incurred charges of $2,060,000 as weimplemented the restructuring plan for our Intersection Control segment toreduce costs through the reduction of overhead and headcount by closing twofacilities.  Included in therestructuring costs for the second quarter of fiscal 2007 are $172,000 ofemployee severance costs, $661,000 of lease expense and $1,227,000 of shut-downand other related costs.  The amount ofrestructuring costs recorded during the second quarter of 2007 was higher thanexpected primarily due to a breakdown in negotiations relating to a sublease ofour Santa Fe Springs, California facility between our landlord and thepotential sub-lessee during the quarter. As a result, we recorded $661,000during the quarter in additional restructuring costs relating to leaseobligations which were not previously anticipated. In addition, the facilityexit and other shut-down costs were higher than originally expected primarilydue to changes in estimates related to contractual obligations.

During the first quarter offiscal 2007, we incurred charges of $9,215,000 related to therestructuring plan. Included in this amount is $5,595,000 of restructuringcharges recorded in operating expenses and $3,620,000 in inventory write-downsrecorded in cost of sales. During fiscal 2006, we recorded $5,775,000 inrestructuring charges, net of proceeds received on the sale of assets.

Under the restructuring plan, we divested anddiscontinued certain low-margin and non-core product lines primarilymanufactured in our leased facilities in Tecate, Mexico and Santa Fe Springs,California. These product lines include portable and permanent variable messagesigns, tunnel lighting and illuminated street signs. We have moved theremaining intersection control family of products, including trafficcontrollers, traffic signals and pedestrian signals to our Palmetto, Floridaand Bedford, Pennsylvania facilities. We have adopted an outsourcing strategyfor non-core manufacturing processes, but will continue to perform finalassembly and testing of products. The manufacturing operations  in Santa Fe Springs, California and Tecate,Mexico facilities ceased in the first quarter of fiscal 2007.

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The remaining cash portion of the plan is currentlyestimated to be approximately $2.6 million which consists principally ofapproximately $0.6 million in employee severance and related benefit costs,$0.7 million in facility exit costs, consulting expense and other related costsand $1.3 million in lease obligations over the next two years. Therestructuring plan was completed as of the end of our fiscal 2007 second quarterand we currently do not expect to record any further restructuring costs.

Activityrelated to the restructuring plan was as follows:

| ** **                               | ** ** | **Employee  Severance and  Related Costs ** | ** ** | **Lease  Obligations ** | ** ** | **Asset  Sales and  Write-offs** | ** ** | **Facility Exit  Costs, Legal  and Other** | ** ** | **Total** | ** ** |
|------------------------------------------|------------|------------------------------------------------------------|------------|------------------------------|------------|---------------------------------------|------------|-----------------------------------------------------------|------------|-----------|------------|
| Accrual balance  July 1, 2005       |       |                                                       | $          | —                       |       |                                  |       | $                                                         | —     |      |       |   | $ | — |   |   |   | $ | — |   |   | $ | — |   |
| Costs incurred                           |       |                                                       | 179        |                         |       |                                  | 90         |                                                      |       |      | 4,571      |   |   |   | 935 |   |   | 5,775 |   |
| Cash proceeds  (payments)                |       |                                                       | (179       | )                            |       |                                  | (90        | )                                                         |       |      | 1,500      |   |   |   | (601 | ) |   | 630 |   |
| Non-cash charges                         |       |                                                       |       |                         |       |                                  |       |                                                      |       |      | (5,908     | ) |   |   |   |   |   | (5,908 | ) |
| Accrual balance  June 30, 2006      |       |                                                       | $          | —                       |       |                                  |       | $                                                         | —     |      |       |   | $ | 163 |   |   |   | $ | 334 |   |   | $ | 497 |   |
| Costs incurred                           |       |                                                       | 1,686      |                         |       |                                  | 1,307      |                                                      |       |      | 3,571      |   |   |   | 2,651 |   |   | 9,215 |   |
| Cash proceeds  (payments)                |       |                                                       | (556       | )                            |       |                                  | (130       | )                                                         |       |      | (114       | ) |   |   | (1,540 | ) |   | (2,340 | ) |
| Non-cash charges                         |       |                                                       |       |                         |       |                                  |       |                                                      |       |      | (3,620     | ) |   |   |   |   |   | (3,620 | ) |
| Accrual balance  September 30, 2006 |       |                                                       | $          | 1,130                        |       |                                  |       | $                                                         | 1,177      |      |       |   | $ | — |   |   |   | $ | 1,445 |   |   | $ | 3,752 |   |
| Costs incurred                           |       |                                                       | 172        |                         |       |                                  | 661        |                                                      |       |      |       |   |   |   | 1,227 |   |   | 2,060 |   |
| Cash proceeds  (payments)                |       |                                                       | (699       | )                            |       |                                  | (507       | )                                                         |       |      |       |   |   |   | (2,020 | ) |   | (3,226 | ) |
| Non-cash charges                         |       |                                                       |       |                         |       |                                  |       |                                                      |       |      |       |   |   |   |   |   |   |   |   |
| Accrual balance  December 31, 2006  |       |                                                       | $          | 603                          |       |                                  |       | $                                                         | 1,331      |      |       |   | $ |   |   |   |   | $ | 652 |   |   | $ | 2,586 |   |
| Remaining expected plan costs            |       |                                                       | $          | —                       |       |                                  |       | $                                                         | —     |      |       |   | $ | — |   |   |   | $ | — |   |   | $ | — |   |
| Total expected  plan costs               |       |                                                       | $          | 2,037                        |       |                                  |       | $                                                         | 2,058      |      |       |   | $ | 8,142 |   |   |   | $ | 4,813 |   |   | $ | 17,050 |   |

 

Employee severance andrelated costs include severance pay, related benefits and retention bonuses. Thetotal workforce reduction associated with restructuring activities initiatedduring fiscal 2006 was approximately 400 employees.

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**PART I—FINANCIALINFORMATION**

**ITEM2.**                MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

**OVERVIEW**

Quixote Corporation (theCompany, we, our or us) and its subsidiaries develop, manufacture and markethighway and transportation safety products to protect, direct and informmotorists, pedestrians and road workers in both domestic and internationalmarkets. Our operations are comprised of three reportable segments within thehighway and transportation safety industry, concentrating on safety problemsand designing products to provide transportation safety solutions. Our threereportable segments are: the manufacture and sale of highway and transportationsafety products which Protect and Direct, the manufacture and sale of productsand services which Inform, and the manufacture and sale of products which areused for Intersection Control. The Protect and Direct segment providessolutions for improving safety on the roads either by minimizing the severityof crashes that occur or by preventing crashes from occurring by directing orguiding traffic. The primary product lines within the Protect and Directsegment include energy-absorbing products such as crash cushions, truck-mountedattenuators, sand-filled barrels and water-filled barriers, and directing andguiding products such as flexible post delineators and glare screen systems.The Inform segment provides solutions for improving traffic flow and safety onroads and runways by providing information. The primary product lines withinthe Inform segment include advanced sensing products which measure distance,count and classify vehicles; weather sensing systems; computerized highwayadvisory radio transmitting systems; and other transportation equipment. TheIntersection Control segment provides solutions for controlling intersections,including intelligent traffic control systems, pedestrian signals, videodetection equipment and other transportation equipment.

Our products are soldprincipally through a distribution network to customers in the highwayconstruction and safety business, state departments of transportation, countyand local governments and other governmental transportation agencies. Thedomestic market for highway and transportation safety products is directlyaffected by federal, state and local governmental policies and budgets. A largeportion of our sales is ultimately financed by funds provided to the states bythe federal government. Historically, these funds have covered 75% to 90% ofthe cost of approved highway safety projects on roads constructed or maintainedwith federal assistance. Seasonality affects our business with historically ahigher level of sales in our fourth fiscal quarter.

**RESULTS OF OPERATIONS**

Our results for the firstsix months of fiscal 2007 were affected by the restructuring in ourIntersection Control segment, as expected. Sales for the second quarter offiscal 2007 declined in all three operating segments compared to the secondquarter of last year as we await the full effect of the federal highway bill. However,we were encouraged to see improved operating profit in our Protect and Directand Inform segments due primarily to favorable product sales mix. In addition,we are seeing increased order activity in our Inform segment. We believe theincrease in order activity reflects the continued improvements in our industrywith the highway bill in place and improved state and municipal budgets. Salesfor the Intersection Control segment have decreased significantly from theprior year primarily due to the sale and discontinuation of products related toour restructuring plan for the segment. In addition, the Intersection Controlsegment recorded a modest profit for the second quarter, excludingrestructuring costs and a loss on the sale of assets, which was sooner than weoriginally expected. See Note 11 to the financial statements and FUTURE OUTLOOKfor further information.

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Thefollowing table sets forth selected key operating statistics relating to theCompany’s financial results:

| ** **                                                    | ** ** | **Three Months Ended  December 31,** | ** ** | **Six Months Ended  December 31,** | ** ** |
|---------------------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                    | ** ** | **2006**                                            | ** ** | **2005**                                          | ** ** | **2006** | ** ** | **2005** | ** ** |
| Revenues by Segment:                                          |       |                                                |       |                                              |       |   |   |   |   |
| Protect and Direct                                            |       | $                                                   | 17,852,000 |                                              | $          | 18,379,000 |   | $ | 36,528,000 |   | $ | 36,199,000 |   |
| Inform                                                        |       | 5,614,000                                           |       | 6,037,000                                         |       | 11,710,000 |   | 12,469,000 |   |
| Intersection Control                                          |       | 7,189,000                                           |       | 14,770,000                                        |       | 16,578,000 |   | 29,909,000 |   |
|                                                          |       | $                                                   | 30,655,000 |                                              | $          | 39,186,000 |   | $ | 64,816,000 |   | $ | 78,577,000 |   |
| Geographic Revenues:                                          |       |                                                |       |                                              |       |   |   |   |   |
| Domestic                                                      |       | $                                                   | 24,102,000 |                                              | $          | 32,361,000 |   | $ | 53,781,000 |   | $ | 67,409,000 |   |
| International                                                 |       | 6,553,000                                           |       | 6,825,000                                         |       | 11,035,000 |   | 11,168,000 |   |
|                                                          |       | $                                                   | 30,655,000 |                                              | $          | 39,186,000 |   | $ | 64,816,000 |   | $ | 78,577,000 |   |
| Operating Income (Loss) by Segment:                           |       |                                                |       |                                              |       |   |   |   |   |
| Protect and Direct                                            |       | $                                                   | 3,648,000  |                                              | $          | 3,111,000 |   | $ | 6,939,000 |   | $ | 6,005,000 |   |
| Inform                                                        |       | 781,000                                             |       | 615,000                                           |       | 1,567,000 |   | 1,197,000 |   |
| Intersection Control                                          |       | (2,048,000                                          | )          | (1,213,000                                        | )          | (12,761,000 | ) | (1,396,000 | ) |
| Unallocated Corporate                                         |       | (2,014,000                                          | )          | (2,025,000                                        | )          | (3,803,000 | ) | (3,691,000 | ) |
|                                                          |       | $                                                   | 367,000    |                                              | $          | 488,000 |   | $ | (8,058,000 | ) | $ | 2,115,000 |   |
| Gross profit percentage                                       |       | 35.8                                                | %          | 28.6                                              | %          | 29.3 | % | 28.2 | % |
| Selling and  administrative expenses as a percentage of sales |       | 24.1                                                | %          | 23.9                                              | %          | 26.8 | % | 22.7 | % |
| Diluted loss per share                                        |       | $                                                   | (0.06      | )                                                 | $          | (0.04 | ) | $ | (0.72 | ) | $ | (0.01 | ) |

 

*Revenues*

Our net sales for thesecond quarter of fiscal 2007 decreased $8,531,000, or 22%, to $30,655,000 from$39,186,000 for the second quarter last year. This was primarily due to thesale and discontinuation of several product lines in our Intersection Controlsegment related to the restructuring of this segment further discussed in Note 11to the financial statements.

Our net sales for thefirst six months of fiscal 2006 decreased $13,761,000, or 18%, to $64,816,000from $78,577,000 for the same period last year primarily due to therestructuring of the Intersection Control segment.

*Geographic—*Internationalsales for the second quarter of fiscal 2007 decreased $272,000, or 4%, to$6,553,000, compared to $6,825,000 for the second quarter last year, primarilydue to decreased sales of Intersection Control products across most majorregions. International sales of weather systems for the Inform segmentincreased due to strong sales in Canada. International sales for the Protectand Direct segment increased 5% over the second quarter last year. Domesticsales for the second quarter of fiscal 2007 decreased 26% to $24,102,000from $32,361,000 primarily due to decreased sales in the Intersection Controlsegment.

International sales forthe first six months of fiscal 2007 decreased $133,000, or 1%, to $11,035,000,compared to $11,168,000 for the same period last year, primarily due todecreased sales of Intersection Control products across most major regions. Internationalsales for the Inform segment increased 81% over the prior period due to salesof weather systems in Canada. International sales for the Protect and Directsegment increased 2% over the prior period. Domestic sales for the first sixmonths of fiscal 2007 decreased 20% to $53,781,000 from $67,409,000 primarilydue to decreased sales in the Intersection Control segment.

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*Protect and Direct—**Net*sales for theProtect and Direct segment for the second quarter of fiscal 2007 decreased 3%to $17,852,000 from $18,379,000 for the second quarter last year primarily dueto decreased sales of sand-filled barrels and Triton® barriers. Sales of truck-mountedattenuators increased 31% as demand continues for the new SSTTM, trailer-mounted attenuator. Internationalsales increased 5% over the second quarter last year.

Net sales for the Protectand Direct segment for the first six months of fiscal 2007 increased 1% to$36,528,000 from $36,199,000 for the same period last year. The increase insales was primarily due to increased sales of truck-mounted attenuators andparts. Sales of permanent crash cushions, sand-filled barrels and Triton®barriers decreased from the prior year period.

*Inform—**Net*sales for theInform segment for the second quarter of fiscal 2006 decreased 7%, or $423,000,to $5,614,000 from $6,037,000 for the second quarter last year, primarily dueto the sale of the weather forecasting product line at the end of fiscal 2006. Excluding$605,000 in sales related to the weather forecasting product line in the secondquarter last year, sales for the Inform segment increased 3% over the secondquarter last year driven by sales of highway advisory radio products.

Net sales for the Informsegment for the first six months of fiscal 2007 decreased 6%, or $759,000, to$11,710,000 from $12,469,000 for the same period last year, again primarily dueto the sale of the weather forecasting line. Excluding $837,000 in salesrelated to the weather forecasting product line in the first six months oflast year, sales for the Inform segment increased slightly. Sales of highwayadvisory radio products and traffic sensing products increased, offset somewhatby decreased sales of weather sensing systems.

*Intersection Control—**Net*sales for theIntersection Control segment for the second quarter of fiscal 2007decreased 51%, or $7,581,000, to $7,189,000 from $14,770,000 for the secondquarter last year, primarily due to the sale and discontinuation of severalproduct lines, including the portable and permanent variable message signs,tunnel lighting, illuminated street signs and automated traffic enforcementlines. Although sales declined asplanned for the segment during the quarter related to the restructuring plan,we are beginning to see bid opportunities for large contracts for this segmentafter a decline in bid activity over the past couple years. In January 2007,we were awarded a $20 million contract from the New York City Department ofTransportation for traffic controllers.

Net sales for theIntersection Control segment for the first six months of fiscal 2007 decreased45%, or $13,331,000, to $16,578,000 from $29,909,000 for the same period lastyear, primarily due to the sale and discontinuation of product lines.

*Gross Profit Margin*

Our gross profit marginfor the second quarter of fiscal 2007 was 35.8% compared to 28.6% for thesecond quarter last year, primarily due to efficiencies in the restructured IntersectionControl segment. The gross margins for the Protect and Direct segment alsoincreased due to a favorable product sales mix with strong high-margin partsales during the current second quarter. The gross profit margin for the Informsegment decreased due to unfavorable product mix.

Our gross profit marginfor the first six months of fiscal 2007 was 29.3% compared to 28.2% for thesame period last year. If we exclude the $3,620,000 in inventory write-offsincurred in the first quarter as part of the Intersection Control segmentrestructuring from cost of sales, our consolidated gross margin for the firstsix months of fiscal 2007 increased to 34.9% from 28.2% last year. Thisimprovement in gross margin was due to efficiencies related to the restructuringinitiative in the Intersection Control segment. Gross margins improved in boththe Protect and Direct segment and the Inform segment due to favorable productsales mix.

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*Selling and Administrative Expenses*

Selling and administrativeexpenses for the second quarter of fiscal 2007 decreased $1,960,000, or 21%, to$7,392,000 from $9,352,000 for the second quarter last year. Selling andadministrative expenses in the Intersection Control segment decreased 50% to$1,333,000 from $2,688,000 for the second quarter last year due to lowerpersonnel costs and other savings as a result of the restructuring plan. Sellingand administrative expenses in the Inform segment decreased primarily due tolower personnel-related expenses. Selling and administrative expenses in theProtect and Direct segment decreased slightly from the second quarter last year.Selling and administrative expenses increased slightly as a percentage of salesto 24.1% for the second quarter of 2007 from 23.9% last year.

Selling and administrativeexpenses for the first six months of fiscal 2007 decreased $492,000, or 3%, to$17,382,000 from $17,874,000 for the same period last year. Selling andadministrative expenses in the Intersection Control segment decreased$1,256,000, or 24% due to savings as a result of the restructuring plan. Sellingand administrative expenses in the Inform segment decreased due to lowerpersonnel expenses.Thesedecreases were partially offset by increased selling and administrativeexpenses in the Protect and Direct segment due to increased legal costs relatedto patent defense and increased bad debt expense. Selling and administrativeexpenses increased as a percentage of sales to 26.8% for the first six monthsof 2007 from 22.7% last year due to the decreased level of sales and the fixedcost nature of many of the expenses.

*Gain on Sale of Assets*

As further discussed inNote 10 to the financial statements, we recorded a net gain on the sale ofassets of $96,000 in the second quarter of fiscal 2007, including a gain of $134,000resulting from contingent proceeds relating to the sale of the weatherforecasting product line within the Inform segment and a loss of $38,000 on thesale of assets related to the sale of the automated enforcement product linewithin the Intersection Control segment. We may record an additional gain related to the sale of theautomated enforcement product line of approximately $450,000 during the thirdquarter of fiscal 2007 dependent upon the receipt of contract consents from ourcustomers.

During the first sixmonths of fiscal 2007, we recorded a net gain on the sale of assets of$593,000, including a gain of $236,000 related to the sale of a buildingformerly used by the Protect and Direct segment, a gain of $223,000 related tothe sale of the automated traffic enforcement product line within theIntersection Control segment and a gain of $134,000 resulting from contingentproceeds relating to the sale of the weather forecasting product line withinthe Inform segment.

*Restructuring Costs*

As further discussed inNote 11 to the financial statements, the second quarter of fiscal 2007 includes$2,060,000 in restructuring costs for the Intersection Control segment. Includedin the restructuring costs are $172,000 of employee severance costs, $661,000of lease expense and $1,227,000 of shut-down and other related costs. Wecurrently do not expect to record any further restructuring costs.

The first six months offiscal 2007 includes $7,655,000 in restructuring costs for the IntersectionControl segment. Included in the restructuring costs are $1,858,000 of employeeseverance costs, $1,968,000 of lease expense and $3,829,000 of shut-down andother related costs.

*Gain on Legal Settlement*

As further discussed inNote 10 to the financial statements, the first quarter of last year included again of $633,000 resulting from the settlement of claims with the seller ofPeek Traffic.

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*Research and Development*

Research and developmentexpenditures decreased to $1,261,000 for the second quarter of fiscal 2007compared to $1,374,000 for the second quarter last year. The decrease of$113,000 was primarily due to decreased expenditures in the IntersectionControl segment. Expenditures decreased slightly in the Protect and Directsegment. Expenditures increased in the Inform segment for product upgrades andenhancements to existing product lines and the development of new products.

Research and developmentexpenditures decreased to $2,627,000 for the first six months of fiscal 2007compared to $2,804,000 for the same period last year. The decrease of $177,000was primarily due to decreased expenditures in both the Intersection Controland Inform segments. Expenditures increased in the Protect and Direct segmentdue principally to outside testing of a product for the security market.

*Operating Profit (Loss)*

Operating profit for thesecond quarter of fiscal 2007 was $367,000, compared to operating profit of$488,000 for the second quarter of fiscal 2006. Without the special items including the$2,060,000 of restructuring costs and the net $96,000 gain on sale of assets,operating profit was $2,331,000 in the current second quarter compared tooperating profit of $488,000 for the second quarter last year. This improvementin operating profit is primarily due to manufacturing and operating efficienciesrelated to the restructuring of the Intersection Control segment. Forthe second quarter of fiscal 2007, operating profit for the Protect and Directsegment increased 17% to a second quarter record of $3,648,000 from $3,111,000for the second quarter last year due primarily to improved gross margins. Operatingprofit for the Inform Group increased due to lower selling and administrativeexpenses primarily related to lower personnel costs. The Intersection Controlsegment had an operating loss of $2,048,000, compared to an operating loss of$1,213,000 for the second quarter last year. Without the special items including the $2,060,000 in restructuringcosts and a loss of the sale of assets of $38,000, the Intersection Controlsegment had operating profit of $50,000 compared to an operating loss of$1,213,000 for the second quarter last year due to manufacturing and operatingefficiencies as a result of the restructuring plan.

The operating loss for thefirst six months of fiscal 2007 was $8,058,000, compared to operating profit of$2,115,000 for the first six months of fiscal 2006. Without the special items including the$3,620,000 in inventory write-offs, the $7,655,000 of restructuring costs, the$593,000 gain on sale of assets and last year’s $633,000 gain on legalsettlement, operating profit was $2,624,000 in the current six-month periodcompared to operating profit of $1,482,000 for the same period last year. Thisimprovement in operating profit is primarily due to manufacturing and operatingefficiencies related to the restructuring of the Intersection Control segment. Forthe first six months of fiscal 2007, operating profit for the Protect andDirect Group increased 16% to $6,939,000 from $6,005,000 for the same periodlast year due primarily to improved gross profit margins. Operating profit forthe Inform segment was $1,567,000 compared to operating profit of $1,197,000for the first six months of last year due primarily to lower selling andadministrative costs. The operating loss for the Intersection Control segmentincreased to $12,761,000 from an operating loss of $1,396,000 for the first sixmonths of last year. Without the special items including the $3,620,000 in inventory write-offs, the$7,655,000 of restructuring costs, the $223,000 gain on sale of assets and lastyear’s $633,000 gain on legal settlement, the operating loss for theIntersection Control segment decreased to $1,619,000 in the current six-monthperiod from an operating loss of $2,030,000 for the same period last year dueto manufacturing and operating efficiencies as a result of the restructuringplan.

*Interest Expense*

Interest expense for thesecond quarter of fiscal 2007 increased to $1,193,000 from $1,106,000 for thesecond quarter last year. The increase was due to higher interest rates. Theinterest rate on our $40 million in Convertible Senior Subordinated Notesis 7%. The interest rate on our bank credit facility is based on 

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prime orLIBOR, plus a margin. Our overall weighted average interest rate was 6.9% as ofDecember 31, 2006.

Interest expense for thefirst six months of fiscal 2007 increased to $2,291,000 from $2,289,000 for thesame period last year. The increase was due to the higher interest rates. Interestexpense is expected to be approximately $4.5 million for fiscal 2007, whichincludes approximately $650,000 in amortization of deferred debt issue costs.

*Provision for Income Taxes*

The income tax benefit forthe second quarter of fiscal 2007 was $313,000 representing a 38% effectiveincome tax rate. The income tax benefit for the first six months of fiscal 2007was $3,926,000.

*Net Earnings (Loss)*

The net loss for thesecond quarter of fiscal 2007 was $511,000, or $0.06 cents per diluted share,compared to a net loss of $383,000, or $0.04 cents per diluted share, for thesecond quarter last year. Withoutthe special items including the $2,060,000 of restructuring costs and the$96,000 in gain on sale of assets, and applying a 38% effective tax rate, netearnings for the current second quarter were $707,000, or $0.08 per dilutedshare, compared to a net loss for the second quarter last year of $383,000, or$0.04 per diluted share.

The net loss for the firstsix months of fiscal 2007 was $6,406,000, or $0.72 cents per diluted share,compared to a net loss of $107,000, or $0.01 cents per diluted share, for thesame period last year. Withoutthe special items including the $3,620,000 in inventory write-offs, the$7,655,000 of restructuring costs, the $593,000 in gain on sale of assets andlast year’s $633,000 gain on legal settlement, and applying a 38% effective taxrate, net earnings for the current six-month period were $217,000, or $0.02 perdiluted share, compared to a net loss for the same period last year of$499,000, or $0.06 per diluted share.

**FINANCIAL CONDITION**

*Liquidity and Capital Resources*

Our principal sources offunds historically have been cash flows from operations and borrowings frombanks and other sources. We had cash and cash equivalents of $71,000 as ofDecember 31, 2006 and access to additional funds of approximately $17million under our secured bank credit agreement. We believe that this bankcredit facility is an important source of liquidity. The credit agreementprovides for a $30 million revolving credit facility with a $10 millionsub-facility for letters of credit. The Company must maintain a minimumavailability of $5 million under the revolving credit facility. Totalavailability is based on a formula of eligible accounts receivable, eligibleinventory, machinery and equipment and real estate. We are also required tomaintain a maximum senior leverage ratio. The covenants also limit theincurrence of additional indebtedness, acquisitions, liens and encumbrances andother matters customarily restricted in such agreements. We are in compliancewith these covenants and expect to remain in compliance through fiscal 2007.The agreement currently expires in April 2008, but may be renewed oneadditional year on each anniversary date upon mutual consent of the Company andthe bank.

Our outstanding borrowingswere $54,360,000, or 56.7% of total capitalization, as of December 31,2006, of which $9,000,000 was outstanding related to the bank credit facility.This compares to $51,587,000, or 51.3% of total capitalization, as ofJune 30, 2006, of which $6,000,000 was outstanding related to the bankcredit facility. As of December 31, 2006, we had approximately $17,000,000in additional availability under the bank credit facility. Included in long-termdebt as of December 31, 2006 and June 30, 2006 was $40 million in 7%Convertible Senior Subordinated Notes due February 2025 and a $5 millionfive-year subordinated promissory note. The amount of standby letters of creditoutstanding was $1,294,000 as of December 31, 2006 and $1,144,000 as ofJune 30, 2006.

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*Cash Flows*

Cash used in operations was $1,912,000 during thefirst six months of fiscal 2007. This compares with $1,741,000 used inoperations in the first six months of fiscal 2006. The cash used in operationsin the first six months of fiscal 2007 was primarily due to increased workingcapital, including increases in inventory and decreases in accounts payable andother accrued expenses, offset by increased collections of accounts receivable.

Investing activities provided cash of $29,000 duringthe first six months of fiscal 2007, compared to using cash of $1,343,000 inthe first six months of the prior year. Proceeds from the sale of assetsprovided cash of $1,901,000 during the first six months of fiscal 2007. Expendituresduring the first six months of fiscal 2007 included $1,386,000 for capitalexpenditures.

Financing activities provided cash of $1,085,000during the first six months of fiscal 2007, compared to $3,534,000 during thefirst six months of fiscal 2006. During the first six months of 2007, weborrowed a net $3,000,000 against our outstanding revolving credit facility. Inaddition, we paid $227,000 on notes payable. The payment of our semi-annualcash dividend used cash of $1,688,000. During the first six months of fiscal2006 we paid $3,105,000 to purchase 150,603 shares of our common stock from thesellers of Peek Traffic, recorded as treasury stock.

For the remainder offiscal 2007, we anticipate needing approximately $2,000,000 in cash for capitalexpenditures. We may require additional investments in working capital tosupport growth. We may also need additional funds to repurchase our own commonstock from time to time or to acquire businesses that complement our existingoperations. As discussed in Note 11 and FUTURE OUTLOOK, we currently estimatethat the remaining cash portion of the restructuring plan for the IntersectionControl segment will be approximately $2.6 million. Future cash expenditureswill be financed either through cash on-hand, cash generated from operations,from borrowings available under our bank credit facility or proceeds from salesof assets or product lines to be discontinued. We currently believe that thesesources of cash should be sufficient for all planned operating and capitalrequirements in the near term. If needed and available on favorable terms, wemay amend existing financing arrangements or may enter into other debt orequity financing arrangements.

**OFF-BALANCE SHEETARRANGEMENTS AND CONTRACTUAL OBLIGATIONS**

We aresubject to certain debt obligations, guarantees, commitments and contingentliabilities further described in our Annual Report on Form 10-K forthe year ended June 30, 2006. The following table presents our contractualobligations to make future payments under contracts, such as debt and leaseagreements, as of December 31, 2006:

| ** **                      | ** ** | ** **                                       | ** ** | **Less than** | ** ** | ** **         | ** ** | ** **         | ** ** | **More than** | ** ** |
|---------------------------------|------------|--------------------------------------------------|------------|--------------------|------------|--------------------|------------|--------------------|------------|--------------------|------------|
| ** **                      | ** ** | **Total**                                        | ** ** | **1 Year**    | ** ** | **1-3 Years** | ** ** | **3-5 Years** | ** ** | **5 Years**   | ** ** |
| ** **                      | ** ** | **(Dollar amounts in thousands)** | ** ** |
| Long-term debt(1)               |       | $                                                | 54,360     |               |       | $                  | 360        |               |       |               | $          | 5,000 |   |   |   | $ | 40,000 |   |   |   | $ | 9,000 |   |   |
| Estimated  interest payments(2) |       | 13,801                                           |       |               | 3,758      |               |       |               | 7,080      |               |       |   | 1,943 |   |   |   | 1,020 |   |   |
| Operating leases                |       | 12,098                                           |       |               | 3,238      |               |       |               | 3,814      |               |       |   | 1,192 |   |   |   | 3,854 |   |   |
| Minimum royalty  payments       |       | 2,210                                            |       |               | 760        |               |       |               | 850        |               |       |   | 600 |   |   |   |   |   |   |
| Retirement award  program       |       | 759                                              |       |               | 81         |               |       |               | 125        |               |       |   | 83 |   |   |   | 470 |   |   |
| Purchase  obligations           |       | 4,874                                            |       |               | 4,874      |               |       |               |       |               |       |   |   |   |   |   |   |   |   |
| Total                           |       | $                                                | 88,102     |               |       | $                  | 13,071     |               |       |               | $          | 16,869 |   |   |   | $ | 43,818 |   |   |   | $ | 14,344 |   |   |

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(1)          Amount includes expectedcash payments on long-term debt based upon current and effective maturities aswell as expected renewals.

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(2)          Amount includesestimated interest payments based on interest rates as of the current period. Interestrates on variable-rate debt are subject to change in the future. Interest isestimated based upon current and effective maturities as well as expectedrenewals of long-term debt currently outstanding.

As disclosed in thefootnotes to the consolidated financial statements, we have entered into bidand performance related bonds associated with various contracts. Potentialpayments due under these bonds are related to our performance under theapplicable contract. The total amount of bid and performance related bonds thatwere available and undrawn as of December 31, 2006 was $1,026,000. We alsohave standby letters of credit covering potential workers’ compensation andother liabilities. The total standby exposure relating to letters of credit asof December 31, 2006 was $1,294,000.

**FUTURE OUTLOOK**

We believe that the enactment of the federaltransportation funding legislation, SAFETEA-LU, in August 2005 willimprove prospects for increased spending for our products in the second half offiscal 2007. State and local governments appear to be increasing spending ontransportation safety in 2007 as both national and local economies improve. Wealso expect international sales to continue to be an important driver of oursales growth. However, it is difficult to predict to what extent we will seeincreased spending for our products and there can be no assurance that eitherdomestic or international sales will continue to increase.

As further discussed in Note 11 to the financialstatements, the restructuring plan for the Intersection Control segment is nowfully complete and we currently do not expect to record any furtherrestructuring charges. The remaining cash expenditures in connection with therestructuring plan are approximately $2.6 million. We expect the restructuringwill result in annualized operating cost savings of approximately $5 to $6million. However, there can be no assurance that we will achieve that level ofsavings. After the product rationalization, annualized revenues for theIntersection Control segment are estimated to be approximately $35 million forfiscal 2007 compared with $56 million for fiscal 2006.

We believe fiscal 2007 is a transitional year for us. Weexpect to see continued growth in sales and profitability for the Protect andDirect and Inform segments. We are beginning to see bids for large contractsfor the Intersection Control segment after a decline in bid activity over thepast couple years. In January 2007, we were awarded a $20 million contractfrom the New York City Department of Transportation for traffic controllers. Webelieve that this award, along with the completion of the restructuring plan,are important steps in reaching profitability for this segment. For the secondhalf of fiscal 2007, we believe this segment will contribute modestly to ourfinancial results.

We historically experiencefluctuation in our gross profit margin from quarter to quarter primarily due tosales volume related to seasonality, variability in product mix and changes inour competitive environment. The gross profit margins of certain acquiredproduct lines, primarily the traffic and intersection control product lines,are lower than our historical gross profit margin, which is currently adverselyaffecting our gross profit margin. We also experience rigorous pricecompetition in our Intersection Control segment, and weather sensing systemproduct line. We do not believe these trends will improve in the near future.

**SIGNIFICANTACCOUNTING POLICIES AND CRITICAL ESTIMATES**

The preparation of financial statements in conformitywith accounting principles generally accepted in the United States of America(U.S. GAAP) requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities and the disclosure of contingentassets and liabilities at the date of the financial statements. Management’sestimates also affect the reported amounts of revenues and expenses during thereporting period. In addition, certain normal and recurring estimates are madeincluding estimates in determining the allowance for doubtful accountsreceivable, inventory valuation 

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reserves, valuationallowance on deferred tax assets, accrued restructuring costs and health careliabilities. These estimates are made using management’s best judgment givenrelevant factors and available data. Actual results could differ materiallyfrom those estimates. Note 2 to our June 30, 2006 consolidated financialstatements includes a summary of the significant accounting policies, methodsand types of estimates used in the preparation of our consolidated financialstatements. There have been no material changes in accounting policies, methodsand types of estimates used by management since the first quarter of fiscal2006. In the opinion of management, we do not have any individual accountingpolicy or use any individual estimate that is critical to the preparation ofour consolidated financial statements. In most instances, we must use anaccounting policy or method because it is the only policy or method permittedunder U.S. GAAP. We believe the following significant accounting policies andmethods used by us are the most important to the presentation of our financialstatements:

Revenue Recognition:   Revenues, net of salesincentives, are recognized when either services have been rendered or bothtitle and risk of loss of products have been transferred to unaffiliatedcustomers. Additionally, we ensure that collection of the resulting receivableis probable, persuasive evidence that an arrangement exists, and the revenue isfixed or determinable. Provision for estimated uncollectible amounts and creditmemos is made based upon management’s analysis of bad debts and credit memos.

Inventories:   Inventories are valued at the lowerof cost (first-in, first-out method) or market. Actual costs are used to valueraw materials and supplies. Standard costs, which approximate actual costs, areused to value finished goods and work-in-process. Standard costs include rawmaterials, direct labor and manufacturing overhead. Provision for potentiallyobsolete or slow-moving inventory is made based on management’s analysis ofinventory levels, ages and salability.

Long-Lived Assets:   Long-lived assets include suchitems as goodwill, patents, product rights, other intangible assets andproperty, plant and equipment. For purposes of evaluating the recoverability oflong-lived assets, we assess the possibility of obsolescence, demand, newtechnology, competition, and other pertinent economic factors and trends thatmay have an impact on the value or remaining lives of these assets.

Amortized long-lived assets (including amortizedintangible assets and property, plant and equipment) held and used by us arereviewed for impairment whenever events or changes in circumstances indicatethat the carrying amount of an asset may not be recoverable in relation tofuture undiscounted cash flows of underlying asset groups. The net carryingvalue of assets not recoverable is reduced to fair value. Fair values ofamortized long-lived assets are determined based upon the performance of athird party fair value appraisal. Patents and other finite-lived intangibleassets are amortized on a straight-line or systematic method over the life ofthe patent or intangible asset.

Goodwill and other indefinite-lived intangible assetsare tested for impairment at least annually. The indefinite-lived intangibleasset impairment test is performed by comparing the fair value of theintangible asset to its carrying value in a one-step analysis. If the fairvalue of the intangible asset is less than its carrying value, the intangibleasset is written-down to its fair value. The goodwill impairment test isperformed at the reporting unit level and is a two-step analysis. First, thefair value of the reporting unit is compared to its book value. If the fairvalue of the reporting unit is less than its book value, we perform ahypothetical purchase price allocation based on the reporting unit’s fair valueto determine the implied fair value of the reporting unit’s goodwill. If theimplied fair value of the goodwill is less than its carrying value, thegoodwill is written-down to its implied fair value. Fair values are determinedusing present value techniques.

The impairment review is highly judgmental andinvolves the use of significant estimates and assumptions. These estimates andassumptions have a significant impact on the amount of any impairment chargerecorded. Estimates of fair value are primarily determined using discountedcash flow methods and are dependent upon assumptions of future sales trends,market conditions and cash flows of each reporting 

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unit over several years. Actualcash flows in the future may differ significantly from those previouslyforecasted. Other significant assumptions include growth rates and the discountrate applicable to future cash flows.

Share-based Compensation Expense:   We account forshare-based compensation in accordance with the provisions of SFAS No. 123(R).Under the fair value recognition provisions of SFAS No. 123(R),share-based compensation cost is estimated at the grant date based on the fairvalue of the award and is recognized as expense ratably over the requisiteservice period of the award. Determining the appropriate fair value model andcalculating the fair value of share-based awards requires judgment, includingestimating stock price volatility, forfeiture rates and expected life.

Restructuring Charges:   We account forrestructuring activities in accordance with SFAS No. 146, “Accounting forCosts Associated with Exit or Disposal Activities.” Generally, costs associatedwith the exit or disposal activity are recognized when the liability isincurred. Costs related to employee separation arrangements requiring futureservice beyond a specified minimum retention period are recognized over theservice period.

Income Taxes:   Werecognize deferred tax assets and liabilities for the expected future taxconsequences of events that have been included in the financial statements ortax returns. Under this method, deferred tax assets and liabilities aredetermined based on the difference between the financial statement and taxbasis of assets and liabilities using enacted tax rates in effect for the yearin which the differences are expected to reverse. In assessing therealizability of the deferred tax assets, management considers whether it ismore likely than not that some portion or all of the deferred tax assets willnot be realized. To the extent that any future tax benefits are not expected tobe fully realized, such future tax benefits are reduced by a valuationallowance. Realization of deferred tax assets assumes that we will be able togenerate sufficient taxable income so that the assets will be realized. Thefactors that we consider in assessing the likelihood of realization include theforecast of future taxable income and available tax planning strategies thatcould be implemented to realize the deferred tax assets. We expect the deferredtax assets currently recorded to be fully realizable; however there can be noassurance that an increased valuation allowance would not need to be recordedin the future.

**RECENTLY ISSUEDACCOUNTING PRONOUNCEMENTS**

In September 2006, the Financial AccountingStandards Board (FASB) issued SFAS No. 157, “Fair Value Measurements”(SFAS No.157). This statement clarifies the definition of fair value,establishes a framework for measuring fair value, and expands the disclosureson fair value measurements. SFAS No. 157 is effective for fiscalyears beginning after November 15, 2007. We do not expect the adoption ofthis statement to have a material affect on our results of operations orfinancial position.

In July 2006, theFinancial Accounting Standards Board (FASB) issued FASB Interpretation No. 48(FIN 48), “Accounting for Uncertainty in Income Taxes—an interpretation of FASBStatement No. 109”. FIN 48 clarifies the accounting for uncertainty inincome taxes recognized in an entity’s financial statements in accordance withFASB Statement No. 109, “Accounting for Income Taxes”. FIN 48 prescribes arecognition threshold and measurement attribute for financial statementdisclosure of tax positions taken or expected to be taken on a tax return. Additionally,FIN 48 provides guidance on derecognition, classification, interest andpenalties, accounting in interim periods, disclosure and transition. FIN 48will be effective for our 2008 fiscal year. We are evaluating the impact thatthis statement will have on our results of operations and financial position.

**FORWARD LOOKINGSTATEMENTS**

Various statements made within the Management’sDiscussion and Analysis of Financial Condition and Results of Operations andelsewhere in this report constitute “forward-looking statements” for 

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purposes of the SEC’s “safeharbor” provisions under the Private Securities Litigation Reform Act of 1995and Rule 3b-6 under the Securities Exchange Act of 1934, as amended.Except for historical information, any statement that addresses expectations orprojections about the future, including statements about our strategy forgrowth, product development, market position, expenditures, financial resultsor changes in governmental legislation, policies and conditions, is aforward-looking statement.

Readers are cautioned notto place undue reliance on these forward-looking statements and that allforward-looking statements involve risks and uncertainties, including thosedetailed in our public filings with the SEC, news releases and othercommunications, which speak only as of the dates of those filings orcommunications. We do not undertake any obligation to release publicly anyrevisions to these forward-looking statements to reflect events orcircumstances after the date hereof or to reflect the occurrence ofunanticipated events. There can be no assurance that actual results will notdiffer materially from our expectations. Factors which could cause materiallydifferent results include, among others, uncertainties related to continuedfederal, state and municipal funding for highways and risks related toreductions in government expenditures; the successful completion, integrationand rationalization of acquisitions; the ability to generate sufficient futurecash flows to be in compliance with financing agreements; the introduction andacceptance of our products and services; an unfavorable change in product salesmix; seasonality along with the extent and timing of the award of largecontracts; the cyclical nature of our governmental markets; competitive andpricing pressures; increasing raw material costs; excess manufacturingcapacity; weather conditions and natural disasters; acts of war and terroristactivities; the possible impairment of goodwill and other intangible assets;and general economic conditions.

**ITEM 3.**                Quantitativeand Qualitative Disclosures about Market Risk

Item 7.A. of our Annual Report on Form 10-Kfor the year ended June 30, 2006 presents information regardingQuantitative and Qualitative Disclosures about Market Risk.

We are exposed to market risk from fluctuations ininterest rates on our revolving credit agreement. Our exposure to fluctuationsin interest rates was reduced when we issued $40 million of fixed ratedconvertible debt and used the proceeds to pay down variable rate bank debtissued pursuant to our revolving credit agreement in the third quarter offiscal 2005. We had managed our exposure to interest rate fluctuationsbeginning in fiscal 2004 through the use of derivative instruments in the formof non-trading interest rate swaps, but our interest rate swap agreementwas liquidated in the third quarter of fiscal 2005.

Substantially all of ourbusiness is transacted in U. S. dollars. We continue to evaluate the use ofderivative financial instruments to manage the effects of foreign currencyexchange rates changes. We do not believe we are currently exposed to anymaterial risk of loss from currency exchange fluctuations.

**ITEM 4.**                Controlsand Procedures

(a)   Evaluationof Disclosure Controls and Procedures

We maintain disclosure controls and procedures thatare designed to ensure that information required to be disclosed in the Company’sreports under the Securities Exchange Act of 1934, as amended, is recorded,processed, summarized and reported within the time periods specified in the SEC’srules and forms, and that such information is accumulated and communicatedto management, including our Chief Executive Officer and Chief FinancialOfficer, as appropriate, to allow timely decisions regarding requireddisclosures. The design of any system of disclosure controls and procedures isbased in part upon certain assumptions about the likelihood of future events,and there can be no assurance that any disclosure controls and procedures willsucceed in achieving their stated goals under all potential future conditions.

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Our management,under the supervision of and with the participation of the Company’s ChiefExecutive Officer and Chief Financial Officer, has evaluated the effectivenessof the Company’s disclosure controls and procedures, as such term is defined inRules 13a-15(e) and 15d-15(e) under the ExchangeAct, as of the end of the period covered by this report. Based on theevaluation as of June 30, 2006 and that our assessment for fiscal 2007 hasnot yet been completed, the Company’s Chief Executive Officer and ChiefFinancial Officer concluded that as a result of the material weakness at theSanta Fe Springs and Tecate, Mexico facilities within our Intersection ControlSegment as described below at paragraph (b), our disclosure controls andprocedures were not effective as of the end of the period covered by thisQuarterly Report on Form 10-Q, December 31, 2006. However, weperformed analysis and other procedures to ensure that our consolidatedfinancial statements were prepared in accordance with accounting principlesgenerally accepted in the United States. Accordingly, we believe that (i) thefinancial statements filed fairly present in all material respects the Company’sfinancial condition, results of operations and cash flow for the periodspresented, and (ii) this report does not contain any untrue statement of amaterial fact or omit a material fact necessary to make the statements, inlight of the circumstances under which such statements were made, notmisleading with respect to the period covered by this report.

(b)   Management’sReport on Internal Controls Over Financial Reporting

Except as described below, there have been no changesin our internal control over financial reporting identified in connection withthe evaluation that occurred during this last fiscal quarter that hasmaterially affected, or is reasonably likely to affect, our internal controlover financial reporting.

Based on our assessment of our internal control overfinancial reporting for the last fiscal year, we determined that a materialweakness existed in our internal controls over certain financial reportingcontrols as of June 30, 2006. Specifically, a number of control breakdownsin the operations at our Santa Fe Springs, California and Tecate, Mexicofacilities within our Intersection Control segment were identified. The controlbreakdowns were noted in financial reporting, revenue, expenditures, inventoryand capital assets, which resulted in a few misstatements identified by our externalauditors, Grant Thornton LLP. These control deficiencies represented amaterial weakness in internal control over financial reporting on the basisthat there is more than a remote likelihood that a material misstatement of ourannual or interim financial statements would not be prevented or detected byour internal control over financial reporting. Accordingly, we concluded that,as of June 30, 2006, our internal control over financial reporting was noteffective based on the criteria set forth by Committee of SponsoringOrganizations of the Treadway Commission.

The manufacturing operations in the two facilitieswhere control breakdowns were noted, Santa Fe Springs, California and Tecate,Mexico, ceased in the first quarter of fiscal 2007 as part of our restructuringactivities. The Santa Fe Springs location still has some non-manufacturingoperations; however, the primary accounting functions were transferred toanother facility within the Intersection Control Segment during this secondquarter. We believe that these actions have addressed and remediated thismaterial control weakness. However, we have not completed this year’s internalcontrol assessment.

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**PART II—OTHERINFORMATION**

There is no informationrequired to be reported under any items except as indicated below:

**Item 1.**                        LegalProceedings

We are involved in severalpending judicial proceedings for product liability claims and other damagesarising out of the conduct of our business. While the outcome of litigation issubject to uncertainties, we believe, after consultation with counsel, that theoutcome of these proceedings, based on current available information and aftertaking into account the availability and limits of our insurance coverage, willnot have a material effect on our consolidated financial condition and resultsof operations.

**Item 4.**                        Submissionof Matters to Vote of Security Holders

Our Annual Meetingof Stockholders was held on November 16, 2006. The matters voted on at theAnnual Meeting were the following:

(1)         The election of James H.DeVries and Lawrence C. McQuade to serve as Directors for a three-year termuntil the annual meeting of stockholders in 2009.

(2)         The ratification of theappointment of Grant Thornton LLP as our independent registered publicaccounting firm.

Messrs. DeVriesand McQuade were elected and the ratification of the appointment of GrantThornton LLP was approved as a result of the following stockholder votes:

|                            | ** ** | **For**   | ** ** | **Against** | ** ** | **Abstain or Withheld** | ** ** |
|----------------------------|------------|-----------|------------|-------------|------------|-----------------------------------|------------|
| (1) Election of Directors  |       |      |       |        |       |                              |       |   |   |
| James H. DeVries           |       | 7,748,357 |       |        |       |                              | 436,461    |   |   |
| Lawrence C. McQuade        |       | 7,725,308 |       |        |       |                              | 459,510    |   |   |
| (2) Ratification  of Grant |       |      |       |        |       |                              |       |   |   |
| Thornton LLP               |       | 8,156,534 |       | 15,703      |       |                              | 12,581     |   |   |

 

The terms of Leslie J.Jezuit, Daniel P. Gorey, Robert D. van Roijen, Jr., Duane M. Tyler andJoseph M. Giglio as directors continued after this meeting.

**Item 6.**                        Exhibits

(a) Exhibits

| 10(a) | First Amendment to Amended and Restated Credit  Agreement and Reaffirmation of Guaranties dated as of December 1, 2006  by and between Quixote Corporation and certain subsidiaries thereof and  LaSalle Bank National Association. |
|-------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 31    | Certification pursuant  to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                            |
| 32    | Certification pursuant  to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                            |

 

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**SIGNATURE**

Pursuantto the requirements of the Securities Exchange Act of 1934, the Registrant hasduly caused this Quarterly Report on Form 10-Q for the quarter endedDecember 31, 2006 to be signed on its behalf by the undersigned thereuntoduly authorized.
|        | QUIXOTE CORPORATION                               |
|--------|---------------------------------------------------|
| DATED: | February 8, 2007                             |   | /s/ DANIEL P. GOREY |   |
|   | DANIEL P. GOREY                                   |
|   | *Chief Financial Officer,*                        |
|   | *Vice President and Treasurer*                    |
|   | *(Chief Financial & Accounting Officer)* |
|        |                                                   |  |  |  |

 

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**EXHIBIT INDEX**

Exhibits:
| 10(a) | First Amendment to Amended and Restated Credit  Agreement, and Reaffirmation of Guaranties dated as of December 1, 2006  by and between Quixote Corporation and certain subsidiaries thereof and  LaSalle Bank National Association |
|-------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 31    | Certification pursuant  to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                            |
| 32    | Certification pursuant  to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                            |

 

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