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 October 4, 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 October 30, 1998 was 8,346,377.

                                       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     17


Part II. Other Information

Item 6.  Exhibits and Reports on Form 8-K                                18


Signatures                                                               19


                                       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>
                                                                       10/4/98         12/31/97
                                                                     ------------    ------------
                                                                      (Unaudited)     (Audited)
ASSETS

Current assets                                                                  
<S>                                                                         <C>             <C> 
        Cash and cash equivalents                                           $748            $337
        Trade accounts receivable less allowance for
              doubtful accounts of $550 (1998)
              and $495 (1997)                                             25,704          14,864
        Inventories                                                       11,273          11,418
        Prepaid expenses and other                                         1,011           1,272
        Deferred tax assets                                                1,654           1,630
                                                                     ------------    ------------
                          Total current assets                            40,390          29,521

Property, plant and equipment, net                                        15,013          11,829
Intangible assets, net                                                     9,391          11,259
Deferred financing costs, net                                                206             251
Deferred tax assets and other                                              2,497           2,341
                                                                     ------------    ------------
                          Total assets                                   $67,497         $55,201
                                                                     ============    ============

LIABILITIES

Current liabilities:
        Accounts payable                                                  $7,982          $7,797
        Current maturities of long-term debt                               2,500           2,500
        Other accrued expenses                                             7,975           2,218
                                                                     ------------    ------------
                 Total current liabilities                                18,457          12,515

Accrued postretirement benefits                                              594             631

Long-term debt                                                            18,325          15,575
                                                                     ------------    ------------
                 Total liabilities                                        37,376          28,721

STOCKHOLDERS' EQUITY

Total stockholders' equity                                                30,121          26,480
                                                                     ------------    ------------
                 Total liabilities and stockholders' equity              $67,497         $55,201
                                                                     ============    ============
</TABLE>

See Accompanying Notes 

                                       3
<PAGE>


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

<TABLE>
<CAPTION>
                                                 Quarter Ended                  Nine Months Ended            Twelve Months Ended
                                           ---------------------------   ----------------------------   ---------------------------
                                             10/4/98        9/28/97        10/4/98         9/28/97        10/4/98        9/28/97  
                                           ------------   ------------   ------------    ------------   ------------   ------------

<S>                                          <C>            <C>            <C>            <C>            <C>            <C>    
Net Sales                                      $28,043        $25,514        $67,332         $63,710        $84,985        $79,923
Cost of goods sold                              17,629         15,704         43,333          41,071         56,220         54,664  

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

Gross profit                                    10,414          9,810         23,999          22,639         28,765         25,259  

Operating expenses:
   Selling and administrative                    3,861          3,439         11,044          10,397         14,831         14,201 
   Research and development                        518            390          2,027           1,404          2,709          2,105
   Amortization of intangibles                     656            654          2,006           2,073          2,663          2,789
   Restructuring charge                            ---            ---            ---             ---            ---          4,000  
                                           ------------   ------------   ------------    ------------   ------------   ------------
Total operating expenses                         5,035          4,483         15,077          13,874         20,203         23,095 
                                           ------------   ------------   ------------    ------------   -------------  ------------
Operating income                                 5,379          5,327          8,922           8,765          8,562          2,164


Interest expense                                   470            620          1,359           1,863          1,798          2,469
                                           ------------   ------------   ------------    ------------   -------------  ------------

Income (loss) before provision for
   income taxes                                  4,909          4,707          7,563           6,902          6,764           (305)

Provision for income taxes                       2,041          1,966          3,178           2,959          2,693            130
                                           ------------   ------------   ------------    ------------   -------------  ------------

Net income (loss)                               $2,868         $2,741         $4,385          $3,943         $4,071          ($435) 
                                           ============   ============   ============    ============   =============  ============

Comprehensive income:
   Foreign exchange translation                    (11)          (277)          (100)           (511)           147           (407)
                                           ------------   ------------   ------------    ------------   -------------  ------------
Comprehensive income (loss)                     $2,857         $2,464         $4,285          $3,432         $4,218          ($842)
                                           ============   ============   ============    ============   =============  ============

Earnings per common and common 
equivalent share:

Net income (loss):
         Basic                                   $0.34          $0.32          $0.52           $0.46          $0.48         ($0.05)
         Diluted                                 $0.34          $0.32          $0.52           $0.45          $0.48         ($0.05)


Weighted average number of shares and 
share equivalents outstanding :
         Basic                               8,364,310      8,549,202      8,371,305       8,580,907      8,406,381      8,625,306
         Diluted                             8,511,844      8,666,125      8,510,079       8,694,073      8,537,272      8,625,306

</TABLE>

See Accompanying Notes


                                       4
<PAGE>

                     STIMSONITE CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (Dollars in Thousands)

<TABLE>
<CAPTION>
 
                                                                   Nine Months Ended              Twelve Months Ended
                                                                ----------------------------   ---------------------------

                                                                   10/4/98         9/28/97         10/4/98        9/28/97
                                                                   -------         -------         -------        -------




<S>                                                                 <C>             <C>            <C>            <C>    
Net cash provided by operating activities:                          $3,867          $3,068         $12,495        $14,010

Cash flows from investing activities:
        Purchase of property, plant and equipment                   (6,056)         (1,734)         (6,866)        (2,642)
        Sale of property, plant and equipment                          751           5,802             699          5,802
        Investment in joint venture partnership                         -               -               -              25
                                                                ------------    ------------   -------------   -----------

         Net cash (used in) provided by investing activities        (5,305)          4,068          (6,167)         3,185

Cash flows from financing activities:
       Proceeds from the issuance of common stock,
         net of offering expenses                                        8              31               8            278
       Payments to reacquire common stock                             (649)         (1,226)         (1,009)        (1,847)
       Principal payments under capital lease obligations             (160)           (210)           (198)          (244)
       Proceeds from long-term debt                                  7,400           6,375           6,050          2,475
       Payments on long-term debt                                   (4,650)        (11,600)        (10,800)       (17,508)
       Financing fees paid in connection with debt refinancing          -               -               -            (107)
                                                                ------------    ------------   -------------   -----------

       Net cash provided by (used in) financing activities           1,949          (6,630)         (5,949)       (16,953)

       Effect of exchange rate changes on cash                        (100)           (511)            147           (407)
                                                                ------------    ------------   -------------   -----------

       Net increase (decrease) in cash and cash equivalents            411              (5)            526           (165)

       Cash and cash equivalents, beginning of period                  337             227             222            387
                                                                ------------    ------------   -------------   -----------

       Cash and cash equivalents, end of period                       $748            $222            $748           $222
                                                                ============    ============   =============   ===========



Supplemental disclosure of cash flow information:
      Cash paid during the period for interest                      $1,349          $1,607          $1,985         $2,547

      Cash paid during the period for income taxes                    $979             $39          $1,881         $1,780
 
      Capital lease for property, plant & equipment                   $469             597            $469           $597

      
</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
October 4, 1998 and for the periods ended October 4, 1998 and September 28, 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 October 4, 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:

                                  October 4,                December 31,
                                    1998                       1997
                                 -----------                ------------  
($000)                           (Unaudited)
Raw materials                        $4,804                    $5,323
Work in process                       1,023                     1,455
Finished goods                        5,446                     4,640
                                   ---------                 ---------
                                    $11,273                   $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 October 4, 1998
-----------------------------

Basic EPS
---------
<S>                                                 <C>                <C>              <C>  
Income (loss) available to common stockholders      $2,868,000         8,364,310        $0.34

Effect of dilutive options                                               147,534
                                                                 ----------------

Diluted EPS
-----------
Income (loss) available to common stockholders
plus assumed conversions                            $2,868,000         8,511,844        $0.34

----------------------------------------------------------------------------------------------
Quarter ended September 28, 1997
--------------------------------

Basic EPS
---------
Income (loss) available to common stockholders      $2,741,000         8,549,202        $0.32

Effect of dilutive options                                               116,923
                                                                 ----------------

Diluted EPS
-----------
Income (loss) available to common stockholders
plus assumed conversions                            $2,741,000         8,666,125        $0.32

----------------------------------------------------------------------------------------------
Nine months ended October 4, 1998
---------------------------------

Basic EPS
---------
Income available to common stockholders             $4,385,000         8,371,305        $0.52

Effect of dilutive options                                               138,774
                                                                 ----------------

Diluted EPS
-----------
Income available to common stockholders
plus assumed conversions                            $4,385,000         8,510,079        $0.52

----------------------------------------------------------------------------------------------
Nine months ended September 28, 1997
------------------------------------

Basic EPS
---------
Income (loss) available to common stockholders      $3,943,000         8,580,907        $0.46

Effect of dilutive options                                               113,166
                                                                 ----------------

Diluted EPS
-----------
Income (loss) available to common stockholders
plus assumed conversions                            $3,943,000         8,694,073        $0.45

----------------------------------------------------------------------------------------------
Twelve months ended October 4, 1998
-----------------------------------

Basic EPS
---------
Income available to common stockholders             $4,071,000         8,406,381        $0.48

Effect of dilutive options                                               130,891
                                                                 ----------------

Diluted EPS
-----------
Income available to common stockholders
plus assumed conversions                            $4,071,000         8,537,272        $0.48

----------------------------------------------------------------------------------------------
Twelve months ended September 28, 1997
--------------------------------------

Basic EPS
---------
Income (loss) available to common stockholders       ($435,000)        8,625,306       ($0.05)

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

Diluted EPS
-----------
Income (loss) available to common stockholders
plus assumed conversions                             ($435,000)        8,625,306       ($0.05)

----------------------------------------------------------------------------------------------
</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 does
not believe that the  implementation of SFAS No. 132 will have a material impact
on its financial reporting.

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
does not believe  that the  implementation  of SFAS No. 133 will have a material
impact on its financial reporting.



                                       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 nine months and
twelve months ended October 4, 1998 and September 28, 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 12.7% and 13.2% of net sales in the third quarters of 1998 and 1997,
respectively,  14.9% and 14.0% of net sales in the first nine months of 1998 and
1997,  respectively.  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 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.  Earlier this year, the U.S. Congress
approved a new federal  highway  spending bill. 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          Nine Months         from         Twelve Months Ended     from
                           10/4/98   9/28/97    Prior Period   10/4/98  9/28/97   Prior Period     10/4/98   9/28/97   Prior Period
                           -------   -------    ------------   -------  -------   ------------     -------   -------   ------------
                             

<S>                          <C>       <C>          <C>        <C>       <C>          <C>           <C>       <C>           <C> 
Net sales                    100.0%    100.0%       9.9%        100.0%    100.0%       5.7%          100.0%    100.0%        6.3%

Cost of goods sold            62.9      61.6       12.3          64.4      64.5        5.5            66.2      68.4         2.8
 
Gross profit                  37.1      38.4        6.2          35.6      35.5        6.0            33.8      31.6        13.9
 
Selling and                   13.8      13.5       12.3          16.4      16.3        6.2            17.5      17.8         4.4
administrative

Research and                   1.8       1.5       32.8           3.0       2.2       44.4             3.2       2.6        28.7
development

Amortization of                2.3       2.6        0.3           3.0       3.3       (3.2)            3.1       3.5        (4.5)
intangibles

Restructuring charge           --        --         --            --        --          --             --        5.0         n.a.

Operating income              19.2      20.9        1.0          13.3      13.8        1.8            10.1       2.7       295.7

Interest expense               1.7       2.4      (24.2)          2.0       2.9      (27.1)            2.1       3.1       (27.2)

Income (loss) before provision
  for income taxes and
  extraordinary item          17.5      18.4        4.3          11.2      10.8        9.6             8.0      (0.4)        n.a.


Net income (loss)             10.2      10.7        4.6           6.5       6.2       11.2             4.8      (0.5)        n.a.


</TABLE>

Quarter ended October 4, 1998
Compared to
Quarter ended September 28, 1997
--------------------------------

Net sales of $28.0 million for the quarter ended October 4, 1998  increased $2.5
million or 9.9% from the comparable  fiscal 1997 quarter.  Net domestic sales of
highway  delineation  products increased 6.5% compared with the third quarter of
1997,  and domestic  sales of optical  film  products  and  international  sales
increased by 52.7% and 6.3%, respectively.  The 52.7% increase in domestic sales
of optical  film  reflected a continued  acceptance  of the  Company's  improved
products  introduced  in the  fourth  quarter  of 1996.  

Cost of goods sold for the third quarter of 1998 totaled $17.6 million  compared
to $15.7  million for the 1997  period.  As a percentage  of net sales,  cost of
goods sold  increased  from 61.6% in the third quarter of 1997 to 62.9% in 1998.
The related  1.3%  decrease in gross  margin  reflected  an  unfavorable  mix of
product  sales  partially  offset by  successful  manufacturing  cost  reduction
programs.

Selling  and  administrative  expenses  for the third  quarter of 1998 were $3.9
million  compared to $3.4 million in the third  quarter of 1997. As a percentage
of net sales,  selling and administrative  expenses were 13.8% in 1998 and 13.5%
in the 1997 period.

                                       10
<PAGE>

Research  and  development  expenses  for the  third  quarter  of 1998 were $0.5
million compared to $0.4 million in the third quarter of 1997.

Interest  expense was $0.5  million in the third  quarter of 1998, a decrease of
$0.1 million compared to the same period in 1997. 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,  Illiois  property on
August 1, 1997.

Provision  for  income  taxes  of $2.0  million  in the  third  quarter  of 1998
reflected  an  effective  tax  rate of  41.6%  compared  to a $2.0  million  tax
provision and a 41.8% rate in the third quarter of 1997.

Nine months ended  October 4, 1998 
Compared to
Nine months ended  September 28, 1997
-------------------------------------

Net sales of $67.3 million for the nine months ended  October 4, 1998  increased
$3.6 million or 5.7% from the comparable fiscal 1997 period.  Net domestic sales
of highway delineation  products decreased 0.3% compared with the same period in
1997, but was offset by strong  domestic sales of optical film products (a 44.4%
increase compared to 1997) and international sales (a 12.6% increase compared to
1997).  1998 results were further  enhanced by changes in the  Company's  fiscal
quarters which resulted in six more calendar days in 1998 than in 1997.

Cost of goods  sold for the first  nine  months of 1998  totaled  $43.3  million
compared to $41.1  million for the 1997 period.  As a  percentage  of net sales,
cost of goods sold decreased from 64.5% in the 1997 period to 64.4% in 1998. The
positive  effects  achieved  by  the  Company's  aggressive  manufacturing  cost
reduction programs were largely negated by an unfavorable mix of product sales.

Selling and  administrative  expenses for the nine months ended  October 4, 1998
were $11.0  million  compared to $10.4  million in the same period of 1997. As a
percentage  of net sales,  selling and  administrative  expenses  were 16.4% and
16.3% in the 1998 and 1997  period,  respectively.  Included  in the nine months
ended October 4, 1998, as an offset to selling and administrative  expense, is a
$0.2 million gain on  involuntary  conversion,  resulting  from the recording of
certain insurance  proceeds and related loss of property at one of the Company's
production  facilities  earlier  this year.  Excluding  the $0.2  million  gain,
selling and  administrative  expenses,  as a percentage of net sales, were 16.6%
during the first nine months of 1998.

Research and development expenses for the nine months ended October 4, 1998 were
$2.0  million  compared to $1.4  million in the same period of 1997.  The higher
expense  level  was in part due to the  absence,  in 1998,  of $0.3  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 


                                       11
<PAGE>



continued  into 1997.  As a percentage  of net sales,  research and  development
expenses  were 3.0% in the 1998  period  compared  to 2.2% in the same period of
1997.

Interest  expense was $1.4 million for the first nine months of 1998, a decrease
of $0.5 million compared to the same period in 1997. 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.

Provision  for income taxes of $3.2 million for the nine months ended October 4,
1998  reflected  an effective  tax rate of 42.0%  compared to a $3.0 million tax
provision and a 42.9% rate in the same period of 1997.

Twelve months ended October 4, 1998  
Compared to
Twelve months ended September 28, 1997
--------------------------------------

Net sales for the twelve  months ended  October 4, 1998 were $85.0  million,  an
increase of $5.1 million or 6.3% compared to 1997. Net domestic sales of highway
delineation  products  decreased  $0.5 million or 0.8%  compared with the twelve
months ended September 28, 1997. Net international  sales increased $2.2 million
or 18.8% and net domestic  sales of optical film increased $3.3 million or 47.3%
compared with the twelve months ended September 28, 1997.

Cost of goods sold for the twelve  months ended  October 4, 1998  totaled  $56.2
million  (66.2% of net sales)  compared to $54.7 million (68.4% of net sales) in
the comparable 1997 period.  The corresponding  2.2% increase in gross margin is
largely  attributable to increased  productivity in the Company's  manufacturing
processes,  partly offset by an unfavorable mix of product sales and competitive
pricing primarily in the non-snowplowable markers product group.

Selling and administrative  expenses for the twelve months ended October 4, 1998
totaled  $14.8  million,  an  increase of $0.6  million or 4.4%  compared to the
previous  twelve  month  period.  As a  percentage  of net  sales,  selling  and
administrative expenses were 17.5% in 1998 and 17.8% in 1997.

Research and  development  expenses for the twelve  months ended October 4, 1998
were $2.7  million  (3.2% of net sales)  compared to $2.8  million  (2.6% of net
sales) in 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."

                                       12
<PAGE>

Interest  expense for the twelve  months ended October 4, 1998 was $1.8 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 nine month  period  ended  October 4,  1998,  the  Company  increased
borrowings  under its long term credit  facility by $2.8 million.  The principal
inflows and outflows of cash during the nine months  ended  October 4, 1998 were
as follows:

                                Cash Flow Summary
                        Nine Months Ended October 4, 1998
                        ---------------------------------

                                   ($millions)

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

         Net cash provided by operating activities              $3.9
         Net borrowings under credit facility                    2.8
                                                                -----

                  Total inflows                                  6.7
                                                                -----

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

         Repurchase of outstanding Company stock                (0.6)
         Capital expenditures                                   (5.3)
         All other (net)                                        (0.4)
                                                                -----

                  Total outflows                                (6.3)
                                                                -----

         Net change in cash balance                            $ 0.4
                                                                =====  
                                                               
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.


                                       13
<PAGE>

The Company has historically borrowed funds available under its revolving credit
facilities to fund working capital during its first and second quarters.  During
the third and fourth quarters, the Company normally reduces its borrowings using
funds generated by normal operating activities.  During the first nine months of
fiscal  1998,  operating  activities  provided  the Company with $3.9 million in
cash, compared to $3.1 million provided during the same period of 1997. The $0.8
million  increase in cash flow from operating  activities  during the period was
the result of an  increase  in net  earnings  ($0.4  million)  and a decrease in
working  capital  ($0.4  million).  The  Company  realized  $12.5  million  from
operating  activities in the twelve month period ended October 4, 1998, compared
to $14.0 million from operating  activities in the twelve months ended September
28,  1997.  The $1.5  million  decrease in cash flow from  operating  activities
resulted largely from unfavorable net changes in working capital.

At  October 4,  1998,  the  Company's  outstanding  borrowings  under its credit
agreement consisted of $14.2 million of term loans and $6.6 million of revolving
loans. Under the terms of the agreement,  $0.6 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 October 4, 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 $13.4
million.

The Company  expects  capital  expenditures  for additions and  replacements  to
approximate  $6.5 million in 1998 and $4.0  million in 1999,  with funding to be
provided  principally from internally  generated funds. Through October 4, 1998,
the Company had spent $5.3 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.  The lease extends until April 30, 2008,
with an option to terminate the lease as of April 30, 2004. The Company also has
an option to purchase the building at a fixed price in 2004 or 2008.

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 October 4, 1998, the
Company had purchased  632,000 shares of its common stock at an average price of
$6.33 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.



                                       14
<PAGE>


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:

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

o SFAS 132 -Disclosures about Pensions and Other Postretirement benefits.

o SFAS 133 -Accounting for Derivative Instruments and Hedging Activities.

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

Some computers,  software, and other equipment include programming code in which
calendar year data are  abbreviated  to two digits.  As a result,  some of these
systems could fail to operate,  or fail to produce correct results, if dates are
not correctly interpreted.  These problems are commonly referred to as the "Year
2000 Problem".

Since 1997,  the Company has been  working to identify and address the Year 2000
issues.  The evaluation  phase of the Company's  Year 2000 readiness  project is
intended to determine the readiness of internal systems and equipment as well as
third parties.  The remediation  phase includes (i)  reprogramming  of software,
(ii)  replacing  computer  software,  hardware and  operating  equipment,  (iii)
testing specific modifications and (iv) idenitifying solutions to possible third
party  noncompliance.  The  testing  phase  includes  integrated  testing of all
systems that were modified.  As of November 10, 1998, the Company estimates that
the internal evaluation phase is substantially  complete,  but the assessment of
third  parties  described  above  has not yet  begun.  The  Company  has not yet
completed the remediation or testing phases, but each of the Company's Year 2000
readiness  project is expected to be completed by the end of the fourth  quarter
of 1999.

The  related  costs  of  compliance  have  not  yet  been  determined.  However,
preliminary  estimates,  which include  costs  attributable  to the  accelerated
purchase of replacement hardware and software,  approximate  $500,000,  of which
$400,000 has been  incurred  through the end of the third  quarter in addressing
Year 2000 issues. While the estimated cost of these efforts are not expect to be
material  to  the  Company's   financial  position  or  any  year's  results  of
operations, there can be no assurance as to this effect.

The Company  believes  that in the most  likely  worst case  scenario,  internal
remediation and testing of information technology and non-information technology
systems will be completed as indicated  above and will have minimal  unfavorable
impact on the Company's financial condition and results of operations. If any or
all of these  efforts are delayed,  however,  there could be  disruption  of the
financial and operating systems at one or more of the Company's  business units.
Additionally,  as discussed  above,  the Company has not begun its assessment of
the third  parties'  readiness.  The  Company  currently  expects  that  certain
external  parties  providing  materials  and  services  to the  Company  will be
reluctant  to  disclose  fully  certain   information   about  their  readiness.
Accordingly,  the Company  cannot be assured that there will be no disruption of
operations  because of vendors and service providers who are not fully Year 2000
compliant.

The company has not yet completed its contingency  planning with respect to Year
2000 issues. The Company intends to complete its contingency planning by the end
of the third  quarter  of 1999 as part of the  remediation  and  testing  phases
described above.

                                       15
<PAGE>
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,  the effect of
the  federal  appropriation  bill,  the 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 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.








                                       16
<PAGE>

Item 3 - Quantitative and Qualitative Disclosures about Market Risks.

Not required.

                                       17
<PAGE>


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






Item 6 - Exhibits and Reports on Form 8-K

(A)     Exhibits


         27.1     Financial Data Schedule


(B)      Reports on Form 8-K

       The  Company  did not file any  Current  Reports  on Form 8-K  during the
       quarter ended October 4, 1998.



                                       18
<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:  November 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)





                                       19