**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

**FORM 10-Q**

**x**                              QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934

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

**or**

**o**                                 TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934

**Forthe transition period from                     To                     **

**CommissionFile Number 0-7903**

**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

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definition of “acceleratedfiler and large accelerated 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: 8,874,806 shares of the Company’sCommon Stock ($.01-2/3 par value) were outstanding as of April 30,2006.

 

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**PART I—FINANCIALINFORMATION**

**ITEM 1.   FINANCIALSTATEMENTS**

**QUIXOTE CORPORATION AND SUBSIDIARIESConsolidated Statements of Operations(Unaudited)**

| ** **                                 | ** ** | **Nine Months Ended March 31,** | ** **  |
|--------------------------------------------|------------|-----------------------------------------------------|-------------|
| ** **                                 | ** ** | **2006**                                            | ** **  | **2005** | ** ** |
| Net sales                                  |       | $                                                   | 116,047,000 |   | $ | 106,386,000 |   |
| Cost of sales                              |       | 82,837,000                                          |        | 74,394,000 |   |
| Gross profit                               |       | 33,210,000                                          |        | 31,992,000 |   |
| Operating expenses:                        |       |                                                |        |   |   |
| Selling & administrative          |       | 27,479,000                                          |        | 29,515,000 |   |
| Gain on legal settlement                   |       | (633,000                                            | )           |   |   |
| Gain on sale of fixed assets               |       |                                                |        | (560,000 | ) |
| Research & development            |       | 4,427,000                                           |        | 4,004,000 |   |
|                                       |       | 31,273,000                                          |        | 32,959,000 |   |
| Operating profit  (loss)                   |       | 1,937,000                                           |        | (967,000 | ) |
| Other income (expense):                    |       |                                                |        |   |   |
| Interest income                            |       | 1,000                                               |        | 34,000 |   |
| Interest expense                           |       | (3,527,000                                          | )           | (2,359,000 | ) |
|                                       |       | (3,526,000                                          | )           | (2,325,000 | ) |
| Loss before  income taxes                  |       | (1,589,000                                          | )           | (3,292,000 | ) |
| Income tax  benefit                        |       | (604,000                                            | )           | (1,251,000 | ) |
| Net loss                                   |       | $                                                   | (985,000    | ) | $ | (2,041,000 | ) |
| Per share data—basic:                 |       |                                                |        |   |   |
| Net loss                                   |       | $                                                   | (.11        | ) | $ | (.23 | ) |
| Weighted average common shares outstanding |       | 8,856,525                                           |        | 8,782,566 |   |
| Per share data—diluted:               |       |                                                |        |   |   |
| Net loss                                   |       | $                                                   | (.11        | ) | $ | (.23 | ) |
| Weighted average common shares outstanding |       | 8,856,525                                           |        | 8,782,566 |   |
| Cash dividends declared  per common share  |       | $                                                   | .18         |   | $ | .18 |   |

 

See Notes to Consolidated Financial Statements.

2

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**QUIXOTE CORPORATION AND SUBSIDIARIESConsolidated Statements of Operations(Unaudited)**

| ** **                                  | ** ** | **Three Months Ended March 31,** | ** ** |
|---------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                  | ** ** | **2006**                                             | ** ** | **2005** | ** ** |
| Net sales                                   |       | $                                                    | 37,470,000 |   | $ | 34,952,000 |   |
| Cost of sales                               |       | 26,420,000                                           |       | 22,939,000 |   |
| Gross profit                                |       | 11,050,000                                           |       | 12,013,000 |   |
| Operating expenses:                         |       |                                                 |       |   |   |
| Selling & administrative           |       | 9,605,000                                            |       | 10,746,000 |   |
| Research & development             |       | 1,623,000                                            |       | 1,498,000 |   |
|                                        |       | 11,228,000                                           |       | 12,244,000 |   |
| Operating loss                              |       | (178,000                                             | )          | (231,000 | ) |
| Other income (expense):                     |       |                                                 |       |   |   |
| Interest income                             |       |                                                 |       |   |   |
| Interest expense                            |       | (1,238,000                                           | )          | (964,000 | ) |
|                                        |       | (1,238,000                                           | )          | (964,000 | ) |
| Loss before  income taxes                   |       | (1,416,000                                           | )          | (1,195,000 | ) |
| Income tax  benefit.                        |       | (538,000                                             | )          | (454,000 | ) |
| Net loss                                    |       | $                                                    | (878,000   | ) | $ | (741,000 | ) |
| Per share data—basic:                  |       |                                                 |       |   |   |
| Net loss                                    |       | $                                                    | (.10       | ) | $ | (.08 | ) |
| Weighted average common shares outstanding  |       | 8,839,721                                            |       | 8,806,333 |   |
| Per share data—diluted:                |       |                                                 |       |   |   |
| Net loss                                    |       | $                                                    | (.10       | ) | $ | (.08 | ) |
| Weighted average  common shares outstanding |       | 8,839,721                                            |       | 8,806,333 |   |

 

See Notes to Consolidated Financial Statements.

3

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**QUIXOTE CORPORATION AND SUBSIDIARIES Consolidated Balance Sheets (Unaudited)**

| ** **                                                                                                                 | ** ** | **March 31,** | ** **  | **June 30,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------|------------|--------------------|-------------|-------------------|------------|
| ** **                                                                                                                 | ** ** | **2006**           | ** **  | **2005**          | ** ** |
| ASSETS                                                                                                                     |       |               |        |              |       |
| Current assets:                                                                                                            |       |               |        |              |       |
| Cash and cash equivalents                                                                                                  |       | $                  | 2,047,000   |              | $          | 156,000 |   |
| Accounts receivable, net of allowance for doubtful  accounts of $1,517,000 at March 31 and $1,581,000 at June 30 |       | 30,617,000         |        | 32,745,000        |       |
| Inventories, net:                                                                                                          |       |               |        |              |       |
| Raw materials                                                                                                              |       | 17,130,000         |        | 13,988,000        |       |
| Work in process                                                                                                            |       | 4,713,000          |        | 4,666,000         |       |
| Finished goods                                                                                                             |       | 8,445,000          |        | 8,757,000         |       |
|                                                                                                                       |       | 30,288,000         |        | 27,411,000        |       |
| Deferred income tax assets                                                                                                 |       | 6,361,000          |        | 5,765,000         |       |
| Other current assets                                                                                                       |       | 3,610,000          |        | 1,160,000         |       |
| Total current  assets                                                                                                      |       | 72,923,000         |        | 67,237,000        |       |
| Property, plant and equipment, at cost                                                                                     |       | 50,679,000         |        | 48,986,000        |       |
| Less accumulated  depreciation                                                                                             |       | (27,143,000        | )           | (23,978,000       | )          |
|                                                                                                                       |       | 23,536,000         |        | 25,008,000        |       |
| Goodwill                                                                                                                   |       | 29,313,000         |        | 29,313,000        |       |
| Intangible  assets, net                                                                                                    |       | 6,749,000          |        | 7,340,000         |       |
| Deferred income  tax assets                                                                                                |       | 5,083,000          |        | 5,083,000         |       |
| Other assets                                                                                                               |       | 2,318,000          |        | 2,809,000         |       |
|                                                                                                                       |       | $                  | 139,922,000 |              | $          | 136,790,000 |   |

 

See Notes to Consolidated Financial Statements.

4

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**QUIXOTE CORPORATION AND SUBSIDIARIES Consolidated Balance Sheets (Continued) (Unaudited)**

 

| ** **                                                                                                                                                                                               | ** ** | **March 31,** | ** **  | **June 30,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|-------------|-------------------|------------|
| ** **                                                                                                                                                                                               | ** ** | **2006**           | ** **  | **2005**          | ** ** |
| LIABILITIES AND  SHAREHOLDERS’ EQUITY                                                                                                                                                               |       |               |        |              |       |
| Current  liabilities:                                                                                                                                                                                    |       |               |        |              |       |
| Current portion of long-term debt                                                                                                                                                                        |       | $                  | 427,000     |              | $          | 427,000 |   |
| Accounts payable                                                                                                                                                                                         |       | 11,732,000         |        | 11,061,000        |       |
| Dividends payable                                                                                                                                                                                        |       |               |        | 1,595,000         |       |
| Accrued expenses                                                                                                                                                                                         |       | 9,265,000          |        | 11,221,000        |       |
| Total current  liabilities                                                                                                                                                                               |       | 21,424,000         |        | 24,304,000        |       |
| Long-term debt, net of current portion                                                                                                                                                                   |       | 58,770,000         |        | 49,587,000        |       |
| Other long-term  liabilities                                                                                                                                                                             |       | 1,053,000          |        | 1,053,000         |       |
|                                                                                                                                                                                                     |       | 81,247,000         |        | 74,944,000        |       |
| 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 at March 31 and 15,000,000 shares at June 30; issued  10,878,151 shares at March 31 and 10,799,784 shares at June 30 |       | 181,000            |        | 180,000           |       |
| Capital in excess of par value of common stock                                                                                                                                                           |       | 61,500,000         |        | 59,382,000        |       |
| Retained earnings                                                                                                                                                                                        |       | 21,031,000         |        | 23,605,000        |       |
| Accumulated other comprehensive income                                                                                                                                                                   |       | 257,000            |        | 345,000           |       |
| Treasury stock, at cost, 2,023,767 shares at March 31  and 1,915,353 shares at June 30                                                                                               |       | (24,294,000        | )           | (21,666,000       | )          |
| Total  shareholders’ equity                                                                                                                                                                         |       | 58,675,000         |        | 61,846,000        |       |
|                                                                                                                                                                                                     |       | $                  | 139,922,000 |              | $          | 136,790,000 |   |

 

See Notes to Consolidated Financial Statements.

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

| ** **                                                                                                                   | ** ** | **Nine Months Ended March 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                                                                   | ** ** | **2006**                                            | ** ** | **2005** | ** ** |
| Operating activities:                                                                                                        |       |                                                |       |   |   |
| Net loss                                                                                                                     |       | $                                                   | (985,000   | ) | $ | (2,041,000 | ) |
| Adjustments to reconcile net earnings to net cash provided  by (used in) operating activities of continuing operations: |       |                                                |       |   |   |
| Depreciation                                                                                                                 |       | 3,545,000                                           |       | 3,337,000 |   |
| Amortization                                                                                                                 |       | 1,304,000                                           |       | 996,000 |   |
| Gain on sale of land                                                                                                         |       |                                                |       | (560,000 | ) |
| Provisions for losses on  accounts receivable                                                                                |       | (64,000                                             | )          | (166,000 | ) |
| Common stock issued for  401K plan                                                                                           |       | 899,000                                             |       | 391,000 |   |
| Stock-based compensation  expense                                                                                            |       | 785,000                                             |       |   |   |
| Tax benefit from stock  options                                                                                              |       | (163,000                                            | )          |   |   |
| Changes in operating assets and liabilities:                                                                                 |       |                                                |       |   |   |
| Accounts receivable                                                                                                          |       | 2,191,000                                           |       | 1,955,000 |   |
| Inventories                                                                                                                  |       | (2,877,000                                          | )          | 551,000 |   |
| Other assets                                                                                                                 |       | (2,080,000                                          | )          | (935,000 | ) |
| Income taxes                                                                                                                 |       | (433,000                                            | )          | 712,000 |   |
| Accounts payable and  accrued expenses                                                                                       |       | (1,284,000                                          | )          | (4,310,000 | ) |
| Other long-term  liabilities                                                                                                 |       |                                                |       | (228,000 | ) |
| Net cash provided by  (used in) operating activities                                                                         |       | 838,000                                             |       | (298,000 | ) |
| Investing activities:                                                                                                        |       |                                                |       |   |   |
| Capital expenditures                                                                                                         |       | (2,073,000                                          | )          | (2,820,000 | ) |
| Patent expenditures                                                                                                          |       | (310,000                                            | )          | (114,000 | ) |
| Software expenditures                                                                                                        |       | (369,000                                            | )          |   |   |
| Proceeds from sale of  asset                                                                                                 |       |                                                |       | 992,000 |   |
| Payments received on note  receivable                                                                                        |       |                                                |       | 217,000 |   |
| Proceeds from  sale/leaseback of assets                                                                                      |       |                                                |       | 1,206,000 |   |
| Net cash used in  investing activities                                                                                       |       | (2,752,000                                          | )          | (519,000 | ) |
| Financing activities:                                                                                                        |       |                                                |       |   |   |
| Proceeds from revolving  credit agreement                                                                                    |       | 28,850,000                                          |       | 10,650,000 |   |
| Payments on revolving  credit agreement                                                                                      |       | (19,350,000                                         | )          | (29,650,000 | ) |
| Payments on term loan                                                                                                        |       |                                                |       | (17,000,000 | ) |
| Net proceeds from  convertible debt offering                                                                                 |       |                                                |       | 37,395,000 |   |
| Payments on notes  payable                                                                                                   |       | (317,000                                            | )          | (291,000 | ) |
| Proceeds from interest  rate swap                                                                                            |       |                                                |       | 394,000 |   |
| Payment of semi-annual  cash dividend                                                                                        |       | (3,185,000                                          | )          | (3,066,000 | ) |
| Purchase of treasury  stock                                                                                                  |       | (3,105,000                                          | )          |   |   |
| Proceeds from exercise  of common stock options                                                                              |       | 912,000                                             |       | 677,000 |   |
| Net cash provided by  (used in) financing activities                                                                         |       | 3,805,000                                           |       | (891,000 | ) |
| Effect of exchange rate  changes on cash                                                                                     |       |                                                |       | (12,000 | ) |
| Increase (decrease) in  cash and cash equivalents                                                                            |       | 1,891,000                                           |       | (1,720,000 | ) |
| Cash and cash  equivalents at beginning of period                                                                            |       | 156,000                                             |       | 2,389,000 |   |
| Cash and cash equivalents at end of period                                                                                   |       | $                                                   | 2,047,000  |   | $ | 669,000 |   |

 

See Notes to Consolidated Financial Statements.

6

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

**1.    **Theaccompanying unaudited consolidated financial statements present information inaccordance with generally accepted accounting principles for interim financialinformation and applicable rules of Regulation S-X. Accordingly, they donot include all information or footnotes required by generally acceptedaccounting principles for complete financial statements. The June 30, 2005consolidated 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 30,2005. Management believes the financial statements include all normal recurringadjustments necessary for a fair presentation of the results for the interimperiods presented.

**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 quarter ended March 31,2006 includes compensation cost for all share-based awards which were unvestedas of July 1, 2005 as well as compensation cost for all share-based awardsgranted subsequent to July 1, 2005, based on the grant date fair valueestimated in accordance with the provisions of SFAS No. 123(R).  The fair value of the options granted is beingamortized on a straight-line basis over the requisite service period, which isgenerally the vesting period. We have two share-based compensation plans, whichare 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 its 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 theemployee to contribute to the Company’s future success and prosperity, thusenhancing the value of the Company for the benefit of its stockholders. ThePlan provides for grants of stock options and restricted stock for employees asmay be determined by the Compensation Committee of the Board of Directors. Nograntee may receive option grants in excess of 100,000 shares per year. Thestock options are granted with an exercise price equal to the fair market valueof our stock on the date of grant. Employee options granted under the currentplan expire not more than ten years from the grant date with vesting to bedetermined by the Committee. For grants currently outstanding, vesting is overa three year period, with one-third of the grant becoming exercisable at theend of each of the three years. Option awards provide for accelerated vestingif there is 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 the growth and performance of theCompany, and generate an increased incentive for the directors to contribute tothe Company’s future success and prosperity, thus enhancing the value of theCompany for the benefit of its stockholders. The Director Plan provides for anannual grant of stock options for directors based on a fixed amount, which iscurrently 5,000 stock options per each non-employee director annually. Thestock options are granted with an exercise price equal to the fair market valueof our stock on the date of grant. Options granted under the Director Planexpire not more than seven years from the grant date. Vesting is over not lessthan a six-month period. Option awards 

7

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provide for acceleratedvesting if there is a change in control, as defined in the Director Plan. Vestingis also accelerated upon the death of a director optionee.

A summary of the principalfeatures of our current plans, as well as copies of those plans are provided inour 2004 Proxy Statement. Shares issued as a result of stock option exercisesor restricted stock grants may be issued as new shares, funded from Treasurystock or may be shares purchased on the open market.  We believe that we currently have adequateTreasury and authorized unissued shares to meet any requirements to issueshares during fiscal 2006. The authorization for issuance will terminate on November 1,2011 for both the Plan and the Director plan.

*Share-basedCompensation Expense*

The share-based compensation cost that has beencharged against income for those plans was $785,000 for the nine months ended March 31,2006. The total income tax benefit recognized in the income statement forshare-based compensation arrangements was $163,000 for that period, and the netexpense recorded was $622,000, which was $0.07 per basic and diluted shareoutstanding. Share-based compensation expense, which is a non-cash item,increased cash flow from operations by $785,000, or $622,000 net of income taxes,in the nine-month period.  The exerciseof stock options provided $912,000 in cash flow from financing activities.

As of March 31, 2006,the total compensation cost related to unvested share-based awards grantedunder our stock option plans not yet recognized was approximately $1,117,000. Thiscost will be amortized on a straight-line basis over a weighted average periodof approximately 0.9 years and will be adjusted for subsequent changes inestimated forfeitures. The 251,489 unvested options outstanding at March 31,2006 had a weighted-average fair value of $7.12.

*Determining FairValue*

Thefair value of stock options granted is estimated using the Black-Scholesoption-pricing model that uses the assumptions noted below for the first ninemonths of fiscal years 2006 and 2005. Expected volatilities are based onhistorical volatility of the Company’s stock. We use historical data toestimate option exercise patterns, employee termination and forfeiture rateswithin the valuation model; separate groups of optionees that have similarhistorical exercise behavior are considered separately for valuation purposes. Theexpected term of options granted is derived from the output of the optionvaluation model and represents the period of time that options granted areexpected to be outstanding; the range given below results from certain groupsof employees exhibiting different behavior. The risk-free rate for periodswithin the contractual life of the option is based on the U.S. Treasury yieldcurve 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.

| ** **                            | ** ** | **2006 YTD**     | ** ** | **2005 YTD**     | ** ** |
|---------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| Risk free  interest rate              |       | 4.0  – 4.5%      |       | 3.9  – 4.2%      |       |
| Expected dividend  yield              |       | 1.73%                 |       | 1.72%                 |       |
| Weighted average  expected volatility |       | 42%                   |       | 41%                   |       |
| Expected term                         |       | 3.7  – 6.0 years |       | 4.0  – 7.0 years |       |
| Weighted average  expected term       |       | 4.5 years             |       | 4.3 years             |       |

 

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*Stock OptionActivity*

Information with respectto stock option activity under our plans is as follows:

| ** **                         | ** ** | ** ** | ** ** | ** **    | ** ** | **Weighted-**   | ** ** | ** **    | ** ** |
|------------------------------------|------------|------------|------------|---------------|------------|-----------------|------------|---------------|------------|
| ** **                         | ** ** | ** ** | ** ** | **Weighted-** | ** ** | **Average**     | ** ** | ** **    | ** ** |
| ** **                         | ** ** | ** ** | ** ** | **Average**   | ** ** | **Remaining**   | ** ** | **Aggregate** | ** ** |
| ** **                         | ** ** | **Common** | ** ** | **Exercise**  | ** ** | **Contractual** | ** ** | **Intrinsic** | ** ** |
| ** **                         | ** ** | **Shares** | ** ** | **Price**     | ** ** | **Term**        | ** ** | **Value**     | ** ** |
| Outstanding at  July 1, 2005  |       | 1,009,971  |       |          | $          | 18.19           |       |          |       |   |   |   |   |   |
| Granted                            |       | 114,200    |       |          | $          | 21.02           |       |          |       |   |   |   |   |   |
| Exercised                          |       | (119,849   | )          |          | $          | 15.44           |       |          |       |   |   |   |   |   |
| Cancelled or  expired              |       | (13,633    | )          |          | $          | 20.83           |       |          |       |   |   |   |   |   |
| Outstanding at March 31, 2006 |       | 990,689    |       |          | $          | 18.81           |       |          |       | 3.4 Years |   |   | $ | 5,885,000 |   |
| Vested at  March 31, 2006     |       | 739,200    |       |          | $          | 18.11           |       |          |       | 2.8 Years |   |   | $ | 4,910,000 |   |

 

Options outstanding at March 31,2006 are exercisable as follows: 739,200 currently, 137,223 within one year,85,599 in two years and 28,667 thereafter. As of March 31, 2006, we have617,131 common shares reserved for our option and award plans available forfuture grants.

*Pro formaDisclosures*

Priorto adoption of SFAS No. 123(R), we accounted for stock options grantedunder the recognition and measurement principles of APB Opinion No. 25, “Accountingfor Stock Issued to Employees,” and related interpretations. The cost ofrestricted stock granted was expensed in the period the stock is issued. Nocharges were made to earnings in connection with stock options granted, as allstock options granted had an exercise price equal to the market value of theunderlying common stock on the date of grant. The following table illustratesthe effect on net earnings and earnings per share if we had applied the fairvalue recognition provisions of FASB Statement No. 123, “Accounting forStock-Based Compensation,” to the stock options granted during the comparableprior year periods:

| ** **                                                                                                                                         | ** ** | **Nine months**                | ** ** | **Three months**               | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                                                                                         | ** ** | **ended March  31,** | ** ** | **ended March  31,** | ** ** |
| ** **                                                                                                                                         | ** ** | **2005**                            | ** ** | **2005**                            | ** ** |
| Net loss, as  reported                                                                                                                             |       |                                | $          | (2,041,000                          | )          |   |   | $ | (741,000 | ) |   |
| Add: Stock-based  employee compensation expense included in reported net earnings, net of  related tax effects                                     |       |                                |       |                                |       |   |   |   |   |
| Deduct: Total  stock-based employee compensation expense determined under fair value based  method for all awards, net of related tax effects |       |                                | (779,000   | )                                   |       |   | (280,000 | ) |   |
| Pro-forma net  loss                                                                                                                                |       |                                | $          | (2,820,000                          | )          |   |   | $ | (1,021,000 | ) |   |
| Loss per share:                                                                                                                                    |       |                                |       |                                |       |   |   |   |   |
| Basic—as reported                                                                                                                             |       |                                | $          | (0.23                               | )          |   |   | $ | (0.08 | ) |   |
| Basic—pro forma                                                                                                                               |       |                                | $          | (0.32                               | )          |   |   | $ | (0.12 | ) |   |
| Diluted—as reported                                                                                                                           |       |                                | $          | (0.23                               | )          |   |   | $ | (0.08 | ) |   |
| Diluted—pro forma                                                                                                                             |       |                                | $          | (0.32                               | )          |   |   | $ | (0.12 | ) |   |

 

Disclosures for the three and nine-month periods endedMarch 31, 2006 are not presented because stock-based payments wererecorded using the fair-value method required under SFAS No. 123(R).

9

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**3.    **The income tax benefitfor the current quarter is based upon the estimated effective income tax ratefor the full fiscal year.

**4.    **Operatingresults for the first nine months of fiscal 2006 are not necessarily indicativeof the performance for the entire year. Our business is generally seasonal witha higher level of sales in the fourth fiscal quarter.

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

| ** **                                         | ** ** | **Nine Months Ended** | ** ** | **Three Months Ended** | ** ** |
|----------------------------------------------------|------------|---------------------------------|------------|----------------------------------|------------|
| ** **                                         | ** ** | **March 31,**              | ** ** | **March 31,**               | ** ** |
| ** **                                         | ** ** | **2006**                        | ** ** | **2005**                         | ** ** | **2006** | ** ** | **2005** | ** ** |
| *Numerator:*                                       |       |                            |       |                             |       |   |   |   |   |
| Net loss  available to common shareholders         |       | $                               | (985,000   | )                                | $          | (2,041,000 | ) | $ | (878,000 | ) | $ | (741,000 | ) |
| *Denominator:*                                     |       |                            |       |                             |       |   |   |   |   |
| Weighted average  shares outstanding-basic         |       | 8,856,525                       |       | 8,782,566                        |       | 8,839,721 |   | 8,806,333 |   |
| Effect of dilutive securities-common stock options |       |                            |       |                             |       |   |   |   |   |
| Weighted average shares outstanding-  diluted      |       | 8,856,525                       |       | 8,782,566                        |       | 8,839,721 |   | 8,806,333 |   |
| *Net  loss per share of common stock:*             |       |                            |       |                             |       |   |   |   |   |
| Basic                                              |       | $                               | (0.11      | )                                | $          | (0.23 | ) | $ | (0.10 | ) | $ | (0.08 | ) |
| Diluted                                            |       | $                               | (0.11      | )                                | $          | (0.23 | ) | $ | (0.10 | ) | $ | (0.08 | ) |

 

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 andnine-month periods ended March 31, 2006 and 2005 and are as follows:

| ** **                        | ** ** | **Nine Months Ended** | ** ** | **Three Months Ended** | ** ** |
|-----------------------------------|------------|---------------------------------|------------|----------------------------------|------------|
| ** **                        | ** ** | **March  31,**        | ** ** | **March 31,**               | ** ** |
| ** **                        | ** ** | **2006**                        | ** ** | **2005**                         | ** ** | **2006** | ** ** | **2005** | ** ** |
| Average exercise  price per share |       | $                               | 25.22      |                             | $          | 24.67 |   | $ | 25.22 |   | $ | 22.73 |   |
| Number of shares                  |       | 264,800                         |       | 311,100                          |       | 264,800 |   | 492,400 |   |
|                                   |            |                                 |            |                                  |            |  |  |  |  |  |  |  |  |

 

In addition, stock options totaling 141,226 and149,108 shares, respectively, for the nine and three-month periods ended March 31,2006 and 113,947 and 100,052 shares, respectively, for the nine and three-monthperiods ending March 31, 2005 were not included in the diluted weightedaverage shares calculation because the effects of these securities wereanti-dilutive due to the net loss recorded for those periods.

10

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**6.**     Accumulated other comprehensive incomeconsists of the following:

| ** **                                 | ** ** | **March 31,** | ** ** | **June 30,** | ** ** |
|--------------------------------------------|------------|--------------------|------------|-------------------|------------|
| ** **                                 | ** ** | **2006**           | ** ** | **2005**          | ** ** |
| Unrealized gain on  derivative instrument: |       |               |       |              |       |
| Beginning balance—July 1         |       | $                  | 345,000    |              | $          | 660,000 |   |
| Change in derivative instrument            |       |               |       | (265,000          | )          |
| Amortization to earnings                   |       | (88,000            | )          | (50,000           | )          |
| Ending balance                             |       | $                  | 257,000    |              | $          | 345,000 |   |
| Currency  translation adjustment:          |       |               |       |              |       |
| Beginning balance—July 1         |       |               |       | $                 | (46,000    | ) |
| Currency translation adjustment            |       |               |       | (27,000           | )          |
| Liquidation of foreign entity              |       |               |       | 73,000            |       |
| Ending balance                             |       | $                  | —     |              | $          | — |   |
| Total accumulated  comprehensive income    |       | $                  | 257,000    |              | $          | 345,000 |   |

 

Comprehensiveincome (loss) consists of the following:

| ** **                       | ** ** | **Nine Months Ended** | ** ** | **Three Months Ended** | ** ** |
|----------------------------------|------------|---------------------------------|------------|----------------------------------|------------|
| ** **                       | ** ** | **March 31,**              | ** ** | **March 31,**               | ** ** |
| ** **                       | ** ** | **2006**                        | ** ** | **2005**                         | ** ** | **2006** | ** ** | **2005** | ** ** |
| Net loss                         |       | $                               | (985,000   | )                                | $          | (2,041,000 | ) | $ | (878,000 | ) | (741,000 | ) |
| Other comprehensive  income:     |       |                            |       |                             |       |   |   |   |   |
| Currency  translation adjustment |       |                            |       | (27,000                          | )          |   |   | (19,000 | ) |
| Change in  derivative instrument |       |                            |       | (285,000                         | )          |   |   | (65,000 | ) |
| Comprehensive  loss              |       | $                               | (985,000   | )                                | $          | (2,353,000 | ) | $ | (878,000 | ) | $ | (825,000 | ) |
|                                  |            |                                 |            |                                  |            |  |  |  |  |  |  |  |  |

 

In the third quarter of fiscal 2006, we entered into aforeign currency swap arrangement to fix the exchange rate related to certaintransactions in Australian currency. However, there were no outstandingtransactions as of March 31, 2006.

**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-filled barrelsand barriers as well as highway delineators. The products within this segmentabsorb and dissipate the force of impact in collisions between vehicles andfixed roadside objects as well as prevent collisions and help to control theflow of traffic by directing or guiding. The primary product lines within theInform segment include highway advisory radio systems; advanced sensingproducts which measure distance, count and classify vehicles; weather sensingsystems and services and other transportation equipment. The products withinthis segment provide information to prevent collisions from occurring and easetraffic congestion. The primary product lines within the Intersection Controlsegment include intelligent intersection control systems, automated enforcementsystems, video detection equipment and other transportation equipment. Theproducts within this segment control traffic and ease traffic congestion,primarily related to intersections.

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

| ** **                         | ** ** | **Protect and** | ** ** | ** ** | ** ** | **Intersection** | ** ** | **Unallocated** | ** ** | ** **  | ** ** |
|------------------------------------|------------|----------------------|------------|------------|------------|------------------|------------|-----------------|------------|-------------|------------|
| ** **                         | ** ** | **Direct**           | ** ** | **Inform** | ** ** | **Control**      | ** ** | **Corporate**   | ** ** | **Total**   | ** ** |
| *2006*                             |       |                 |       |       |       |             |       |            |       |        |       |
| NINE MONTHS                        |       |                 |       |       |       |             |       |            |       |        |       |
| Net sales from  external customers |       | $                    | 55,434,000 |       | $          | 17,222,000       |       | $               | 43,391,000 |        |       |   | $ | 116,047,000 |   |
| Operating profit  (loss)           |       | 9,684,000            |       | 1,678,000  |       | (3,687,000       | )          | $               | (5,738,000 | )           | 1,937,000  |   |
| Identifiable  assets               |       | 51,814,000           |       | 21,029,000 |       | 51,450,000       |       | 15,629,000      |       | 139,922,000 |       |
| THREE MONTHS                       |       |                 |       |       |       |             |       |            |       |        |       |
| Net sales from  external customers |       | $                    | 19,235,000 |       | $          | 4,754,000        |       | $               | 13,481,000 |        |       |   | $ | 37,470,000 |   |
| Operating profit  (loss)           |       | 3,678,000            |       | 481,000    |       | $                | (2,290,000 | )               | $          | (2,047,000  | )          | (178,000 | ) |
| *2005*                             |       |                 |       |       |       |             |       |            |       |        |       |
| NINE MONTHS                        |       |                 |       |       |       |             |       |            |       |        |       |
| Net sales from  external customers |       | $                    | 52,093,000 |       | $          | 14,492,000       |       | $               | 39,801,000 |        |       |   | $ | 106,386,000 |   |
| Operating profit  (loss)           |       | 9,111,000            |       | 496,000    |       | (4,344,000       | )          | $               | (6,230,000 | )           | (967,000   | ) |
| Identifiable  assets               |       | 53,110,000           |       | 20,979,000 |       | 46,476,000       |       | 14,618,000      |       | 135,183,000 |       |
| THREE MONTHS                       |       |                 |       |       |       |             |       |            |       |        |       |
| Net sales from  external customers |       | $                    | 18,417,000 |       | $          | 4,225,000        |       | $               | 12,310,000 |        |       |   | $ | 34,952,000 |   |
| Operating profit (loss)            |       | 4,021,000            |       | (8,000     | )          | (1,927,000       | )          | $               | (2,317,000 | )           | (231,000   | ) |

 

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

| ** **                         | ** ** | **March 31, 2006** | ** ** | **June 30, 2005** | ** ** |
|------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                         | ** ** | **Gross**                    | ** ** | ** **                  | ** ** | **Net** | ** ** | **Gross** | ** ** | ** ** | ** ** | **Net** | ** ** |
| ** **                         | ** ** | **Carrying**                 | ** ** | **Accumulated**             | ** ** | **Intangible** | ** ** | **Carrying** | ** ** | **Accumulated** | ** ** | **Intangible** | ** ** |
| ** **                         | ** ** | **Amount**                   | ** ** | **Amortization**            | ** ** | **Assets** | ** ** | **Amount** | ** ** | **Amortization** | ** ** | **Assets** | ** ** |
| Amortized  intangible  assets:     |       |                         |       |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Patents and licenses               |       | $                            | 3,300,000  |                        |       | $ | 1,894,000 |   |   | $ | 1,406,000 |   | $ | 2,990,000 |   |   | $ | 1,755,000 |   |   | $ | 1,235,000 |   |
| Technology and installed base |       | 2,491,000                    |       |                        | 1,048,000  |   |   | 1,443,000 |   | 2,491,000 |   |   | 899,000 |   |   | 1,592,000 |   |
| Customer relationships             |       | 3,807,000                    |       |                        | 1,569,000  |   |   | 2,238,000 |   | 3,807,000 |   |   | 1,181,000 |   |   | 2,626,000 |   |
| Trade names                        |       | 2,250,000                    |       |                        | 588,000    |   |   | 1,662,000 |   | 2,250,000 |   |   | 363,000 |   |   | 1,887,000 |   |
| Other                              |       | 640,000                      |       |                        | 640,000    |   |   | — |   | 640,000 |   |   | 640,000 |   |   | — |   |
| Total                              |       | $12,488,000                  |       |                        | $5,739,000 |   |   | $6,749,000 |   | $12,178,000 |   |   | $4,838,000 |   |   | $ | 7,340,000 |   |
|                                    |            |                              |            |                             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Intangible amortization expense was $901,000 and$821,000 for the nine months ended March 31, 2006 and 2005, respectively. Theestimated amortization expense for this fiscal year ended June 30, 2006and for the four fiscal years subsequent to 2006 are as follows:  $1,195,000, $1,151,000, $1,086,000, $875,000and $762,000. The carrying amount of goodwill consists of $11,397,000 for theIntersection Control segment, $9,777,000 for the Inform segment and $8,139,000for the Protect and Direct segment  as ofMarch 31, 2006 and June 30, 2005.

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**9.    **Disclosures regarding each group of similarguarantees, 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 $3,857,000 in fiscal year 2006, a total of $6,805,000 inthe next year to three fiscal years, a total of $2,081,000 in the next three tofive fiscal years and $3,854,000 thereafter, for an aggregate of $16,597,000.

*Product WarrantyLiability*

Wewarrant to the original purchaser of our products that we will, at our option,repair or replace, without charge, such products if they fail due to amanufacturing defect. The term of these warranties varies (30 days to 5 years)by product. We accrue for product warranties, when, based on availableinformation, it is probable that customers will make claims under warrantiesrelating to products that have been sold, and a reasonable estimate of thecosts can be made. Our estimated product warranty liability for the nine-monthperiods ended March 31 is as follows:

| ** **                         | ** ** | **2006** | ** ** | **2005**   | ** ** |
|------------------------------------|------------|----------|------------|------------|------------|
| Beginning Balance—July 1 |       | $        | 2,510,000  |       | $          | 4,691,000 |   |
| Current provisions, net            |       | (139,000 | )          | (571,000   | )          |
| Expenditures and settlements       |       | (391,000 | )          | (1,517,000 | )          |
| Adjustments                        |       |     |       | 44,000     |       |
| Ending balance—March 31  |       | $        | 1,980,000  |       | $          | 2,647,000 |   |

 

The amount of $1,517,000presented as “Expenditures and settlements” for fiscal 2005 includes $1,036,000related to the favorable settlement of a lawsuit which occurred in the firstquarter of fiscal 2005.

*Legal*

We are involved in severalpending judicial proceedings for product liability and other damages arisingout of the conduct of our business. We record loss contingencies whereappropriate within the guidelines established by Statement of FAS No. 5 “Accountingfor Contingencies”. While the outcome of litigation is subject touncertainties, we believe, after consultation with counsel, that the outcome ofthese proceedings, based on current available information and after taking intoaccount the availability and limits of our insurance coverage, will not have amaterial effect on our consolidated financial condition and results ofoperations.

*ExecutiveAgreements*

We have agreements withcertain executives which are designed to retain the services of key employeesand to provide for continuity of management in the event of a termination or anactual or threatened change in control of the Company. Upon occurrence of atermination or a triggering event after a change in control, as defined, wewould be liable for payment of benefits under these agreements, to a maximumamount of $4,487,000.  We have by-lawsand agreements under which we indemnify our directors and officers fromliability for certain events or occurrences while the directors or officersare, or were, serving at the Company’s request in such capacities.  The term of the indemnification period is for thedirector’s or officer’s lifetime. We believe that any obligations relating tothis indemnification are predominantly covered by insurance subject to certainexclusions and deductibles. Historically, we have not 

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madepayments under these executive agreements, and no amount has been accrued inthe accompanying consolidated financial statements.

*Business PurchaseAgreements*

As part of the purchaseprice of U.S. Traffic Corporation (UST), we have agreed to pay certainamounts  based on a percentage of revenuesfor sales of certain products between May 1, 2003 and December 31,2009, up to a maximum of $5,250,000. No amounts are outstanding as of March 31,2006. Also as part of the purchase price of UST, the Company guaranteed theprincipal and interest payments on a $5,000,000 five-year, 5.25% subordinatedpromissory note payable to the sellers.

*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 the applicablecontract. The total amount of bid and performance related bonds that wereavailable and undrawn was $5,229,000 at March 31, 2006 and $8,094,000 at June 30,2005. Historically, we have not made significant payments on bid andperformance bonds, and no amount has been accrued in the accompanyingconsolidated financial statements.

*Other Commitments*

We have standby letters of credit covering potentialworkers’ compensation liabilities. The total amount of standby letters ofcredit that were outstanding at March 31, 2006 and at June 30, 2005was $1,144,000. We have included $946,000 in accrued liabilities for thisexposure as of March 31, 2006.

We have certainnon-cancelable royalty agreements, which contain certain minimum payments inthe aggregate of $2,385,000 through fiscal year 2012. We have included $340,000in accrued liabilities for this exposure as of March 31, 2006.

**10.  **DuringSeptember 2005, we settled all claims arising from the 2003 acquisition ofthe Peek Traffic Corporation business with the Peek Traffic Group Limited andits affiliates (the Sellers) for $633,000 in cash, net of legal expenses. Also,as part of the settlement, the Sellers sold to us 150,603 shares of our commonstock acquired by the Sellers as part of the purchase price for $3,105,000, or$20.62 per share. We had claimed damages from the Sellers of the Peek Trafficbusinesses arising from the Sellers’ breaches of representations and warrantiesin the asset purchase agreement and from certain liabilities of the PeekTraffic business that we did not specifically assume or were misrepresented tous.

**11.  **Thecontinued underperformance of the Intersection Control segment resulted in ourdecision to rationalize that business and divest certain non-core product lines.On April 25, 2006, our Board of Directors approved a restructuring planfor our Intersection Control segment, comprised of U.S. Traffic Corporation(USTC) and Peek Traffic Corporation (Peek Traffic).

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Under the restructuring plan, we will discontinuecertain low-margin and non-core product lines manufactured in our USTC leasedfacilities located in Tecate, Mexico and Santa Fe Springs, California. Theseproduct lines include portable and permanent variable message signs, tunnellighting, illuminated street signs and in-ground loop detectors. We willattempt to sell the assets associated with these discontinued product lines.

Additionally, we plan to adopt an outsourcing strategyfor metal enclosures and electronic boards for the remaining intersectioncontrol family of products, including traffic controllers, traffic signals andpedestrian signals. Once substantial outsourcing is accomplished, the Tecate,Mexico and Santa Fe Springs, California facilities will be closed and theremaining core products will be relocated to our Palmetto, Florida and Bedford,Pennsylvania (Peek Traffic) facilities. The Company will continue theactivities of assembly, software installation, and system testing ofintersection control products following the manufacturing process used by PeekTraffic.  We expect the plan will resultin profitability for the Intersection Control business with annualizedoperating cost savings of approximately $6 to $7 million. After the sale anddiscontinuation of product lines, annualized revenues for the Intersection Controlsegment are estimated to be approximately $38 million from $52 million for theyear ended June 30, 2005.

In connection with the restructuring plan, we expectto record cash and non-cash charges. The cash portion of the plan is currentlyestimated to be between $7 and $9 million consisting principally of $3 millionin severance costs and $3 million in lease obligations over the next two years.Implementation of the plan is expected to take between 6 and 9 months tocomplete, and we expect most of the restructuring charges to be incurred beforethe end of our fiscal 2007 second quarter. We are currently analyzing thenon-cash charges and cannot reasonably estimate the amount of those charges atthis time. We will disclose the estimates after we make a determination of suchestimates.

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**PART I—FINANCIALINFORMATION**

**ITEM2.**   MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION ANDRESULTS OF OPERATIONS

*OVERVIEW*

Quixote Corporation (the Company) and its subsidiariesdevelop, manufacture and market highway and transportation safety products toprotect, direct and inform motorists, pedestrians and road workers in bothdomestic and international markets. Our operations are comprised of threereportable segments within the highway and transportation safety industry,concentrating on safety problems and designing products to providetransportation safety solutions. Our three reportable segments are—themanufacture and sale of highway and transportation safety products whichProtect and Direct, the manufacture and sale of products and services whichInform, and the manufacture and sale of products which are used forIntersection Control. The Protect and Direct segment provides solutions forimproving safety on the roads either by minimizing the severity of crashes thatoccur or by preventing crashes from occurring by directing or guiding traffic. Theprimary product lines within the Protect and Direct segment includeenergy-absorbing products such as crash cushions, truck-mounted attenuators,sand-filled barrels and water-filled barriers, and directing and guidingproducts such as flexible post delineators and glare screen systems. The Informsegment provides solutions for improving traffic flow and safety on roads andrunways by providing information. The primary product lines within the Informsegment include advanced sensing products which measure distance, count andclassify vehicles; weather sensing systems and services; computerized highwayadvisory radio transmitting systems; and other transportation equipment. TheIntersection Control segment provides solutions for controlling intersections,including intelligent intersection control systems, automated red light andspeed enforcement systems, and other transportation equipment.

Our products are sold byboth a direct sales force and a distribution network to customers in thehighway construction and safety business, state departments of transportation,county and 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. Aportion 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 highway safety projects on roads constructed or maintained withfederal assistance. Seasonality affects our business with generally a higherlevel of sales in our fourth fiscal quarter.

*RESULTS OFOPERATIONS*

Our results for the firstnine months of fiscal 2006 were below our expectations. Although we arebeginning to see good growth prospects in these early stages of the new federal highway spending bill(SAFETEA-LU), which was signed in August 2005, the performance of our Intersection Control segment has beensubstandard. During the first nine months of fiscal 2006, sales increased overthe same period last year and we are seeing increased order activity in mostareas of our business. We believe the increase in sales and order activityreflects the early signs of improvements in our industry now that a highwaybill is in place. We were encouraged to see sales growth of 19% in our Informsegment and 6% in our Protect and Direct segment, as well as increasedprofitability, during the first nine months. Although sales for theIntersection Control segment have increased from the prior year, they have beenbelow our expectations and break-even levels. The substandard performance ofour Intersection Control segment led to our decision to adopt a restructuringplan in order to improve the profitability of that segment. See Note 11 andFUTURE OUTLOOK for further information.

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

| ** **                                                    | ** ** | **Three Months Ended  March 31,** | ** ** | **Nine Months Ended  March 31,** | ** ** |
|---------------------------------------------------------------|------------|--------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                                    | ** ** | **2006**                                         | ** ** | **2005**                                        | ** ** | **2006** | ** ** | **2005** | ** ** |
| Revenues by Segment:                                          |       |                                             |       |                                            |       |   |   |   |   |
| Protect and Direct                                            |       | $                                                | 19,235,000 |                                            | $          | 18,417,000 |   | $ | 55,434,000 |   | $ | 52,093,000 |   |
| Inform                                                        |       | 4,754,000                                        |       | 4,225,000                                       |       | 17,222,000 |   | 14,492,000 |   |
| Intersection Control                                          |       | 13,481,000                                       |       | 12,310,000                                      |       | 43,391,000 |   | 39,801.000 |   |
|                                                          |       | $                                                | 37,470,000 |                                            | $          | 34,952,000 |   | $ | 116,047,000 |   | $ | 106,386,000 |   |
| Geographic Revenues:                                          |       |                                             |       |                                            |       |   |   |   |   |
| Domestic                                                      |       | $                                                | 32,351,000 |                                            | $          | 30,852,000 |   | $ | 99,760,000 |   | $ | 93,779,000 |   |
| International                                                 |       | 5,119,000                                        |       | 4,100,000                                       |       | 16,287,000 |   | 12,607,000 |   |
|                                                          |       | $                                                | 37,470,000 |                                            | $          | 34,952,000 |   | $ | 116,047,000 |   | $ | 106,386,000 |   |
| Operating Income (Loss)  by Segment:                          |       |                                             |       |                                            |       |   |   |   |   |
| Protect and Direct                                            |       | $                                                | 3,678,000  |                                            | $          | 4,021,000 |   | $ | 9,684,000 |   | $ | 9,111,000 |   |
| Inform                                                        |       | 481,000                                          |       | (8,000                                          | )          | 1,678,000 |   | 496,000 |   |
| Intersection Control                                          |       | (2,290,000                                       | )          | (1,927,000                                      | )          | (3,687,000 | ) | (4,344,000 | ) |
| Unallocated Corporate                                         |       | (2,047,000                                       | )          | (2,317,000                                      | )          | (5,738,000 | ) | (6,230,000 | ) |
|                                                          |       | $                                                | (178,000   | )                                               | $          | (231,000 | ) | $ | 1,937,000 |   | $ | (967,000 | ) |
| Gross profit percentage                                       |       | 29.5                                             | %          | 34.4                                            | %          | 28.6 | % | 30.1 | % |
| Selling and administrative expenses as a percentage  of sales |       | 25.6                                             | %          | 30.7                                            | %          | 23.7 | % | 27.7 | % |
| Diluted loss per  share                                       |       | $                                                | (0.10      | )                                               | $          | (0.08 | ) | $ | (0.11 | ) | $ | (0.23 | ) |

 

*Revenues*

Our net sales for the thirdquarter of fiscal 2006 increased$2,518,000, or 7%, to $37,470,000 from $34,952,000 for the third quarter lastyear. This was due to increases in sales across most major product lines.

Our net sales for the firstnine months of fiscal 2006 increased$9,661,000, or 9%, to $116,047,000 from $106,386,000 for the same period lastyear due to increases in sales across most major product lines.

*Protectand Direct—**Net*sales for the Protect andDirect segment for the third quarter of fiscal 2006 increased 4% to $19,235,000from $18,417,000 for the third quarter last year due to increased domestic andinternational sales. The increase in sales was primarily due to increased salesof core crash cushion and truck mounted attenuator product lines. These salesincreases were offset somewhat by decreases in sales of Triton Barriers® andparts. International sales increased 6% over the prior year period.

Net sales for the Protect and Direct segment for thefirst nine months of fiscal 2006 increased 6% to $55,434,000 from $52,093,000for the same period last year. The increase in sales was due to increased salesacross most major product lines, particularly permanent crash cushions, truckmounted attenuators, delineators and Triton Barriers, which were offsetsomewhat by lower sales of parts.

*Inform—**Net*sales for theInform segment for the third quarter of fiscal 2006 increased 13%, or $529,000,to $4,754,000 from $4,225,000 for the third quarter last year. Sales of highwayadvisory radio products increased sharply from the prior year period, and salesof weather sensing systems and services also increased significantly.

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Net sales for the Inform segment for the first ninemonths of fiscal 2006 increased 19%, or $2,730,000, to $17,222,000 from$14,492,000 for the same period last year. Sales increased across most majorproduct lines including highway advisory radios, weather sensing systems andservices.

*IntersectionControl—**Net*sales for the IntersectionControl segment for the third quarter of fiscal 2006 increased 10%, or$1,171,000, to $13,481,000 from $12,310,000 for the third quarter last year,primarily due to increased international sales. However the sales volumes were less than expected and below break-even levels.International sales for the Intersection Control segment were more than triplethe third quarter last year led by sales of traffic signals in Latin Americaand automatic data recorders in Europe.

Net sales for the Intersection Control segment for thefirst nine months of fiscal 2006 increased 9%, or $3,590,000, to $43,391,000from $39,801,000 for the same period last year. Sales increased across mostmajor product lines, and particularly internationally.

*Geographic*—Internationalsales for the third quarter of fiscal 2006 increased $1,019,000, or 25%, to$5,119,000, compared to $4,100,000 for the third quarter last year, due toincreased sales across all major regions with particularly strong sales in theEurope, Canada and Latin America regions. Domestic sales for the third quarterof fiscal 2006 increased 5% to $32,351,000 from $30,852,000.

International sales forthe first nine months of fiscal 2006 increased $3,680,000, or 29%, to$16,287,000, compared to $12,607,000 for the same period last year, due tostrong sales increases in Europe and Latin America. Domestic sales for thefirst nine months of fiscal 2006 increased 6% to $99,760,000 from $93,779,000.

*Gross Profit Margin*

Our gross profit margin for the third quarter offiscal 2006 was 29.5% compared to 34.4% for the third quarter last year,primarily due to lower gross margins in the Protect and Direct segmentattributable to unfavorable sales mix and higher freight costs. The grossprofit margin for the Inform segment improved slightly due to higher grossprofit margins for weather sensing products and services. The gross profitmargin for the Intersection Control segment decreased slightly.

Our gross profit marginfor the first nine months of fiscal 2006 was 28.6% compared to 30.1% for thesame period last year. Gross margins in the Protect and Direct segment werelower due to higher freight and raw material costs. The gross profit margin forthe Inform segment improved due to higher gross profit margins for highwayadvisory radios and weather sensing products and services. The gross profitmargin for the Intersection Control segment decreased slightly.

*Selling andAdministrative Expenses*

Selling and administrative expenses for the thirdquarter of fiscal 2006 decreased $1,141,000, or 11%, to $9,605,000 from$10,746,000 for the third quarter last year. Selling and administrativeexpenses in the Protect and Direct segment decreased due to lower marketingcosts and personnel related expenses. Selling and administrative expenses inthe Inform segment were slightly lower than the prior year period. Selling andadministrative expenses in the Intersection Control segment were slightlyhigher than the prior period, as increased legal costs related to litigationwith the sellers of the assets of the U.S. Traffic business were higher thansavings from cost reduction measures. Unallocated expenses related to theadoption of SFAS No. 123(R), requiring the expensing of stock options,were $315,000 for the third quarter of fiscal 2006. Selling and administrativeexpenses decreased as a percentage of sales to 25.6% for the third quarter of2006 from 30.7% last year due to the increased level of sales and the fixedcost nature of many of the expenses and certain cost reduction efforts.

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Selling and administrativeexpenses for the first nine months of fiscal 2006 decreased $2,036,000, or 7%,to $27,479,000 from $29,515,000 for the same period last year. Selling andadministrative expenses in the Protect and Direct segment decreased due tolower marketing costs and personnel related expenses. Selling andadministrative expenses in the Inform segment increased due to higher variablecosts related to the higher sales volume. Selling and administrative expensesin the Intersection Control segment decreased somewhat due to the realizationof benefits from cost reduction measures. Unallocated corporate expenses decreased due to lower health care andworkers compensation costs, which were partially offset by the inclusion of $785,000of expense related to the adoption of SFAS 123(R). We expect the after-taxexpense related to SFAS No. 123(R) for fiscal 2006 to beapproximately $800,000, or $0.09 per diluted share. Selling and administrativeexpenses decreased as a percentage of sales to 23.7% for the first nine monthsof 2006 from 27.7% last year, due to the increased level of sales and the fixedcost nature of many of the expenses and certain cost reduction efforts.

*Gain on LegalSettlement*

As further discussed inNote 10, the fiscal 2006 nine-month period for the Intersection Control segmentincludes a gain of $633,000 resulting from the settlement of claims with theseller of Peek Traffic Corporation recorded in this year’s first quarter.

*Gain on Sale ofFixed Assets*

The fiscal 2005 nine-monthperiod included a gain of $560,000 on the sale of some land for the Protect andDirect segment recorded in last year’s second quarter.

*Research andDevelopment*

Research and development expenditures were $1,623,000for the third quarter of fiscal 2006 compared to $1,498,000 for the thirdquarter last year. The increase of $125,000 was due to increased expendituresin both the Inform and the Protect and Direct segments. Expenditures increasedin the Protect and Direct segment for the development of innovative newproducts to address safety needs both domestically and abroad. Expendituresincreased in the Inform segment for product upgrades and enhancements toexisting product lines and on new products. Expenditures remained flat in theIntersection Control segment.

Research and developmentexpenditures were $4,427,000 for the first nine months of fiscal 2006 comparedto $4,004,000 for the same period last year. The increase of $423,000 was dueto increased expenditures in all three segments.

*Operating Profit*

The operating loss for the third quarter of fiscal2006 was $178,000, compared to an operating loss of $231,000 for the thirdquarter of fiscal 2005. For the third quarter of fiscal 2006, operating profitfor the Protect and Direct Group decreased 9% to $3,678,000 from $4,021,000 forthe third quarter last year due primarily to unfavorable sales mix andincreased freight costs. Operating profit for the Inform segment was $481,000compared to an operating loss of $8,000 for the third quarter of last year dueprimarily to the increased level of sales. The operating loss for theIntersection Control segment increased to $2,290,000 from an operating loss of$1,927,000 for the third quarter of last year.

Operating profit for thefirst nine months of fiscal 2006 was $1,937,000, compared to an operating lossof $967,000 for the same period of fiscal 2005. For the first nine months offiscal 2006, operating profit for the Protect and Direct Group increased$573,000 to $9,684,000 from $9,111,000 for the first nine months last year dueprimarily to the increased level of sales. Last year’s period for the Protectand Direct segment included the $560,000 gain on sale of assets. Operatingprofit for the Inform segment increased to 

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$1,678,000from $496,000 for the first nine months of last year primarily due to theincreased level of sales. The operating loss for Intersection Control segmentdecreased to $4,320,000 from an operating loss of $4,344,000 for the first ninemonths of last year primarily due to the increased level of sales, certain costreduction efforts, and the legal settlement.

*Interest Expense*

Interest expense for the third quarter of fiscal 2006increased to $1,238,000 from $964,000 for the third quarter last year. Theincrease was due to the higher level of debt and to higher interest rates. Theinterest rate on our $40 million in Convertible Senior Subordinated Notes is 7%.The interest rate on our collateralized bank credit facility is based on primeor LIBOR and a fixed rate, plus a margin, and the weighted average rate was7.4% as of March 31, 2006.

Interest expense for thefirst nine months of fiscal 2006 increased to $3,527,000 from $2,359,000 forthe same period last year. The increase was due to the higher level of debt andto higher interest rates. Interest expense is expected to be approximately $4.5million for fiscal 2006.

*Provision forIncome Taxes*

The income tax benefit for the third quarter of fiscal2006 was $538,000 representing a 38% effective income tax rate.

The income tax benefit forthe first nine months of fiscal 2006 was $604,000, also representing a 38%effective income tax rate.

*Net Earnings*

The net loss for the third quarter of fiscal 2006 was$878,000, or $0.10 cents per diluted share, compared to a net loss of $741,000,or $0.08 cents per diluted share, for the third quarter last year. Stockcompensation expense recorded in the third quarter of fiscal 2006 was $315,000or $0.03 per diluted share.

The net loss for the firstnine months of fiscal 2006 was $985,000, or $0.11 cents per diluted share,compared to a net loss of $2,041,000, or $0.23 cents per diluted share, for thesame period last year. Stock compensation expense recorded in the first ninemonths of fiscal 2006 was $0.07 per diluted share.

*FINANCIAL CONDITION*

*Liquidity andCapital Resources*

Our principal sources of funds historically have beencash flows from operations and borrowings from banks and other sources. We hadcash and cash equivalents of $2,047,000 as of March 31, 2006 and access toadditional funds of approximately $8 million under a bank collateralized creditagreement. We believe that this bank credit facility is an important source ofliquidity. The credit agreement provides for a $30 million secured revolvingcredit facility with a $10 million sub-facility for letters of credit. TheCompany must maintain a minimum amount of availability of $8 million under therevolving credit facility through June 30, 2006, which decreases to $5 millionafter June 30, 2006. Availability is based on a formula of eligibleaccounts receivable, eligible inventory, machinery and equipment and realestate, subject to a minimum excess collateral availability factor. EffectiveJune 30, 2006, we will also be required to maintain a maximum seniorleverage ratio. The covenants also limit the incurrence of additionalindebtedness, acquisitions, liens and encumbrances and other matterscustomarily restricted in such agreements. The agreement currently expires in April 2008,but may be renewed one additional year on each anniversary date upon mutualconsent of the Company and the bank.

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Our outstanding borrowingswere $59,197,000, or 50.2% of total capitalization, as of March 31, 2006,of which $13,500,000 was outstanding related to the bank credit facility. Thiscompares to $50,014,000, or 44.7% of total capitalization, as of June 30,2005, of which $4,000,000 was outstanding related to the bank credit facility. Asof March 31, 2006, we had approximately $8,000,000 in availability underthe bank credit facility. Included in the amount outstanding as of March 31,2006 and June 30, 2005 was $40 million in 7% Convertible SeniorSubordinated Notes due February 2025, which were sold through a privateplacement in February 2005 and a $5 million five-year subordinatedpromissory note. The amount of standby letters of credit outstanding was $1,144,000as of both March 31, 2006 and June 30, 2005.

*Cash Flows*

Cash flows provided by operations were $838,000 duringthe first nine months of fiscal 2006. This compares with $298,000 used inoperations in the first nine months of fiscal 2005. Cash flow generated byoperations was primarily derived from earnings before non-cash expenses such asdepreciation and amortization. The increase in cash provided by operations inthe first nine months of fiscal 2006 was partially offset by increased workingcapital, in particular, increases in inventory and other assets.

Investing activities used cash of $2,752,000 duringthe first nine months of fiscal 2006, compared to $519,000 in the first ninemonths of the prior year. Expenditures during the first nine months of fiscal2006 included $2,073,000 for capital expenditures.

Financing activities provided cash of $3,805,000during the first nine months of fiscal 2006, compared to using cash of $891,000during the first nine months of fiscal 2005. During the first nine months of2006, we borrowed a net $9,500,000 against our outstanding revolving creditfacility. We paid $3,105,000 to purchase 150,603 shares of our common stockfrom the sellers of Peek Traffic for the treasury. In addition, we paid$317,000 on notes payable. We received cash of $912,000 from the exercise ofcommon stock options. The payment of our semi-annual cash dividend used cash of$3,185,000.

For fiscal 2006, weanticipate needing less than $1,000,000 in additional cash for capitalexpenditures. We may require additional investments in working capital tomaintain growth. We may also need additional funds to repurchase our own commonstock from time to time or if we consider acquiring businesses that complementour existing operations. As discussed in Note 11 and FUTURE OUTLOOK, wecurrently estimate that the cash portion of the recently approved restructuringplan for the Intersection Control segment will be between $7 and $9 million. Approximately$3 million of that amount relates to current lease obligations over the nexttwo years, which we may be able to offset with funds from sub-rentalarrangements. Future cash expenditures will be financed either through cashon-hand, cash generated from operations, from borrowings available under ourbank credit facility or proceeds from sales of assets or product lines to bediscontinued. We currently believe that these sources of cash should besufficient for all planned operating and capital requirements in the near term.However, if needed and available on favorable terms, we may amend existingfinancing arrangements or may enter into other debt or equity financingarrangements.

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*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, 2005. The following table presents our contractualobligations to make future payments under contracts, such as debt and leaseagreements, as of March 31, 2006:

| ** **                      | ** ** | **Total**                                        | ** ** | **Less than  1 Year** | ** ** | **1-3 Years** | ** ** | **3-5 Years** | ** ** | **More than  5 Years** | ** ** |
|---------------------------------|------------|--------------------------------------------------|------------|---------------------------------|------------|--------------------|------------|--------------------|------------|----------------------------------|------------|
| ** **                      | ** ** | **(Dollar amounts in thousands)** | ** ** |
| Long-term debt(1)               |       | $                                                | 59,197     |                            |       | $                  | 427        |               |       | $                                | 5,270      |   | $ | 40,000 |   |   | $ | 13,500 |   |   |
| Estimated  interest payments(2) |       | 17,439                                           |       |                            | 4,111      |               |       | 7,898              |       | 4,437                            |       |   | 993 |   |   |
| Operating leases                |       | 16,597                                           |       |                            | 3,857      |               |       | 6,805              |       | 2,081                            |       |   | 3,854 |   |   |
| Minimum royalty  payments       |       | 2,385                                            |       |                            | 635        |               |       | 850                |       | 600                              |       |   | 300 |   |   |
| Retirement award  program       |       | 3,264                                            |       |                            | 321        |               |       | 689                |       | 342                              |       |   | 1,912 |   |   |
| Total                           |       | $                                                | 98,882     |                            |       | $                  | 9,351      |               |       | $                                | 21,512     |   | $ | 47,460 |   |   | $ | 20,559 |   |   |

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

(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 March 31, 2006 was $5,229,000. We alsohave standby letters of credit covering potential workers’ compensationliabilities. The total standby exposure relating to letters of credit as of March 31,2006 was $1,144,000.

*FUTURE OUTLOOK*

We believe that the enactment of the federaltransportation funding legislation, SAFETEA-LU, in August 2005 isimproving prospects for increased spending for our products in fiscal 2006. Stateand local governments appear to be increasing spending on transportation safetyin 2006 as both national and local economies improve. We are seeing increasedorder activity in most areas of our business. We also expect internationalsales to continue to be an important driver of our sales growth. However, it isdifficult to predict to what extent we will see increased spending for ourproducts and there can be no assurance that either domestic or internationalsales will continue to increase.

As further discussed in Note 11, the continuedunderperformance of the Intersection Control business has necessitated ourdecision to rationalize that business and divest certain non-core product lines.This restructuring was approved by our Board on April 25, 2006. We intendto discontinue and attempt to sell the portable and fixed overhead signportions of that business, as well as the non-core lighting product line. Withinthe remaining intersection control business, we will outsource manufacturing,but continue the activities of assembly, software installation and systemtesting following the manufacturing process used by Peek Traffic. In connectionwith the restructuring plan, we expect to record cash and non-cash charges. Weare currently analyzing the non-cash charges and cannot reasonably estimate theamount at this time. The cash portion of the plan is currently estimated to bebetween $7 and $9 million dollars primarily relating to $3 million dollars inseverance costs and $3 million dollars in lease obligations over the next twoyears. Most of the substantial restructuring charges are expected to beincurred before the end of our fiscal 2007 second quarter. We expect the planwill result in annualized operating cost savings of approximately $6 to 

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$7 million dollars. However,there can be no assurance that we will achieve that level of savings. Therefore,we remain cautious about our performance in fiscal 2006 and into fiscal 2007.

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. In addition, we have acquired complementarybusinesses over the past several years and, as part of our strategy, maycontinue to acquire complementary businesses. The gross profit margins ofcertain acquired product lines, primarily the traffic and intersection controlproduct lines, are lower than our historical gross profit margin, which iscurrently adversely affecting our gross profit margin. We also experiencerigorous price competition in our intersection control system, variable messagesign and weather sensing system product lines. We do not believe these trendswill 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 reserves, valuation allowance on deferred taxassets and health care liabilities. These estimates are made using management’sbest judgment given relevant factors and available data. Actual results coulddiffer materially from those estimates. Note 2 to our June 30, 2005consolidated financial statements includes a summary of the significantaccounting policies, methods and estimates used in the preparation of ourconsolidated financial statements. There have been no material changes inaccounting policies, methods and estimates used by management, except for theadoption of FAS No. 123(R), as discussed in note 2. In the opinion ofmanagement, we do not have any individual accounting policy or use anyindividual estimate that is critical to the preparation of its consolidatedfinancial statements. In most instances, we must use an accounting policy ormethod because it is the only policy or method permitted under U.S. GAAP. Webelieve the following significant accounting policies and methods used by usare the most important to the presentation of our financial statements:

*Revenue Recognition:*   Revenues,net of sales incentives, are recognized when either services have been renderedor both title and risk of loss of products have been transferred tounaffiliated customers. Additionally, we ensure that collection of theresulting receivable is probable, persuasive evidence that an arrangementexists, and the revenue is fixed or determinable. Provision for estimateduncollectible amounts and credit memos is made based upon management’s analysisof bad debts and credit memos.

*Inventories:*   Inventoriesare valued at the lower of cost (first-in, first-out method) or market. Actualcosts are used to value raw materials and supplies. Standard costs, whichapproximate actual costs, are used to value finished goods and work-in-process.Standard costs include raw materials, direct labor and manufacturing overhead. Provisionfor potentially obsolete or slow-moving inventory is made based on management’sanalysis of inventory levels, ages and salability.

*Long-Lived Assets:*   Long-livedassets include such items as goodwill, patents, product rights, otherintangible assets and property, plant and equipment. For purposes of evaluatingthe recoverability of long-lived assets, we assess the possibility ofobsolescence, demand, new technology, competition, and other pertinent economicfactors and trends that may have an impact on the value or remaining lives ofthese 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 

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cash flows of underlyingasset groups. The net carrying value of assets not recoverable is reduced tofair value. Fair values of amortized long-lived assets are determined basedupon the performance of a third party fair value appraisal. Patents and otherfinite-lived intangible assets are amortized on a straight-line or systematicmethod over the life of the patent or intangible asset. In connection with therestructuring plan adopted on April 25, 2006 further discussed in Note 11,we may record certain non-cash charges to adjust the book value of the assetsto be discontinued or sold. We are currently analyzing the non-cash charges andcannot reasonably estimate the amount at this time. We plan to disclose theestimates after we make a determination of such estimates.

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 determinedwith the help of a third party appraisal firm using 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 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. The impact of these estimates andassumptions on impairment testing of goodwill is particularly critical for ourInform and Intersection Control segments with $21,174,000 of our $29,313,000 ofgoodwill recorded in our March 31, 2006 balance sheet. In connection withthe substandard performance of our Intersection Control segment, we may recorda goodwill impairment charge in connection with our impairment review conductedduring the fourth quarter. We are currently analyzing the non-cash charges andcannot reasonably estimate the amount at this time. We plan to disclose theestimates after we make a determination of such estimates.

*Share-based Compensation Expense:*   Weaccount for share-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.

*Income Taxes:*   We recognizedeferred tax assets and liabilities for the expected future tax consequences ofevents that have been included in the financial statements or tax returns. Underthis method, deferred tax assets and liabilities are determined based on thedifference between the financial statement and tax basis of assets andliabilities using enacted tax rates in effect for the year in which thedifferences are expected to reverse. In assessing the realizability of thedeferred tax assets, management considers whether it is more likely than notthat some portion or all of the deferred tax assets will not be realized. Tothe extent that any future tax benefits are not expected to be fully realized,such future tax benefits are reduced by a valuation allowance. Realization ofdeferred tax assets assumes that we will be able to generate sufficient taxableincome so that the assets will be realized. The factors that we consider inassessing the likelihood of realization include the forecast of future taxableincome and available tax planning strategies that could be implemented torealize the deferred tax assets. We expect the net 

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deferred tax assetscurrently recorded to be fully realizable; however there can be no assurancethat an increased valuation allowance would not need to be recorded in thefuture.

**RECENTLY ISSUED ACCOUNTINGPRONOUNCEMENTS**

In February 2006, the Financial AccountingStandards Board (FASB) issued SFAS No. 155, “Accounting for Certain HybridFinancial Instruments—an amendment of FASB Statements No. 133 and 140.”SFAS No. 155 permits an entity to measure at fair value any financialinstrument that contains an embedded derivative that otherwise would requirebifurcation. The Statement will be effective for all instruments acquired,issued, or subject to a remeasurement event occurring after the beginning ofour fiscal year that begins after September 15, 2006, with earlieradoption permitted. We plan to adopt this Statement effective with thebeginning of our next fiscal year, July 1, 2006. We do not expect theadoption of SFAS No. 155 to have a material impact, if any, on ouroperating results or financial condition.

In March 2006, theFinancial Accounting Standards Board (FASB) issued SFAS No. 156, “Accountingfor Servicing of Financial Assets—an amendment of FASB Statement No. 140,”which permits entities to elect to measure servicing assets and servicingliabilities at fair value and report changes in fair value in earnings. We planto adopt this Statement effective with the beginning of our next fiscal year, July 1,2006. We do not expect the adoption of SFAS No. 156 to have a materialimpact, if any, on our operating results or financial condition.

**FORWARD LOOKING STATEMENTS**

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 purposesof the SEC’s “safe harbor” provisions under the Private Securities LitigationReform Act of 1995 and Rule 3b-6 under the Securities Exchange Actof 1934, as amended. Any statement that addresses expectations or projectionsabout the future, including statements about our strategy for growth, productdevelopment, market position, expenditures, financial results or changes ingovernmental legislation, policies and conditions, is a forward-lookingstatement.

Investors are cautionedthat all forward-looking statements involve risks and uncertainties, includingthose detailed in our public filings with the SEC, news releases and other communications,which speak only as of the dates of those filings or communications. We do notundertake any obligation to release publicly any revisions to theseforward-looking statements to reflect events or circumstances after the datehereof or to reflect the occurrence of unanticipated events. There can be noassurance that actual results will not differ materially from our expectations.Factors which could cause materially different results include, among others,uncertainties related to continued federal, state and municipal funding forhighways and risks related to reductions in government expenditures; thesuccessful completion and integration of our acquisitions and the restructuringof our Intersection Control segment; 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 and freight costs; increasinginterest rates; excess manufacturing capacity; weather conditions and naturaldisasters; acts of war and terrorist activities; the possible impairment ofgoodwill and other intangible assets; compliance with Section 404 of theSarbanes-Oxley Act of 2002; and general economic conditions.

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

Item 7.A. of our Annual Report on Form 10-Kfor the year ended June 30, 2005 presents information regardingQuantitative and Qualitative Disclosures about Market Risk.

We are exposed to market risk from fluctuations ininterest rates. Our exposure to fluctuations in interest rates was reduced whenwe issued $40 million of fixed rated convertible debt and used the proceeds topay down variable rate bank debt issued pursuant to our revolving creditagreement in the third quarter of fiscal 2005. We had managed our exposure to interestrate fluctuations beginning in fiscal 2004 through the use of derivativeinstruments in the form of non-trading interest rate swaps, but our interestrate swap agreement was liquidated in the third quarter of fiscal 2005.

The majority of our businessis transacted in U. S. dollars. We continue to evaluate the use of derivativefinancial instruments to manage the effects of foreign currency exchange rateschanges. In the third quarter of fiscal 2006, we entered into a foreigncurrency swap arrangement to fix the exchange rate related to certaintransactions in Australian currency. However, there were no outstandingtransactions as of March 31, 2006. We do not believe we are currentlyexposed to any material risk of loss from currency exchange fluctuations.

**ITEM 4.**   Controlsand Procedures

(a)           Evaluation ofDisclosure 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.

Our management, under thesupervision of and with the participation of the Company’s Chief ExecutiveOfficer and Chief Financial Officer, has evaluated the effectiveness of theCompany’s disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and15d-15(e) under the Exchange Act, as of the end of the periodcovered by this report. Based on the evaluation, the Company’s Chief ExecutiveOfficer and Chief Financial Officer concluded that solely as a result of thematerial weakness in the Company’s internal controls over certain informationtechnology general controls as described below at paragraph (b), our disclosurecontrols and procedures were not effective as of the end of the period coveredby this Quarterly Report on Form 10-Q, March 31, 2006. However,we performed 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, not misleadingwith respect to the period covered by this report.

(b)          Management’s Report onInternal Controls Over Financial Reporting

Based on its assessment of our internal control overfinancial reporting for our last fiscal year, we determined that a materialweakness existed in our internal controls over certain information technologygeneral controls as of June 30, 2005. Specifically, we did not have (i) monitoringof information technology 

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managers who have accessto the application and underlying data, (ii) mechanisms to track changesmade to the application itself, and (iii) adequate security administrationof users’ access to the application. These control deficiencies did not resultin any known financial statement misstatements. However, the aggregation of thesecontrol deficiencies represented a material weakness in internal control overfinancial reporting on the basis that there is more than a remote likelihoodthat a material misstatement of our annual or interim financial statementswould not be prevented or detected by our internal control over financialreporting. Accordingly, we concluded that, as of June 30, 2005, ourinternal control over financial reporting was not effective based on thecriteria set forth by Committee of Sponsoring Organizations of the TreadwayCommission.

During the first half of fiscal 2006, we developed acomprehensive, detailed remediation plan to address our known deficiencies. Duringthe third quarter of fiscal 2006, we performed the following: (1) Weupgraded our primary information technology software to a more current version.This upgrade will allow us to identify changes made to certain data within thesoftware. (2) We implemented “trouble ticket” tracking software, whichallows tracking of changes made by information technology managers to ensurethese changes were authorized. Also, during the fourth quarter, we plan tocomplete our segregation of duties review, to outsource the management ofunderlying data within our software applications and complete testing ofcontrols.

Management expects that the activities performed todate, along with the completion of our remediation plan in the fourth quarterof fiscal 2006, will successfully remediate the known material weakness. However,we cannot determine the effectiveness of the changes until they have beensuccessfully tested and evaluated.

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**PART II—OTHERINFORMATION**

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

**Item 1.**   LegalProceedings

(1) MYERSAMERICA, INC. V. U.S. TRAFFIC CORPORATION, Circuit Court of Cook County,Illinois, Chancery Division, No. 05CH16573. The Company is involved inlitigation with the sellers of the assets of the U.S. Traffic business. In thisaction, one of the Sellers, Myers America, Inc. (Myers), filed a complaintagainst us, seeking an order requiring us to submit reports regarding sales oftraffic controllers to New York City pursuant to the asset purchase agreementand an accounting of such sales. We assert that we have delivered all reportsand accounted for all sales to Myers and have filed an answer and a motion forsummary judgment which is pending.

On November 1, 2005, our subsidiary, U.S. TrafficCorporation (USTC) filed a third-party complaint and motion for a temporaryrestraining order in this lawsuit against Myers Power Products, Inc., anaffiliate of sellers (Myers Power), asserting breach of an OEM Supply Agreemententered into between the parties as part of the acquisition.  Under the terms of the OEM supply agreement,Myers Power agreed to supply UST’s requirements for uninterruptible powersupply products (a product line that we purchased under the original assetpurchase agreement) for a period of five years. We contended that Myers Powerhad breached the OEM supply agreement by failing to supply USTC with powersupply products for approximately one month, and subsequently interfered withUSTC’s efforts to fulfill demand by acquiring products from a third-partysupplier. On November 9, 2005, the court entered a temporary restrainingorder, ordering Myers Power to supply products to USTC pursuant to the terms ofthe OEM Supply Agreement. Myers Power resumed shipments of product to USTCshortly after the temporary restraining order was entered. After a hearing onour motion for a preliminary injunction in late February, the court denied ourmotion in March 2006 and dissolved the temporary restraining order. Wehave filed an appeal. Other than some late shipments and customer managementissues, there was little impact on USTC’s operations arising from Myers Power’srefusal to ship product to USTC, and normal operations resumed after entry ofthe temporary restraining order. Myers Power continues to supply product toUSTC subsequent to the dissolution of the restraining order.

(2) U.S. TRAFFICCORPORATION V. MYERS AMERICA, INC., MYERS/NUART ELECTRICAL PRODUCTS, INC.,RAYMOND INT’L W.L.L., RAYMOND OVERSEAS HOLDING LIMITED, AND BASIL K. VASILIOU,Circuit Court of Cook County, Illinois, Law Division, No. 2005L010719. Inthis action against the sellers of the USTC business, we allege that sellersengaged in a fraudulent scheme to induce us to enter into and close thepurchase of assets of the USTC business for a purchase price which was inflated.Specifically, the purchase price was based on a multiple of the earningsgenerated by the acquired business. By understating reserves for obsolete andslow moving inventory, bad debt reserve, and warranty accruals, sellersoverstated the earnings upon which the purchase price was based. We contend thesellers concealed these understatements by making a series ofmisrepresentations about the inventory, receivables, payables and procedures. Forthis fraud, we are seeking actual and punitive damages.

In addition, our complaint alleges that sellersbreached the asset purchase agreement by: (1) breaching representationsand warranties concerning the accuracy and GAAP-compliance of the sellers’financial statements, specifically with respect to the inventory reserve,payables, bad debt reserve, and warranty accruals; and (2) breachingindemnity obligations with respect to certain excluded liabilities that we paidconcerning certain  inventory purchases,Mexican taxes, improper transfer of automobiles and cash from the business, andfailure to honor certain pre-closing customer contracts. Certain of theseclaims are subject to contractual materiality and dollar thresholds and caps ontotal damages. For these breaches, 

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we are seeking actualdamages and a declaration of sellers’ indemnity obligations, along with itscosts and attorneys’ fees.

We have also asserted claims against three guarantorsof sellers’ obligations under the original asset purchase agreement. Lastly, wesought a declaration that one of the sellers remains the holder of a promissorynote in connection with the asset purchase agreement.

The parties have agreed to consolidate this actionwith the lawsuit described in paragraph (1) above and by agreed order havedelayed the filing of amended pleadings until the end of May.

(3) OTHER LEGAL PROCEEDINGS.   We are involved in several pendingjudicial proceedings for product liability and other damages arising out of theconduct of our business. While the outcome of litigation is subject touncertainties, we believe, after consultation with counsel, that the outcome ofthese proceedings including those referenced in items (1) and (2) above,based on current available information and after taking into account theavailability and limits of our insurance coverage, will not have a materialeffect on our consolidated financial condition and results of operations.

**Item 6.**   Exhibits

(a)           Exhibits

31             Certificationpursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32             Certificationpursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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**SIGNATURE**

Pursuant to therequirements of the Securities Exchange Act of 1934, the Registrant has dulycaused this Quarterly Report on Form 10-Q for the quarter ended March 31,2006 to be signed on its behalf by the undersigned thereunto duly authorized.
|                                           | QUIXOTE  CORPORATION                              |
|-------------------------------------------|---------------------------------------------------|
| DATED:   May 8,  2006 | /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:
| 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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