**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, 2007**

**or**

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

**Forthe transition period from                           to                           **

**CommissionFile Number 001-08123**

**QUIXOTE CORPORATION**

(Exact name of registrantas specified in its charter)

| **Delaware**                              |   | **36-2675371**          |
|-------------------------------------------|--------|-------------------------|
| (State or other  jurisdiction of          |   | (I.R.S. Employer        |
| incorporation or  organization)           |   | Identification  Number) |
| **35 East Wacker Drive**                  |   |                    |
| **Chicago,  Illinois**                    |   | **60601**               |
| (Address of  principal executive offices) |   | (Zip Code)              |

 

**(312) 467-6755**

(Registrant’s telephonenumber, including area code)

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

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

Large accelerated filer o               Acceleratedfiler x               Non-acceleratedfiler o

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

Indicate the number ofshares outstanding of each of the issuer’s classes of common stock, as of thelatest practicable date: 9,018,526 shares of the Company’s Common Stock ($.01-2/3par value) were outstanding as of April 30, 2007.

 

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**PART I—FINANCIALINFORMATION**

**ITEM 1.   FINANCIALSTATEMENTS**

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

| ** **                                 | ** ** | **Nine Months Ended March 31,** | ** ** |
|--------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                 | ** ** | **2007**                                            | ** ** | **2006** | ** ** |
| Net sales                                  |       | $                                                   | 95,791,000 |   | $ | 116,047,000 |   |
| Cost of sales                              |       | 66,105,000                                          |       | 82,837,000 |   |
| Gross profit                               |       | 29,686,000                                          |       | 33,210,000 |   |
| Operating  expenses:                       |       |                                                |       |   |   |
| Selling & administrative          |       | 25,853,000                                          |       | 27,479,000 |   |
| Research & development            |       | 3,849,000                                           |       | 4,427,000 |   |
| Gain on legal settlement                   |       |                                                |       | (633,000 | ) |
| Gain on sale of assets                     |       | (1,191,000                                          | )          |   |   |
| Restructuring costs                        |       | 7,655,000                                           |       |   |   |
|                                       |       | 36,166,000                                          |       | 31,273,000 |   |
| Operating profit  (loss)                   |       | (6,480,000                                          | )          | 1,937,000 |   |
| Other income  (expense):                   |       |                                                |       |   |   |
| Interest income                            |       | 17,000                                              |       | 1,000 |   |
| Interest expense                           |       | (3,389,000                                          | )          | (3,527,000 | ) |
|                                       |       | (3,372,000                                          | )          | (3,526,000 | ) |
| Loss before  income taxes                  |       | (9,852,000                                          | )          | (1,589,000 | ) |
| Income tax  benefit                        |       | (3,744,000                                          | )          | (604,000 | ) |
| Net loss                                   |       | $                                                   | (6,108,000 | ) | $ | (985,000 | ) |
| Per share data—basic:                 |       |                                                |       |   |   |
| Net loss                                   |       | $                                                   | (0.68      | ) | $ | (0.11 | ) |
| Weighted average common shares outstanding |       | 8,920,521                                           |       | 8,856,525 |   |
| Per share data—diluted:               |       |                                                |       |   |   |
| Net loss                                   |       | $                                                   | (0.68      | ) | $ | (0.11 | ) |
| Weighted average common shares outstanding |       | 8,920,521                                           |       | 8,856,525 |   |
| Cash dividends declared  per common share  |       | $                                                   | 0.19       |   | $ | 0.18 |   |

** **

See Notes to Consolidated Financial Statements.

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

| ** **                                  | ** ** | **Three Months Ended March 31,** | ** ** |
|---------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                  | ** ** | **2007**                                             | ** ** | **2006** | ** ** |
| Net sales                                   |       | $                                                    | 30,975,000 |   | $ | 37,470,000 |   |
| Cost of sales                               |       | 20,302,000                                           |       | 26,420,000 |   |
| Gross profit                                |       | 10,673,000                                           |       | 11,050,000 |   |
| Operating  expenses:                        |       |                                                 |       |   |   |
| Selling & administrative           |       | 8,471,000                                            |       | 9,605,000 |   |
| Research & development             |       | 1,222,000                                            |       | 1,623,000 |   |
| Gain on sale of assets                      |       | (598,000                                             | )          |   |   |
|                                        |       | 9,095,000                                            |       | 11,228,000 |   |
| Operating profit  (loss)                    |       | 1,578,000                                            |       | (178,000 | ) |
| Other income  (expense):                    |       |                                                 |       |   |   |
| Interest income                             |       |                                                 |       |   |   |
| Interest expense                            |       | (1,098,000                                           | )          | (1,238,000 | ) |
|                                        |       | (1,098,000                                           | )          | (1,238,000 | ) |
| Profit (loss)  before income taxes          |       | 480,000                                              |       | (1,416,000 | ) |
| Income tax  provision (benefit)             |       | 182,000                                              |       | (538,000 | ) |
| Net earnings  (loss)                        |       | $                                                    | 298,000    |   | $ | (878,000 | ) |
| Per share data—basic:                  |       |                                                 |       |   |   |
| Net earnings (loss)                         |       | $                                                    | 0.03       |   | $ | (0.10 | ) |
| Weighted average common shares outstanding  |       | 8,948,133                                            |       | 8,839,721 |   |
| Per share data—diluted:                |       |                                                 |       |   |   |
| Net earnings (loss)                         |       | $                                                    | 0.03       |   | $ | (0.10 | ) |
| Weighted average  common shares outstanding |       | 9,040,559                                            |       | 8,839,721 |   |

 

See Notes to Consolidated Financial Statements.

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

| ** **                                                                                                                  | ** ** | **March 31,  2007** | ** **  | **June 30,  2006** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|-------------|-------------------------|------------|
| **ASSETS**                                                                                                                  |       |                     |        |                    |       |
| Current assets:                                                                                                             |       |                     |        |                    |       |
| Cash and cash equivalents                                                                                                   |       | $                        | 452,000     |                    | $          | 869,000 |   |
| Accounts  receivable, net of allowance for doubtful accounts of $1,601,000 at March 31  and $1,816,000 at June 30 |       | 27,220,000               |        | 36,481,000              |       |
| Refundable income taxes                                                                                                     |       | 2,612,000                |        | 238,000                 |       |
| Inventories, net:                                                                                                           |       |                     |        |                    |       |
| Raw materials                                                                                                               |       | 10,289,000               |        | 10,356,000              |       |
| Work in process                                                                                                             |       | 5,172,000                |        | 6,642,000               |       |
| Finished goods                                                                                                              |       | 9,191,000                |        | 8,467,000               |       |
|                                                                                                                        |       | 24,652,000               |        | 25,465,000              |       |
| Deferred income tax assets                                                                                                  |       | 3,824,000                |        | 3,824,000               |       |
| Other current assets                                                                                                        |       | 1,768,000                |        | 952,000                 |       |
| Total current  assets                                                                                                       |       | 60,528,000               |        | 67,829,000              |       |
| Property, plant and equipment, at cost                                                                                      |       | 42,690,000               |        | 46,714,000              |       |
| Less accumulated  depreciation                                                                                              |       | (24,759,000              | )           | (27,179,000             | )          |
|                                                                                                                        |       | 17,931,000               |        | 19,535,000              |       |
| Goodwill                                                                                                                    |       | 17,385,000               |        | 17,385,000              |       |
| Intangible  assets, net                                                                                                     |       | 6,072,000                |        | 6,467,000               |       |
| Deferred income  tax assets                                                                                                 |       | 13,168,000               |        | 11,844,000              |       |
| Other assets                                                                                                                |       | 1,623,000                |        | 2,143,000               |       |
|                                                                                                                        |       | $                        | 116,707,000 |                    | $          | 125,203,000 |   |

 

See Notes to Consolidated Financial Statements.

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

 

| ** **                                                                                                                                             | ** ** | **March 31,   2007** | ** **  | **June 30,  2006** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------|-------------|-------------------------|------------|
| **LIABILITIES AND SHAREHOLDERS’  EQUITY**                                                                                                         |       |                           |        |                    |       |
| Current liabilities:                                                                                                                                   |       |                           |        |                    |       |
| Current portion of long-term debt                                                                                                                      |       | $                              | 242,000     |                    | $          | 465,000 |   |
| Accounts payable                                                                                                                                       |       | 8,475,000                      |        | 13,234,000              |       |
| Dividends payable                                                                                                                                      |       |                           |        | 1,688,000               |       |
| Accrued restructuring costs                                                                                                                            |       | 1,648,000                      |        | 497,000                 |       |
| Accrued expenses                                                                                                                                       |       | 6,407,000                      |        | 8,164,000               |       |
| Total current  liabilities                                                                                                                             |       | 16,772,000                     |        | 24,048,000              |       |
| Long-term debt, net of current portion                                                                                                                 |       | 55,250,000                     |        | 51,122,000              |       |
| Other long-term  liabilities                                                                                                                           |       | 1,242,000                      |        | 1,087,000               |       |
|                                                                                                                                                   |       | 73,264,000                     |        | 76,257,000              |       |
| Commitments and contingent  liabilities (Note 9)                                                                                                       |       |                           |        |                    |       |
| Shareholders’  equity:                                                                                                                            |       |                           |        |                    |       |
| Preferred stock,  no par value; authorized 100,000 shares; none issued                                                                                 |       |                           |        |                    |       |
| Common stock, par  value $.01-2/3; authorized 30,000,000 shares; issued 10,986,335  shares at March 31 and 10,904,678 shares at June 30 |       | 183,000                        |        | 182,000                 |       |
| Capital in excess of par value of common stock                                                                                                         |       | 64,408,000                     |        | 62,434,000              |       |
| Retained earnings                                                                                                                                      |       | 2,425,000                      |        | 10,226,000              |       |
| Accumulated other comprehensive income                                                                                                                 |       | 138,000                        |        | 227,000                 |       |
| Treasury stock,  at cost, 1,972,177 shares at March 31 and 2,008,636 shares at  June 30                                                      |       | (23,711,000                    | )           | (24,123,000             | )          |
| Total  shareholders’ equity                                                                                                                       |       | 43,443,000                     |        | 48,946,000              |       |
|                                                                                                                                                   |       | $                              | 116,707,000 |                    | $          | 125,203,000 |   |

 

See Notes to Consolidated Financial Statements.

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**QUIXOTE CORPORATION AND SUBSIDIARIESConsolidated Statements of Cash Flows(Unaudited)**

| ** **                                                                                                                    | ** ** | **Nine Months Ended March 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                                                                    | ** ** | **2007**                                            | ** ** | **2006** | ** ** |
| Operating activities:                                                                                                         |       |                                                |       |   |   |
| Net loss                                                                                                                      |       | $                                                   | (6,108,000 | ) | $ | (985,000 | ) |
| Adjustments to  reconcile net earnings to net cash provided by (used in) operating  activities of continuing operations: |       |                                                |       |   |   |
| Depreciation                                                                                                                  |       | 2,629,000                                           |       | 3,545,000 |   |
| Amortization                                                                                                                  |       | 1,292,000                                           |       | 1,304,000 |   |
| Non-cash inventory disposal                                                                                                   |       | 3,620,000                                           |       |   |   |
| Gain on sale of assets                                                                                                        |       | (1,191,000                                          | )          |   |   |
| Provisions for losses on accounts receivable                                                                                  |       | 530,000                                             |       | (64,000 | ) |
| Common stock issued for 401K plan                                                                                             |       | 690,000                                             |       | 899,000 |   |
| Stock-based compensation expense                                                                                              |       | 726,000                                             |       | 622,000 |   |
| Changes in  operating assets and liabilities:                                                                                 |       |                                                |       |   |   |
| Accounts receivable                                                                                                           |       | 8,731,000                                           |       | 2,191,000 |   |
| Inventories                                                                                                                   |       | (2,807,000                                          | )          | (2,877,000 | ) |
| Other assets                                                                                                                  |       | (788,000                                            | )          | (2,080,000 | ) |
| Income taxes                                                                                                                  |       | (3,698,000                                          | )          | (433,000 | ) |
| Accounts payable and accrued expenses                                                                                         |       | (5,301,000                                          | )          | (1,284,000 | ) |
| Other long-term liabilities                                                                                                   |       | (30,000                                             | )          |   |   |
| Net cash provided  by (used in) operating activities                                                                          |       | (1,705,000                                          | )          | 838,000 |   |
| Investing  activities:                                                                                                        |       |                                                |       |   |   |
| Capital expenditures                                                                                                          |       | (2,212,000                                          | )          | (2,442,000 | ) |
| Patent expenditures                                                                                                           |       | (494,000                                            | )          | (310,000 | ) |
| Proceeds from sale of assets                                                                                                  |       | 2,499,000                                           |       |   |   |
| Net cash used in  investing activities                                                                                        |       | (207,000                                            | )          | (2,752,000 | ) |
| Financing  activities:                                                                                                        |       |                                                |       |   |   |
| Proceeds from revolving credit agreement                                                                                      |       | 21,400,000                                          |       | 28,850,000 |   |
| Payments on revolving credit agreement                                                                                        |       | (17,150,000                                         | )          | (19,350,000 | ) |
| Payments on notes payable                                                                                                     |       | (345,000                                            | )          | (317,000 | ) |
| Payment of semi-annual cash dividend                                                                                          |       | (3,381,000                                          | )          | (3,185,000 | ) |
| Purchase of treasury stock                                                                                                    |       |                                                |       | (3,105,000 | ) |
| Proceeds from exercise of common stock options                                                                                |       | 971,000                                             |       | 912,000 |   |
| Net cash provided  by financing activities                                                                                    |       | 1,495,000                                           |       | 3,805,000 |   |
| Increase (decrease) in cash and cash equivalents                                                                              |       | (417,000                                            | )          | 1,891,000 |   |
| Cash and cash  equivalents at beginning of period                                                                             |       | 869,000                                             |       | 156,000 |   |
| Cash and cash  equivalents at end of period                                                                                   |       | $                                                   | 452,000    |   | $ | 2,047,000 |   |

 

See Notes to Consolidated Financial Statements.

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

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

*Recently IssuedAccounting Pronouncements*

In February 2007, the Financial AccountingStandards Board (FASB) issued SFAS No. 159, “The Fair Value Option forFinancial Assets and Financial Liabilities—including an amendment of FAS 115”(SFAS No.159). This statement permits entities to choose to measure manyfinancial instruments and certain other items at fair value. SFAS No. 159is effective for fiscal years beginning after November 15, 2007, includinginterim periods within that fiscal year. We do not expect the adoption of thisstatement to have a material affect on our results of operations or financialposition.

In July 2006,the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48(FIN 48), “Accounting for Uncertainty in Income Taxes—an interpretation of FASBStatement No. 109”. FIN 48 clarifies the accounting for uncertainty inincome taxes recognized in an entity’s financial statements in accordance withFASB Statement No. 109, “Accounting for Income Taxes”. FIN 48 prescribes arecognition threshold and measurement attribute for financial statement disclosureof tax positions taken or expected to be taken on a tax return. Additionally,FIN 48 provides guidance on derecognition, classification, interest andpenalties, accounting in interim periods, disclosure and transition. FIN 48will be effective for our 2008 fiscal year. We are in the process of evaluatingthe impact that this statement will have on our results of operations andfinancial position, however we currently do not expect that the adoption willhave a material impact.

**2.    **We adopted the provisionsof SFAS No. 123 (revised 2004) (SFAS No. 123(R)), “Share-BasedPayment” as of July 1, 2005 using the modified prospective method. Underthis transition method, share-based compensation cost recognized in the periodsended March 31, 2007 and 2006 includes compensation cost for allshare-based awards which were unvested as of July 1, 2005 as well ascompensation cost for all share-based awards granted subsequent to July 1,2005, based on the grant date fair value estimated in accordance with the provisionsof 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 current share-based compensationplans, which are described below.

*Plan Descriptions*

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

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restricted stock foremployees as may be determined by the Compensation Committee of the Board ofDirectors. No grantee may receive option grants in excess of 100,000 shares peryear. The stock options are granted with an exercise price equal to or greaterthan the fair market value of our stock on the date of grant. Employee optionsgranted under the Plan expire not more than ten years from the grant date withvesting determined by the Committee. For grants currently outstanding, vestingis over a three year period, with one-third of the grant becoming exercisableat the end of each of the three years. Option awards provide for acceleratedvesting if there is a change in control, as defined in the Plan.

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

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

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

*Share-basedCompensation Expense*

The share-based compensation cost that has beencharged against income for our plans was $726,000 and $785,000 for the ninemonths ended March 31, 2007 and 2006, respectively. The total income taxbenefit recognized in the income statement for share-based compensationarrangements was $142,000 and $163,000 for those periods, and the net expenserecorded was $585,000 and $622,000, which was $0.07 per basic share outstandingfor both periods and $0.06 per diluted share outstanding for the nine monthsended March 31, 2007 and $0.07 per diluted share outstanding for the ninemonths ended March 31, 2006.

As of March 31, 2007,the total compensation cost related to unvested share-based awards grantedunder our stock option plans not yet recognized was approximately $1,020,000. Thiscost will be amortized on a straight-line basis over a weighted average periodof approximately 1.0 year and will be adjusted for subsequent changes inestimated forfeitures. The 294,999 unvested options outstanding at March 31,2007 had a weighted-average fair value of $5.68.

*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 2007 and 2006. Expected volatilities are based onhistorical volatility of our stock. We use historical data to estimate optionexercise patterns, employee termination and forfeiture rates within thevaluation model; separate groups of optionees that have similar historicalexercise behavior are considered separately for valuation purposes. 

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The expected term of options granted is derived fromthe output of the option valuation model and represents the period of time thatoptions granted are expected to be outstanding; the range given below resultsfrom certain groups of employees exhibiting different behavior. The risk-freerate for periods within the contractual life of the option is based on the U.S.Treasury yield curve in effect at the time of the grant. The expected dividendyield is determined by dividing the current level of per share dividend by thegrant date stock price. We do not incorporate changes in dividends anticipatedby management unless those changes have been communicated to marketplaceparticipants.

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

 

*Stock OptionActivity*

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

| ** **                          | ** ** | ** **       | ** ** | ** **    | ** ** | **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  |   |   | $ | 6,015,000 |   |
| Outstanding at July 1, 2006    |       | 944,902          |       |          | $          | 18.98           |       |          |       |   |   |   |   |   |
| Granted                             |       | 187,000          |       |          | $          | 18.65           |       |          |       |   |   |   |   |   |
| Exercised                           |       | (82,500          | )          |          | $          | 11.99           |       |          |       |   |   |   |   |   |
| Cancelled or  expired               |       | (170,533         | )          |          | $          | 24.28           |       |          |       |   |   |   |   |   |
| Outstanding at  March 31, 2007 |       | 878,869          |       |          | $18.53     |            |       |          | 3.6 Years  |   |   | $ | 2,080,000 |   |
| Vested at  March 31, 2007      |       | 583,870          |       |          | $18.16     |            |       |          | 3.1 Years  |   |   | $ | 1,796,000 |   |

 

Options outstanding at March 31, 2007 areexercisable as follows: 583,870 currently, 160,476 within one year, 81,190 intwo years and 53,333 thereafter. At March 31, 2006, 739,200 options wereexercisable. As of March 31, 2007, we have 534,487 common shares reservedfor our option and award plans available for future grants.

Duringthe nine months ended March 31, 2007 and 2006, the following activityoccurred under our plans:

| ** **                                        | ** ** | **Nine Months Ended  March 31,** | ** ** |
|---------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                        | ** ** | **2007**                                        | ** ** | **2006** | ** ** |
| Total intrinsic  value of stock options exercised |       | $                                               | 686,000    |   | $ | 866,000 |   |
| Total fair value of  stock options vested         |       | $                                               | 583,000    |   | $ | 730,000 |   |

 

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

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

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

| ** **                                          | ** ** | **Nine Months Ended** | ** ** | **Three Months Ended** | ** ** |
|-----------------------------------------------------|------------|---------------------------------|------------|----------------------------------|------------|
| ** **                                          | ** ** | **March 31,**              | ** ** | **March 31,**               | ** ** |
| ** **                                          | ** ** | **2007**                        | ** ** | **2006**                         | ** ** | **2007** | ** ** | **2006** | ** ** |
| *Numerator:*                                        |       |                            |       |                             |       |   |   |   |   |
| Net profit (loss)  available to common shareholders |       | $                               | (6,108,000 | )                                | $          | (985,000 | ) | $ | 298,000 |   | $ | (878,000 | ) |
| *Denominator:*                                      |       |                            |       |                             |       |   |   |   |   |
| Weighted average  shares  outstanding—basic    |       | 8,920,521                       |       | 8,856,525                        |       | 8,948,133 |   | 8,839,721 |   |
| Effect of dilutive securities-common stock options  |       |                            |       |                             |       | 92,426 |   |   |   |
| Weighted average shares  outstanding—diluted   |       | 8,920,521                       |       | 8,856,525                        |       | 9,040,559 |   | 8,839,721 |   |
| *Net profit (loss) per share of common stock:*      |       |                            |       |                             |       |   |   |   |   |
| Basic                                               |       | $                               | (0.68      | )                                | $          | (0.11 | ) | $ | 0.03 |   | $ | (0.10 | ) |
| Diluted                                             |       | $                               | (0.68      | )                                | $          | (0.11 | ) | $ | 0.03 |   | $ | (0.10 | ) |

 

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, 2007 and 2006 and are as follows:

| ** **                        | ** ** | **Nine Months Ended  March 31,** | ** ** | **Three Months Ended  March 31,** | ** ** |
|-----------------------------------|------------|-------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                        | ** ** | **2007**                                        | ** ** | **2006**                                         | ** ** | **2007** | ** ** | **2006** | ** ** |
| Average exercise  price per share |       | $                                               | 21.26      |                                             | $          | 25.22 |   | $ | 23.14 |   | $ | 25.22 |   |
| Number of shares                  |       | 518,533                                         |       | 264,800                                          |       | 248,000 |   | 264,800 |   |
|                                   |            |                                                 |            |                                                  |            |  |  |  |  |  |  |  |  |

 

In addition,employee stock options totaling 82,691 shares for the nine-month period ended March 31,2007 and 141,226 and 149,108 shares, respectively, for the nine and three monthperiods ending March 31, 2006 were not included in the diluted weightedaverage shares calculation because the effects of these securities wereanti-dilutive.

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

| ** **                                 | ** ** | **March 31,** | ** ** | **March 31,** | ** ** |
|--------------------------------------------|------------|--------------------|------------|--------------------|------------|
| ** **                                 | ** ** | **2007**           | ** ** | **2006**           | ** ** |
| Unrealized gain  on derivative instrument: |       |               |       |               |       |
| Beginning balance—July 1         |       | $                  | 227,000    |               | $          | 345,000 |   |
| Amortization to earnings                   |       | (89,000            | )          | (88,000            | )          |
| Total accumulated  comprehensive income    |       | $                  | 138,000    |               | $          | 257,000 |   |

 

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**7.    **Thesegment financial data presented herein presents our three reportable segments—themanufacture and sale of products which Protect and Direct; the manufacture andsale of products which Inform; and the manufacture and sale of IntersectionControl products. The primary product lines within the Protect and Directsegment include energy-absorbing products such as crash cushions, truck-mountedattenuators, sand-filled barrels, barriers and highway delineators. Theproducts within this segment absorb and dissipate the force of impact incollisions between vehicles and fixed roadside objects as well as preventcollisions and help to control the flow of traffic by directing or guiding. Theprimary product lines within the Inform segment include highway advisory radiosystems; advanced sensing products which measure distance, count and classifyvehicles; weather sensing systems and other transportation equipment. Theproducts within this segment provide information to prevent collisions fromoccurring and to ease traffic congestion. The primary product lines within theIntersection Control segment include intelligent intersection control systems,pedestrian signals, video detection equipment and other transportationequipment. The products within this segment control traffic and ease trafficcongestion, primarily related to intersections. Our segments are discussed infurther detail in our Annual Report on Form 10-K for the year endedJune 30, 2006.

The following tablepresents financial information about reported segments for the nine-month andthree-month periods ended March 31, 2007 and 2006 along with the itemsnecessary to reconcile the segment information to the totals reported in theconsolidated financial statements. 

| ** **                         | ** ** | **Protect and** | ** ** | ** ** | ** ** | **Intersection** | ** ** | **Unallocated** | ** ** | ** **  | ** ** |
|------------------------------------|------------|----------------------|------------|------------|------------|------------------|------------|-----------------|------------|-------------|------------|
| ** **                         | ** ** | **Direct**           | ** ** | **Inform** | ** ** | **Control**      | ** ** | **Corporate**   | ** ** | **Total**   | ** ** |
| *2007*                             |       |                 |       |       |       |             |       |            |       |        |       |
| NINE MONTHS                        |       |                 |       |       |       |             |       |            |       |        |       |
| Net sales from external  customers |       | $                    | 56,325,000 |       | $          | 16,618,000       |       | $               | 22,848,000 |        |       |   | $ | 95,791,000 |   |
| Operating profit (loss)            |       | 10,487,000           |       | 2,151,000  |       | (12,966,000      | )          | $               | (6,152,000 | )           | (6,480,000 | ) |
| Unallocated interest and other     |       |                 |       |       |       |             |       | (3,372,000      | )          | (3,372,000  | )          |
| Total income (loss) before taxes   |       | 10,487,000           |       | 2,151,000  |       | (12,966,000      | )          | (9,524,000      | )          | (9,852,000  | )          |
| Identifiable assets                |       | 54,147,000           |       | 21,619,000 |       | 18,417,000       |       | 22,524,000      |       | 116,707,000 |       |
| THREE  MONTHS                      |       |                 |       |       |       |             |       |            |       |        |       |
| Net sales from external  customers |       | $                    | 19,797,000 |       | $          | 4,908,000        |       | $               | 6,270,000  |        |       |   | $ | 30,975,000 |   |
| Operating profit (loss)            |       | 3,549,000            |       | 584,000    |       | (206,000         | )          | $               | (2,349,000 | )           | 1,578,000  |   |
| Unallocated interest and other     |       |                 |       |       |       |             |       | (1,098,000      | )          | (1,098,000  | )          |
| Total income (loss) before taxes   |       | 3,549,000            |       | 584,000    |       | (206,000         | )          | (3,447,000      | )          | 480,000     |       |
| *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  |   |
| Unallocated interest and other     |       |                 |       |       |       |             |       | (3,526,000      | )          | (3,526,000  | )          |
| Total income (loss) before taxes   |       | 9,684,000            |       | 1,678,000  |       | (3,687,000       | )          | (9,264,000      | )          | (1,589,000  | )          |
| 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 | ) |
| Unallocated interest and other     |       |                 |       |       |       |             |       | (1,238,000      | )          | (1,238,000  | )          |
| Total income (loss) before taxes   |       | 3,678,000            |       | 481,000    |       | (2,290,000)      |       | (3,285,000)     |       | (1,416,000) |       |

 

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Identifiable assets of the Intersection Controlsegment as of March 31, 2007 decreased to $18,417,000 from $51,450,000 asof March 31, 2006 due to $13,374,000 in non-cash asset impairment chargesmade in the fourth quarter of the fiscal year ended June 30, 2006 as wellas due to the sale and write off of assets as part of the restructuring of thissegment over the last four quarters.

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

| ** **                    | ** ** | **March 31, 2007** | ** ** | **June 30, 2006** | ** ** |
|-------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                    | ** ** | **Gross**                    | ** ** | ** **                  | ** ** | **Net** | ** ** | **Gross** | ** ** | ** ** | ** ** | **Net** | ** ** |
| ** **                    | ** ** | **Carrying**                 | ** ** | **Accumulated**             | ** ** | **Intangible** | ** ** | **Carrying** | ** ** | **Accumulated** | ** ** | **Intangible** | ** ** |
| ** **                    | ** ** | **Amount**                   | ** ** | **Amortization**            | ** ** | **Assets** | ** ** | **Amount** | ** ** | **Amortization** | ** ** | **Assets** | ** ** |
| Amortized intangible  assets: |       |                         |       |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Patents and licenses          |       |                         | $          | 3,629,000                   |       |   |   | $ | 1,890,000 |   |   | $ | 1,739,000 |   | $ | 3,135,000 |   |   | $ | 1,758,000 |   |   | $ | 1,377,000 |   |
| Technology and installed base |       |                         | 2,491,000  |                        |       |   | 1,247,000 |   |   | 1,244,000 |   | 2,491,000 |   |   | 1,097,000 |   |   | 1,394,000 |   |
| Customer  relationships       |       |                         | 3,807,000  |                        |       |   | 2,092,000 |   |   | 1,715,000 |   | 3,807,000 |   |   | 1,698,000 |   |   | 2,109,000 |   |
| Trade names                   |       |                         | 2,250,000  |                        |       |   | 876,000 |   |   | 1,374,000 |   | 2,250,000 |   |   | 663,000 |   |   | 1,587,000 |   |
| Other                         |       |                         | 640,000    |                        |       |   | 640,000 |   |   | — |   | 640,000 |   |   | 640,000 |   |   | — |   |
| Total                         |       |                         | $          | 12,817,000                  |       |   |   | $ | 6,745,000 |   |   | $6,072,000 |   | $ | 12,323,000 |   |   | $ | 5,856,000 |   |   | $ | 6,467,000 |   |
|                               |            |                              |            |                             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

We paid $494,000for patents and licenses in the first nine months of fiscal 2007, including$459,000 for a patent relating to a sensor product line in the Inform segment. Intangibleamortization expense was $888,000 and $901,000 for the nine months ended March 31,2007 and 2006, respectively. The estimated amortization expense for this fiscalyear ended June 30, 2007 and for the four fiscal years subsequent to 2007is as follows: $1,180,000, $1,131,000, $919,000, $807,000 and $708,000. Thecarrying amount of goodwill consists of $9,246,000 for the Inform segment and$8,139,000 for the Protect and Direct segment as of March 31, 2007 and June 30,2006. For the Intersection Control segment, the remaining goodwill of$11,397,000 was written off in the fourth quarter of fiscal 2006.

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

*Lease Commitments*

We use various leasedfacilities and equipment in our operations. The terms for these leased assetsvary depending on the lease agreements. These operating leases may includeoptions for renewal and we may guarantee the performance of our obligationsunder the leases. Annual minimum future rental payments for lease commitmentswill be approximately $3,249,000 in fiscal year 2007, $4,048,000 in fiscalyears 2008 to 2009, $1,066,000 in fiscal years 2010 to 2011 and $3,854,000thereafter, for an aggregate of $12,217,000. The annual minimum future rentalsinclude lease obligations related to our Santa Fe Springs, California facility,for which we have accrued $980,000 as part of our restructuring accrual as of March 31, 2007.

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*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 a manufacturingdefect. The term of these warranties typically varies (30 days to 1 year) byproduct. We accrue for product warranties when based on available information,it is probable that customers will make claims under warranties relating toproducts that have been sold, and a reasonable estimate of the costs can bemade. Our estimated product warranty liability for the nine-month periods endedMarch 31 is as follows:

| ** **                         | ** ** | **2007** | ** ** | **2006** | ** ** |
|------------------------------------|------------|----------|------------|----------|------------|
| Beginning Balance—July 1 |       | $        | 927,000    |     | $          | 2,510,000 |   |
| Current provisions, net            |       | (216,000 | )          | (139,000 | )          |
| Expenditures and settlements       |       | (272,000 | )          | (391,000 | )          |
| Ending balance—March 31  |       | $        | 439,000    |     | $          | 1,980,000 |   |

 

*Legal*

We are involved in severalpending judicial proceedings for product liability claims and other damagesarising out of the conduct of our business. We record loss contingencies whereappropriate within the 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 with certain executives which aredesigned to retain the services of key employees and to provide for continuityof management in the event of a termination other than for cause or resultingfrom an actual or threatened change in control of the Company. Upon occurrenceof a termination or a triggering event after a change in control, as defined,we would be liable for payment of benefits under these agreements, to a maximumamount of $4,886,000.

We have by-laws andagreements under which we indemnify our directors and officers from liabilityfor certain events or occurrences while the directors or officers are, or were,serving at the Company’s request in such capacities. The term of the indemnificationperiod is for the director’s or officer’s lifetime. We believe that anyobligations relating to this indemnification are predominantly covered byinsurance subject to certain exclusions and deductibles. Historically, we havenot made payments under these executive agreements, and no amount has beenaccrued in the accompanying consolidated financial statements.

*Indemnification ofLenders and Agents Under Credit Facilities*

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

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*Bid and PerformanceBonds*

We have entered into bidand performance related bonds associated with various contracts. Potentialpayments due under these bonds are related to our performance under theapplicable contract. The total amount of bid and performance related bonds thatwere available and undrawn was $748,000 at March 31, 2007 and $3,028,000at June 30, 2006. Historically, customers have not drawn upon theseinstruments due to non-performance, and no amount has been accrued in theaccompanying consolidated financial statements.

*Other Commitments*

We have standby letters of credit covering potentialworkers’ compensation liabilities and other liabilities. The total amount ofstandby letters of credit that were outstanding was $1,294,000 and $1,144,000at March 31, 2007 and June 30, 2006, respectively. We have included$1,513,000 in accrued liabilities for potential workers’ compensationliabilities as of March 31, 2007.

We have certainnon-cancelable royalty agreements, which contain certain minimum payments inthe aggregate of $2,210,000 through fiscal year 2012. We have included $172,000in accrued liabilities for current obligations relating to royalty agreementsas of March 31, 2007.

**10.  **Wesold our automated traffic enforcement product line within the IntersectionControl segment to Traffipax, Inc. during the first quarter of fiscal 2007for total cash proceeds of $795,000 received through March 31, 2007. Wetransferred to Traffipax city and county contracts to provide red lightenforcement and speed enforcement services, as well as related assets. Severalof our employees were hired by Traffipax to service the transferred contracts. Duringthe first nine months of fiscal 2007, we recognized a gain on the sale ofassets of the automated traffic enforcement product line of $673,000.

During the first nine months of fiscal 2007, wereceived the final contingent proceeds of $282,000 relating to the sale of theweather forecasting product line within the Inform segment during the fourthquarter of fiscal 2006. We recognized a gain on the sale of assets of $282,000during the first nine months of fiscal 2007.

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

During the firstquarter of fiscal 2006, we settled all claims arising from the 2003 acquisitionof the Peek Traffic Corporation business with the Peek Traffic Group Limitedand its affiliates (the Sellers) for $633,000 in cash, net of legal expenses. Also,as part of the settlement, the Sellers sold us 150,603 shares of our commonstock for $3,105,000, or $20.62 per share. We had claimed damages from theSellers of the Peek Traffic business arising from the Sellers’ breaches ofrepresentations and warranties in the asset purchase agreement and from certainliabilities of the Peek Traffic business that we did not specifically assume orwere misrepresented to us.

**11.  **Duringthe fourth quarter of fiscal 2006, our Board of Directors approved arestructuring plan for our Intersection Control segment in order to reducecosts through the reduction of overhead by closing two facilities and throughthe reduction of headcount. Under the restructuring plan, we divested and discontinuedcertain low-margin and non-core product lines primarily manufactured in ourleased facilities in Tecate, Mexico and Santa Fe Springs, California. Theseproduct lines include portable and permanent variable message signs, tunnellighting and illuminated street signs. We moved the remaining intersectioncontrol family of products, including traffic controllers, traffic signals andpedestrian signals to our Palmetto, Florida and Bedford, Pennsylvaniafacilities. We adopted an outsourcing strategy for non-core manufacturingprocesses, but continue to perform final assembly and testing of products. The 

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manufacturing operationsin Santa Fe Springs, California and Tecate, Mexico facilities ceased in thefirst quarter of fiscal 2007.

The implementation of the restructuring plan wascompleted during the second quarter of fiscal 2007 and we incurred noadditional restructuring charges during the third quarter of fiscal 2007. During the second quarter of fiscal 2007, weincurred charges of $2,060,000 related to the restructuring plan, including$172,000 of employee severance costs, $661,000 of lease expense and $1,227,000of shut-down and other related costs. During the first quarter of fiscal 2007,we incurred charges of $9,215,000 related to the restructuring plan, including$5,595,000 of restructuring charges recorded in operating expenses and$3,620,000 in inventory write-downs recorded in cost of sales. During thefourth quarter of fiscal 2006, we recorded $5,775,000 in restructuring charges,net of proceeds received on the sale of assets.

The remaining portion of the restructuring planrecorded in accrued expenses and other long-term liabilities is $1.6 million asof March 31, 2007, which consists of $0.2 million in employee severanceand related benefit costs, $1.0 million in lease obligations over the next twoyears, and $0.4 million in facility exit costs, consulting expense and otherrelated costs.

Activityrelated to the restructuring plan was as follows:

| ** **                               | ** ** | **Employee**         | ** ** | ** **      | ** ** | ** **         | ** ** | ** **             | ** ** | ** ** | ** ** |
|------------------------------------------|------------|----------------------|------------|-----------------|------------|--------------------|------------|------------------------|------------|------------|------------|
| ** **                               | ** ** | **Severance**        | ** ** | ** **      | ** ** | **Asset**          | ** ** | **Facility Exit** | ** ** | ** ** | ** ** |
| ** **                               | ** ** | **and Related** | ** ** | **Lease**       | ** ** | **Sales and** | ** ** | **Costs, Legal**  | ** ** | ** ** | ** ** |
| ** **                               | ** ** | **Costs **      | ** ** | **Obligations** | ** ** | **Write-offs**     | ** ** | **and Other**     | ** ** | **Total**  | ** ** |
| Accrual balance  July 1, 2005       |       |                 | $          | —          |       |               |       | $                      | —     |       |       |   | $ | — |   |   |   | $ | — |   |   | $ | — |   |
| Costs incurred                           |       |                 | 179        |            |       |               | 90         |                   |       |       | 4,571      |   |   |   | 935 |   |   | 5,775 |   |
| Cash proceeds (payments)                 |       |                 | (179       | )               |       |               | (90        | )                      |       |       | 1,500      |   |   |   | (601 | ) |   | 630 |   |
| Non-cash charges                         |       |                 |       |            |       |               |       |                   |       |       | (5,908     | ) |   |   |   |   |   | (5,908 | ) |
| Accrual balance  June 30, 2006      |       |                 | —     |            |       |               | —     |                   |       |       | 163        |   |   |   | 334 |   |   | 497 |   |
| Costs incurred                           |       |                 | 1,686      |            |       |               | 1,307      |                   |       |       | 3,571      |   |   |   | 2,651 |   |   | 9,215 |   |
| Cash proceeds  (payments)                |       |                 | (556       | )               |       |               | (130       | )                      |       |       | (114       | ) |   |   | (1,540 | ) |   | (2,340 | ) |
| Non-cash charges                         |       |                 |       |            |       |               |       |                   |       |       | (3,620     | ) |   |   |   |   |   | (3,620 | ) |
| Accrual balance  September 30, 2006 |       |                 | 1,130      |            |       |               | 1,177      |                   |       |       | —     |   |   |   | 1,445 |   |   | 3,752 |   |
| Costs incurred                           |       |                 | 172        |            |       |               | 661        |                   |       |       |       |   |   |   | 1,227 |   |   | 2,060 |   |
| Cash proceeds  (payments)                |       |                 | (699       | )               |       |               | (507       | )                      |       |       |       |   |   |   | (2,020 | ) |   | (3,226 | ) |
| Non-cash charges                         |       |                 |       |            |       |               |       |                   |       |       |       |   |   |   |   |   |   |   |   |
| Accrual balance  December 31, 2006  |       |                 | 603        |            |       |               | 1,331      |                   |       |       |       |   |   |   | 652 |   |   | 2,586 |   |
| Costs incurred                           |       |                 |       |            |       |               |       |                   |       |       |       |   |   |   |   |   |   |   |   |
| Cash proceeds  (payments)                |       |                 | (370       | )               |       |               | (351       | )                      |       |       |       |   |   |   | (217 | ) |   | (938 | ) |
| Non-cash charges                         |       |                 |       |            |       |               |       |                   |       |       |       |   |   |   |   |   |   |   |   |
| Accrual balance  March 31, 2007     |       |                 | $          | 233             |       |               |       | $                      | 980        |       |       |   | $ | —       |   |   |   | $ | 435 |   |   | $ | 1,648 |   |
| Remaining expected plan costs            |       |                 | $          | —          |       |               |       | $                      | —     |       |       |   | $ | — |   |   |   | $ | — |   |   | $ | — |   |
| Total expected  plan costs               |       |                 | $          | 2,037           |       |               |       | $                      | 2,058      |       |       |   | $ | 8,142 |   |   |   | $ | 4,813 |   |   | $ | 17,050 |   |

 

Employee severance and related costs include severancepay, related benefits and retention bonuses. The total workforce reductionassociated with restructuring activities initiated during fiscal 2006 wasapproximately 400 employees.

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**PART I—FINANCIALINFORMATION**

**ITEM 2.**                MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS

**OVERVIEW**

Quixote Corporation (the Company, we, our or us) andits subsidiaries develop, manufacture and market highway and transportationsafety products to protect, direct and inform motorists, pedestrians and roadworkers in both domestic and international markets. Our operations arecomprised of three reportable segments within the highway and transportationsafety industry, concentrating on safety problems and designing products toprovide transportation 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; computerized highway advisory radiotransmitting systems; and other transportation equipment. The IntersectionControl segment provides solutions for controlling intersections, includingintelligent traffic control systems, pedestrian signals, video detectionequipment and other transportation equipment.

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

**RESULTS OFOPERATIONS**

Our results for the first nine months of fiscal 2007were affected by the restructuring in our Intersection Control segment, asexpected. Sales for the first nine months of fiscal 2007 increased modestly inour Protect and Direct segment driven by increased international sales. Salesfor the Inform segment for the first nine months of fiscal 2007 increasedcompared to last year after excluding $1.5 million in comparable prior yearsales related to the weather forecasting product line sold in the fourthquarter of fiscal 2006. Sales for the Intersection Control segment decreasedsignificantly from the prior year primarily due to the sale and discontinuationof products related to our restructuring plan for the segment. As a result ofthe completion of our restructuring plan in the second quarter of this year,our overall cost structure improved, with gross profit for the current thirdquarter increasing to 34.5% from 29.5% for the third quarter last year. SeeNote 11 to the financial statements and FUTURE OUTLOOK for further information.

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The following table setsforth selected key operating statistics relating to the Company’s financialresults:

| ** **                                                    | ** ** | **Three Months Ended  March 31,** | ** ** | **Nine Months Ended  March 31,** | ** ** |
|---------------------------------------------------------------|------------|--------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                                    | ** ** | **2007**                                         | ** ** | **2006**                                        | ** ** | **2007** | ** ** | **2006** | ** ** |
| Revenues by  Segment:                                         |       |                                             |       |                                            |       |   |   |   |   |
| Protect and Direct                                            |       | $                                                | 19,797,000 |                                            | $          | 19,235,000 |   | $ | 56,325,000 |   | $ | 55,434,000 |   |
| Inform                                                        |       | 4,908,000                                        |       | 4,754,000                                       |       | 16,618,000 |   | 17,222,000 |   |
| Intersection Control                                          |       | 6,270,000                                        |       | 13,481,000                                      |       | 22,848,000 |   | 43,391,000 |   |
|                                                          |       | $                                                | 30,975,000 |                                            | $          | 37,470,000 |   | $ | 95,791,000 |   | $ | 116,047,000 |   |
| Geographic Revenues:                                          |       |                                             |       |                                            |       |   |   |   |   |
| Domestic                                                      |       | $                                                | 25,055,000 |                                            | $          | 32,351,000 |   | $ | 78,836,000 |   | $ | 99,760,000 |   |
| International                                                 |       | 5,920,000                                        |       | 5,119,000                                       |       | 16,955,000 |   | 16,287,000 |   |
|                                                          |       | $                                                | 30,975,000 |                                            | $          | 37,470,000 |   | $ | 95,791,000 |   | $ | 116,047,000 |   |
| Operating Income (Loss) by Segment:                           |       |                                             |       |                                            |       |   |   |   |   |
| Protect and Direct                                            |       | $                                                | 3,549,000  |                                            | $          | 3,678,000 |   | $ | 10,487,000 |   | $ | 9,684,000 |   |
| Inform                                                        |       | 584,000                                          |       | 481,000                                         |       | 2,151,000 |   | 1,678,000 |   |
| Intersection Control                                          |       | (206,000                                         | )          | (2,290,000                                      | )          | (12,966,000 | ) | (3,687,000 | ) |
| Unallocated Corporate                                         |       | (2,349,000                                       | )          | (2,047,000                                      | )          | (6,152,000 | ) | (5,738,000 | ) |
|                                                          |       | $                                                | 1,578,000  |                                            | $          | (178,000 | ) | $ | (6,480,000 | ) | $ | 1,937,000 |   |
| Gross profit percentage                                       |       | 34.5                                             | %          | 29.5                                            | %          | 31.0 | % | 28.6 | % |
| Selling and administrative expenses as a percentage  of sales |       | 27.3                                             | %          | 25.6                                            | %          | 27.0 | % | 23.7 | % |
| Diluted profit  (loss) per share                              |       | $                                                | 0.03       |                                            | $          | (0.10 | ) | $ | (0.68 | ) | $ | (0.11 | ) |

 

***Revenues***

Our net sales for thethird quarter of fiscal 2007 decreased $6,495,000, or 17%, to $30,975,000 from$37,470,000 for the third quarter last year. This was primarily due to the saleand discontinuation of several product lines in our Intersection Controlsegment related to the restructuring of this segment further discussed in Note11 to the financial statements.

Our net sales for thefirstninemonths of fiscal 2007 decreased $20,256,000, or 17%, to $95,791,000 from$116,047,000 for the same period last year primarily due to the restructuringof the Intersection Control segment.

*Geographic—**International sales for the thirdquarter of fiscal 2007 increased $801,000, or 16%, to $5,920,000, compared to$5,119,000 for the third quarter last year, as increased sales of Protect andDirect segment products more than offset decreased sales of IntersectionControl products across most major regions. International sales for the Protectand Direct segment increased 38% over the third quarter last year primarily dueto increased sales of Triton® water-filled barriers to the Asia-Pacific region.International sales of sensing systems for the Inform segment increased due tostrong sales in Canada. Domestic sales for the third quarter of fiscal 2007decreased 23% to $25,055,000 from $32,351,000 primarily due to decreased salesin the Intersection Control segment.*

International sales forthe first nine months of fiscal 2007 increased $668,000, or 4%, to $16,955,000,compared to $16,287,000 for the same period last year, as increased sales ofProtect and Direct as well as Inform segment products were partially offset bydecreased sales of Intersection Control products across 

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mostmajor regions. International sales for the Inform segment increased over theprior period due to sales of weather systems in Canada. International sales forthe Protect and Direct segment increased over the prior period with increasedsales across all major regions. Domestic sales for the first nine months offiscal 2007 decreased 21% to $78,836,000 from $99,760,000 primarily due todecreased sales in the Intersection Control segment.

*Protect and Direct—**Net*sales for theProtect and Direct segment for the third quarter of fiscal 2007 increased 3% to$19,797,000 from $19,235,000 for the third quarter last year primarily due toincreased international sales. Sales of Triton® water-filled barriers,delineators and parts increased, which were partially offset by decreased salesof permanent crash cushions, sand-filled barrels and truck mounted attenuators(TMAs).

Net sales for the Protectand Direct segment for the first nine months of fiscal 2007 increased 2% to$56,325,000 from $55,434,000 for the same period last year. The increase wasprimarily due to increased sales of TMAs, delineators, anti-icing systems andparts. Sales of permanent crash cushions, sand-filled barrels and Triton®barriers decreased from the prior year nine-month period.

*Inform—**Net*sales for theInform segment for the third quarter of fiscal 2006 increased 3% to $4,908,000from $4,754,000 for the third quarter last year, primarily due to increasedsales of traffic sensing products, offset somewhat by decreased sales due tothe sale of the weather forecasting product line at the end of fiscal 2006. Excluding$708,000 in sales related to the weather forecasting product line in the thirdquarter last year, sales for the Inform segment increased 21% over the thirdquarter last year.

Net sales for the Informsegment for the first nine months of fiscal 2007 decreased 4%, or $604,000, to$16,618,000 from $17,222,000 for the same period last year, primarily due tothe sale of the weather forecasting line. Excluding $1,546,000 in sales relatedto the weather forecasting product line for the first nine months of last year,sales for the Inform segment increased 6% over the prior period. Sales ofhighway advisory radio products increased, offset somewhat by decreased salesof weather sensing systems and traffic sensing products.

*Intersection Control—**Net*sales for theIntersection Control segment for the third quarter of fiscal 2007decreased 53%, or $7,211,000, to $6,270,000 from $13,481,000 for the thirdquarter last year, primarily due to the sale and discontinuation of severalproduct lines, including the portable and permanent variable message signs,tunnel lighting, illuminated street signs and automated traffic enforcementlines.

Net sales for theIntersection Control segment for the first nine months of fiscal 2007 decreased47%, or $20,543,000, to $22,848,000 from $43,391,000 for the same period lastyear, primarily due to the sale and discontinuation of product lines.

*Gross Profit Margin*

Our gross profit marginfor the third quarter of fiscal 2007 was 34.5% compared to 29.5% for the thirdquarter last year, primarily due to efficiencies in the restructuredIntersection Control segment. The gross margin for the Protect and Directsegment decreased due to unfavorable product sales mix with strong sales of thelower margin Triton® barrier during the current third quarter. The gross profitmargin for the Inform segment also decreased due to unfavorable product mix.

Our gross profit marginfor the first nine months of fiscal 2007 was 31.0% compared to 28.6% for thesame period last year. If the $3,620,000 in inventory write-offs incurred inthe first quarter as part of the Intersection Control segment restructuring isexcluded from cost of sales, our consolidated gross margin for the first ninemonths of fiscal 2007 increased to 34.8% from 28.6% last year. This improvementin gross margin was due to efficiencies related to the restructuring initiativein the Intersection Control segment. Gross margins improved in the Protect andDirect segment due to favorable product sales mix. Gross margins in the Informsegment remained consistent with the prior period.

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*Selling and Administrative Expenses*

Selling and administrativeexpenses for the third quarter of fiscal 2007 decreased $1,134,000, or 12%, to$8,471,000 from $9,605,000 for the third quarter last year. Selling andadministrative expenses in the Intersection Control segment decreased 50% to$1,495,000 from $2,999,000 for the third quarter last year due to lowerpersonnel costs and other savings as a result of the restructuring plan. Sellingand administrative expenses in the Inform segment decreased primarily due tolower personnel-related expenses due to the sale of the weather forecastingproduct line. Selling and administrative expenses in the Protect and Directsegment increased from the third quarter last year in part due to expendituresrelating to promoting international sales. See FUTURE OUTLOOK for additional information.Selling and administrative expenses increased as a percentage of sales to 27.3%for the third quarter of 2007 from 25.6% last year primarily due to the fixedcost nature of many of the expenses and the lower level of sales.

Selling and administrativeexpenses for the first nine months of fiscal 2007 decreased $1,626,000, or 6%,to $25,853,000 from $27,479,000 for the same period last year. Selling andadministrative expenses in the Intersection Control segment decreased$2,760,000, or 33% due to savings as a result of the restructuring plan. Sellingand administrative expenses in the Inform segment decreased due to lowerpersonnel expenses. Thesedecreases were partially offset by increased selling and administrativeexpenses in the Protect and Direct segment due to increased legal costs relatedto patent defense, increased bad debt expense and international expenditures. Sellingand administrative expenses increased as a percentage of sales to 27.0% for thefirst nine months of 2007 from 23.7% last year due to the fixed cost nature ofmany of the expenses.

*Gain on Sale of Assets*

As further discussed inNote 10 to the financialstatements, we recorded a net gain on the sale of assets of $598,000 inthe third quarter of fiscal 2007, including a gain of $148,000 resulting fromfinal contingent proceeds relating to the sale of the weather forecastingproduct line within the Inform segment and a gain of $450,000 resulting fromfinal contingent proceeds relating to the sale of the automated traffic enforcementproduct line within the Intersection Control segment.

During the first ninemonths of fiscal 2007, we recorded a net gain on the sale of assets of$1,191,000, including a gain of $236,000 related to the sale of a buildingformerly used by the Protect and Direct segment, a gain of $673,000 related tothe sale of the automated traffic enforcement product line within theIntersection Control segment and a gain of $282,000 resulting from contingentproceeds relating to the sale of the weather forecasting product line withinthe Inform segment.

*Restructuring Costs*

As further discussed inNote 11 to the financialstatements, the restructuring plan for the Intersection Control segmentwas completed during the second quarter of fiscal 2007 and no restructuringcosts were recorded in the third quarter of fiscal 2007.

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

*Gain on Legal Settlement*

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

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*Research and Development*

Research and developmentexpenditures decreased to $1,222,000 for the third quarter of fiscal 2007compared to $1,623,000 for the third quarter last year. The decrease of$401,000 was primarily due to decreased expenditures due to the restructuringof the Intersection Control segment and lower expenditures in the Protect andDirect segment on Safe-Hit products.

Research and developmentexpenditures decreased to $3,849,000 for the first nine months of fiscal 2007compared to $4,427,000 for the same period last year. The decrease of $578,000was primarily due to decreased expenditures in the Intersection Controlsegment, although expenditures also decreased slightly in both the Protect andDirect and the Inform segments.

*Operating Profit (Loss)*

Operating profit for thethird quarter of fiscal 2007 was $1,578,000, compared to an operating loss of$178,000 for the third quarter of fiscal 2006. Without the gain on sale of assets of$598,000, operating profit was $980,000 in the current third quarter comparedto the operating loss of $178,000 for the third quarter last year. Thisimprovement in operating profit is primarily due to manufacturing and operatingefficiencies related to the restructuring of the Intersection Control segment. Forthe third quarter of fiscal 2007, operating profit for the Protect and Directsegment decreased 4% to $3,549,000 from $3,678,000 for the third quarter lastyear due primarily to lower gross margins. Operating profit for the InformGroup increased due to the gain on sale of assets, offset somewhat by lowergross margins. The Intersection Control segment had an operating loss of$206,000 compared to an operating loss of $2,290,000 for the third quarter lastyear due to manufacturing and operatingefficiencies as a result of the restructuring plan and to a gain on sale ofassets of the automated enforcement product line.

The operating loss for thefirst nine months of fiscal 2007 was $6,480,000, compared to operating profitof $1,937,000 for the first nine months of fiscal 2006. Without the special items including the$3,620,000 in inventory write-offs, the $7,655,000 of restructuring costs, the$1,191,000 gain on sale of assets and last year’s $633,000 gain on legal settlement,operating profit was $3,604,000 in the current nine-month period comparedto operating profit of $1,304,000 for the same period last year. Thisimprovement in operating profit is primarily due to manufacturing and operatingefficiencies related to the restructuring of the Intersection Control segment. Forthe first nine months of fiscal 2007, operating profit for the Protect andDirect segment increased 8% to $10,487,000 from $9,684,000 for the same periodlast year due primarily to improved gross profit margins. Operating profit forthe Inform segment was $2,151,000 compared to operating profit of $1,678,000for the first nine months of last year due primarily to lower selling andadministrative costs and due to the $282,000 gain on sale of assets. Theoperating loss for the Intersection Control segment increased to $12,966,000from an operating loss of $3,687,000 for the first nine months of last year. Withoutthe special items including the$3,620,000 in inventory write-offs, the $7,655,000 of restructuring costs, the$673,000 gain on sale of assets and last year’s $633,000 gain on legalsettlement, the operating loss for the Intersection Control segment decreasedto $2,365,000 in the current nine-month period from an operating loss of$4,320,000 for the same period last year due to manufacturing and operatingefficiencies as a result of the restructuring plan.

*Interest Expense*

Interest expense for thethird quarter of fiscal 2007 decreased to $1,098,000 from $1,238,000 for thethird quarter last year. The decrease was due to the lower level of averagedebt outstanding. The interest rate on our $40 million in Convertible SeniorSubordinated Notes is 7%. The interest rate on our bank credit facility isbased on prime or LIBOR, plus a margin. Our overall weighted average interestrate was 6.9% as of March 31, 2007.

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Net interest expense forthe first nine months of fiscal 2007 decreased to $3,372,000 from $3,526,000for the same period last year. The decrease was due to the lower level ofaverage debt outstanding. Net interest expense is expected to be approximately$4.5 million for fiscal 2007, which includes approximately $650,000 inamortization of deferred debt issue costs.

*Provision for Income Taxes*

The provision for incometaxes for the third quarter of fiscal 2007 was $182,000 representing a 38%effective income tax rate. The income tax benefit for the first nine months offiscal 2007 was $3,744,000.

*Net Earnings (Loss)*

Net profit for the thirdquarter of fiscal 2007 was $298,000, or $0.03 cents per diluted share, comparedto a net loss of $878,000, or $0.10 cents per diluted share, for the thirdquarter last year. Withoutthe $598,000 in gain on sale of assets, and applying a 38% effective tax rate,the net loss for the current third quarter was $73,000, or $0.01 per dilutedshare, compared to a net loss for the third quarter last year of $878,000, or$0.10 per diluted share.

The net loss for the firstnine months of fiscal 2007 was $6,108,000, or $0.68 cents per diluted share,compared to a net loss of $985,000, or $0.11 cents per diluted share, for thesame period last year. Withoutthe special items including the $3,620,000 in inventory write-offs, the$7,655,000 of restructuring costs, the $1,191,000 in gain on sale of assets andlast year’s $633,000 gain on legal settlement, and applying a 38% effective taxrate, net earnings for the current nine-month period were $144,000, or $0.02per diluted share, compared to a net loss for the same period last year of$1,377,000, or $0.16 per diluted share.

**FINANCIAL CONDITION**

*Liquidity and Capital Resources*

Our principal sources offunds historically have been cash flows from operations and borrowings frombanks and other sources. We had cash and cash equivalents of $452,000 as of March 31,2007 and access to additional funds of approximately $11 million under oursecured bank credit agreement. We believe that this bank credit facility is animportant source of liquidity. The credit agreement provides for a $30 millionrevolving credit facility with a $10 million sub-facility for letters of credit.The Company must maintain a minimum availability of $5 million under therevolving credit facility. Total availability is based on a formula of eligibleaccounts receivable, eligible inventory, machinery and equipment and realestate. We are also required to maintain a maximum senior leverage ratio. Thecovenants also limit the incurrence of additional indebtedness, acquisitions,liens and encumbrances and other matters customarily restricted in suchagreements. We are in compliance with these covenants and expect to remain incompliance through fiscal 2007. The agreement currently expires in February 2009,but may be renewed one additional year on each anniversary date upon mutualconsent of the Company and the bank.

Our outstanding borrowingswere $55,492,000, or 56.1% of total capitalization, as of March 31, 2007,of which $10,250,000 was outstanding related to the bank credit facility. Thiscompares to $51,587,000, or 51.3% of total capitalization, as of June 30,2006, of which $6,000,000 was outstanding related to the bank credit facility. Includedin long-term debt as of March 31, 2007 and June 30, 2006 was $40million in 7% Convertible Senior Subordinated Notes due February 2025 anda $5 million five-year subordinated promissory note due May 2008. Theamount of standby letters of credit outstanding was $1,294,000 as of March 31,2007 and $1,144,000 as of June 30, 2006.

*Cash Flows*

Cash used in operationswas $1,705,000 during the first nine months of fiscal 2007. This compares with$838,000 provided by operations in the first nine months of fiscal 2006. Thecash used in operations in the 

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firstnine months of fiscal 2007 was primarily due to increased working capital,including increases in inventory and decreases in accounts payable and otheraccrued expenses, offset by increased collections of accounts receivable.

Investing activities usedcash of $207,000 during the first nine months of fiscal 2007, compared to usingcash of $2,752,000 in the first nine months of the prior year. Proceeds fromthe sale of assets provided cash of $2,499,000 during the first nine months offiscal 2007. Expenditures during the first nine months of fiscal 2007 included$2,212,000 for capital expenditures.

Financing activitiesprovided cash of $1,495,000 during the first nine months of fiscal 2007,compared to $3,805,000 during the first nine months of fiscal 2006. During thefirst nine months of 2007, we borrowed a net $4,250,000 against our outstandingrevolving credit facility. In addition, we paid $345,000 on notes payable. Thepayment of our semi-annual cash dividend used cash of $3,381,000. During thefirst nine months of fiscal 2006 we paid $3,105,000 to purchase 150,603 sharesof our common stock from the sellers of Peek Traffic, recorded as treasurystock.

For the remainder offiscal 2007, we anticipate needing approximately $1.0 million in additionalcash for capital expenditures primarily for the Protect and Direct segmentincluding further investments in our new Beijing, China facility discussedfurther in FUTURE OUTLOOK. We may require additional investments in workingcapital to support growth. We may also need additional funds to repurchase ourown common stock from time to time or to acquire businesses that complement ourexisting operations. As discussed in Note 11 and FUTURE OUTLOOK, we currentlyestimate that the remaining cash portion of the restructuring plan for theIntersection Control segment will be approximately $1.6 million over the nextyear. Future cash expenditures will be financed either through cash on-hand,cash generated from operations, from borrowings available under our bank creditfacility or proceeds from sales of assets or product lines to be discontinued. Wecurrently believe that these sources of cash should be sufficient for allplanned operating and capital requirements in the near term. If needed andavailable on favorable terms, we may amend existing financing arrangements ormay enter into other debt or equity financing arrangements.

**OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUALOBLIGATIONS**

We aresubject to certain debt obligations, guarantees, commitments and contingentliabilities further described in our Annual Report on Form 10-K forthe year ended June 30, 2006. The following table presents our contractualobligations to make future payments under contracts, such as debt and leaseagreements, as of March 31, 2007:
|                                 | ** ** | ** **                        | ** ** | **Less than** | ** ** | ** **         | ** ** | ** **         | ** ** | **More than** | ** ** |
|---------------------------------|------------|-----------------------------------|------------|--------------------|------------|--------------------|------------|--------------------|------------|--------------------|------------|
| ** **                      | ** ** | **Total**                         | ** ** | **1 Year**    | ** ** | **1-3 Years** | ** ** | **3-5 Years** | ** ** | **5 Years**   | ** ** |
| ** **                      | ** ** | **(Dollar amounts in thousands)** | ** ** |
| Long-term debt(1)               |       | $                                 | 55,492     |               |       | $                  | 242        |               |       | $                  | 5,000      |   | $ | 40,000 |   |   | $ | 10,250 |   |   |
| Estimated interest  payments(2) |       | 14,090                            |       |               | 3,802      |               |       | 7,169              |       | 2,032              |       |   | 1,087 |   |   |
| Operating leases                |       | 12,217                            |       |               | 3,249      |               |       | 4,048              |       | 1,066              |       |   | 3,854 |   |   |
| Minimum royalty payments        |       | 2,210                             |       |               | 760        |               |       | 850                |       | 600                |       |   |   |   |   |
| Retirement award program        |       | 844                               |       |               | 90         |               |       | 139                |       | 93                 |       |   | 522 |   |   |
| Purchase obligations            |       | 10,733                            |       |               | 10,733     |               |       |               |       |               |       |   |   |   |   |
| Total                           |       | $                                 | 95,586     |               |       | $                  | 18,876     |               |       | $                  | 17,206     |   | $ | 43,791 |   |   | $ | 15,713 |   |   |

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(1)          Amountincludes expected cash payments on long-term debt based upon current andeffective maturities as well 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.

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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, 2007 was $748,000. We also havestandby letters of credit covering potential workers’ compensation and otherliabilities. The total standby exposure relating to letters of credit as of March 31,2007 was $1,294,000.

**FUTURE OUTLOOK**

We believe that the enactment of the federal transportationfunding legislation, SAFETEA-LU, in August 2005 has improved prospects forincreased spending for our products. However, we believe that domestic demandfor our products has not yet fully benefited from opportunities developing as aresult of SAFETEA-LU and an improving industry environment. Given our historyas a late-stage benefactor of highway infrastructure spending, we remainoptimistic that we have properly positioned our business for growth oncespending increases the demand for our products. 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.

To meet increasing international sales demands andfurther penetrate emerging markets, we formed a new company in China and haveleased an 16,000 square foot manufacturing facility in Beijing. Our investmentin this new company is expected to be approximately $1 million, of which$300,000 to $400,000 is expected to impact earnings during our fourth quarter. Weexpect our Beijing facility to become operational later in our fiscal fourthquarter.

As further discussed in Note 11 to the financialstatements, the restructuring plan for the Intersection Control segment is nowcomplete. The remaining cash expenditures in connection with the restructuringplan are approximately $1.6 million. We expect the restructuring will result inannualized operating cost savings of approximately $5 to $6 million andtherefore we expect the operating performance of this segment to improvesignificantly. However, there can be no assurance that we will achieve thatlevel of savings. After the product rationalization, annualized revenues forthe Intersection Control segment are estimated to be approximately $30 millionfor fiscal 2007 compared with $56 million for fiscal 2006.

We believe fiscal 2007 is a transitional year for us.As we enter our seasonally strong fourth quarter, we believe that we have madethe needed investments to position our business for improved growth andprofitability in the future when demand increases. We expect the operatingresults of the fourth quarter of fiscal 2007 to improve compared to the fourthquarter of last year after the completion of the restructuring plan, similar tothe improvement for the current second and third quarters as compared to theprior year. We expect to see continued growth in sales and profitability forthe Protect and Direct and the Inform segments. We are beginning to see bidsfor large contracts for the Intersection Control segment after a decline in bidactivity over the past couple years. In January 2007, we were awarded a$20 million contract from the New York City Department of Transportation fortraffic controllers. We believe that this award along with the completion ofthe restructuring plan are important steps in reaching profitability for theIntersection Control segment.

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

**SIGNIFICANTACCOUNTING POLICIES AND CRITICAL ESTIMATES**

The preparation of financial statements in conformitywith accounting principles generally accepted in the United States of America(U.S. GAAP) requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities and the disclosure of contingentassets and liabilities at the date of the financial statements. Management’sestimates also affect the reported amounts of revenues and expenses during thereporting period. In addition, certain normal and recurring estimates are madeincluding estimates in determining the allowance for doubtful accountsreceivable, inventory valuation reserves, valuation allowance on deferred taxassets, accrued restructuring costs and health care liabilities. Theseestimates are made using management’s best judgment given relevant factors andavailable data. Actual results could differ materially from those estimates. Note2 to our June 30, 2006 consolidated financial statements includes asummary of the significant accounting policies, methods and types of estimatesused in the preparation of our consolidated financial statements.  There have been no material changes inaccounting policies, methods and types of estimates used by management duringthis fiscal year.  In the opinion ofmanagement, we do not have any individual accounting policy or use any individualestimate that is critical to the preparation of our consolidated financialstatements. In most instances, we must use an accounting policy or methodbecause it is the only policy or method permitted under U.S. GAAP. We believethe following significant accounting policies and methods used by us are themost 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:****  *Inventories are valued at the lower of cost(first-in, first-out method) or market. Actual costs are used to value rawmaterials and supplies. Standard costs, which approximate actual costs, areused to value finished goods and work-in-process. Standard costs include rawmaterials, direct labor and manufacturing overhead. Provision for potentiallyobsolete or slow-moving inventory is made based on management’s analysis ofinventory levels, ages and salability.

***Long-Lived Assets:***   Long-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 cash flows of underlying asset groups. The net carryingvalue of assets not recoverable is reduced to fair value. Fair values ofamortized long-lived assets are determined based upon the performance of a fair

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value appraisal. Patentsand other finite-lived intangible assets are amortized on a straight-line orsystematic method over the life of the patent or intangible asset.

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

The impairment review is highly judgmental andinvolves the use of significant estimates and assumptions. These estimates andassumptions have a significant impact on the amount of any impairment chargerecorded. Estimates of fair value are primarily determined using discountedcash flow methods and are dependent upon assumptions of future sales trends,market conditions and cash flows of each reporting unit over several years. Actualcash flows in the future may differ significantly from those previouslyforecasted. Other significant assumptions include growth rates and the discountrate applicable to future cash flows.

***Share-based Compensation Expense:***   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.

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

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

**RECENTLY ISSUEDACCOUNTING PRONOUNCEMENTS**

In February 2007, the Financial AccountingStandards Board (FASB) issued SFAS No. 159, “The Fair Value Option forFinancial Assets and Financial Liabilities—including an amendment of FAS 115” 

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(SFAS No.159). Thisstatement permits entities to choose to measure many financial instruments andcertain other items at fair value. SFAS No. 159 is effective for fiscalyears beginning after November 15, 2007, including interim periods withinthat fiscal year. We do not expect the adoption of this statement to have amaterial affect on our results of operations or financial position.

In July 2006, theFinancial Accounting Standards Board (FASB) issued FASB Interpretation No. 48(FIN 48), “Accounting for Uncertainty in Income Taxes—an interpretation of FASBStatement No. 109”. FIN 48 clarifies the accounting for uncertainty inincome taxes recognized in an entity’s financial statements in accordance withFASB Statement No. 109, “Accounting for Income Taxes”. FIN 48 prescribes arecognition threshold and measurement attribute for financial statementdisclosure of tax positions taken or expected to be taken on a tax return. Additionally,FIN 48 provides guidance on derecognition, classification, interest andpenalties, accounting in interim periods, disclosure and transition. FIN 48will be effective for our 2008 fiscal year. We are in the process of evaluatingthe impact that this statement will have on our results of operations andfinancial position, however we currently do not expect that the adoption willhave a material impact.

**FORWARD LOOKINGSTATEMENTS**

Various statements made within the Management’sDiscussion and Analysis of Financial Condition and Results of Operations andelsewhere in this report constitute “forward-looking statements” for 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. Except for historical information, any statement thataddresses expectations or projections about the future, including statementsabout our strategy for growth, product development, market position,expenditures, financial results or changes in governmental legislation,policies and conditions, is a forward-looking statement.

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

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

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

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

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non-trading interestrate swaps, but our interest rate swap agreement was liquidated in the thirdquarter of fiscal 2005.

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

**ITEM 4.**                Controlsand Procedures

(a)      Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that aredesigned 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 the supervision of and with theparticipation of the Company’s Chief Executive Officer and Chief FinancialOfficer, has evaluated the effectiveness of the Company’s disclosure controlsand 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 as of June 30, 2006 andthat our assessment for fiscal 2007 has not yet been completed, the Company’sChief Executive Officer and Chief Financial Officer concluded that as a resultof the material weakness at the Santa Fe Springs and Tecate, Mexico facilitieswithin our Intersection Control Segment as described below at paragraph (b),our disclosure controls and procedures were not effective as of the end of theperiod covered by this Quarterly Report on Form 10-Q, March 31,2007. However, we performed analysis and other procedures to ensure that ourconsolidated financial statements were prepared in accordance with accountingprinciples generally accepted in the United States. Accordingly, we believethat (i) the financial statements filed fairly present in all materialrespects the Company’s financial condition, results of operations and cash flowfor the periods presented, and (ii) this report does not contain anyuntrue statement of a material fact or omit a material fact necessary to makethe statements, in light of the circumstances under which such statements weremade, not misleading with respect to the period covered by this report.

(b)   Management’s Report on Internal ControlsOver Financial Reporting

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

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

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reporting was noteffective based on the criteria set forth by Committee of SponsoringOrganizations of the Treadway Commission.

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

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**PART II—OTHERINFORMATION**

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

**Item 1.**                        LegalProceedings

We are involved in severalpending judicial proceedings for product liability and other damages arisingout of the conduct of our business. While the outcome of litigation is subjectto uncertainties, we believe, after consultation with counsel, that the outcomeof these proceedings, based on current available information and after takinginto account the availability and limits of our insurance coverage, will nothave a material effect on our consolidated financial condition and results ofoperations.

**Item 6.**                        Exhibits
| (a)   |   | Exhibits                                                                                                                                                                                                                                                                                                                                                        |
|-------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10(a) |   | Second Amendment to  Amended and Restated Credit Agreement and Reaffirmation of Guaranties dated  as of March 15, 2007 by and between Quixote Corporation and certain  subsidiaries thereof and LaSalle Bank National Association and Revolving Loan  Note dated as of March 15, 2007 from Quixote Corporation to LaSalle Bank  National Association. |
| 31    |   | Certification pursuant  to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                                   |
| 32    |   | Certification pursuant  to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                                   |

 

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**SIGNATURE**

Pursuantto the requirements of the Securities Exchange Act of 1934, the Registrant hasduly caused this Quarterly Report on Form 10-Q for the quarter ended March 31,2007 to be signed on its behalf by the undersigned thereunto duly authorized.
|        | **QUIXOTE CORPORATION**                                  |
|--------|----------------------------------------------------------|
| DATED: | May 9, 2007                                         |   | /s/ DANIEL P. GOREY |
|   | DANIEL P. GOREY                                          |
|   | *Chief Financial Officer, Vice President and  Treasurer* |
|   | *(Chief Financial & Accounting Officer)*        |
|        |                                                          |  |  |

 

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**EXHIBIT INDEX**

Exhibits:
| 10(a) |   | Second Amendment to Amended and Restated Credit  Agreement and Reaffirmation of Guaranties dated as of March 15, 2007 by  and between Quixote Corporation and certain subsidiaries thereof and LaSalle  Bank National Association and Revolving Loan Note dated as of March 15,  2007 from Quixote Corporation to LaSalle Bank National Association. |
|-------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 31    |   | Certification pursuant  to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                                  |
| 32    |   | Certification pursuant  to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                                  |

 

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