SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-Q

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

                   For the quarterly period ended July 5, 1998

          [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934
             For the transition period from _________ to __________

                         Commission file number 0-22978

                             STIMSONITE CORPORATION
             (Exact name of registrant as specified in its charter)

                  Delaware                                   36-3718658
      (State or other jurisdiction of                     (I.R.S. Employer
       incorporation or organization )                 Identification Number)

           6565 West Howard Street
               Niles, Illinois                               60714-3373
  (Address of principal executive offices)                   (Zip Code)

                                 (847) 647-7717
              (Registrant's telephone number, including area code)



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

The  number  of  shares  of the  registrant's  common  stock,  $.01  par  value,
outstanding as of July 31, 1998 was 8,373,477.

                                       1

<PAGE>


                             STIMSONITE CORPORATION

                                      Index

                                                                            Page
                                                                            ----
Part I.   Financial Information

Item 1.   Condensed Consolidated Financial Statements
                  Condensed Consolidated Balance Sheets                      3
                  Condensed Consolidated Statements of Operations            4
                  Consolidated Statements of Cash Flows                      5
                  Notes to Condensed Consolidated Financial Statements     6-8

Item 2.   Management's Discussion and Analysis of Financial
          Condition and Results of Operations                             9-16

Item 3.   Quantitative and Qualitative Disclosures about Market Risks       16

Part II.  Other Information

Item 6.   Exhibits and Reports on Form 8-K                                  17


          Signatures                                                        18


                                       2

<PAGE>

                         PART I - FINANCIAL INFORMATION

Item 1 - Condensed Consolidated Financial Statements.

                     STIMSONITE CORPORATION AND SUBSIDIARIES
                      CONDENSED CONSOLIDATED BALANCE SHEETS
                             (Dollars in Thousands)
<TABLE>
<CAPTION>

                                                                      7/5/98           12/31/97
                                                                    ------------    ---------------
                                                                    (Unaudited)        (Audited)
ASSETS

Current assets
<S>                                                                        <C>                <C> 
       Cash and cash equivalents                                           $576               $337
       Trade accounts receivable less allowance for
             doubtful accounts of $448 (1998)
             and $495 (1997)                                             23,266             14,864
       Inventories                                                       12,996             11,418
       Prepaid expenses and other                                         1,336              1,272
       Deferred tax assets                                                1,630              1,630
                                                                    ------------    ---------------
                          Total current assets                           39,804             29,521

Property, plant and equipment, net                                       14,264             11,829
Intangible assets, net                                                    9,983             11,259
Deferred financing costs, net                                               221                251
Deferred tax assets and other                                             2,342              2,341
                                                                    ------------    ---------------
                          Total assets                                  $66,614            $55,201
                                                                    ============    ===============

LIABILITIES

Current liabilities:
       Accounts payable                                                  $7,452             $7,797
       Current maturities of long-term debt                               2,500              2,500
       Other accrued expenses                                             6,923              2,218
                                                                    ------------    ---------------
                 Total current liabilities                               16,875             12,515

Accrued postretirement benefits                                             594                631

Long-term debt                                                           21,725             15,575
                                                                    ------------    ---------------
                 Total liabilities                                       39,194             28,721

STOCKHOLDERS' EQUITY

Total stockholders' equity                                               27,420             26,480
                                                                    ------------    ---------------
                 Total liabilities and stockholders' equity             $66,614            $55,201
                                                                    ============    ===============
</TABLE>



                                       3
<PAGE>


                     STIMSONITE CORPORATION AND SUBSIDIARIES
                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                    (Amounts in Thousands Except Share Data)
                                   (Unaudited)
<TABLE>
<CAPTION>

                                                Quarter Ended                Six Months Ended              Twelve Months Ended
                                         ----------------------------   ----------------------------   ----------------------------
                                            7/5/98         6/29/97         7/5/98         6/29/97         7/5/98         6/29/97
                                         -------------   ------------   -------------   ------------   -------------   ------------

<S>                                           <C>            <C>             <C>            <C>             <C>            <C>    
Net sales                                     $25,433        $23,594         $39,290        $38,196         $82,457        $83,243
Cost of goods sold                             15,460         15,029          25,704         25,367          54,295         57,073
                                         -------------   ------------   -------------   ------------   -------------   ------------

Gross profit                                    9,973          8,565          13,586         12,829          28,162         26,170

Operating expenses:
     Selling and administrative                 3,710          3,434           7,184          6,958          14,410         14,720
     Research and development                     692            369           1,509          1,014           2,581          2,404
     Amortization of intangibles                  668            708           1,351          1,419           2,662          2,846
     Restructuring charge                         ---            ---             ---            ---             ---          4,000
                                         -------------   ------------   -------------   ------------   -------------   ------------

Total operating expenses                        5,070          4,511          10,044          9,391          19,653         23,970
                                         -------------   ------------   -------------   ------------   -------------   ------------

Operating income                                4,903          4,054           3,542          3,438           8,509          2,200

Interest expense                                  459            665             889          1,243           1,948          2,509
                                         -------------   ------------   -------------   ------------   -------------   ------------

Income (loss) before provision for
  income taxes and extraordinary item           4,444          3,389           2,653          2,195           6,561           (309)

Provision for income taxes                      1,878          1,411           1,136            993           2,617             77
                                         -------------   ------------   -------------   ------------   -------------   ------------

Income before extraordinary item                2,566          1,978           1,517          1,202           3,944           (386)

Extraordinary item, net of tax benefit            ---            ---             ---            ---             ---            332
                                         -------------   ------------   -------------   ------------   -------------   ------------

Net income (loss)                              $2,566         $1,978          $1,517         $1,202          $3,944          ($718)
                                         =============   ============   =============   ============   =============   ============

Earnings per common and common
equivalent share:

Income (loss) before extraordinary item:
         Basic                                  $0.31          $0.23           $0.18          $0.14           $0.47         ($0.04)
         Diluted                                $0.30          $0.23           $0.18          $0.14           $0.46         ($0.04)

Extraordinary item, net of tax benefit:
         Basic                                    ---            ---             ---            ---             ---         ($0.04)
         Diluted                                  ---            ---             ---            ---             ---         ($0.04)

Net income (loss):
         Basic                                  $0.31          $0.23           $0.18          $0.14           $0.47         ($0.08)
         Diluted                                $0.30          $0.23           $0.18          $0.14           $0.46         ($0.08)


Weighted average number of shares and
share equivalents outstanding :
         Basic                              8,374,527      8,570,027       8,374,802      8,609,598       8,449,565      8,830,153
         Diluted                            8,537,611      8,693,643       8,509,360      8,735,508       8,576,365      8,830,153

</TABLE>

See Accompanying Notes


                                       4

<PAGE>


                        STIMSONITE CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (Dollars in Thousands)
<TABLE>
<CAPTION>

                                                                      Six Months Ended             Twelve Months Ended
                                                                 ---------------------------    ---------------------------

                                                                    7/5/98         6/29/97         7/5/98         6/29/97
                                                                    ------         -------         ------         -------




<S>                                                                 <C>              <C>           <C>            <C>    
Net cash provided by (used in) operating activities:                ($1,427)         ($499)        $10,768        $11,617

Cash flows from investing activities:
        Purchase of property, plant and equipment                    (3,818)        (1,424)         (4,938)        (4,833)
        Sale of property, plant and equipment                            -              -            5,750             -
        Investment in joint venture partnership                          -              -               -              25
                                                                ------------    -----------    ------------    -----------

         Net cash provided by (used in) investing activities         (3,818)        (1,424)            812         (4,808)

Cash flows from financing activities:
       Proceeds from the issuance of common stock,
         net of offering expenses                                         8              5              34            252
       Payments to reacquire common stock                              (493)        (1,030)         (1,049)        (1,899)
       Principal payments under capital lease obligations               (92)           (80)           (260)          (114)
       Proceeds from long-term debt                                   7,400          5,650           6,775         36,650
       Payments on long-term debt                                    (1,250)        (2,275)        (16,725)       (41,399)
       Financing fees paid in connection with debt refinancing           -              -               -            (332)
                                                                ------------    -----------    ------------    -----------

        Net cash provided by (used in) financing activities           5,573          2,270         (11,225)        (6,842)

       Effect of exchange rate changes on cash                          (89)          (379)             26            (13)
                                                                ------------    -----------    ------------    -----------

       Net increase (decrease) in cash and cash equivalents             239            (32)            381            (46)

       Cash and cash equivalents, beginning of period                   337            227             195            241
                                                                ------------    -----------    ------------    -----------

       Cash and cash equivalents, end of period                        $576           $195            $576           $195
                                                                ============    ===========    ============    ===========



Supplemental disclosure of cash flow information:
      Cash paid during the period for interest                         $828           $614          $2,457         $2,220

      Cash paid during the period for income taxes                     $288             $5          $1,224         $2,727

      Capital lease for property, plant & equipment                    $537             -             $537           $724

      Property, plant & equipment purchases
      included in accounts payable                                     $602           $866            $602           $866
</TABLE>

See Accompanying Notes
                                       5

<PAGE>

                        Notes to Condensed Consolidated
                              Financial Statements
                                   (Unaudited)

Note 1 - Financial Information

The  consolidated  financial  statements  included  herein  have  been  prepared
pursuant to the rules and regulations of the Securities and Exchange Commission.
Certain  information  and footnote  disclosures  normally  included in financial
statements prepared in accordance with generally accepted accounting  principles
have been  condensed or omitted  pursuant to, or as permitted by, such rules and
regulations.  In the opinion of management,  the financial information presented
reflects all adjustments (which are normal and recurring) that are necessary for
a fair statement of financial results for the interim periods  presented.  These
financial  statements  should  be  read in  conjunction  with  the  consolidated
financial  statements and footnotes  thereto  contained in the Company's  Annual
Report on Form 10-K for the year ended December 31, 1997 (the "1997 Form 10-K").

The Company's  business is seasonal and,  accordingly,  comparative twelve month
trailing information is provided.  The financial  information included herein at
July 5,  1998 and for the  periods  ended  July 5,  1998  and  June 29,  1997 is
unaudited and, in the opinion of the Company,  reflects all  adjustments  (which
include  only  normal  and  recurring   adjustments)   necessary  for  the  fair
presentation of financial position as of that date and the results of operations
for these periods.  The information in the condensed  consolidated balance sheet
at December  31,  1997 was derived  from the  Company's  consolidated  financial
statements included in the 1997 Form 10-K.

The results for the quarter ended July 5, 1998 are not necessarily indicative of
results that can be expected for the full year ending December 31, 1998.


Note 2 - Inventories

Inventories consist of the following:

                               July 5,                  December 31,
                                1998                       1997
                             -----------             ---------------
($000)                       (Unaudited)
Raw materials                   $5,764                    $5,323
Work in process                  1,002                     1,455
Finished goods                   6,230                     4,640
                                ------                    ------
                               $12,996                   $11,418
                                ======                    ======



                                       6
<PAGE>
                                   
Note 3 - Earnings Per Share

The  computation  of basic and  diluted  EPS,  as  prescribed  by SFAS  128,  is
presented below:
<TABLE>
<CAPTION>

                                                                      Weighted
                                                  Net Income       Average Shares       Per Share
                                                  (Numerator)      (Denominator)         Amounts
Quarter ended July 5, 1998
--------------------------

Basic EPS
---------
<S>                                                <C>                 <C>                 <C>  
Income (loss) available to common stockholders     $2,566,000          8,374,527           $0.31

Effect of dilutive options                                               163,084
                                                                 ----------------

Diluted EPS
-----------
Income (loss) available to common stockholders
plus assumed conversions                           $2,566,000          8,537,611           $0.30

-------------------------------------------------------------------------------------------------
Quarter ended June 29, 1997
---------------------------

Basic EPS
---------
Income (loss) available to common stockholders     $1,978,000          8,570,027           $0.23

Effect of dilutive options                                               123,616
                                                                 ----------------

Diluted EPS
-----------
Income (loss) available to common stockholders
plus assumed conversions                           $1,978,000          8,693,643           $0.23

-------------------------------------------------------------------------------------------------
Six months ended July 5, 1998
-----------------------------

Basic EPS
---------
Income available to common stockholders            $1,517,000          8,374,802           $0.18

Effect of dilutive options                                               134,558
                                                                 ----------------

Diluted EPS
-----------
Income available to common stockholders
plus assumed conversions                           $1,517,000          8,509,360           $0.18

------------------------------------------------------------------------------------------------
Six months ended June 29, 1997
------------------------------

Basic EPS
---------
Income (loss) available to common stockholders     $1,202,000          8,609,598           $0.14

Effect of dilutive options                                               125,910
                                                                 ----------------

Diluted EPS
-----------
Income (loss) available to common stockholders
plus assumed conversions                           $1,202,000          8,735,508           $0.14

------------------------------------------------------------------------------------------------
Twelve months ended July 5, 1998
--------------------------------

Basic EPS
---------
Income available to common stockholders            $3,944,000          8,449,565           $0.47

Effect of dilutive options                                               126,800
                                                                 ----------------

Diluted EPS
-----------
Income available to common stockholders
plus assumed conversions                           $3,944,000          8,576,365           $0.46

------------------------------------------------------------------------------------------------
Twelve months ended June 29, 1997
---------------------------------

Basic EPS
---------
Income (loss) available to common stockholders      ($718,000)         8,830,153          ($0.08)

Effect of dilutive options                                                     0
                                                                 ----------------

Diluted EPS
-----------
Income (loss) available to common stockholders
plus assumed conversions                            ($718,000)         8,830,153          ($0.08)

------------------------------------------------------------------------------------------------
</TABLE>

                                       7

<PAGE>


Note 4  -  Impact of New Accounting Standards

In June 1997, the FASB issued a Statement of Financial  Accounting Standards No.
130,  "Reporting   Comprehensive  Income"  ("SFAS  No.  130").  This  statement,
effective  for fiscal years  beginning  after  December  15, 1997,  requires the
Company to report  components of comprehensive  income in a financial  statement
that is displayed with the same  prominence as other financial  statements.  The
Company's financial statements are prepared in accordance with SFAS No. 130.

The Company will implement the  provisions of Statement of Financial  Accounting
Standards No. 131,  "Disclosures  about  Segments of an  Enterprise  and Related
Information"  (SFAS  No.  131).  This  statement,  effective  for  fiscal  years
beginning after December 15, 1997,  specifies revised guidelines for determining
an entity's operating  segments and the type and level of financial  information
to be disclosed. The Company is currently evaluating the effect of adopting SFAS
No. 131.

The Company will implement the  provisions of Statement of Financial  Accounting
Standards   No.  132,   "Employers'   Disclosures   about   Pensions  and  Other
Postretirement  Benefits" (SFAS No. 132).  This statement,  effective for fiscal
years   beginning   after  December  15,  1997,   standardizes   the  disclosure
requirements for pensions and other postretirement benefits, requires additional
information on changes in the benefit  obligation and fair values of plan assets
and eliminates  certain  disclosures  that are no longer useful.  The Company is
currently evaluating the effect of adopting SFAS No. 132.

The Company will implement the  provisions of Statement of Financial  Accounting
Standards  No.  133,   "Accounting   for  Derivative   Instruments  and  Hedging
Activities" (SFAS No. 133). This statement, effective for fiscal years beginning
after June 15, 1999,  provides a comprehensive  and consistent  standard for the
recognition and measurement of derivatives and hedging  activities.  The Company
is currently evaluating the effect of adopting SFAS No. 133.

                                       8

<PAGE>



Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations

The  following  is a  discussion  and  analysis  of the  consolidated  financial
condition and results of operations of the Company for the six months and twelve
months ended July 5, 1998 and June 29,  1997.  The  following  should be read in
conjunction  with the condensed  consolidated  financial  statements and related
notes appearing elsewhere herein and the consolidated  financial  statements and
related notes contained in the Company's 1997 Form 10-K.

The Company  manufactures and markets reflective highway safety products used in
a variety of applications where motorist and pedestrian guidance are important.

Seasonality and Quarterly Results
---------------------------------

The  Company's  sales  are  seasonal.   The  domestic  highway  maintenance  and
construction  season tends to reach its peak in the second and third quarters of
the year, and domestic sales of the Company's  products are generally highest in
these  quarters.  While  international  sales are also  seasonal,  international
maintenance and  construction  seasons vary from the domestic season and tend to
offset  somewhat  the  seasonality  of  domestic  sales.   International   sales
constituted  13.6%  and 13.2% of net sales in the  second  quarters  of 1998 and
1997, respectively, 16.5% and 14.6% of net sales in the first six months of 1998
and 1997,  respectively  and 15.6% of net sales in the year ended  December  31,
1997.  Because the Company  operates  with  little  backlog,  sales in any given
quarter  generally  result  from  orders  booked and  shipped  in that  quarter.
Accordingly,  net sales and operating income are  particularly  sensitive to the
timing of domestic  market demand and tend to be highest in the second and third
quarters,  whereas net sales and operating  income tend to be reduced during the
first and  fourth  quarters,  resulting  in either  operating  losses or reduced
earnings for those periods. In addition,  the Company's performance in any given
quarter is further affected by weather anomalies.

The Company's  sales are dependent on the ability and willingness of the federal
and state governments to fund highway construction  projects.  Such sales may be
affected by real or perceived  uncertainty  concerning  the level of  government
funding for highway  construction  projects. A new federal highway spending bill
was recently  approved by the U.S.  Congress.  The Company  expects that the new
federal  highway  bill will  increase  the  number of new  highway  construction
projects,  which,  over an extended  period of time, may benefit the sale of the
Company's products.

Results of Operations
---------------------

The following table sets forth, for the periods indicated, the percentage of net
sales of certain  items in the  Company's  condensed  consolidated  statement of
operations  and the  percentage  change in each  item from the prior  comparable
period.

                                       9

<PAGE>



<TABLE>
<CAPTION>

Table.                  Percentage of      Inc (Dec)      Percentage of       Inc (Dec)      Percentage of        Inc (Dec)
                          Net Sales       % Change          Net Sales         % Change         Net Sales           % Change
                        Quarter Ended       from        Six Months Ended       from       Twelve Months Ended       from
                    7/5/98    6/29/97    Prior Period   7/5/98   6/29/97    Prior Period    7/5/98   6/29/97     Prior Period
                    ------    -------    ------------   ------   -------    ------------    ------   -------     ------------
                                                  

<S>                   <C>        <C>         <C>       <C>       <C>            <C>      <C>         <C>           <C>     
Net sales             100.0 %    100.0 %     7.8  %    100.0 %   100.0  %       2.9 %    100.0 %     100.0 %       (0.9)  %

Cost of goods sold     60.8       63.7       2.9        65.4      66.4          1.3       65.8        68.6         (4.9)

Gross profit           39.2       36.3      16.4        34.6      33.6          5.9       34.2        31.4          7.6

Selling and            14.6       14.6       8.0        18.3      18.2          3.2       17.5        17.7         (2.1)
administrative

Research and            2.7        1.6      87.5         3.8       2.7         48.8        3.1         2.9          7.4
development

Amortization            2.6        3.0      (5.6)        3.4       3.7         (4.8)       3.2         3.4         (6.5)
of intangibles

Restructuring charge     --         --        --          --        --           --         --         4.8          n.m.

Operating income       19.3       17.2      20.9         9.0       9.0          3.0       10.3         2.6        286.8

Interest expense        1.8        2.8     (31.0)        2.3       3.3        (28.5)       2.4         3.0        (22.4)

Income (loss) before provision
for income taxes and
extraordinary item     17.5       14.4      31.1         6.8       5.7         20.9        8.0        (0.4)         n.m.

Extraordinary item, net of
tax benefit              --         --        --          --        --           --         --         0.4          n.m.

Net income             10.1        8.4      29.7         3.9       3.1         26.2        4.8        (0.9)         n.m.
(loss)

</TABLE>


Quarter ended July 5, 1998
Compared to
Quarter ended June 29, 1997
---------------------------

Net sales of $25.4  million for the quarter  ended July 5, 1998  increased  $1.8
million or 7.8% from the comparable  fiscal 1997 quarter.  Net domestic sales of
highway delineation  products increased 1.2% compared with the second quarter of
1997,  and domestic  sales of optical  film  products  and  international  sales
increased by 60.7% and 11.6%, respectively. The 60.7% increase in domestic sales
of optical film reflected growing  acceptance of the Company's improved products
introduced in the fourth quarter of 1996.  International  revenues  increased by
11.6%  compared to the first  quarter of 1997,  due  primarily  to strong  sales
growth in Latin America.

Cost of goods sold for the second quarter of 1998 totaled $15.5 million compared
to $15.0  million for the 1997  period.  As a percentage  of net sales,  cost of
goods sold  decreased from 63.7% in the second quarter of 1997 to 60.8% in 1998.
The related 2.9%  increase in gross margin  reflected  the success of aggressive
manufacturing cost reduction programs.

                                       10
<PAGE>

Selling and  administrative  expenses  for the second  quarter of 1998 were $3.7
million  compared to $3.4 million in the second quarter of 1997. As a percentage
of net sales,  selling and  administrative  expenses were 14.6% in both the 1998
and 1997 period.  Included in the second  quarter  1998, as an offset to selling
and administrative  expense,  is a $0.2 million gain on involuntary  conversion,
resulting  from the  accounting  treatment  of certain  insurance  proceeds  and
related loss of property at one of the Company's  production  facilities earlier
this year. As a percentage  of net sales,  selling and  administrative  expenses
excluding the $0.2 million gain, were 15.5% in the second quarter of 1998.

Research  and  development  expenses  for the  second  quarter of 1998 were $0.7
million  compared  to $0.4  million  in the first  quarter  of 1997.  The higher
expense  level  resulted  from the absence,  in 1998,  of $0.3  million  expense
absorption related to the sale of insert tooling to the automotive industry. The
Company sold its  automotive-related  insert tooling  business  during 1996, but
certain  carry over work  continued  into 1997.  As a  percentage  of net sales,
research and development  expenses were 2.7% in the 1998 period compared to 1.6%
in the 1997 period.

Interest  expense was $0.5 million in the second  quarter of 1998, a decrease of
$0.2 million  compared to the  comparable  1997 period,  due  principally to the
repayment  of debt  with  $5.8  million  in net  proceeds  from  the sale of the
Company's Waukegan, Illinois property on August 1, 1997.

Provision  for  income  taxes of $1.9  million  in the  second  quarter  of 1998
reflected  an  effective  tax  rate of  42.3%  compared  to a $1.4  million  tax
provision  and a 41.6% rate in the second  quarter of 1997.  The increase in the
effective  tax  rate  resulted  from  a  change  in  the  mix  of  domestic  and
international  income.  The  Company  does not  record  tax  benefits  on losses
incurred in certain international operations.

Six months ended July 5, 1998
Compared to
Six months ended June 29, 1997
------------------------------

Net sales of $39.3 million for the six months ended July 5, 1998  increased $1.1
million or 2.9% from the  comparable  fiscal 1997 period.  Net domestic sales of
highway  delineation  products  decreased  5.1% compared with the same period in
1997, but was offset by strong  domestic sales of optical film products (a 40.5%
increase compared to 1997) and international sales (a 16.3% increase compared to
1997).


Cost of goods  sold for the  first  six  months of 1998  totaled  $25.7  million
compared to $25.4  million for the 1997 period.  As a  percentage  of net sales,
cost of goods sold decreased from 66.4% in the 1997 period to 65.4% in 1998. The
resulting 1.0% improvement of gross margin is attributable to the success of the
Company's aggressive manufacturing cost reduction programs,  partly offset by an
unfavorable mix of product sales.
                                       11
<PAGE>

Selling and  administrative  expenses for the six months ended July 5, 1998 were
$7.2  million  compared  to $7.0  million  in the  same  period  of  1997.  As a
percentage  of net sales,  selling and  administrative  expenses  were 18.3% and
18.2% in the 1998 and 1997 period respectively. Included in the six months ended
July 5, 1998,  as an offset to selling  and  administrative  expense,  is a $0.2
million gain on involuntary conversion,  resulting from the accounting treatment
of  certain  insurance  proceeds  and  related  loss of  property  at one of the
Company's production facilities earlier this year. As a percentage of net sales,
selling and administrative  expenses excluding the $0.2 million gain, were 18.8%
during the first six months of 1998.

Research  and  development  expenses  for the six months ended July 5, 1998 were
$1.5  million  compared to $1.0  million in the same period of 1997.  The higher
expense  level was  largely  due to the  absence,  in 1998,  of $0.4  million of
expense  absorption  related  to the sale of insert  tooling  to the  automotive
industry. The Company sold its automotive-related insert tooling business during
1996,  but certain carry over work  continued  into 1997. As a percentage of net
sales,  research and development  expenses were 3.8% in the 1998 period compared
to 2.7% in the same period of 1997.

Interest  expense was $0.9  million for the first six months of 1998, a decrease
of $0.4  million  compared  to the same  period in 1997.  The  decrease  was due
principally  to the repayment of debt with $5.8 million in net proceeds from the
sale of the Company's Waukegan, Illinois property on August 1, 1997.

Provision for income taxes of $1.1 million for the six months ended July 5, 1998
reflected  an  effective  tax  rate of  42.8%  compared  to a $1.0  million  tax
provision and a 45.2% rate in the same period of 1997.

Twelve months ended July 5, 1998
Compared to
Twelve months ended June 29, 1997
---------------------------------

Net sales for the  twelve  months  ended  July 5, 1998  were  $82.5  million,  a
decrease of $0.8  million or 0.9%.  Net  domestic  sales of highway  delineation
products  decreased  $6.4 million or 9.7%  compared with the twelve months ended
June 29, 1997. Net  international  sales increased $2.9 million or 27.5% and net
domestic sales of optical film increased $2.6 million or 38.2% compared with the
twelve months ended June 29, 1997.

Cost of goods  sold for the  twelve  months  ended  July 5, 1998  totaled  $54.3
million  (65.8% of net sales)  compared to $57.1 (68.6% of net sales) million in
the comparable 1997 period.  The corresponding  2.8% increase in gross margin is
largely  attributable to increased  productivity in the Company's  manufacturing
processes,   partly   offset   by   competitive   pricing   primarily   in   the
non-snowplowable markers product group.
                                       12
<PAGE>


Selling and  administrative  expenses  for the twelve  months ended July 5, 1998
totaled  $14.4  million,  a decrease  of $0.3  million or 2.1%  compared  to the
previous twelve month period.

Research and development  expenses for the twelve months ended July 5, 1998 were
$2.6 million  compared to $2.4 million in the previous twelve month period.  The
higher  expense  level was largely due to a reduction in the expense  absorption
related to the sale of insert  tooling to the automotive  industry.  The Company
sold its  automotive-related  insert tooling  business  during 1996, but certain
carry over work continued into 1997. As a percentage of net sales,  research and
development expenses were 3.1% for the twelve months ended July 5, 1998 compared
to 2.9% for the previous twelve month period.

The Company incurred a $4.0 million  restructuring  charge in the fourth quarter
of 1996 relating  principally to the planned sale of certain land and a building
under construction in Waukegan,  Illinois. The restructuring charge is described
in detail in the 1997 Form 10-K under the caption  "Management's  Discussion and
Analysis of Financial  Condition and Results of Operations - Year Ended December
31, 1997 Compared to Year Ended December 31, 1996 Restructuring Charge."

Interest  expense  for the twelve  months  ended July 5, 1998 was $1.9  million,
compared to $2.5 million in the previous  twelve month period.  The decrease was
the result of a lower level of debt  primarily due to the repayment of debt with
$5.8 million in net proceeds from the sale of the Company's  Waukegan,  Illinois
property on August 1, 1997.

Liquidity and Capital Resources
-------------------------------

The Company  finances  working  capital  requirements  and capital  expenditures
through internally  generated funds,  revolving  borrowings and lease financing.
During the six month period ended July 5, 1998, the Company increased borrowings
under its long term credit facility by $6.2 million.  The principal  inflows and
outflows of cash during the six months ended July 5, 1998 were as follows:

                                Cash Flow Summary
                          Six Months Ended July 5, 1998
                          -----------------------------

                                   ($millions)

         Cash inflows
         ------------

         Net borrowings under credit facility                  $6.2
                                                               ----

                  Total inflows                                 6.2
                                                               ----

         Cash outflows
         -------------

         Cash used in operating activities                     (1.4)

                                       13
<PAGE>



         Repurchase of outstanding Company stock               (0.5)
         Capital expenditures                                  (3.8)
         All other (net)                                       (0.3)
                                                               -----

                  Total outflows                               (6.0)
                                                               -----
         Net change in cash balance                           $ 0.2
                                                               =====

The Company's sales are seasonal,  with domestic  revenues tending to be highest
in the second and third quarter of the year consistent with the domestic highway
maintenance  and  construction  season.  The  Company  builds  working  capital,
principally  accounts  receivable  and  inventory,  during  the second and third
quarters to support  sales.  Positive  cash flow from  operations  is  generally
realized in the third  quarter as cash  collections  are higher than  production
levels  and in the  fourth  quarter  of  the  year  as  production  and  related
expenditures   seasonally   decline  and  accounts   receivable  are  collected.
Conversely,  the Company generally  experiences  negative cash flow in the first
quarter,  when sales are lower,  and in the second quarter,  when the Company is
building working capital but has not yet collected  revenues from second quarter
sales.

The Company has historically borrowed funds available under its revolving credit
facilities to fund working  capital  during its first and second  quarters.  The
Company used $1.4 million of cash in operating  activities  during the first six
months of fiscal 1998,  compared to $0.5  million  used in operating  activities
during the same  period of 1997.  The $0.9  million  decrease  in cash flow from
operating  activities  during the period resulted largely from increased working
capital.  The Company  realized $10.8 million from  operating  activities in the
twelve month period ended July 5, 1998, compared to $11.6 million from operating
activities in the twelve months ended June 29, 1997.  The $0.8 million  decrease
in cash flow from operating  activities  resulted  largely from  unfavorable net
changes in working capital.

At July 5, 1998, the Company's outstanding borrowings under its credit agreement
consisted of $14.8  million of term loans and $9.4  million of revolving  loans.
Under the terms of the  agreement,  $1.3  million of term loans will  become due
during the  remainder  of 1998,  and an  additional  $2.5  million of term loans
become due during 1999. At July 5, 1998, the additional  amount  available under
the revolving portion of the Company's credit agreement,  after consideration of
all borrowing base limitations and outstanding loans, was $10.6 million.

The Company  expects  capital  expenditures  for additions and  replacements  to
approximate  $5.5 million in 1998 and $4.0  million in 1999,  with funding to be
provided  principally from internally generated funds. Through July 5, 1998, the
Company had spent $3.8 million on capital expenditures.

On May 1, 1998,  the Company began  leasing an additional  78,000 square feet of
space in Niles,  Illinois.  These  facilities will be principally used to expand
the Company's manufacturing capacity.

                                       14
<PAGE>

In October  1995,  the board of directors  authorized  the  repurchase  of up to
500,000  shares of the Company's  common  stock.  In  conjunction  with the then
pending  sale of the  Waukegan  facility,  the board of  directors  in July 1997
authorized an expansion of the stock buyback program by 500,000 shares,  raising
the total  allowable  purchases to 1,000,000  shares.  Through July 5, 1998, the
Company had purchased  604,850 shares of its common stock at an average price of
$6.37 per share.

The Company  expects that cash flow from  operations  and  borrowings  under the
credit  facility  will be  sufficient  to fund working  capital  needs,  capital
expenditures and mandatory  principal payments under the credit facility through
1999.  From  time to  time,  the  Company  considers  possible  acquisitions  of
businesses  complimentary  to the  Company's  business.  It is  likely  that any
significant acquisition would be funded with additional long term debt.


Adoption of new accounting standards
------------------------------------

As  described  in Note 4 to the Notes to  Condensed  Financial  Statements,  the
Company is required to adopt the following new accounting standards:

      SFAS 131 - Disclosures  about  Segments  of an  Enterprise  and  Related
                 Information.

      SFAS 132 - Disclosures about Pensions and Other Postretirement benefits.

      SFAS 133 - Accounting for Derivative Instruments and Hedging Activities.

Year 2000 issues
----------------

In  response  to the  Year  2000  problem,  the  Company  is in the  process  of
evaluating  the Year  2000  compliance  of its  business  systems.  The  Company
believes that its primary  business  control system is Year 2000  compliant.  In
addition,  the Company has initiated a program to communicate  with its vendors,
other service  providers  and  customers to determine  whether they are actively
involved in projects to ensure that their products and business  systems will be
Year 2000  compliant.  The  inability  of the Company or its  material  vendors,
service providers or customers to effectuate  solutions to their respective Year
2000 issues on a timely and cost effective  basis could have a material  adverse
effect on the Company.

Forward Looking Statements
--------------------------

This Form 10-Q contains "forward looking  statements"  within the meaning of the
Private Securities Litigation Reform Act of 1995, including (without limitation)
statements as to  expectations,  beliefs and future  financial  performance  and
assumptions  underlying the foregoing related to product demand, ability to meet
short and long  term  debt  requirements,  expected  cash flow from  operations,
projected  capital  spending  levels and compliance  with Year 2000 issues.  The
actual results or outcomes could differ  materially  from those discussed in the

                                       15
<PAGE>

particular forward looking  statements based on a number of factors,  including;
(i) changes in economic  conditions;  (ii)  pricing and other  actions  taken by
competitors; (iii) government funding (or perceptions regarding such funding) of
highway construction projects; (iv) the Company's ability to develop and protect
its proprietary  technology and to react to increased competition resulting from
expiring  patents  and (v) the  ability  of the  Company,  its  vendors  and its
customers  to  identify  and  remediate  Year 2000  issues on a timely  and cost
effective basis.

Item 3 - Quantitative and Qualitative Disclosures about Market Risks.

Not required.
                                       16

<PAGE>




                           Part II - Other Information
                           ---------------------------

Item 6-Exhibits and Reports on Form 8-K

(A)   Exhibits

      27.1   Financial Data Schedule


(B)   Reports from Form 8-K

      The Company did not file any Current Reports on Form 8-K
      during the quarter ended July 5, 1998

                                       17

<PAGE>



                                  SIGNATURES



Pursuant to the  requirements of Section 13 or 15(d) of the Securities  Exchange
Act of 1934,  the  registrant  has duly  caused  this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

Dated:  August 13, 1998              STIMSONITE CORPORATION


                                     /s/THOMAS C. RATCHFORD
                                     ----------------------
                                     Thomas C. Ratchford
                                     Vice President-Finance, Treasurer,
                                     Secretary and Chief Financial Officer
                                     (Its Duly Authorized Officer and  Principal
                                     Financial and Accounting Officer)


                                       18