**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

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FORM 10-K

**x**                              ANNUALREPORT PURSUANT TO SECTION 13 OR 15(d)

**Forthe fiscal year ended June 30, 2005**

**OR**

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

**Forthe transition period**            to

**Commissionfile number 0-7903**

**QUIXOTE CORPORATION**

(Exact name of registrantas specified in its charter)

| **DELAWARE**                              | **36-2675371**      |
|-------------------------------------------|---------------------|
| (State or other  jurisdiction of          | (I.R.S. Employer    |
| incorporation or  organization)           | Identification No.) |
| **THIRTY FIVE EAST WACKER DRIVE,**        |                |
| **CHICAGO**,  **ILLINOIS**                | **60601**           |
| (Address of  principal executive offices) | (Zip Code)          |

 

Registrant’s telephonenumber including area code: **(312) 467-6755**

Securities RegisteredPursuant to Section 12(g) of the Act:

**Common Stock ($.01**2¤3 ParValue)

(Title of Class)

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filing requirements for the past 90days.   Yes*  *x   No   o

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K isnot contained herein, and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment tothis Form 10-K (   ).

Indicate by check markwhether the registrant is an accelerated filer as defined by Rule 12b-2of the Securities Exchange Act of 1934.   Yes*  *x   No   o

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

State the aggregate marketvalue of the voting common equity held by non-affiliates of the registrant,computed by reference to the price at which the common equity was sold, or theaverage bid and asked prices of such common equity, as of the last business dayof the registrant’s most recently completed second fiscal quarter.

$168,689,518 as ofDecember 31, 2004

Indicate the number ofshares outstanding of each of the issuer’s classes of common stock, as of thelatest practicable date:

8,929,570 shares of theCompany’s Common Stock ($.012¤3 par value)were outstanding as of September 7, 2005.

**DOCUMENTSINCORPORATED BY REFERENCE**

The Registrant’sDefinitive Proxy Statement for the Annual Meeting of Stockholders to be held onNovember 17, 2005 which will be filed with the Commission on or aboutOctober 6, 2005 is incorporated by reference at Part III.

 

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**TABLE OF CONTENTS**
|                   |   |                                                                  |   | **PAGE** |
|-------------------|--------|-----------------------------------------------------------------------|--------|----------|
| **PART I**   |   |                                                                  |   |     |
| Item 1.           |   | Business                                                              |   | 4-8      |
| Item 2.           |   | Properties                                                            |   | 9        |
| Item  3.          |   | Legal  Proceedings                                                    |   | 10       |
| Item 4.           |   | Submission of Matters to a Vote of Security Holders                   |   | 10       |
| **PART II**  |   |                                                                  |   |     |
| Item 5.           |   | Market for the Registrant’s Common Equity and Related            |   |     |
|              |   | Stockholder Matters                                                   |   | 11       |
| Item 6.           |   | Selected Financial Data                                               |   | 12       |
| Item 7.           |   | Management’s Discussion and Analysis of Financial  Condition and |   |     |
|              |   | Results of Operations                                                 |   | 13-24    |
| Item 7A.     |   | Quantitative and Qualitative Disclosures about Market  Risk           |   | 24       |
| Item 8.           |   | Financial Statements and Supplementary Data                           |   | 25-51    |
| Item 9.           |   | Changes in and Disagreements with Independent  Registered Public      |   |     |
|              |   | Accounting Firm on Accounting and Financial Disclosure                |   | 52       |
| Item 9A.          |   | Controls and Procedures.                                              |   | 52       |
| **PART III** |   |                                                                  |   |     |
| Item 10.          |   | Directors and Executive Officers of the Registrant                    |   | 56       |
| Item 11.          |   | Executive Compensation                                                |   | 56       |
| Item 12.          |   | Security Ownership of Certain Beneficial Owners and  Management       |   | 56       |
| Item 13.          |   | Certain Relationships and Related Transactions                        |   | 57       |
| **PART IV**  |   |                                                                  |   |     |
| Item 14.          |   | Principal Accountant Fees and Services                                |   | 58       |
| Item 15.          |   | Exhibits and Financial Statement Schedule                             |   | 58-62    |
| **SIGNATURES**    |   | 63                                                                    |

 

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**PART ITHE COMPANY**

**Overviewof the Company and Its Financial Condition**

Quixote Corporation was originally incorporated underthe laws of the State of Delaware in 1969 as Energy Absorption Systems, Inc.In June 1980, Energy Absorption Systems, Inc. changed its name toQuixote Corporation. When we use the terms “Quixote Corporation”, “the Company”,“we”, “our” or “us” in this report, we refer to Quixote Corporation and itssubsidiaries, unless otherwise provided by the context in which the term isused.

Quixote Corporation develops, manufactures and sellshighway and transportation safety products to domestic and internationalmarkets. Quixote’s operations are divided into two reportable segments: highwayand transportation safety products that “Protect and Direct,” which improvesafety on the roads by minimizing the severity of crashes or by directing orguiding traffic to avoid crashes; and highway and transportation safetyproducts that “Inform” motorists, pedestrians and state and local highwaypersonnel about dangerous or congested conditions or provide other usefulinformation. Our products are sold by both a direct sales force and adistribution network to customers in the highway construction and safetybusiness, state and municipal departments of transportation and othergovernmental transportation agencies.

Quixote’s business is directly affected by federal,state and municipal government funding for transportation safety, highwayconstruction and maintenance, and other infrastructure projects. A significantpart of our sales are ultimately financed by funds provided to the states bythe federal government through the federal transportation funding bill. Thelast six-year federal bill expired on September 30, 2003 and was extendedeleven times over almost two years. The new bill, SAFETEA-LU, was passed byCongress in July 2005, and signed by the President in August. Until thenew legislation was enacted, the transportation safety allotment in federal andstate budgets was uncertain. The Company believes that during the prolongeddelay, the uncertainty negatively impacted spending on the products andservices offered by the Company and adversely affected Quixote’s financialperformance in fiscal years 2004 and 2005. We believe that the passage of thenew six-year reauthorization legislation will improve that situation; however,due to the long sales cycles typical in this business, the Company does notexpect to begin to realize the benefit of the bill’s passage until the secondhalf of fiscal 2006.

In addition, many states have reduced spending onhighways due to budget constraints, given both national and local economies.Such budget constraints adversely affect the ability of the states to fund highwayand infrastructure projects, and therefore reduced the demand for our products.Municipalities also suffered from budget restraints that reduced transportationsafety spending. While general economic conditions are improving, we remaincautious about our outlook for fiscal 2006.

Although the Company generally performed belowhistoric levels due to the issues mentioned above, revenues for our Informsegment declined substantially more than those of the Protect and Directsegment. In fiscal year 2005, we have been rationalizing the operations of ourtraffic control business, (U.S. Traffic Corporation and Peek TrafficCorporation), as well as several of our other Inform businesses. Integration ofthe Inform businesses, combined with the reduced demand for the Companyproducts described above, resulted in losses which adversely affected Quixote’sfinancial performance in the year ended June 30, 2005. If sales for theInform segment increase by at least $10 million above the fiscal 2005 level, weexpect to record a slight profit for the Inform segment in fiscal 2006. However,there can be no assurance either that we will achieve that level of sales orthat the gross margin on those sales will be sufficient to produce a profit.

The Company hashistorically met its financial needs through a combination of cash flowsgenerated from operations and borrowing from a group of banks pursuant to amulti-year credit agreement. In fiscal 

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2005, wedecided to secure longer term financing with a fixed rate and issued $40,000,000of 7% Convertible Senior Subordinated Notes due February 15, 2025 in aprivate placement. The net proceeds were used to pay off our bank term loan andreduce the amount of our revolving credit agreement. The Company subsequently entered into a new bank credit agreement with onebank including a secured revolving credit facility of $30 million.

**Item 1.   Business**

Quixote Corporation, through its subsidiaries,develops, manufactures and markets highway and transportation safety productsto protect, direct and inform motorists and highway workers in both domesticand international markets. These products include energy-absorbing highwaycrash cushions, flexible post delineators, electronic wireless measuring andsensing devices, weather information systems and forecasting services, variablemessage signs, highway advisory radios, intelligent intersection controldevices, automated enforcement systems, video detection equipment and otherhighway and transportation safety devices.

As of June 30, 2005,we employed approximately 1,100 people.

*Description ofBusiness*

Our operations arecomprised of two reportable segments:

·       TheProtect and Direct segment provides solutions for improving safety on the roadseither by minimizing the severity of crashes that occur or by preventingcrashes from occurring by directing or guiding traffic.

**·****     **TheInform segment provides solutions for improving traffic flow and safety onroads and runways by providing information.

The Company’s products aresold world-wide by both a direct sales force and a distribution network tocustomers in the highway construction and safety business, state and municipaldepartments of transportation and other governmental transportation agencies.

*Protect and DirectSegment*

Our Protect and Direct category of products, whichreduce the severity of crashes, includes our patented highway crash cushionswhich were first conceived and developed in 1969. These products were developedand sold in response to the high number of fatalities and serious injuries sufferedby occupants of errant vehicles in collisions with roadside hazards, such asbridge abutments, overpass piers, overhead sign supports, lane dividers,traffic islands and toll booths. Since 1969, various types of highway crashcushions have been installed in front of thousands of life-threatening roadsidehazards. The Federal Highway Administration (FHWA) endorses the installation ofhighway crash cushions as an effective safety program and they are mandatory oninterstate roads in the U.S.

We develop, manufacture and market lines of patentedhighway crash cushion systems and other barriers which absorb and dissipate theforce of impact in collisions between vehicles and fixed roadside objects orslow moving highway construction vehicles. The product lines utilize theprinciples of momentum transfer and kinetic energy to safely decelerate errantvehicles. Energy absorption or energy dissipation is accomplished by usingdifferent combinations of water, aluminum, steel, urethane foam systems,cardboard, plastic structures, elastometric cylinders and sand.

We also manufacture and sell products that preventcrashes and help control the flow of traffic by directing or guiding. Theseproducts consist of a line of flexible sign and guide post systems (delineators)and a glare screen system. The guide posts are used to delineate a travel way,channel vehicles or mark the 

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location of an object. Thepost features a patented, in-ground anchor system that permits inexpensiverepair and replacement. The glare screen system, made from polyethylene, isinstalled on top of median barriers to eliminate the distraction of lights fromoncoming vehicles.

Our products within theProtect and Direct segment also include a crashworthy barrier arm for use atareas such as railroad crossings and tollroads and as security for access ways,driveways and parking lots. In addition, we market a FreezeFreeTM anti-icingsystem which automatically or manually dispenses deicing liquids in advance ofice formation on bridges, roads and overpasses.

*Inform Segment*

To expand our business within the highway andtransportation safety industry, in 1998 we began acquiring companies thatmanufacture Intelligent Transportation System (ITS) products which provideinformation to improve traffic flow and safety. Products sold by the Informsegment include traffic control products, weather and sensing products andhighway advisory radio products.

Traffic control products include traffic controllers,in-ground vehicle detectors, permanently-mounted electronic message signs andmobile variable message signs, directional displays, traffic and pedestriansignals, traffic uninterruptible power supply (UPS) systems, data collectiondevices, video detection equipment, automated enforcement systems, parkingdetection devices, illuminated transportation signage and tunnel lighting. Trafficcontrollers and detectors are devices that control traffic signal operations atintersections either with pre-set timers or with detectors that enable thesignals to change in response to variations in traffic. Permanently-mounted andmobile variable message signs provide advance warning and directionalinformation to oncoming drivers to assist in diverting and controlling trafficaround areas of potential hazard, and are used as a key component of the “AmberAlert” program. These LED signs and displays are electronic, and are solar ordiesel powered. UPS is a power supply system with battery backup that keeps alighted intersection operating either normally or in flash-mode during a powerinterruption. Traffic and pedestrian signals are LED or incandescent signalsfor intersection operations and pedestrian crossings which may include anumerical countdown warning before a signal changes.

The Company manufactures and sells portable orpermanent sensors that record traffic volume, speed, and length classificationof vehicles. These sensors also collect, analyze and store traffic, roadsurface conditions and freezing point data which can be relayed on a real-timebasis to a transportation department’s base computer or control center viatelephone, cellular link, fiber optic connection or a wireless link. We alsomanufacture and market road/runway weather information systems. Using a towerequipped with weather instruments and special detectors, these systems candetect freezing conditions and provide valuable weather information totransportation departments or airports in order to dispatch salt trucks orautomatically activate anti-icing systems.

We also provide automated enforcement systems, such asred light enforcement and laser speed enforcement, that involve digital camerasto detect possible traffic violations at intersections or on the side of a road.A toll road monitoring system is a data collection system able to count axlesof vehicles to ensure the proper toll amount is collected. In addition, theCompany sells specialty lighting solutions for roadway and pedestrian tunnels,subways and other areas.

We are a leading manufacturer of highway advisoryradio (HAR) systems that broadcast traffic information using an AM radiofrequency with reception up to six miles from the unit. HAR systems, inconnection with flashing lights and message signs, advise drivers to tune intoa particular AM station to hear messages about traffic, road conditions andweather. These HAR systems can be permanent or mobile. One of our products, theIntellizone® system, is designed to provide real-time information to motoristswho are approaching construction zones by integrating traffic and/or weathersensors, variable message signs and computer controlled software.

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We also provide product education, selection andapplication assistance. In limited cases, we perform site preparation andinstallation services for our products.

Financial informationrelating to industry segments appears in Note 16 of the notes to ourconsolidated financial statements incorporated by reference herein.

*Marketing andCompetition*

Our products are sold in all 50 U.S. states andinternationally. Domestically, the Company sells either through a distributionnetwork or through a direct sales force. The distribution network consists ofregional managers who supervise domestic****distributorsand make direct sales in areas not covered by distributors. The Company sellsits products principally to distributors, contractors (on behalf of state andlocal governments), state departments of transportation, state agencies, localgovernments, municipalities, and airports. Although the federal governmentprovides matching funds for the purchase of certain highway safety products bystate and local governmental agencies, the federal government is not a directpurchaser of the Company’s domestic products. For certain products, we sellthrough catalogs and inside sales personnel.

Many foreign governments are now beginning torecognize the need for crash cushions and the Company’s other transportationsafety products as a method of reducing traffic congestion and fatalities. Ourproducts are sold outside of the U.S through a network of distributors who makesales to municipal and national governments and contractors who are respondingto bids from their respective governments.

We experience competition in many of our product lines.We believe that we are a leading U.S. manufacturer of transportation safetyproducts. Within the Protect and Direct segment, no other company presentlymarkets as broad a line of highway crash cushion systems designed to shield aslarge a variety of fixed roadside hazards as the Company. However, many of ourcompetitors offer similar products to those supplied by us, and a few arebetter capitalized than we are. The Company experiences competitionparticularly in the sand barrel, QuadGuard®, REACT 350® and TMA product lines. TheCompany competes in the U.S. market for crash cushions with Trinity Industries, Inc.,(NYSE: TRN), TrafFix Devices, Inc. and other smaller regional companies. Anumber of other companies manufacture flexible sign and guide post systems.Within the Inform segment, we experience rigorous competition in sellingcertain product lines because they are generally sold through a bidding process.These product lines may include our road/runway traffic and weather informationsystems, permanently-mounted and mobile variable message signs, traffic anddetection controllers, traffic and pedestrian signals and lighting products. Thereare several companies that manufacture and sell highway advisory radio systems.We compete with many different companies that sell sensors using differenttechnologies, including microwave and infra-red sensors and machine-vision(video), and each technology offers certain advantages.

Competition may have anadverse effect on the selling prices and profit margins of certain productlines, and depending on the product mix sold, can adversely affect ourfinancial results. We believe that we compete effectively through our ownadvanced product development, patent protection, quality and price, and theeffectiveness of our strong distribution network.

*Government Policiesand Funding*

The domestic market for highway and transportationsafety products is directly affected by federal, state and local governmentalpolicies. Federal transportation spending is funded through a trust based onthe sale of gasoline. Funds are allocated and highway policy is developedthrough a six-year federal highway bill. A portion of our sales is ultimatelyfinanced by funds provided to the states by the federal government.Historically, these funds have covered 75% to 90% of the cost of highway safetyprojects on roads constructed or maintained with federal assistance. The lastsix-year federal highway bill (TEA-21) expired on September 30, 2003and was extended eleven times over almost two years. The new bill, 

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SAFETEA-LU, was passed byCongress in July, 2005 and signed by the President in August, 2005. Until thenew legislation was enacted, the transportation safety allotment in federal andstate budgets was uncertain, and the Company believes that during the prolongeddelay, this uncertainty negatively impacted spending on the products andservices offered by the Company and adversely affected Quixote’s financialperformance in fiscal years 2004 and 2005. We believe that the passage of thenew six-year reauthorization bill should improve highway spending; however, dueto the long sales cycles typical in this business, the Company does not expectto begin to realize the benefit of the bill’s passage until the second half offiscal 2006.

SAFETEA-LU, or the “Safe, Accountable, Flexible andEfficient Transportation Equity Act–A Legacy for Users” will provide $286.4billion in guaranteed funding for the federal highway, transit and safetyprograms through 2009. Importantly, unlike historical funding bills, it focuseson improving safety and relieving congestion as a priority, as well as on newhighway construction and resurfacing projects. Several sections of SAFETEA-LU provideincreased funding and focus on products and systems within our Inform segment. Whilethe new bill does not include projects that specifically indicate our productsby name and there can be no guarantee of increased sales, we expect the marketpotential for applications of our sensors, counters, audio and visual outputdisplays and adaptive control and monitored intersections to increase due tothis legislation. However, any change in the availability of federal funds andthe timing of the release of those funds to the state and local governments canhave an adverse impact on our financial results.

Many of our products are approved as acceptablehighway hardware according to procedures in the National Cooperative HighwayResearch Program number 230 or 350 that provide various test levels dependingon the application. This FHWA approval makes the products eligible for federalfunds for certain highway projects. We are obligated to seek such approval forimprovements or upgrades to such devices and for any new devices.

Foreign governmentpolicies and funding vary by country for highway and transportation safety. Inmany cases, additional testing of our products may be required in order toobtain certification.

*Backlog*

As of June 30, 2005,2004 and 2003, we had a backlog of unfilled orders for highway safety devicesof $23,796,000, $26,921,000 and $28,364,000, respectively. We can usually fillan order within two days to 8 weeks of receipt depending on the type ofproduct.

*Research andDevelopment; Patents*

Many of our products have patented features and weconduct our own research, development and testing of new products beforeintroducing them to the marketplace. The expenditures for research anddevelopment activities were $5,391,000, $3,605,000 and $2,356,000 for thefiscal years 2005, 2004 and 2003, respectively. The Company maintains a crashtest facility in California.

We develop new products by working with federal, stateand local highway officials to determine highway traffic safety needs, and thenwe design products to satisfy those needs. The Company is also active inpromoting cooperation among state highway agencies, contractors and engineersto encourage comprehensive repair and maintenance of roadside crash attenuatingsystems. In addition to developing new products, the Company is also seeking toacquire new products which can be sold through its existing distributionnetworks to its existing customers.

We own a number of U.S.and foreign patents covering our major products. We actively seek patent andtrademark protection for new developments.

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*Raw Materials*

The principal raw materials used in the production ofhighway safety devices are plastic and plastic resins, steel, aluminum andelectronic components. These raw materials are purchased from various suppliersand have been readily available throughout the last year. We believe thatadequate supplies of these materials will continue to be available.

We have been affected byincreased prices for certain commodities, particularly steel and resin, whichcan be a significant component of the cost of certain of the Company’s products.We attempt to reduce the negative impact of increasing prices by entering intocertain fixed price arrangements. However, increased commodity pricesnegatively impacted the Company’s gross margin for certain products. Inaddition, increasing fuel costs may adversely affect the Company’s results infiscal 2006.

*Major Customers*

No single customer of theCompany represents a significant portion of total revenues. However,approximately 11% and 9% of the Company’s consolidated revenues resulted fromsales to customers in the states of Texas and California, respectively, in fiscal2005. Customers are typically distributors, contractors, departments oftransportation, state agencies, local governments or municipalities, so achange in policy in state spending could materially affect our sales in thatstate.

*Seasonality*

Our sales are seasonalbecause domestic highway maintenance and construction seasons peak in theCompany’s fourth fiscal quarter.

*Foreign andDomestic Operations and Revenues*

The Company’s business is conducted principally in theUnited States, with sales outside of the United States of $19,111,000,$14,249,000 and $13,545,000 in 2005, 2004 and 2003, respectively, representing13%, 9% and 12% of the Company’s total revenues in 2005, 2004 and 2003,respectively.

Excluding ourmanufacturing facility in Tecate, Mexico (See Properties at Item 2), our assetsoutside of the United States are not material. Our long-lived assets used inthe leased Tecate facility are recorded on our books and records atapproximately $100,000.

*AvailableInformation*

We file annual reports on Form 10-K,quarterly reports on Form 10-Q, current reports on Form 8-K,special reports, proxy and information statements, and amendments to thosereports, with the Securities and Exchange Commission (SEC). The public may readand copy any materials filed by the Company with the SEC at the SEC’s PublicReference Room at 100 F. Street, N.E., Washington D. C. Information aboutthe operation of the SEC Public Reference Room may be obtained by callingthe SEC at 1-800-SEC-0330. The SEC maintains an internetwebsite at http://www.sec.gov that contains access to filings of issuers thatfile electronically with the SEC. The Company also maintains an internetwebsite at http://www.quixotecorp.com that contains access to its publicfilings and other information regarding the Company. We make our public filingsavailable as soon as reasonably practicable after such material is filed, orfurnished, to the SEC. A copy of our filings will also be furnished free ofcharge upon request.

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**Item 2.   Properties**

Informationrelating to the Company’s principal facilities is as follows:
| Location                        | ** ** | ** **      | ** ** | **Available Space**       | ** ** | **Purpose** | ** ** | **Owned or  Leased** |
|---------------------------------|------------|-----------------|------------|--------------------------------|------------|-------------|------------|---------------------------|
| 35 East Wacker Drive            |       | 18,000  sq. ft. |       | Executive Offices              |       | Leased      |
| Chicago, Illinois               |       |            |       |                           |       |        |
| 250 Bamberg Drive               |       | 300,000 sq. ft. |       | Manufacture of  Protect and    |       | Owned       |
| Pell City, Alabama              |       |            |       | Direct highway safety  devices |       |        |
| 3617 Cincinnati Avenue          |       | 22,000 sq. ft.  |       | Research and                   |       | Owned       |
| Rocklin, California             |       |            |       | development facility           |       |        |
|                                 |       |            |       | for Protect and Direct         |       |        |
|                                 |       |            |       | highway safety devices         |       |        |
| 3300 N. Kenmore Street          |       | 81,000 sq. ft.  |       | Leased to a third  party       |       | Owned       |
| South Bend, Indiana             |       |            |       |                           |       |        |
| 9603 John Street                |       | 183,000 sq. ft. |       | Sale and  manufacture of       |       | Leased      |
| Santa Fe Springs, CA            |       |            |       | Inform products                |       |        |
| Eucalipto y Nogal L4-7          |       | 68,000 sq. ft.  |       | Manufacture of                 |       | Leased      |
| Tecate, Baja California  Mexico |       |            |       | Inform products                |       |        |
| 2511 Corporate Way              |       | 52,000 sq. ft.  |       | Sale and  manufacture of       |       | Leased      |
| Palmetto, FL                    |       |            |       | Inform products                |       |        |
| 4021 Stirrup Creek Drive        |       | 13,000 sq. ft.  |       | Sale and  manufacture of       |       | Leased      |
| Durham, North Carolina          |       |            |       | Inform highway advisory        |       |        |
|                            |       |            |       | radio equipment                |       |        |
| Route 119 University Drive      |       | 26,000 sq. ft.  |       | Sale and  manufacture of       |       | Owned       |
| Uniontown, Pennsylvania         |       |            |       | Inform traffic sensing  and    |       |        |
|                                 |       |            |       | distance measuring  devices    |       |        |
| 11612 Lilburn Park Road         |       | 17,000 sq. ft.  |       | Sale and  manufacture of       |       | Leased      |
| St. Louis, Missouri             |       |            |       | Inform sensing and  weather    |       |        |
|                            |       |            |       | forecasting products           |       |        |
|                            |       |            |       | and services                   |       |        |
| 200 Corporate Pointe            |       | 19,800 sq. ft.  |       | Subleased to a  third party    |       | Leased      |
| Culver City, California         |       |            |       |                           |       |        |

 

The Company believes thatits principal plants are suitable and adequate for the manufacturing and otheractivities performed at those plants. In addition to the principal facilitieslisted above, the Company has other small facilities, including internationallocations, used primarily for sales activities.

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**Item 3.**   LegalProceedings

BEDINGER V. THE MILLS CORPORATION, GAYLORDENTERTAINMENT AND SAFE-HIT CORPORATION, State of Tennessee Circuit Court ofDavidson County, No. 02C2832. In October 2002, Energy AbsorptionSystems, Inc. was served in this matter. The Complaint alleges thatplaintiff was injured when she tripped over a surface mount twist-lock and postin a parking lot and seeks judgment for $1,000,000 in damages. The case hasbeen tendered to the Company’s insurance carrier and discovery is proceeding.

The Company is involved inother legal proceedings and claims arising out of the conduct of its business. TheCompany believes, after consultation with counsel, that the outcome of suchproceedings and claims will not have a material adverse effect on the Company’sconsolidated financial condition or results of operations.

**Item4.   Submission of Matters to a Vote of Security Holders**

There were no matters submitted to a vote of securityholders during the fourth quarter of fiscal 2005.

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**PART II**

**Item5.   Market for the Registrant’s Common Equity and Related StockholderMatters**

TheCompany’s common stock is quoted on The Nasdaq Stock Marketâ,under the symbol QUIX. Set forth are the daily high and low sales prices forthe Company’s common stock for the periods indicated, as reported by theNasdaq.
| ** **   | ** ** | **Three Months Ending** | ** ** |
|--------------|------------|-----------------------------------|------------|
| ** **   | ** ** | **9/30**                          | ** ** | **12/31** | ** ** | **3/31** | ** ** | **6/30** | ** ** |
| FISCAL 2005: |       |                              |       |   |   |   |   |   |   |
| High         |       | $                                 | 23.35      |   | $ | 22.45 |   | $ | 21.93 |   | $ | 22.49 |   |
| Low          |       | 17.80                             |       | 17.28 |   | 17.30 |   | 18.26 |   |
| FISCAL 2004: |       |                              |       |   |   |   |   |   |   |
| High         |       | $                                 | 29.08      |   | $ | 27.73 |   | $ | 28.36 |   | $ | 25.70 |   |
| Low          |       | 22.05                             |       | 22.30 |   | 20.12 |   | 19.00 |   |

 

The current quoted priceof the stock is listed daily in *The Wall Street Journal*in the Nasdaq National Market System section. As of September 7, 2005,there were 1,089 shareholders of record.

*Dividend Policy*

During 2005, the Companydeclared two semi-annual cash dividends of eighteen cents per share. During2004, the Company declared two semi-annual cash dividends of seventeen centsper share.

*Equity CompensationPlan Information*

As of June 30, 2005, the Company has twooutstanding stock option plans which were approved by the shareholders of theCompany in November 2001. Additional information relating to the Company’sstock option plans appears in Note 8 to the Company’s consolidated financialstatements included herein.

Thefollowing table details information regarding the Company’s equity compensationplans as of June 30, 2005:
| **Plan Category**                                      | ** ** | ** ** | ** ** | **(a)  Number of securities  to be issued upon exercise  of outstanding options,  warrants and rights** | ** ** | **(b)  Weighted-average  exercise price of  outstanding options,  warrants and rights** | ** ** | **(c)  Number of securities  remaining for future  issuance under equity  plans (excluding securities  reflected in column (a))** | ** ** |
|-------------------------------------------------------------|------------|------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| Equity  compensation plans approved by security holders     |       |       | 1,009,971  |                                                                                                                                                      |       |                                                                                                             | $          | 18.19                                                                                                                                                                                    |       |   |   | 793,215 |   |   |
| Equity  compensation plans not approved by security holders |       |       | -0-        |                                                                                                                                                      |       |                                                                                                             | -0-        |                                                                                                                                                                                     |       |   | -0- |   |   |
|                                                        |       |       | 1,009,971  |                                                                                                                                                      |       |                                                                                                             | $          | 18.19                                                                                                                                                                                    |       |   |   | 793,215 |   |   |

 

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**Item6.   Selected Financial Data**
| ** **                                                        | ** ** | **For the years ended June 30,**                        | ** ** |
|-------------------------------------------------------------------|------------|----------------------------------------------------------------------------------|------------|
| ** **                                                        | ** ** | **2005**                                                                         | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** **                                                        | ** ** | **Dollar amounts in thousands, except share data** | ** ** |
| Operating Results:                                                |       |                                                                             |       |   |   |   |   |   |   |   |   |
| Net sales                                                         |       | $                                                                                | 146,353    |   | $ | 150,290 |   | $ | 114,310 |   | $ | 89,694 |   | $ | 93,554 |   |
| Gross profit                                                      |       | 46,489                                                                           |       | 47,303 |   | 46,240 |   | 35,932 |   | 43,938 |   |
| Selling and  administrative  expenses                             |       | 40,057                                                                           |       | 36,700 |   | 28,730 |   | 23,975 |   | 23,299 |   |
| Research and  development expenses                           |       | 5,391                                                                            |       | 3,605 |   | 2,356 |   | 2,468 |   | 1,752 |   |
| Operating profit  (loss)                                          |       | 2,167                                                                            |       | (25,602 | )(1) | 15,154 |   | 9,489 |   | 18,887 |   |
| Other income  (expense)                                           |       | (3,264                                                                           | )          | (2,326 | ) | (802 | ) | (276 | ) | (1,399 | ) |
| Earnings (loss) from  continuing operations                       |       | (650                                                                             | )          | (17,027 | )(2) | 9,472 |   | 5,897 |   | 10,843 |   |
| Net earnings  (loss)                                              |       | (650                                                                             | )          | (17,027 | )(2) | 9,472 |   | 6,824 |   | 10,843 |   |
| Cash dividends  per common share                                  |       | .36                                                                              |       | .34 |   | .33 |   | .32 |   | .30 |   |
| Per Share Data:                                                   |       |                                                                             |       |   |   |   |   |   |   |   |   |
| Basic EPS:                                                        |       |                                                                             |       |   |   |   |   |   |   |   |   |
| Earnings (loss)  from continuing operations                       |       | $                                                                                | (0.07      | ) | $ | (1.99 | )(3) | $ | 1.21 |   | $ | .77 |   | $ | 1.47 |   |
| Net earnings  (loss)                                              |       | $                                                                                | (0.07      | ) | $ | (1.99 | )(3) | $ | 1.21 |   | $ | .89 |   | $ | 1.47 |   |
| Weighted average  common shares outstanding                       |       | 8,800,421                                                                        |       | 8,567,741 |   | 7,847,169 |   | 7,682,706 |   | 7,377,443 |   |
| Diluted EPS:                                                      |       |                                                                             |       |   |   |   |   |   |   |   |   |
| Earnings (loss)  from continuing operations                       |       | $                                                                                | (0.07      | ) | $ | (1.99 | )(3) | $ | 1.17 |   | $ | .73 |   | $ | 1.35 |   |
| Net earnings  (loss)                                              |       | $                                                                                | (0.07      | ) | $ | (1.99 | )(3) | $ | 1.17 |   | $ | .84 |   | $ | 1.35 |   |
| Weighted average  common and common equivalent shares outstanding |       | 8,800,421                                                                        |       | 8,567,741 |   | 8,062,397 |   | 8,121,621 |   | 8,049,513 |   |
| Financial  Position:                                              |       |                                                                             |       |   |   |   |   |   |   |   |   |
| Total assets                                                      |       | $                                                                                | 136,790    |   | $ | 139,882 |   | $ | 150,825 |   | $ | 100,044 |   | $ | 88,096 |   |
| Working capital                                                   |       | 42,933                                                                           |       | 39,973 |   | 36,089 |   | 30,923 |   | 31,036 |   |
| Property, plant  and equipment,  net                              |       | 25,008                                                                           |       | 27,512 |   | 26,237 |   | 21,959 |   | 17,343 |   |
| Long-term debt,  net                                              |       | 49,587                                                                           |       | 47,014 |   | 39,789 |   | 24,772 |   | 21,526 |   |
| Shareholders’  equity                                        |       | 61,846                                                                           |       | 63,907 |   | 75,555 |   | 59,226 |   | 50,606 |   |
| Book value per common  share                                      |       | 6.96                                                                             |       | 7.30 |   | 9.10 |   | 7.62 |   | 6.73 |   |

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(1)          Includes non-cash assetimpairment charges of $32,600.

(2)          Includes non-cash assetimpairment charges of $21,266, net of income tax benefits, and an income taxbenefit of $1,249 related to the favorable settlement of a tax audit.

(3)          Includesnon-cash asset impairment charges of $2.48 per diluted share and $0.14 perdiluted share related to the favorable settlement of a tax audit.

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**Item7.   Management’s Discussion and Analysis of Financial Condition andResults of Operations**

**OVERVIEW**

Quixote Corporation (the Company) and its subsidiariesdevelop, manufacture and market highway and transportation safety products toprotect, direct and inform motorists, pedestrians and road workers in bothdomestic and international markets. The Company’s operations are comprised oftwo reportable segments within the highway and transportation safety industry,concentrating on safety problems and designing products to providetransportation safety solutions. The Company’s two reportable segments are—themanufacture and sale of highway and transportation safety products which “Protectand Direct”, and the manufacture and sale of products and services which “Inform”that are often referred to as Intelligent Transportation Systems (ITS) products.The Company’s Protect and Direct segment provides solutions for improvingsafety on the roads either by minimizing the severity of crashes that occur orby preventing crashes from occurring by directing or guiding traffic. Theprimary product lines within the Protect and Direct segment includeenergy-absorbing products such as crash cushions, truck-mounted attenuators,sand-filled barrels and water-filled barriers, and directing and guidingproducts such as flexible post delineators and glare screen systems. TheCompany’s Inform segment provides solutions for improving traffic flow andsafety on roads and runways by providing information. The primary product lineswithin the Inform segment include intelligent intersection control systems,automated enforcement systems, video detection systems, mobile and permanentvariable message signs, advanced sensing products which measure distance, countand classify vehicles, and sense weather conditions, computerized highwayadvisory radio transmitting systems, automated red light enforcement systems,and other transportation equipment.

The Company’s products aresold by both a direct sales force and a distribution network to customers inthe highway construction and safety business, state departments oftransportation, county and local governments and other governmentaltransportation agencies. The domestic market for highway and transportationsafety products is directly affected by federal, state and local governmentalpolicies. A large portion of the Company’s sales is ultimately financed by fundsprovided to the states by the federal government. Historically, these fundshave covered 75% to 90% of the cost of highway safety projects on roadsconstructed or maintained with federal assistance. The Company’s business isseasonal with a higher level of sales and earnings in the Company’s fourthfiscal quarter.

**RESULTS OF OPERATIONS**

The financial results for fiscal 2005 were below ourexpectations, largely as a result of federal funding issues and state and localbudgetary constraints. We believe that the long delay in the passage of thefederal transportation funding legislation, SAFETEA-LU which was passed byCongress in July 2005 and signed by the President in August 2005,adversely impacted spending on products offered by the Company, and therefore adverselyaffected our financial performance. In addition, many state and localgovernments reduced spending on transportation safety due to budgetaryconstraints, given both national and local economies. See FUTURE OUTLOOK forfurther information.

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Thefollowing table sets forth selected key operating statistics relating to theCompany’s financial results:
| ** **                                                    | ** ** | **For the Years Ended  June 30**                                    | ** ** |
|---------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------|------------|
| ** **                                                    | ** ** | **2005**                                                                                | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                    | ** ** | **(Dollar amounts in thousands,  except per share data)** | ** ** |
| Revenues by  Segment:                                         |       |                                                                                    |       |   |   |   |   |
| Protect and Direct                                            |       | $                                                                                       | 73,575     |   | $ | 73,282 |   | $ | 77,243 |   |
| Inform                                                        |       | 72,778                                                                                  |       | 77,008 |   | 37,067 |   |
|                                                          |       | $                                                                                       | 146,353    |   | $ | 150,290 |   | $ | 114,310 |   |
| Geographic Revenues:                                          |       |                                                                                    |       |   |   |   |   |
| Domestic                                                      |       | $                                                                                       | 127,242    |   | $ | 136,041 |   | $ | 100,765 |   |
| International                                                 |       | 19,111                                                                                  |       | 14,249 |   | 13,545 |   |
|                                                          |       | $                                                                                       | 146,353    |   | $ | 150,290 |   | $ | 114,310 |   |
| Operating Income (Loss) by Segment:                           |       |                                                                                    |       |   |   |   |   |
| Protect and Direct                                            |       | $                                                                                       | 14,859     |   | $ | 15,904 |   | $ | 18,846 |   |
| Inform                                                        |       | (4,572                                                                                  | )          | (33,613 | )(1) | 3,151 |   |
| Unallocated Corporate                                         |       | (8,120                                                                                  | )          | (7,893 | ) | (6,843 | ) |
|                                                          |       | $                                                                                       | 2,167      |   | $ | (25,602 | ) | $ | 15,154 |   |
| Gross profit percentage                                       |       | 31.8                                                                                    | %          | 31.5 | % | 40.5 | % |
| Selling and administrative expenses as a percentage of  sales |       | 27.4                                                                                    | %          | 24.4 | % | 25.1 | % |
| Diluted earnings  (loss) per share                            |       | $                                                                                       | (0.07      | ) | $ | (1.99 | ) | $ | 1.17 |   |

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(1)          Includes$32,600 in non-cash asset impairment charges.

*Revenues*

The Company’s net sales for fiscal 2005 decreased 3%to $146,353,000 from $150,290,000 for 2004 primarily due to lower sales oftraffic control systems and products further described below. The acquisitionof Peek Traffic, effective December 2003, contributed net sales of$28,689,000 in fiscal 2005 for the Inform segment compared to net sales of$14,484,000 for the seven months the results of its operations were part of theCompany in fiscal 2004.

The Company’s net sales for fiscal 2004 increased$35,980,000, or 31%, to $150,290,000 from $114,310,000 for fiscal 2003. Thiswas primarily due to the acquisitions of U.S. Traffic Corporation (“UST”) inMay 2003 and Peek Traffic in December 2003, which contributed$50,753,000 of net sales of traffic control systems and products in fiscal 2004for the Inform segment. The net sales of the Company’s other product linesdecreased by 8% due to decreases in sales volume across both its Protect andDirect and Inform segments in fiscal 2004.

*Geographic—*International salesfor fiscal 2005 increased by $4,862,000, or 34%, to $19,111,000 compared to$14,249,000 for fiscal 2004, primarily due to increases in the Protect andDirect segment, where international sales increased 30% to $14,929,000. Theincrease in international sales in the Protect and Direct segment was due toboth sales increases in established markets and to sales to customers incountries which had not previously purchased those products from the Protectand Direct segment. International sales in the Inform segment increased 54% to$4,182,000, in part due to the acquisition of 

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Peek Traffic in fiscal2004. Domestic sales for fiscal 2005 decreased 6% to $127,242,000 from$136,041,000 due primarily to decreased sales of traffic control systems and productsfurther described below.

International sales for fiscal 2004 increased by$704,000, or 5%, to $14,249,000 compared to $13,545,000 for fiscal 2003. Theacquisitions of UST and Peek Traffic contributed $1,194,000 in internationalnet sales of traffic control systems and products for fiscal 2004. Domesticsales for fiscal 2004 increased 35% to $136,041,000 from $100,765,000 due tothe sales of traffic control systems and products related to the acquisitionsof UST and Peek Traffic. The domestic sales of the Company’s other productlines decreased 9% as further described below.

*Protect and Direct*—Net sales forthe Company’s Protect and Direct segment for fiscal 2005 increased slightly to$73,575,000 from $73,282,000 for fiscal 2004 due to strong international salesgrowth, as stated above. Domestic sales decreased by 5%. The Company believesthat the decrease in domestic sales volume was due to state budgetaryconstraints and transportation funding uncertainties caused by the continueddelay in the passage of the new federal highway funding bill. Increased salesof permanent crash cushions and Triton barrier products were largely offset bydecreased sales of truck mounted attenuators, sand-filled barrels, delineatorproducts and parts. Sales of permanent crash cushions increased 5%, sales ofTMA products decreased 3%, and sales of parts decreased 2%.

Net sales for the Company’s Protect and Direct segmentfor fiscal 2004 decreased 5% to $73,282,000 from $77,243,000 for fiscal 2003. TheCompany believed the decrease in sales was due to state budgetary constraints and transportation funding uncertaintiescaused by the delay in the passage of the new federal highway funding bill. Decreasedsales of permanent crash cushions, truck-mounted attenuator (TMA) products, andbarrels were partially offset by increased sales of parts. Sales of permanentcrash cushions decreased 9%, sales of TMA products decreased 17%, and sales ofparts increased 17%.

*Inform*—Net sales for the Company’sInform segment for fiscal 2005 decreased $4,229,000 to $72,778,000 from$77,008,000 for fiscal 2004. The acquisition of Peek Traffic, effective December 2003,contributed net sales of $12,101,000 during the year from the period July 1,2004 and November 30, 2004 not comparable to the prior period. Thedecrease in sales was primarily due to lower sales volume of traffic controlsystems and highway advisory radio products. Sales of traffic control productscontinue to be affected by ongoing state and municipal budgetary issues, whichhas resulted in depressed order flows and sales levels significantly lower thanplanned.

Net sales for the Company’sInform segment for fiscal 2004 increased $39,941,000 to $77,008,000 from$37,067,000 for fiscal 2003. This was primarily due to the acquisitions of USTand Peek Traffic, which added $50,753,000 in net sales of traffic controlsystems and products for 2004. Net sales for the Company’s other Inform productlines decreased 16% due to lower sales of advanced sensing equipment andweather systems. Sales for fiscal 2003 included two particularly largecontracts totaling $4,048,000 for weather and traffic sensing stations to Ohioand variable message signs to California. UST was affected by ongoing state andmunicipal budgetary issues, which resulted in depressed order flows and saleslevels significantly lower than planned.

*Gross Profit Margin*

The Company’s gross profit margin for fiscal 2005 was31.8% compared to 31.5% for fiscal 2004 as higher gross margins for the Informsegment were largely offset by lower gross profit margins in the Protect andDirect segment due to increased raw material costs, particularly steel costswhich were not entirely passed along to customers. The gross margin for theInform segment increased modestly due to favorable sales mix.

The gross profit marginfor fiscal 2004 was 31.5% compared to 40.5% for fiscal 2003 due principally tolower gross profit margins at UST and Peek Traffic. The gross profit margin forthe Protect and Direct 

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segmentdecreased somewhat due to volume inefficiencies associated with the lower levelof sales offset by a positive change in product sales mix with decreased salesof the lower margin TMA product line. The gross profit margin for the Informsegment decreased primarily due to low gross profit margins for the trafficcontrol products sold by UST and Peek Traffic as those gross profit margins areless than the segment’s historical gross profit margin. In addition, the grossprofit margin at UST was lower than planned due to decreased sales volumes. Thegross profit margin for the other Inform product lines in fiscal 2004 wasslightly lower than fiscal 2003 primarily due to volume inefficienciesassociated with the lower level of sales volume.

*Selling andAdministrative Expenses*

Selling and administrative expenses for fiscal 2005increased $3,357,000, or 9%, to $40,057,000 from $36,700,000 for fiscal 2004. Expensesincreased due to the inclusion of $4,607,000 of Peek Traffic expenses forfiscal 2005, which added $2,366,000 for the period from July 1, 2004 to November 30,2004 not comparable to the prior year, increased expenses relating toSarbanes-Oxley compliance and employee related expenses.**Selling and administrative expensesincreased as a percentage of sales to 27.4% for fiscal 2005 compared to 24.4%for 2004 primarily due to the decline in sales and the Company’s primarilyfixed cost structure.

Selling and administrativeexpenses increased $7,970,000, or 28%, to $36,700,000 from $28,730,000 forfiscal 2003 due to the inclusion of the traffic control business, UST and PeekTraffic, which added $8,689,000 for fiscal 2004, not comparable to fiscal 2003.Selling and administrative expenses for the other businesses decreased 3% infiscal 2004 primarily related todecreased selling expenses due to lower sales volume in the Protect and Directsegment and other businesses within the Inform segment. Selling andadministrative expenses decreased as a percentage of sales to 24.4% for fiscal2004 compared to 25.1% for 2003 as UST and Peek Traffic have lower selling andadministrative expenses as a percentage of sales than the Company’s historicalpercentage.

*Asset ImpairmentCharges*

In fiscal 2004, theprolonged delay in the passage of new federal transportation fundinglegislation as well as ongoing state and municipal budget issues had asignificant negative impact on the Company as a whole. In addition, USToperating results were much lower than expected, although the Company waspursuing the integration of UST and Peek Traffic in order to improve profitability.As a result of these factors and the Company’s impairment review in the fourthquarter of fiscal 2004, the Company determined that the carrying amounts ofcertain long-lived assets were no longer recoverable based on estimated futurecash flows to be generated by those assets, which were lower than previouslyprojected. The Company recorded asset impairment charges in the Inform segmentfor fiscal 2004 of $32,600,000, or $21,266,000, net of income tax benefits, or$2.48 per diluted share. The charges within the Inform segment included$26,009,000 relating to goodwill, $4,182,000 for intangible assets and$2,409,000 for fixed assets. 

*Gain on Sale ofFixed Assets*

The Company recorded again of $566,000 in fiscal 2005 due to the sale of certain machinery andequipment of a captive manufacturer of the Protect and Direct segment andreceived proceeds of $650,000. The Company also received proceeds of $992,000from the sale of land and recorded a gain on that sale of $560,000 for theProtect and Direct segment in the second quarter of fiscal 2005 which wasreclassified from other income during the fourth quarter.

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*Research andDevelopment*

Research and development expenditures were $5,391,000for fiscal 2005 compared to $3,605,000 for fiscal 2004. The increase of$1,786,000 was due primarily to increased expenditures related to trafficcontrol products, to enhance and upgrade their product suite, and to increasedexpenditures in the Protect and Direct segment as they develop new products andapplication extensions to existing products.

Research and developmentexpenditures were $3,605,000 for fiscal 2004 compared to $2,356,000 for fiscal2003. The increase of $1,249,000 was due primarily to the inclusion of researchand development expenditures for UST and Peek Traffic. The Company continued toinvest in development projects for new applications as well as upgrades andmodifications to existing products.

*Operating Profit*

Operating profit of $2,167,000 for fiscal 2005compared to an operating loss of $25,602,000 for fiscal 2004. The fiscal 2004operating loss included asset impairment charges of $32,600,000. Operatingprofit for the Protect and Direct segment decreased $1,045,000 to $14,859,000for fiscal 2005 from $15,904,000 for fiscal 2004. The operating loss for theInform segment was $4,572,000 compared to an operating loss for fiscal 2004 of$33,613,000, which included the asset impairment charges of $32,600,000.

The operating loss was$25,602,000 for fiscal 2004, including the asset impairment charges of$32,600,000, compared to operating profit of $15,154,000 for fiscal 2003. Operatingprofit for the Protect and Direct segment decreased $2,942,000 to $15,904,000for fiscal 2004 from $18,846,000 for fiscal 2003. The operating loss for theInform segment was $33,613,000, including the asset impairment charges of$32,600,000, compared to operating profit of $3,151,000 for fiscal 2003.

*Interest Expense*

Interest expense for fiscal 2005 increased $1,154,000to $3,298,000 from $2,144,000 in fiscal 2004. The increase was due primarily tohigher interest rates, and also to the higher level of average long-term debtoutstanding during fiscal 2005. The interest rate on the Company’s creditagreement is based on prime or LIBOR and a fixed rate, plus a margin. Theweighted average rate was 5.5% as of June 30, 2005 compared to a weightedaverage rate of 3.7% as of June 30, 2004. The interest rate on the Company’sconvertible debt issued during fiscal 2005 is 7%. The Company expects theaverage interest rate paid during fiscal 2006 on all debt to be approximately7%.

Interest expense forfiscal 2004 increased to $2,144,000 from $906,000 in fiscal 2003. The increasewas due to the higher level of average long-term debt since the acquisitions ofUST in May 2003 and Peek Traffic in December 2003. The interest rateon the Company’s collateralized credit agreement is based on prime or LIBOR anda fixed rate, plus a margin. The weighted average rate was 3.7% as of June 30,2004 compared to a weighted average rate of 2.8% as of June 30, 2003.

*Provision forIncome Taxes*

The income tax benefit for fiscal 2005 was $447,000,reflecting a 41% effective tax rate. The Company expects to provide for incometaxes at a rate of 38% for fiscal 2006. 

The income tax benefit forfiscal 2004 was $10,901,000, which included $11,334,000 relating to the assetimpairment charges recorded in the fourth quarter and a $1,249,000 income taxbenefit related to the favorable settlement of a tax audit recorded during thethird quarter. Excluding the impact of these benefits, income taxes reflected a36% effective income tax rate for fiscal 2004 as compared to the effectiveincome tax rate of 34% for fiscal 2003.

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*Net Earnings (Loss)*

The net loss for fiscal 2005 was $650,000, or $0.07 perdiluted share, compared to a net loss of $17,027,000, or $1.99 per dilutedshare, for 2004. Included in the net loss for fiscal 2004 were the assetimpairment charges of $21,266,000, net of taxes, or $2.48 per diluted share.

The net loss for fiscal2004 was $17,027,000, or $1.99 per diluted share, compared to net earnings of$9,472,000, or $1.17 per diluted share, for 2003. Included in the net loss forfiscal 2004 are the asset impairment charges of $21,266,000, net of taxes, or$2.48 per diluted share.

**FINANCIAL CONDITION**

*Liquidity and Capital Resources*

The Company’s principal sources of funds historicallyhave been cash flows from operations and borrowings from banks and othersources. The Company had cash and cash equivalents of $156,000 as of June 30,2005.

During February 2005, the Company sold$40,000,000 of 7% Convertible Senior Subordinated Notes due February 15,2025 in a private placement and received net proceeds of $37,395,000. The netproceeds were used to pay off the Company’s bank term loan and reduce theamount of its revolving credit agreement. The conversion price is $25.90 pershare, which represented a 40% premium over the closing price of the Company’sstock on the close of the transaction. Iffully converted, the notes would convert into approximately 1,544,000 shares ofthe Company’s common stock. The shares are not included in earnings per shareas they are currently anti-dilutive until earnings per share reachapproximately $1.20 per share. The notes are fully redeemable by the Company atany time after February 20, 2008 at 100% of the principal amount plusaccrued and unpaid interest. The investors may require the Company torepurchase the notes in cash at a price equal to 100% of the principal amountof the notes plus accrued and unpaid interest, if any, on February 15,2010, 2015 or 2020.

Subsequently, the Company entered into a new securedcredit agreement during February 2005 with one bank which currentlyexpires on February 1, 2008. The Company believes that this collateralizedcredit agreement is an important source of liquidity. The credit agreementprovides for a $30 million revolving credit facility, with a $10 millionsubfacility for letters of credit issued by the bank or its affiliates. The revolving credit availability is based ona formula of eligible accounts receivable, eligible inventory, machinery andequipment and real estate, subject to a minimum excess collateral availabilityfactor. Effective June 30, 2006, the Company will also be required tomaintain a maximum senior leverage ratio. The covenants also limit theincurrence of additional indebtedness, acquisitions, liens and encumbrances andother matters customarily restricted in such agreements. The borrowing issecured by a first security interest in all existing and hereafter acquiredassets of the company, including accounts receivable, inventory, machinery andequipment, real estate and the equity securities of the Company’s subsidiaries.Under certain conditions, the Company may request a release of all securityinterests after June 30, 2006, at which time the Company would no longerbe subject to a borrowing base formula, but would be subject to severalfinancial covenants. The agreement may be renewed for one additionalyear on each anniversary date upon mutual consent of the Company and the bank.

The Company’s outstandingborrowings were $50,014,000, or 44.7% of total capitalization, as of June 30,2005, of which $4,000,000 was outstanding related to the bank credit facility. Thiscompares to $50,407,000, or 44.1% of total capitalization, as of June 30,2004.

*Cash Flows*

Cash flows provided by operations were $3,398,000during fiscal 2005. This compares with $8,676,000 in fiscal 2004 and$16,156,000 in fiscal 2003. In each of the past three years, cash flow fromoperations was 

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primarily derived fromearnings before non-cash expenses such as depreciation, amortization and assetimpairment charges. The decrease in cash generated from operating activities infiscal 2005 is primarily due to the lower net earnings excluding non-cashexpenses in fiscal 2005.

Investing activities used cash of $910,000 duringfiscal 2005, compared to $15,943,000 in fiscal 2004 and $22,660,000 in fiscal2003. Expenditures during fiscal 2005 included $3,805,000 for capitalexpenditures, which were partially offset by proceeds received from the sale ofassets.

Financing activities used cash of $4,709,000 duringfiscal 2005, compared to cash provided of $5,910,000 in fiscal 2004 and$8,422,000 in fiscal 2003. The Company sold $40,000,000 of Convertible SeniorSubordinated Notes in February 2005 and received net proceeds of$37,395,000. The proceeds from the sale of the Notes were used to pay off theterm loan under the Company’s credit agreement and pay down the revolvingcredit facility. The Company paid a net $23,000,000 on the Company’soutstanding revolving credit facility, $17,000,000 against the remainingbalance of the term loan and $393,000 on other notes payable. The Company’sinterest rate swap arrangement was liquidated in the third quarter of fiscal2005 and the Company received cash of $394,000. The Company also received cashof $961,000 from the exercise of common stock options. The payment of theCompany’s semi-annual cash dividend used cash of $3,066,000.

For 2006, the Company anticipatesneeding $4,000,000 in cash for capital expenditures. The Company may also needadditional cash as it considers acquiring businesses that complement itsexisting operations. The Company may require additional investments in workingcapital to maintain growth. The Company may also need additional funds torepurchase its own common stock from time to time. These expenditures will befinanced either through the Company’s cash on-hand, cash generated from itsoperations or from borrowings available under the Company’s bank creditfacility. The Company currently expects cash generated from operations to behigher in fiscal year 2006 compared to fiscal 2005. However, due to factorsdisclosed in FUTURE OUTLOOK below in this report, there can be no assurancethat this will occur, or to what extent this will occur. The Company believesits existing cash, cash generated from operations and funds available under itsexisting credit facility are sufficient for all planned operating and capitalrequirements in the near term. If needed and available on favorable terms, theCompany may also enter into other debt or equity financing arrangements.

**OFF-BALANCESHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS**

TheCompany is subject to certain debt obligations, guarantees, commitments andcontingent liabilities further described in the notes to the consolidatedfinancial statements. The following table presents the Company’s contractualobligations to make future payments under contracts, such as debt and leaseagreements, as of June 30, 2005:
| ** **                          | ** ** | **Total**                                        | ** ** | **Less than  1 Year** | ** ** | **1-3 Years** | ** ** | **3-5 Years** | ** ** | **More than  5 Years** | ** ** |
|-------------------------------------|------------|--------------------------------------------------|------------|---------------------------------|------------|--------------------|------------|--------------------|------------|----------------------------------|------------|
| ** **                          | ** ** | **(Dollar amounts in thousands)** | ** ** |
| Long-term debt  (Note 7)            |       | $                                                | 50,014     |                            |       | $                  | 427        |               |       | $                                | 5,587      |   |   |   |   | $44,000 |   |   |
| Operating leases (Note  14)         |       | 15,181                                           |       |                            | 3,754      |               |       | 5,840              |       | $                                | 1,733      |   |   | 3,854 |   |   |
| Minimum royalty  payments (Note 14) |       | 2,313                                            |       |                            | 513        |               |       | 600                |       | 600                              |       |   | 600 |   |   |
| Total                               |       | $                                                | 67,508     |                            |       | $                  | 4,694      |               |       | $                                | 12,027     |   | $ | 2,333 |   |   | $ | 48,454 |   |   |
|                                     |            |                                                  |            |                                 |            |                    |            |                    |            |                                  |            |  |  |  |  |  |  |  |  |  |

 

As disclosed in Note 14 to the consolidatedfinancial statements, the Company has entered into bid and performance relatedbonds associated with various contracts. Potential payments due under thesebonds are related to the Company’s performance under the applicable contract.The total amount of bid and performance related bonds that were available andundrawn as of June 30, 2005 was $8,094,000. The Company also has standbyletters of credit covering potential workers’ compensation liabilities. Thetotal standby exposure relating to letters of credit as of June 30, 2005was $1,144,000.

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**FUTURE OUTLOOK**

We believe that the enactment of the federaltransportation funding legislation, SAFETEA-LU, in August 2005 willimprove prospects for increased spending for our products in fiscal 2006. Dueto the long sales cycle typical of our business, we do not expect to begin torealize the benefit of this legislation until the second half of fiscal 2006. Stateand local governments may be able to increase spending on transportation safetyin 2006, and therefore increase the domestic demand for our products, as boththe national and local economies improve. International sales represented 13%of the Company’s total revenues in fiscal 2005 which increased from 9% infiscal 2004. We expect international sales to continue to be a strong driver ofour sales growth. However, there can be no assurance either domestic orinternational sales will increase and we remain cautious about our performancein fiscal 2006.

Although the Company generally performed belowhistoric levels in fiscal 2005 due to the federal funding issues and state andlocal budgetary constraints described above, revenues for our Inform segmentdeclined substantially more than those of the Protect and Direct segment. Weexpect the substandard sales volumes and operating losses at the trafficcontrol business to continue during the first half of fiscal 2006. If sales forthe Inform segment increase by at least $10 million above the fiscal 2005level, we expect to record a slight profit for the Inform segment in fiscal2006. However, there can be no assurance either that we will achieve that levelof sales or that the gross margin on those sales will be sufficient to producea profit.

We historically experiencefluctuation in our gross profit margin from quarter to quarter primarily due tosales volume related to seasonality, variability in product mix and changes inour competitive environment. In addition, we have acquired complementarybusinesses over the past several years and, as part of our strategy, maycontinue to acquire complementary businesses. The gross profit margins ofcertain acquired product lines, primarily the traffic control product lines,are lower than our historical gross profit margin, which is currently adverselyaffecting our gross profit margin. We also experience rigorous pricecompetition in our variable message sign and weather sensing system productlines. We do not believe these trends will improve in the near future.

**SIGNIFICANTACCOUNTING POLICIES AND CRITICAL ESTIMATES**

The preparation of financial statements in conformitywith accounting principles generally accepted in the United States of America(U.S. GAAP) requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities and the disclosure of contingentassets and liabilities at the date of the financial statements. Management’sestimates also affect the reported amounts of revenues and expenses during thereporting period. In addition, certain normal and recurring estimates are madeincluding estimates in determining the allowance for doubtful accountsreceivable, inventory valuation reserves, valuation allowance on deferred taxassets and health care liabilities. These estimates are made using management’sbest judgment given relevant factors and available data. Actual results coulddiffer materially from those estimates. Note 2 to the Company’s June 30,2005 consolidated financial statements includes a summary of the significantaccounting policies, methods and estimates used in the preparation of theCompany’s consolidated financial statements. There have been no materialchanges in accounting policies, methods and estimates used by management. Inthe opinion of management, the Company does not have any individual accountingpolicy or use any individual estimate that is critical to the preparation ofits consolidated financial statements. In most instances, the Company must usean accounting policy or method because it is the only policy or methodpermitted under U.S. GAAP. The Company believes the following significantaccounting policies and methods used by the Company are the most important tothe presentation of the Company’s financial statements:

**Revenue Recognition:  **Revenues,net of discounts and allowances, are recognized when either services have beenrendered or both title and risk of loss of products have been transferred tounaffiliated 

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customers. Additionally,the Company ensures that collection of the resulting receivable is probable,persuasive evidence that an arrangement exists, and the revenue is fixed ordeterminable. Provision for estimated uncollectible amounts and credit memos ismade based upon management’s analysis of bad debts and credit memos.

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

**Long-Lived Assets:  **Long-livedassets include such items as goodwill, patents, product rights, otherintangible assets and property, plant and equipment. For purposes of evaluatingthe recoverability of long-lived assets, the Company assesses the possibilityof obsolescence, demand, new technology, competition, and other pertinenteconomic factors and trends that may have an impact on the value or remaininglives of these assets.

Amortized long-lived assets (including amortizedintangible assets and property, plant and equipment) held and used by the Companyare reviewed for impairment whenever events or changes in circumstancesindicate that the carrying amount of an asset may not be recoverable inrelation to future undiscounted cash flows of underlying asset groups. The netcarrying value of assets not recoverable is reduced to fair value. Fair valuesof amortized long-lived assets are determined based upon the performance of athird party fair value appraisal. Patents and other finite-lived intangibleassets are amortized on a straight-line or systematic method over the life ofthe patent or intangible asset.

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

The Company’s annual impairment review resulted in noimpairment charges for fiscal years 2005 and 2003. As discussed further in Note6 to the Company’s June 30, 2005 consolidated financial statements, as aresult of the Company’s impairment review during fiscal 2004, the Companyrecorded non-cash asset impairment charges of $32,600,000 relating to goodwill,other indefinite-lived intangible assets and amortized long-lived assets of theInform segment. The impairment review is highly judgmental and involves the useof significant estimates and assumptions. These estimates and assumptions havea significant impact on the amount of any impairment charge recorded. Estimatesof fair value are primarily determined using discounted cash flow methods andare dependent upon assumptions of future sales trends, market conditions andcash flows of each reporting unit over several years. Actual cash flows in thefuture may differ significantly from those previously forecasted. Othersignificant assumptions include growth rates and the discount rate applicableto future cash flows. The impact of these estimates and assumptions onimpairment testing of goodwill is particularly critical for the Company’sInform segment with $21,173,000 of the Company’s $29,313,000 of goodwillrecorded in the Company’s June 30, 2005 balance sheet.

**Income Taxes:  **TheCompany recognizes deferred tax assets and liabilities for the expected futuretax consequences of events that have been included in the financial statementsor tax returns. Under this 

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method, deferredtax assets and liabilities are determined based on the difference between thefinancial statement and tax basis of assets and liabilities using enacted taxrates in effect for the year in which the differences are expected to reverse. Inassessing the realizability of the deferred tax assets, management considerswhether it is more likely than not that some portion or all of the deferred taxassets will not be realized. To the extent that any future tax benefits are notexpected to be fully realized, such future tax benefits are reduced by avaluation allowance. Realization of deferred tax assets assumes that theCompany will be able to generate sufficient taxable income so that the assetswill be realized. The factors that the Company considers in assessing thelikelihood of realization include the forecast of future taxable income andavailable tax planning strategies that could be implemented to realize thedeferred tax assets. The Company expects the deferred tax assets currentlyrecorded to be fully realizable; however, there can be no assurance that anincreased valuation allowance would not need to be recorded in the future.

**RECENTLYISSUED ACCOUNTING PRONOUNCEMENTS**

In December 2004, the Financial AccountingStandards Board (FASB) issued SFAS No. 123(R), “Share-Based Payment.” ThisStatement is a revision to SFAS No. 123, “Accounting for Stock-BasedCompensation,” and supersedes Accounting Principles Board (APB) Opinion No. 25,“Accounting for Stock Issued to Employees.” SFAS No. 123(R) requiresthe recognition of the cost of employee services received in exchange for anaward of equity instruments based on the grant fair value of the award. Thecost will be recognized over the period during which the employee is requiredto provide service in exchange for the award. No compensation cost isrecognized for equity instruments for which the employees do not render therequired service period. The Company plans to adopt the statement effectivewith the 2006 fiscal year. The Company anticipates that the adoption of SFAS No. 123(R) willhave an impact of approximately $1,000,000, or $0.11 per diluted share, on theCompany’s consolidated earnings for fiscal 2006. The adoption of the statementwill not impact the Company’s financial position or cash flows.

The FASB issued Statement No. 150, “Accountingfor Certain Financial Instruments with Characteristics of both Liabilities andEquity”, which required financial instruments within its scope to be classifiedas liabilities (or assets in some circumstances). The Statement is effectivefor financial instruments entered into or modified after May 31, 2003, andotherwise effective at the beginning of the first interim period beginningafter June 15, 2003, except for certain mandatorily redeemable financialinstruments. It is to be implemented by reporting the cumulative effect of achange in an accounting principle for financial instruments created before theissuance date of the Statement and still existing at the beginning of theinterim period of adoption. Restatement is not permitted. The effective date ofcertain provisions of Statement No. 150 for certain mandatorily redeemablefinancial instruments has been deferred by FSP FAS 150-5. Under the FSP,certain mandatorily redeemable shares are subject to the provisions ofStatement No. 150 for the first fiscal period beginning after June 30,2005. Other mandatorily redeemable shares are deferred indefinitely but may besubject to classification or disclosure provisions of the Statement. TheCompany is currently evaluating the impact that this statement will have on theCompany’s financial statements, however the Company does not expect theadoption will have a material impact.

In November 2004, the FASB issued SFAS No. 151,“Inventory Costs, an amendment of ARB No. 43, Chapter 4,” which amends theguidance in ARB No. 43, Chapter 4, “Inventory Pricing” to clarify theaccounting for abnormal amounts of idle facility expense, freight, handlingcosts and spoilage. This statement requires that these costs be expensed ascurrent period charges. In addition, this statement requires that theallocation of fixed production overhead to the costs of conversion be based onthe normal capacity of the production facilities. The provisions of thisstatement were effective July 1, 2005 for the Company. The Company iscurrently evaluating the impact that this statement will have on the Company’s 

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financial position andresults of operations, however the Company does not expect the adoption willhave a material impact.

In December 2004, the FASB issued Statement No. 153,“Exchanges of Nonmonetary Assets,” (“SFAS 153”). SFAS 153 amends AccountingPrinciples Board (“APB”) Opinion No. 29, “Accounting for NonmonetaryTransactions” (Opinion 29), to require exchanges of nonmonetary assets beaccounted for at fair value, rather than carryover basis. Nonmonetary exchangesthat lack commercial substance are exempt from this requirement. SFAS 153 iseffective for nonmonetary exchanges entered into in fiscal years beginningafter June 15, 2005. The Company does not routinely enter into exchangesthat could be considered nonmonetary, accordingly the Company does not expectthe adoption of SFAS 153 to have a material impact on the Company’s financialstatements.

In June 2005, the FASB issued Statement ofFinancial Accounting Standards No. 154 (SFAS 154), “Accounting Changes andError Corrections.” SFAS 154 changes the requirements for the accounting forand reporting of a change in accounting principle. This Statement requiresretrospective applications to prior periods’ financial statements of a voluntarychange in accounting principle unless it is impracticable. In addition, thisStatement requires that a change in depreciation, amortization, or depletionfor long-lived, non-financial assets be accounted for as a change in accountingestimate effected by a change in accounting principle. This new accountingstandard is effective January 1, 2006. The adoption of SFAS 154 is notexpected to have a material impact on our financial statements.

In March 2005, the FASB issued FASBInterpretation No. (FIN) 47, “Accounting for Conditional Asset RetirementObligations,” which is effective for the Company’s fiscal year ending June 30,2006. The interpretation requires a conditional asset retirement obligation tobe recognized when the fair value of the liability can be reasonably estimated.The Company does not believe the adoption of this interpretation will have amaterial impact on the Company’s financial statements.

In December 2004, theFASB issued FASB Staff Position No. 109-1, “Application of FASBStatement No.109, Accounting for Income Taxes, to the Tax Deduction onQualified Production Activities Provided by the American Jobs Creation Act of2004”, (FSP 109-1). FSP 109-01 provides accounting guidance forcompanies that will be eligible for a tax deduction resulting from “qualifiedproduction activities income” as defined in the American Jobs Creation Act of2004 (the Act). FSP 109-1 requires this deduction be treated as a specialdeduction in accordance with SFAS 109, which does not require the revaluation ofour U.S. deferred tax assets. We applied the guidance in FSP 109-1effective July 1, 2005. Although we are currently evaluating the impact ofthe adoption of this standard, we do not expect the adoption to have a materialimpact on the Company’s financial statements for fiscal 2006.

**FORWARD LOOKING STATEMENTS**

Various statements made within the Management’sDiscussion and Analysis of Financial Condition and Results of Operations andelsewhere in this report constitute “forward-looking statements” for purposesof the SEC’s “safe harbor” provisions under the Private Securities LitigationReform Act of 1995 and Rule 3b-6 under the Securities Exchange Actof 1934, as amended. Any statement that addresses expectations or projectionsabout the future, including statements about the Company’s strategy for growth,product development, market position, expenditures, financial results orchanges in governmental legislation, policies and conditions, is aforward-looking statement.

Investors are cautionedthat all forward-looking statements involve risks and uncertainties, includingthose detailed in the Company’s public filings with the SEC, news releases andother communications, which speak only as of the dates of those filings orcommunications. The Company does not undertake any obligation to releasepublicly any revisions to these forward-looking statements to reflect events orcircumstances after the date hereof or to reflect the occurrence ofunanticipated events. There can be no assurance that actual results will notdiffer materially from the Company’s expectations. Factors which 

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couldcause materially different results include, among others, uncertainties relatedto continued federal, state and municipal funding for highways and risksrelated to reductions in government expenditures; the successful completion,integration and rationalization of acquisitions; the ability to generatesufficient future cash flows to be in compliance with financing agreements; theintroduction and acceptance of the Company’s products and services; anunfavorable change in product sales mix; seasonality along with the extent andtiming of the award of large contracts; the cyclical nature of the Company’sgovernmental markets; competitive and pricing pressures; increasing rawmaterial costs; excess manufacturing capacity; weather conditions and naturaldisasters; acts of war and terrorist activities; the possible impairment ofgoodwill and other intangible assets; compliance with Section 404 of theSarbanes-Oxley Act of 2002; and general economic conditions.

**Item7A.   Quantitative and Qualitative Disclosures about Market Risk**

The Company is exposed to market risk fromfluctuations in interest rates on its revolving credit agreement. The exposureto interest rate fluctuations was significantly reduced in the third quarter offiscal 2005 when the Company issued convertible debt and used the proceeds topay down the debt issued pursuant to the revolving credit agreement. Due to thelower exposure to rate fluctuations, the use of derivative instruments in theform of non-trading interest rate swaps to manage the risk has beendiscontinued. As described in Note 7****tothe consolidated financial statements, the amount of long-term debt outstandingas of June 30, 2005 and 2004 was $49,587,000 and $47,014,000, respectively.A hypothetical 1% increase in interest rates would have adversely affected theCompany’s 2005 and 2004 net earnings and cash flows by approximately $273,000and $249,000, respectively.

The majority of the Company’s business is transactedin U.S. dollars and the U.S. dollar is considered the primary currency for themajority of the Company’s operations. Although the Company continues toevaluate derivative financial instruments to manage foreign currency exchangerate changes, the Company did not hold such derivatives during 2005 or 2004. Assets,liabilities and commitments that are to be settled in cash and are denominatedin foreign currencies for transaction purposes are sensitive to changes incurrency exchange rates. However, there were no significant transaction gainsor losses during 2005, 2004 or 2003 and the Company does not believe it iscurrently exposed to any material risk of loss from currency exchangefluctuations.

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**Item8.   Financial Statements and Supplementary Data**

**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM**

Board of Directors and ShareholdersQuixote Corporation

We have audited the accompanying consolidated balancesheet of Quixote Corporation and subsidiaries as of June 30, 2005, and therelated consolidated statements of operations, shareholders’ equity, and cashflows for the year then ended. We have also audited the accompanying ScheduleII—Valuation and Qualifying Accounts and Reserves as of June 30, 2005. Thefinancial statements and schedule are the responsibility of the Company’smanagement. Our responsibility is to express an opinion on the financialstatements and schedule based on our audit.

We conducted our audit in accordance with the standardsof the Public Company Accounting Oversight Board (United States). Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation.We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statementsand schedule referred to above present fairly, in all material respects, thefinancial position of Quixote Corporation and subsidiaries as of June 30,2005, and the results of their operations and their cash flows for the yearthen ended in conformity with accounting principles generally accepted in theUnited States of America.

We also have audited, in accordance with the standardsof the Public Company Accounting Oversight Board (United States), theeffectiveness of Quixote Corporation’s internal control over financialreporting as of June 30, 2005, based on criteria established in InternalControl—Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO) and our report dated September12, 2005 expressed an unqualified opinion on management’s assessment of, and anadverse opinion on the effective operation of, internal control over financialreporting.

/s/ GRANT THORNTON LLP

Chicago, IllinoisSeptember 12, 2005

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**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM**

To the board of directors and shareholders of QuixoteCorporation:

In our opinion, the consolidatedbalance sheet as of June 30, 2004 and the related consolidated statementsof operations, shareholders’ equity and cash flows for each of the two years inthe period ended June 30, 2004 present fairly, in all material respects,the financial position of Quixote Corporation and its subsidiaries at June 30,2004, and the results of their operations and their cash flows for each of thetwo years in the period ended June 30, 2004 in conformity with accountingprinciples generally accepted in the United States of America. In addition, inour opinion, the financial statement schedule as of June 30, 2004 and 2003and for the years then ended presents fairly, in all material respects, theinformation set forth therein when read in conjunction with the relatedconsolidated financial statements. These financial statements and financialstatement schedule are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on these financial statements andfinancial statement schedule based on our audits. We conducted our audits ofthese statements in accordance with the standards of the Public Company Accounting Oversight Board (UnitedStates). Those standards require that weplan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement. An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements, assessing the accounting principles used andsignificant estimates made by management, and evaluating the overall financialstatement presentation. We believe that our audits provide a reasonable basisfor our opinion.

/s/ PricewaterhouseCoopers LLP

Chicago, IllinoisSeptember 13, 2004

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**QUIXOTECORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF OPERATIONS**
| ** **                                                        | ** ** | **For each of the three years  ended June 30,** | ** ** |
|-------------------------------------------------------------------|------------|------------------------------------------------------------------------------------|------------|
| ** **                                                        | ** ** | **2005**                                                                           | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                        | ** ** | **Dollar amounts in thousands,  except share data**       | ** ** |
| Net sales                                                         |       | $                                                                                  | 146,353    |   | $ | 150,290 |   | $ | 114,310 |   |
| Cost of sales                                                     |       | 99,864                                                                             |       | 102,987 |   | 68,070 |   |
| Gross profit                                                      |       | 46,489                                                                             |       | 47,303 |   | 46,240 |   |
| Operating  (income) expenses:                                     |       |                                                                               |       |   |   |   |   |
| Selling and administrative                                        |       | 40,057                                                                             |       | 36,700 |   | 28,730 |   |
| Asset impairment charges                                          |       |                                                                               |       | 32,600 |   |   |   |
| Gain on sale of fixed assets                                      |       | (1,126                                                                             | )          |   |   |   |   |
| Research and development                                          |       | 5,391                                                                              |       | 3,605 |   | 2,356 |   |
|                                                              |       | 44,322                                                                             |       | 72,905 |   | 31,086 |   |
| Operating profit (loss)                                           |       | 2,167                                                                              |       | (25,602 | ) | 15,154 |   |
| Other income  (expense):                                          |       |                                                                               |       |   |   |   |   |
| Interest income                                                   |       | 34                                                                                 |       | 30 |   | 104 |   |
| Interest expense                                                  |       | (3,298                                                                             | )          | (2,144 | ) | (906 | ) |
| Other                                                             |       |                                                                               |       | (212 | ) |   |   |
|                                                              |       | (3,264                                                                             | )          | (2,326 | ) | (802 | ) |
| Earnings (loss) before provision (benefit) for  income taxes      |       | (1,097                                                                             | )          | (27,928 | ) | 14,352 |   |
| Income tax  provision (benefit)                                   |       | (447                                                                               | )          | (10,901 | ) | 4,880 |   |
| Net earnings  (loss)                                              |       | $                                                                                  | (650       | ) | $ | (17,027 | ) | $ | 9,472 |   |
| Basic earnings  (loss) per share:                                 |       |                                                                               |       |   |   |   |   |
| Net earnings (loss)                                               |       | $                                                                                  | (0.07      | ) | $ | (1.99 | ) | $ | 1.21 |   |
| Weighted average common shares outstanding                        |       | 8,800,421                                                                          |       | 8,567,741 |   | 7,847,169 |   |
| Diluted earnings  (loss) per share:                               |       |                                                                               |       |   |   |   |   |
| Net earnings (loss)                                               |       | $                                                                                  | (0.07      | ) | $ | (1.99 | ) | $ | 1.17 |   |
| Weighted average  common and common equivalent shares outstanding |       | 8,800,421                                                                          |       | 8,567,741 |   | 8,062,397 |   |

 

*THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS.*

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**QUIXOTECORPORATION AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS**
| ** **                                                                                                                                      | ** ** | **As of June 30,**                                        | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------|------------|
| ** **                                                                                                                                      | ** ** | **2005**                                                                 | ** ** | **2004** | ** ** |
| ** **                                                                                                                                      | ** ** | **Dollar amounts in  thousands, except  share data** | ** ** |
| **ASSETS**                                                                                                                                      |       |                                                                     |       |   |   |
| Current assets:                                                                                                                                 |       |                                                                     |       |   |   |
| Cash and cash  equivalents                                                                                                                      |       | $                                                                        | 156        |   | $ | 2,389 |   |
| Accounts  receivable, net of allowance for doubtful accounts of $1,581 in 2005 and  $1,872 in 2004                                              |       | 32,745                                                                   |       | 33,606 |   |
| Refundable income  taxes                                                                                                                        |       |                                                                     |       | 3,371 |   |
| Inventories, net                                                                                                                                |       | 27,411                                                                   |       | 25,308 |   |
| Deferred income  taxes                                                                                                                          |       | 5,765                                                                    |       | 2,682 |   |
| Notes receivable                                                                                                                                |       |                                                                     |       | 217 |   |
| Other current  assets                                                                                                                           |       | 1,160                                                                    |       | 668 |   |
| Total current  assets                                                                                                                           |       | 67,237                                                                   |       | 68,241 |   |
| Property, plant and equipment at cost:                                                                                                          |       |                                                                     |       |   |   |
| Land                                                                                                                                            |       | 1,054                                                                    |       | 1,434 |   |
| Buildings and  improvements                                                                                                                     |       | 15,710                                                                   |       | 15,480 |   |
| Machinery and  equipment                                                                                                                        |       | 20,058                                                                   |       | 19,645 |   |
| Furniture and  fixtures                                                                                                                         |       | 2,019                                                                    |       | 2,068 |   |
| Computer equipment  and software                                                                                                                |       | 7,892                                                                    |       | 6,500 |   |
| Leasehold  improvements                                                                                                                         |       | 1,624                                                                    |       | 1,661 |   |
| Construction in  progress                                                                                                                       |       | 629                                                                      |       | 1,648 |   |
|                                                                                                                                            |       | 48,986                                                                   |       | 48,436 |   |
| Less: accumulated  depreciation                                                                                                                 |       | (23,978                                                                  | )          | (20,924 |   |
|                                                                                                                                            |       | 25,008                                                                   |       | 27,512 |   |
| Goodwill                                                                                                                                        |       | 29,313                                                                   |       | 29,503 |   |
| Intangible assets,  net                                                                                                                         |       | 7,340                                                                    |       | 8,249 |   |
| Deferred income  taxes                                                                                                                          |       | 5,083                                                                    |       | 6,099 |   |
| Other assets                                                                                                                                    |       | 2,809                                                                    |       | 278 |   |
|                                                                                                                                            |       | $                                                                        | 136,790    |   | $ | 139,882 |   |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**                                                                                                  |       |                                                                     |       |   |   |
| Current liabilities:                                                                                                                            |       |                                                                     |       |   |   |
| Current portion of  long-term debt                                                                                                              |       | $                                                                        | 427        |   | $ | 3,393 |   |
| Accounts payable                                                                                                                                |       | 11,061                                                                   |       | 10,723 |   |
| Dividends payable                                                                                                                               |       | 1,595                                                                    |       | 1,486 |   |
| Accrued expenses:                                                                                                                               |       |                                                                     |       |   |   |
| Payroll and  commissions                                                                                                                        |       | 3,164                                                                    |       | 4,286 |   |
| Warranty                                                                                                                                        |       | 2,510                                                                    |       | 4,691 |   |
| Accrued insurance.                                                                                                                              |       | 1,558                                                                    |       | 1,176 |   |
| Other                                                                                                                                           |       | 3,989                                                                    |       | 2,513 |   |
| Total current  liabilities                                                                                                                      |       | 24,304                                                                   |       | 28,268 |   |
| Long-term debt,  net of current portion                                                                                                         |       | 49,587                                                                   |       | 47,014 |   |
| Other long-term  liabilities                                                                                                                    |       | 1,053                                                                    |       | 693 |   |
| Commitments and  contingent liabilities                                                                                                         |       |                                                                     |       |   |   |
| Shareholders’ equity:                                                                                                                      |       |                                                                     |       |   |   |
| Preferred stock, no par  value; authorized 100,000 shares; none issued                                                                          |       |                                                                     |       |   |   |
| Common stock, par  value $.012¤3; authorized 15,000,000 shares; issued 10,799,784  shares—2005 and issued 10,707,440 shares—2004 |       | 180                                                                      |       | 178 |   |
| Capital in excess  of par value of stock                                                                                                        |       | 59,382                                                                   |       | 57,757 |   |
| Retained earnings                                                                                                                               |       | 23,605                                                                   |       | 27,430 |   |
| Accumulated  comprehensive income                                                                                                               |       | 345                                                                      |       | 614 |   |
| Treasury stock, at  cost, 1,915,353 shares—2005 and 1,951,240 shares—2004                                                             |       | (21,666                                                                  | )          | (22,072 |   |
| Total  shareholders’ equity                                                                                                                |       | 61,846                                                                   |       | 63,907 |   |
|                                                                                                                                            |       | $                                                                        | 136,790    |   | $ | 139,882 |   |

 

*THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS.*

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**QUIXOTECORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY**
| ** **                                                             | ** ** | **For the three years ended June 30, 2005**   | ** ** |
|------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------|------------|
| ** **                                                             | ** ** | **Common Stock**                                                            | ** ** | **Capital in  Excess of  Par Value** | ** ** | **Accumulated  Comprehensive** | ** ** | **Retained** | ** ** | **Treasury Stock** | ** ** | **Comprehensive** | ** ** |
| ** **                                                             | ** ** | **Shares**                                                                       | ** ** | **Dollars** | ** ** | **of Stock** | ** ** | **Income (Loss)** | ** ** | **Earnings** | ** ** | **Shares** | ** ** | **Dollars** | ** ** | **Income (Loss)** | ** ** |
| ** **                                                             | ** ** | **Dollar amounts in thousands, except share data** | ** ** |
| BALANCES, JULY 1,  2002                                           |       | 9,744,033                                                                        |       |   | $ | 162 |   |   |   | $ | 40,033 |   |   |   | $ | (424 | ) |   |   | $ | 40,547 |   |   | 1,967,963 |   | $ | (21,092 | ) |   |   |   |   |
| Exercise of  options, net of  tax                                      |       | 124,075                                                                          |       |   | 2 |   |   |   | 1,332 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net earnings—2003                                                 |       |                                                                             |       |   |   |   |   |   |   |   |   |   |   |   |   |   | 9,472 |   |   |   |   |   |   |   | $ | 9,472 |   |   |
| Currency  translation adjustment                                       |       |                                                                             |       |   |   |   |   |   |   |   |   |   | 19 |   |   |   |   |   |   |   |   |   |   |   | 19 |   |   |
| Liquidation of  foreign entity                                    |       |                                                                             |       |   |   |   |   |   |   |   |   |   | 361 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Issuance of shares  for acquisition of U.S. Traffic               |       | 558,534                                                                          |       |   | 10 |   |   |   | 10,557 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Declaration of  semi-annual cash dividends ($0.16 and $0.17 per share) |       |                                                                             |       |   |   |   |   |   |   |   |   |   |   |   |   |   | (2,651 | ) |   |   |   |   |   |   |   |   |   |
| Issuance of shares  pursuant to the stock retirement plan              |       | 10,794                                                                           |       |   |   |   |   |   | 251 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Purchase of shares  at $16.31 to $19.28 per share                      |       |                                                                             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 164,000 |   | (3,024 | ) |   |   |   |   |
| BALANCES, JUNE 30,  2003                                               |       | 10,437,436                                                                       |       |   | 174 |   |   |   | 52,173 |   |   |   | (44 | ) |   |   | 47,368 |   |   | 2 ,131,963 |   | (24,116 | ) |   | $ | 9,491 |   |   |
| Exercise of  options, net of  tax                                      |       | 243,210                                                                          |       |   | 4 |   |   |   | 2,578 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net loss—2004                                                     |       |                                                                             |       |   |   |   |   |   |   |   |   |   |   |   |   |   | (17,027 | ) |   |   |   |   |   |   | $ | (17,027 | ) |   |
| Other  comprehensive  income                                           |       |                                                                             |       |   |   |   |   |   |   |   |   |   | 658 |   |   |   |   |   |   |   |   |   |   |   | 658 |   |   |
| Issuance of shares  for acquisition of Peek  Traffic                   |       |                                                                             |       |   |   |   |   |   | 2,386 |   |   |   |   |   |   |   |   |   |   | (180,723 | ) | 2,044 |   |   |   |   |   |
| Declaration of  semi-annual cash dividends ($0.17 per share)           |       |                                                                             |       |   |   |   |   |   |   |   |   |   |   |   |   |   | (2,911 | ) |   |   |   |   |   |   |   |   |   |
| Issuance of shares  pursuant to the stock retirement plan              |       | 10,794                                                                           |       |   |   |   |   |   | 227 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Issuance of  restricted  stock                                         |       | 16,000                                                                           |       |   |   |   |   |   | 393 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| BALANCES, JUNE 30,  2004                                               |       | 10,707,440                                                                       |       |   | $ | 178 |   |   |   | $ | 57,757 |   |   |   | $ | 614 |   |   |   | $ | 27,430 |   |   | 1,951,240 |   | $ | (22,072 | ) |   | $ | (16,369 | ) |   |
| Exercise of  options, net of  tax                                      |       | 81,550                                                                           |       |   | 2 |   |   |   | 1,117 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net loss—2005                                                     |       |                                                                             |       |   |   |   |   |   |   |   |   |   |   |   |   |   | (650 | ) |   |   |   |   |   |   | $ | (650 | ) |   |
| Other  comprehensive  income                                           |       |                                                                             |       |   |   |   |   |   |   |   |   |   | (292 | ) |   |   |   |   |   |   |   |   |   |   | (292 | ) |   |
| Reclassification  to earnings                                          |       |                                                                             |       |   |   |   |   |   |   |   |   |   | 23 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Declaration of  semi-annual cash dividends ($0.18 per share)           |       |                                                                             |       |   |   |   |   |   |   |   |   |   |   |   |   |   | (3,175 | ) |   |   |   |   |   |   |   |   |   |
| Issuance of shares  for 401K plan                                      |       |                                                                             |       |   |   |   |   |   | 298 |   |   |   |   |   |   |   |   |   |   | (35,887 | ) | 406 |   |   |   |   |   |
| Issuance of shares  pursuant to the stock retirement plan              |       | 10,794                                                                           |       |   |   |   |   |   | 210 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| BALANCES, JUNE 30,  2005                                               |       | 10,799,784                                                                       |       |   | $ | 180 |   |   |   | $ | 59,382 |   |   |   | $ | 345 |   |   |   | $ | 23,605 |   |   | 1,915,353 |   | $ | (21,666 | ) |   | $ | (942 | ) |   |

 

*THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS.*

29

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**QUIXOTECORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS**
| ** **                                                                                   | ** ** | **For each of the three years  ended June 30,** | ** ** |
|----------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------|------------|
| ** **                                                                                   | ** ** | **2005**                                                                           | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                                                   | ** ** | **Dollar amounts in thousands**                                     | ** ** |
| OPERATING ACTIVITIES:                                                                        |       |                                                                               |       |   |   |   |   |
| Net earnings (loss)                                                                          |       | $                                                                                  | (650       | ) | $ | (17,027 | ) | $ | 9,472 |   |
| ADJUSTMENTS TO  RECONCILE NET EARNINGS (LOSS) TO NET CASH PROVIDED BY CONTINUING OPERATIONS: |       |                                                                               |       |   |   |   |   |
| Asset impairment charges                                                                     |       |                                                                               |       | 32,600 |   |   |   |
| Depreciation                                                                                 |       | 4,587                                                                              |       | 4,763 |   | 3,383 |   |
| Amortization                                                                                 |       | 1,224                                                                              |       | 1,757 |   | 595 |   |
| (Gain) loss on disposition of assets                                                         |       | (1,126                                                                             | )          | 212 |   |   |   |
| Deferred income taxes                                                                        |       | (2,253                                                                             | )          | (9,380 | ) | 1,957 |   |
| Provisions for losses on accounts receivable                                                 |       | 647                                                                                |       | 686 |   | 184 |   |
| Income tax benefit from employee stock options                                               |       | 160                                                                                |       | 431 |   | 446 |   |
| Issuance of stock retirement plan shares                                                     |       | 210                                                                                |       | 227 |   | 251 |   |
| Issuance of stock to 401K plan                                                               |       | 704                                                                                |       |   |   |   |   |
| Issuance of restricted stock                                                                 |       |                                                                               |       | 393 |   |   |   |
| Changes in operating  assets and liabilities, net of acquisitions:                           |       |                                                                               |       |   |   |   |   |
| Accounts receivable                                                                          |       | 218                                                                                |       | 4,956 |   | (4,948 | ) |
| Inventories                                                                                  |       | (2,109                                                                             | )          | 726 |   | (395 | ) |
| Other assets                                                                                 |       | (614                                                                               | )          | 267 |   | (353 | ) |
| Accounts payable and accrued expenses                                                        |       | (929                                                                               | )          | (6,907 | ) | 3,881 |   |
| Income taxes payable/refundable                                                              |       | 3,556                                                                              |       | (4,676 | ) | 2,037 |   |
| Other long-term liabilities                                                                  |       | (227                                                                               | )          | (352 | ) | (354 | ) |
| Net cash provided by operating activities                                                    |       | 3,398                                                                              |       | 8,676 |   | 16,156 |   |
| INVESTING  ACTIVITIES:                                                                       |       |                                                                               |       |   |   |   |   |
| Cash paid for acquired businesses, net of cash  acquired                                     |       |                                                                               |       | (11,263 | ) | (20,158 | ) |
| Capital expenditures                                                                         |       | (3,805                                                                             | )          | (4,638 | ) | (2,257 | ) |
| Proceeds from sale of assets                                                                 |       | 1,642                                                                              |       |   |   |   |   |
| Proceeds from sale/leaseback of assets                                                       |       | 1,206                                                                              |       |   |   |   |   |
| Patent expenditures                                                                          |       | (170                                                                               | )          | (42 | ) | (445 | ) |
| Payments on notes receivable                                                                 |       | 217                                                                                |       |   |   | 200 |   |
| Net cash used in investing activities                                                        |       | (910                                                                               | )          | (15,943 | ) | (22,660 | ) |
| FINANCING  ACTIVITIES:                                                                       |       |                                                                               |       |   |   |   |   |
| Proceeds from convertible debt offering                                                      |       | 40,000                                                                             |       |   |   |   |   |
| Fees on convertible debt offering                                                            |       | (2,605                                                                             | )          |   |   |   |   |
| Payments on notes payable                                                                    |       | (393                                                                               | )          | (910 | ) | (953 | ) |
| Payments on revolving credit agreement                                                       |       | (37,400                                                                            | )          | (22,250 | ) | (22,500 | ) |
| Proceeds from revolving credit agreement                                                     |       | 14,400                                                                             |       | 32,750 |   | 16,500 |   |
| Proceeds from term loan                                                                      |       |                                                                               |       |   |   | 20,000 |   |
| Payments on term loan                                                                        |       | (17,000                                                                            | )          | (3,000 | ) |   |   |
| Proceeds from interest rate swap arrangement                                                 |       | 394                                                                                |       |   |   |   |   |
| Payment of semi-annual cash dividends                                                        |       | (3,066                                                                             | )          | (2,827 | ) | (2,489 | ) |
| Proceeds from exercise of common stock options                                               |       | 961                                                                                |       | 2,147 |   | 888 |   |
| Repurchase of common stock for treasury                                                      |       |                                                                               |       |   |   | (3,024 | ) |
| Net cash (used in) provided by financing activities                                          |       | (4,709                                                                             | )          | 5,910 |   | 8,422 |   |
| Effect of exchange rate changes on cash                                                      |       | (12                                                                                | )          | (7 | ) | 37 |   |
| Net change in cash and cash equivalents                                                      |       | (2,233                                                                             | )          | (1,364 | ) | 1,955 |   |
| Cash and cash equivalents at beginning of year                                               |       | 2,389                                                                              |       | 3,753 |   | 1,798 |   |
| Cash and cash  equivalents at end of year                                                    |       | $                                                                                  | 156        |   | $ | 2,389 |   | $ | 3,753 |   |

 

*THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS.*

30

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**QUIXOTE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**1.**   NATURE OF BUSINESS

Quixote Corporation andits subsidiaries (the Company) develop, manufacture and market, to bothdomestic and international markets, energy-absorbing highway crash cushions,flexible post delineators, electronic wireless measuring and sensing devices,weather forecasting systems, variable message signs, computerized highwayadvisory radio transmitting systems, intelligent intersection control devices,automated enforcement systems, video detection systems and other highway andtransportation safety products to protect, direct and inform motorists andhighway workers.

**2.**   ACCOUNTING POLICIES

**CONSOLIDATION  **Theconsolidated financial statements include the accounts of Quixote Corporationand its wholly-owned subsidiaries. All significant intercompany accounts andtransactions have been eliminated in consolidation.

**MANAGEMENT ESTIMATES**   Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the United States of America (U.S. GAAP) requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities and the disclosure of contingent assets andliabilities at the date of the financial statements. Management’s estimatesalso affect the reported amounts of revenues and expenses during the reportingperiod. Actual results could differ from those estimates.

**CASH AND CASH EQUIVALENTS**   Cashin excess of operating requirements is invested in income-producing investmentsgenerally having initial maturities of three months or less. These investmentsare stated at cost, which approximates market value. The Company considersthese short-term instruments to be cash equivalents.

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

**PROPERTY,PLANT AND EQUIPMENT**   The Company capitalizesexpenditures for major renewals and improvements and charges current earningswith the cost of maintenance and repairs. Provisions for depreciation have beencomputed on a straight-line or systematic method based on the expected usefullives of the assets as indicated below:
| Buildings and  improvements      |   | 10  to 40 years |
|----------------------------------|--------|-----------------|
| Machinery and equipment          |   | 3 to  12 years  |
| Furniture and fixtures           |   | 3 to  10 years  |
| Computer equipment and  software |   | 3 to  7 years   |
| Leasehold improvements           |   | 5 to 10 years   |

 

The cost and accumulated depreciation relating toassets retired or otherwise disposed of are eliminated from the respectiveaccounts at the time of retirement or other disposition with the gain or losscredited or charged to earnings.

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**QUIXOTE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**2.**   ACCOUNTING POLICIES (Continued)

**COMPUTER SOFTWARE**   TheCompany capitalizes certain costs incurred in connection with developing orobtaining internal use computer software. During 2005 and 2004, approximately$419,000 and $694,000, respectively, of computer software was capitalized,primarily relating to new manufacturing and accounting systems.

**LONG-LIVED ASSETS**   Long-livedassets include such items as goodwill, patents, product rights, otherintangible assets and property, plant and equipment. For purposes of evaluatingthe recoverability of long-lived assets, the Company assesses the possibilityof obsolescence, demand, new technology, competition, and other pertinenteconomic factors and trends that may have an impact on the value or remaininglives of these assets.

Amortized long-lived assets (including amortizedintangible assets and property, plant and equipment) held and used by theCompany are reviewed for impairment whenever events or changes in circumstancesindicate that the carrying amount of an asset may not be recoverable inrelation to future undiscounted cash flows of underlying asset groups. The netcarrying value of assets not recoverable is reduced to fair value. Fair valuesof amortized long-lived assets are determined based upon the performance of athird party fair value appraisal. Patents and other finite-lived intangibleassets are amortized on a straight-line or systematic method over the life ofthe patent or intangible asset.

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

**INCOME TAXES**   The Companyrecognizes deferred tax assets and liabilities for the expected future taxconsequences of events that have been included in the financial statements ortax returns. Under this method, deferred tax assets and liabilities aredetermined based on the difference between the financial statement and taxbasis of assets and liabilities using enacted tax rates in effect for the yearin which the differences are expected to reverse. In assessing therealizability of the deferred tax assets, management considers whether it ismore likely than not that some portion or all of the deferred tax assets willnot be realized. To the extent that any future tax benefits are not expected tobe fully realized, such future tax benefits are reduced by a valuationallowance. Realization of deferred tax assets assumes that the Company will beable to generate sufficient future taxable income so that the assets will berealized. The factors that the Company considers in assessing the likelihood ofrealization include the forecast of future taxable income and available taxplanning strategies that could be implemented to realize the deferred taxassets. The Company expects the deferred tax assets currently recorded to befully realizable, however there can be no assurance that an increased valuationallowance would not need to be recorded in the future.

**FINANCIAL INSTRUMENTS**   Thefair value of cash and cash equivalents approximates the carrying value ofthese assets due to the short-term maturity of these instruments. The fairvalue of the Company’s 

32

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**QUIXOTE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**2.**   ACCOUNTING POLICIES (Continued)

long-term debt isestimated to approximate the carrying value based upon borrowing ratescurrently available to the Company for borrowings with similar terms andmaturity.

**DERIVATIVES**   Until theissuance of fixed rate convertible debt in the third quarter of fiscal 2005,the Company managed its exposure to interest rate fluctuations through the useof derivative instruments in the form of non-trading interest rate swaps. Theobjective of the swap was to fix the interest rate on certain variable ratedebt to stabilize interest rates and to more effectively balance the Company’slong-term borrowing costs and interest rate risk. During July 2003, theCompany entered into a five-year interest rate swap agreement (the Agreement)to set a fixed interest rate relating to $20 million of its outstanding debt atvariable interest rates. The terms of the Agreement matched the terms of theunderlying debt. In addition, the Agreement was designated as, and waseffective as, a cash-flow hedge of an outstanding debt obligation. Changes infair value of the Agreement were reported as other comprehensive income andwere recognized into earnings when the hedge transaction affects earnings. TheCompany’s derivative instrument was liquidated during February 2005 andthe Company received $394,000 in cash. The current market value of the interestrate swap arrangement as of the date of liquidation included in accumulatedother comprehensive income is being amortized over the remaining life of theoriginally forecasted transaction.

**GEOGRAPHIC CONCENTRATION**   TheCompany’s customers may consist of distributors, contractors, departments oftransportation, state agencies, local governments or municipalities. No singlecustomer of the Company represents a significant portion of total revenues. However,in fiscal 2005, 2004 and 2003, approximately 11%, 10% and 12%, respectively, ofrevenues were from customers in the state of Texas, and 9%, 14% and 10%,respectively, of revenues in fiscal 2005, 2004 and 2003, were from customers inthe state of California.

**REVENUE RECOGNITION**   Revenues,net of discounts and allowances, are recognized when either services have beenrendered or both title and risk of loss of products have been transferred tounaffiliated customers. Additionally, the Company ensures that collection ofthe resulting receivable is probable, persuasive evidence that an arrangementexists, and the revenue is fixed or determinable. Provision for estimateduncollectible amounts and credit memos is made based upon management’s analysisof bad debts and credit memos.

**SHIPPING AND HANDLING**   Shippingand handling fees charged to customers are included in net sales, and shippingand handling costs incurred by the Company are included in cost of sales.

**RESEARCH AND DEVELOPMENT**   Researchand development (R&D) costs are expensed as incurred.

**STOCK-BASED COMPENSATION**   Stockoption plans, more fully described in Note 8, are accounted for under theprovisions of Financial Accounting Standards Board (FASB) Statement No. 123,“Accounting for Stock-Based Compensation” which encourages entities to adopt a fairvalue based method of accounting for stock-based compensation plans in place ofthe provisions of Accounting Principles Board Opinion (APB) No. 25, “Accountingfor Stock Issued to Employees” for all arrangements under which employeesreceive shares of stock or other equity instruments of the employer. As allowedby FASB Statement No. 123, the Company applies the provisions of APB No. 25in accounting for its stock-based employee compensation arrangements. Nocompensation expense has been recognized for stock option grants as all suchgrants had an exercise price not less than fair market value on the date of the

33

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**QUIXOTE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**2.**   ACCOUNTING POLICIES (Continued)

grant. During fiscal 2004,the Company issued 16,000 shares of restricted stock to certain employees,which resulted in a charge to earnings of $252,000, net of tax effects.Employees who received the shares are restricted from selling those shares forthree years.

The following tablepresents the pro forma effects on net earnings (loss) and earnings (loss) pershare if the Company had applied the fair value recognition provisions of FASBStatement No. 123 to stock-based compensation for the years ended June 30:
| ** **                                                                                                                                    | ** ** | **2005**                                                                                | ** ** | **2004** | ** ** | **2003** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| ** **                                                                                                                                    | ** ** | **(Dollar amounts in thousands,  except per share data)** | ** ** |
| Net earnings  (loss)—as reported                                                                                                         |       | $                                                                                       | (650       | )        | $          | (17,027  | )          | $ | 9,472 |   |
| Add: Stock-based  employee compensation expense included in reported net earnings, net of  related tax effects                                |       | —                                                                                  |       | 252      |       | —   |       |
| Deduct: Total  stock-based employee compensation expense determined under fair value based  method for all awards, net of related tax effects |       | (961                                                                                    | )          | (1,299   | )          | (1,303   | )          |
| Net earnings  (loss)—pro forma                                                                                                           |       | $                                                                                       | (1,611     | )        | $          | (18,074  | )          | $ | 8,169 |   |
| Earnings (loss)  per share:                                                                                                                   |       |                                                                                    |       |     |       |     |       |
| Basic—as reported                                                                                                                        |       | $                                                                                       | (0.07      | )        | $          | (1.99    | )          | $ | 1.21 |   |
| Basic—pro forma                                                                                                                          |       | $                                                                                       | (0.18      | )        | $          | (2.11    | )          | $ | 1.04 |   |
| Diluted—as  reported                                                                                                                     |       | $                                                                                       | (0.07      | )        | $          | (1.99    | )          | $ | 1.17 |   |
| Diluted—pro forma                                                                                                                        |       | $                                                                                       | (0.18      | )        | $          | (2.11    | )          | $ | 1.01 |   |

 

Thefair value of each option grant is estimated on the date of grant using theBlack-Scholes option-pricing model with the following assumptions:
| ** **                            | ** ** | **2005**  | ** ** | **2004**  | ** ** | **2003**  | ** ** |
|---------------------------------------|------------|-----------|------------|-----------|------------|-----------|------------|
| Risk free  interest rate              |       | 3.9%-4.2% |       | 2.1%-3.6% |       | 3.2%-3.6% |       |
| Expected dividend  yield              |       | 1.72%     |       | 1.55%     |       | 1.70%     |       |
| Weighted average  expected volatility |       | 41%       |       | 41%       |       | 42%       |       |
| Weighted average  expected life       |       | 4.3 years |       | 4.3 years |       | 4.2 years |       |

 

In December, 2004, the Financial Accounting StandardsBoard (FASB) issued SFAS No. 123 (R), “Share-Based Payment.” SFAS No. 123 (R)requires the recognition of the cost of employee services received in exchangefor an award of equity instruments based on the grant date fair value of theaward. The cost will be recognized over the period during which an employee isrequired to provide service in exchange for the award. Although it is difficultto predict the exact impact the adoption of SFAS No. 123 (R) willhave on the Company’s consolidated earnings due to the number of variablesinvolved, the Company believes the impact in fiscal 2006 will be approximately$1,000,000, or $0.11 per diluted share.

**EARNINGS PER SHARE  **Basicearnings per share (EPS) is computed by dividing net earnings available toholders of common stock by the weighted average number of shares of commonstock outstanding. Diluted EPS is computed assuming the exercise of all stockoptions that are profitable to the 

34

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**QUIXOTE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**2.**   ACCOUNTING POLICIES (Continued)

recipients and aredilutive to results of operations. Under this assumption, the weighted averagenumber of shares is increased accordingly.

**RECLASSIFICATIONS  **Certainprior year balances have been reclassified to conform to current yearpresentations.

**RECENT ACCOUNTING PRONOUCEMENTS  **TheFASB issued Statement No. 150, “Accounting for Certain FinancialInstruments with Characteristics of both Liabilities and Equity”, whichrequired financial instruments within its scope to be classified as liabilities(or assets in some circumstances). The Statement is effective for financialinstruments entered into or modified after May 31, 2003, and otherwiseeffective at the beginning of the first interim period beginning after June 15,2003, except for certain mandatorily redeemable financial instruments. It is tobe implemented by reporting the cumulative effect of a change in an accountingprinciple for financial instruments created before the issuance date of theStatement and still existing at the beginning of the interim period of adoption.Restatement is not permitted. The effective date of certain provisions ofStatement No. 150 for certain mandatorily redeemable financial instrumentshas been deferred by FSP FAS 150-5. Under the FSP, certain mandatorilyredeemable shares are subject to the provisions of Statement No. 150 forthe first fiscal period beginning after June 30, 2005. Other mandatorilyredeemable shares are deferred indefinitely but may be subject toclassification or disclosure provisions of the Statement. The Company iscurrently evaluating the impact that this statement will have on the Company’sfinancial statements, however the Company does not expect the adoption to havea material impact.

In November 2004, the FASB issued SFAS No. 151,“Inventory Costs, an amendment of ARB No. 43, Chapter 4,” which amends theguidance in ARB No. 43, Chapter 4, “Inventory Pricing” to clarify theaccounting for abnormal amounts of idle facility expense, freight, handlingcosts and spoilage. This statement requires that these costs be expensed ascurrent period charges. In addition, this statement requires that theallocation of fixed production overhead to the costs of conversion be based onthe normal capacity of the production facilities. The provisions of thisstatement were effective July 1, 2005 for the Company. The Company iscurrently evaluating the impact that this statement will have on the Company’sfinancial position and results of operations, however the Company does notexpect the adoption will have a material impact.

In December 2004, the FASB issued Statement No. 153,“Exchanges of Nonmonetary Assets,” (“SFAS 153”). SFAS 153 amends AccountingPrinciples Board (“APB”) Opinion No. 29, “Accounting for NonmonetaryTransactions” (Opinion 29), to require exchanges of nonmonetary assets beaccounted for at fair value, rather than carryover basis. Nonmonetary exchangesthat lack commercial substance are exempt from this requirement. SFAS 153 iseffective for nonmonetary exchanges entered into in fiscal years beginningafter June 15, 2005. The Company does not routinely enter into exchangesthat could be considered nonmonetary, accordingly the Company does not expectthe adoption of SFAS 153 to have a material impact on the Company’s financialstatements.

In June 2005, the FASB issued Statement ofFinancial Accounting Standards No. 154 (SFAS 154), “Accounting Changes andError Corrections.” SFAS 154 changes the requirements for the accounting forand reporting of a change in accounting principle. This Statement requiresretrospective applications to prior periods’ financial statements of avoluntary change in accounting principle unless it is impracticable. Inaddition, this Statement requires that a change in depreciation, amortization,or depletion for long-lived, non-financial assets be accounted for as a changein accounting estimate effected by a change in 

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**QUIXOTE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**2.**   ACCOUNTING POLICIES (Continued)

accounting principle. Thisnew accounting standard is effective January 1, 2006. The adoption of SFAS154 is not expected to have a material impact on our financial statements.

In March 2005, the FASB issued FASB InterpretationNo. (FIN) 47, “Accounting for Conditional Asset Retirement Obligations,”which is effective for the Company’s fiscal year ending June 30, 2006. Theinterpretation requires a conditional asset retirement obligation to berecognized when the fair value of the liability can be reasonably estimated. TheCompany does not believe the adoption of this interpretation will have amaterial impact on the Company’s financial statements.

In December 2004, theFASB issued FASB Staff Position No. 109-1, “Application of FASBStatement No.109, Accounting for Income Taxes, to the Tax Deduction onQualified Production Activities Provided by the American Jobs Creation Act of2004”, (FSP 109-1). FSP 109-01 provides accounting guidance forcompanies that will be eligible for a tax deduction resulting from “qualifiedproduction activities income” as defined in the American Jobs Creation Act of2004 (the Act). FSP 109-1 requires this deduction be treated as a specialdeduction in accordance with SFAS 109, which does not require the revaluationof our U.S. deferred tax assets. We applied the guidance in FSP 109-1effective July 1, 2005. Although we are currently evaluating the impact ofthe adoption of this standard, we do not expect the adoption to have a materialimpact on the Company’s financial statements for fiscal 2006.

**3.**   ACQUISITIONSAND DISPOSITIONS

Effective December 1, 2003, the Company acquiredsubstantially all of the assets and assumed certain liabilities of the NorthAmerican operations of Peek Traffic Corporation (Peek Traffic). The Companypaid a purchase price of $15,693,000. The purchase price consisted of$11,263,000 in cash and 180,723 shares of the Company’s common stock, issuedfrom Treasury Stock, valued at $4,430,000. The cash portion of the purchaseprice was obtained from the Company’s revolving credit facility. The excess ofpurchase price over the estimated fair value of the assets acquiredapproximated $7,611,000, of which approximately $6,528,000 is deductible fortax purposes. Peek Traffic is a designer, manufacturer and supplier ofintelligent intersection control systems, red light enforcement systems andother transportation equipment. The results of Peek Traffic have been includedin the Company’s Inform segment since the date of acquisition.

Thefollowing summary presents the estimated fair values of the assets acquired andliabilities of Peek Traffic assumed as of December 1, 2003, the effectivedate of acquisition:
| ** **                     | ** ** | **(Dollar amounts in thousands)** | ** ** |
|--------------------------------|------------|--------------------------------------------------|------------|
| Current assets                 |       |                                             | $          | 5,977 |   |   |
| Property, plant  and equipment |       |                                             | 2,902      |   |   |
| Intangible assets              |       |                                             | 5,760      |   |   |
| Goodwill                       |       |                                             | 7,611      |   |   |
| Total assets                   |       |                                             | 22,250     |   |   |
| Current  liabilities           |       |                                             | 6,557      |   |   |
| Net assets                     |       |                                             | $          | 15,693 |   |   |

 

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**QUIXOTE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**3.**   ACQUISITIONSAND DISPOSITIONS (Continued)

Theintangible assets acquired in connection with the acquisition of Peek Trafficwere assigned as follows:
| ** **                    | ** ** | **Gross Carrying  Amount**                  | ** ** | **Weighted-average  Useful Life__** | ** ** |
|-------------------------------|------------|--------------------------------------------------|------------|------------------------------------------|------------|
| ** **                    | ** ** | **(Dollar amounts in thousands)** | ** ** |
| Amortized intangible  assets: |       |                                             |       |                                     |       |   |   |   |   |
| Customer relationships        |       |                                             | $          | 3,110                                    |       |   |   | 11 years |   |   |
| Trade names                   |       |                                             | 1,700      |                                     |       |   | 10 years |   |   |
| Technology                    |       |                                             | 840        |                                     |       |   | 15 years |   |   |
| Backlog                       |       |                                             | 110        |                                     |       |   | 1 year |   |   |
| Total                         |       |                                             | $          | 5,760                                    |       |   |   | 11 years |   |   |

 

Effective May 16, 2003, the Company acquired certainassets and liabilities of the Traffic and Transit Lighting businesses of U.S.Traffic Corporation (UST). UST is a designer, manufacturer and supplier ofintelligent intersection control systems and other transportation equipmentlocated in Santa Fe Springs, California and Tecate, Mexico. The Company paid apurchase price of $35,725,000, net of cash acquired, consisting of $20,158,000in cash, a $5,000,000 five-year note and 558,534 shares of the Company’s commonstock with a fair market value of $10,567,000. The Company’s source of cash forthis acquisition was a $70,000,000 credit facility. The results of UST havebeen included in the Company’s Inform segment since the date of acquisition.

The Company anticipated that the UST and Peek Trafficbusinesses would provide future operating synergies in the traffic controlmarket, expand the Company’s customer base in the municipal and county marketsand leverage the Company’s existing technologies within the Inform segment.

The following pro formasummary presents the Company’s consolidated results of operations for the yearsended June 30, 2004 and 2003 as if the UST and Peek Traffic acquisitionshad occurred at the beginning of fiscal year 2003:
| ** **                             | ** ** | **2004**                                                                                | ** ** | **2003** | ** ** |
|----------------------------------------|------------|-----------------------------------------------------------------------------------------|------------|----------|------------|
| ** **                             | ** ** | **(Dollar amounts in thousands,  except per share data)** | ** ** |
| Net sales                              |       | $                                                                                       | 159,887    |     | $          | 180,773 |   |
| Net earnings  (loss)                   |       | (17,198                                                                                 | )          | 7,949    |       |
| Net earnings (loss) per  diluted share |       | (1.99                                                                                   | )          | .91      |       |
|                                        |            |                                                                                         |            |          |            |  |  |

 

The consolidated pro forma information is notnecessarily indicative of the combined results that would have occurred had theacquisitions occurred on that date, nor is it indicative of the results thatmay occur in the future.

Effective June 30,2005, the Company sold certain machinery and equipment of a captivemanufacturer of the Company’s Protect and Direct segment for approximately$650,000 and recorded a gain on the sale of $566,000. During fiscal 2005, theCompany sold land and received proceeds of $992,000 and recorded a gain on thesale of $560,000.

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**QUIXOTE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**4.**   INVENTORIES

Inventoriesconsist of the following at June 30:
| ** **      | ** ** | **2005**                                         | ** ** | **2004** | ** ** |
|-----------------|------------|--------------------------------------------------|------------|----------|------------|
| ** **      | ** ** | **(Dollar amounts in thousands)** | ** ** |
| Finished goods  |       | $                                                | 8,757      |     | $          | 10,414 |   |
| Work-in-process |       | 4,666                                            |       | 4,732    |       |
| Raw materials   |       | 13,988                                           |       | 10,162   |       |
|            |       | $27,411                                          |       | $        | 25,308     |   |
|                 |            |                                                  |            |          |            |  |  |

 

**5.**   INTANGIBLEASSETS AND GOODWILL

Intangibleassets consist of the following as of June 30:
| ** **                     | ** ** | **2005**                                         | ** ** | **2004**                      | ** ** |
|--------------------------------|------------|--------------------------------------------------|------------|-------------------------------|------------|
| ** **                     | ** ** | **Gross  Carrying  Amount**                      | ** ** | **Accumulated  Amortization** | ** ** | **Net  Intangible  Assets** | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Net  Intangible  Assets** | ** ** |
| ** **                     | ** ** | **(Dollar amounts in thousands)** | ** ** |
| Amortized intangible  assets:  |       |                                             |       |                          |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Patents and licenses           |       | $                                                | 2,990      |                          |       | $ | 1,755 |   |   |   | $ | 1,235 |   |   | $ | 2,820 |   |   | $ | 1,597 |   |   |   | $ | 1,223 |   |   |
| Technology and installed  base |       | 2,491                                            |       |                          | 899        |   |   |   | 1,592 |   |   | 2,491 |   |   | 700 |   |   |   | 1,791 |   |   |
| Customer relationships         |       | 3,807                                            |       |                          | 1,181      |   |   |   | 2,626 |   |   | 3,807 |   |   | 827 |   |   |   | 2,980 |   |   |
| Trade names                    |       | 2,250                                            |       |                          | 363        |   |   |   | 1,887 |   |   | 2,250 |   |   | 49 |   |   |   | 2,201 |   |   |
| Other                          |       | 640                                              |       |                          | 640        |   |   |   | — |   |   | 640 |   |   | 586 |   |   |   | 54 |   |   |
| Total                          |       | $                                                | 12,178     |                          |       | $ | 4,838 |   |   |   | $ | 7,340 |   |   | $ | 12,008 |   |   | $ | 3,759 |   |   |   | $ | 8,249 |   |   |

 

During the fourth quarter of fiscal 2004, the Companyrecorded impairment charges relating to certain intangible assets (see Note 6)including indefinite-lived trade names. The remaining carrying values of thesetrade names were redesignated as amortized intangible assets.

Amortization expense was $1,079,000, $1,757,000 and$595,000 for the years ended June 30, 2005, 2004 and 2003, respectively. Theestimated amortization expense for the five fiscal years subsequent to 2005 isas follows: $1,173,000 in 2006, $1,126,000 in 2007, $1,061,000 in 2008, $849,000in 2009 and $737,000 in 2010. The intangible assets are amortized over theiruseful lives, which is four to seventeen years for patents and licenses, fiveto fifteen years for technology and installed base, five to ten years forcustomer relationships, ten years for trade names and one to two years forother intangible assets.

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**QUIXOTE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**5.**   INTANGIBLE ASSETS AND GOODWILL (Continued)

The following tabledisplays a rollforward of the carrying amount of goodwill from July 1,2003 to June 30, 2005 by business segment:
| ** **                   | ** ** | **2005**                                         | ** ** | **2004**            | ** ** |
|------------------------------|------------|--------------------------------------------------|------------|---------------------|------------|
| ** **                   | ** ** | **Protect and  Direct Segment**        | ** ** | **Inform  Segment** | ** ** | **Protect and  Direct Segment** | ** ** | **Inform  Segment** | ** ** |
| ** **                   | ** ** | **(Dollar amounts in thousands)** | ** ** |
| Beginning balance            |       |                                             | $          | 8,139               |       |   | $ | 21,364 |   |   | $ | 8,139 |   |   | $ | 40,503 |   |
| Acquired                     |       |                                             |       |                |       | — |   |   |   |   |   | 7,611 |   |
| Adjustments                  |       |                                             |       |                |       | (190 | ) |   |   |   |   | (741 | ) |
| Impairment  charges (Note 6) |       |                                             |       |                |       | — |   |   |   |   |   | (26,009 | ) |
| Ending balance               |       |                                             | $          | 8,139               |       |   | $ | 21,174 |   |   | $ | 8,139 |   |   | $ | 21,364 |   |

 

An adjustment of $190,000to decrease goodwill was recorded in fiscal 2005 in connection with thefinalization of valuations of certain assets and liabilities of Peek Traffic. Goodwillin the amount of $7,611,000 was recorded in connection with the acquisition ofPeek Traffic in the fiscal year ended June 30, 2004. In connection with thefinalization of valuations of certain assets and liabilities of Peek Trafficand UST, a net adjustment of $741,000 to decrease goodwill was recorded infiscal 2004.

**6.**   ASSETIMPAIRMENT CHARGES

During fiscal year 2004, the prolonged delay in thepassage of new federal highway funding legislation as well as ongoing state andmunicipal budget issues had a significant negative impact on the Company as awhole. In addition, UST operating results were much lower than expected,although the Company was pursuing theintegration of UST and Peek Traffic in order to improve profitability. Asa result of these factors and the Company’s impairment review in the fourthquarter of fiscal 2004, the Company determined that the carrying amounts ofcertain long-lived assets were no longer recoverable based on estimated futureoperating cash flows to be generated by those assets, which were lower thanpreviously projected. The Company recorded asset impairment charges in theInform segment of $32,600,000, or $21,266,000, net of income tax benefits, or$2.48 per diluted share. The charges included $26,009,000 for goodwill relatingto UST, SSI and Nu-Metrics, $4,182,000 for intangible assets and $2,409,000 forfixed assets. The intangible asset impairment charges included $1,449,000 fortechnology and installed base, $1,623,000 for customer relationships and$1,110,000 for trade names. In addition, the remaining carrying values of thetrade names were redesignated as amortized intangible assets and are beingamortized over ten years. No impairment charges were recorded during fiscal2005 or 2003.

In performing itsimpairment assessments, the Company first assessed its indefinite-livedintangibles; second, assessed its amortized long-lived assets (includingamortized intangible assets and property, plant and equipment); and third,assessed its goodwill. Additionally, the Company re-assessed the remaininguseful lives of its amortized long-lived assets.

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**QUIXOTE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**7.**   LONG-TERMDEBT

Long-termdebt consists of the following at June 30:
| ** **                                                                   | ** ** | **2005**                                         | ** ** | **2004** | ** ** |
|------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|----------|------------|
| ** **                                                                   | ** ** | **(Dollar amounts in thousands)** | ** ** |
| Convertible debt  7% interest rate due February 15, 2025.               |       | $                                                | 40,000     |     |       |   |
| Revolving credit  note due February 1, 2008, interest at variable rates |       | 4,000                                            |       |     |       |
| Revolving credit  note due May 16, 2006, interest at variable rates     |       | —                                           |       | $        | 27,000     |   |
| Term loan due  May 16, 2006,interest at variable rates                  |       | —                                           |       | 17,000   |       |
| Subordinated  promissory note                                                |       | 5,000                                            |       | 5,000    |       |
| Notes payable,  net of discounts of $111—2005 and $218—2004        |       | 1,014                                            |       | 1,407    |       |
| Total long-term  debt                                                        |       | 50,014                                           |       | 50,407   |       |
| Less current portion                                                         |       | 427                                              |       | 3,393    |       |
| Long-term debt, net                                                          |       | $                                                | 49,587     |     | $          | 47,014 |   |

 

During February 2005, the Company sold$40,000,000 of 7% Convertible Senior Subordinated Notes due February 15,2025 in a private placement and received net proceeds of $37,395,000. Debtissue costs representing direct costs incurred related to the issuance of theNotes in the amount of $2,605,000 were recorded in other assets and are beingamortized into interest expense over five years, the effective term of theNotes. The net proceeds were used to pay off the Company’s bank term loan andreduce the amount of its revolving credit agreement. The conversion price is$25.90 per share, which represented a 40% premium over the closing price of theCompany’s stock on the close of the transaction. The Notes are fully redeemable by the Company at any time after February 20,2008 at 100% of the principal amount plus accrued and unpaid interest. Theinvestors may require the Company to repurchase the notes in cash at a priceequal to 100% of the principal amount of the notes plus accrued and unpaidinterest, if any, on February 15, 2010, 2015 or 2020. Interest is payablesemi-annually on February 15 and August 15 of each year, beginning August 15,2005.

During April 2005, the Company entered into a newbank credit agreement with a secured revolving credit facility of $30 million. Therevolving credit availability is based on a formula of eligible accounts receivable,eligible inventory, machinery & equipment and real estate, subject toa minimum excess collateral availability factor. Effective June 30, 2006,the Company will also be required to maintain a maximum senior leverage ratio.The covenants also limit the incurrence of additional indebtedness,acquisitions, liens and encumbrances and other matters customarily restrictedin such agreements. The borrowing is secured by a first security interest inall existing and hereafter acquired assets of the company, including accountsreceivable, inventory, machinery and equipment, real estate and the equitysecurities of the Company’s subsidiaries. Under certain conditions, the Companymay request a release of all security interests after June 30, 2006, atwhich time the Company would no longer be subject to a borrowing base formula,but would be subject to several financial covenants.

The subordinated promissory note is a five-year note,payable at the end of the term. It was entered into in connection with theacquisition of UST and is payable to the former owners. It bears interest at5.25%, with interest payable semi-annually. The notes payable were entered intoin connection with the acquisition of Roadway Safety Service, Inc.(Roadway) and are payable to several former owners and employees. The Roadwaynotes are payable quarterly over five and ten year periods through 2007 withinterest imputed at 8.5%.

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**QUIXOTE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**7.**   LONG-TERM DEBT (Continued)

The aggregate amount ofmaturities of long-term debt for the four years subsequent to 2006 assumingrenewal of the credit agreement is as follows: $465,000 in 2007, $5,122,000 in2008, $0 in 2009, $0 in 2010 and $44,000,000 thereafter.

**8.**   STOCKOPTIONS AND STOCK TRANSACTIONS

The Company has stock option plans providing forgrants of options for directors based upon a fixed calculation and foremployees as may be determined by the Compensation Committee of the Board ofDirectors. Options under the plans are to be granted at no less than 100% ofthe current market price at the date of the grant. Options vest over not lessthan a six-month period and have a term of not more than ten years. No chargesare made to earnings in connection with the option plans.

Information with respectto stock option activity under the Company’s plans is as follows:
| ** **            | ** ** | **Number of  Common Shares** | ** ** | **Option Price  per Share** | ** ** | **Weighted Average  Exercise Price** | ** ** |
|-----------------------|------------|----------------------------------------|------------|---------------------------------------|------------|------------------------------------------------|------------|
| July 1, 2002     |       |                                   | 1,248,174  |                                  |       | $                                              | 6.88       |   | to |   | $ | 24.95 |   |   | $ | 15.28 |   |   |
| Granted               |       |                                   | 198,100    |                                  |       | 16.04                                          |       | to |   | 20.54 |   |   | 16.40 |   |   |
| Exercised             |       |                                   | (189,744   | )                                     |       | 8.00                                           |       | to |   | 16.00 |   |   | 12.32 |   |   |
| Cancelled or  expired |       |                                   | (300       | )                                     |       | 23.77                                          |       | to |   | 23.77 |   |   | 23.77 |   |   |
| June 30, 2003    |       |                                   | 1,256,230  |                                  |       | 6.88                                           |       | to |   | 24.95 |   |   | 15.90 |   |   |
| Granted               |       |                                   | 122,900    |                                  |       | 25.63                                          |       | to |   | 26.02 |   |   | 25.68 |   |   |
| Exercised             |       |                                   | (349,007   | )                                     |       | 8.34                                           |       | to |   | 24.95 |   |   | 13.81 |   |   |
| Cancelled or  expired |       |                                   | (29,165    | )                                     |       | 12.19                                          |       | to |   | 25.63 |   |   | 21.16 |   |   |
| June 30, 2004    |       |                                   | 1,000,958  |                                  |       | 6.88                                           |       | to |   | 26.02 |   |   | 17.68 |   |   |
| Granted               |       |                                   | 205,700    |                                  |       | 18.40                                          |       | to |   | 20.68 |   |   | 19.51 |   |   |
| Exercised             |       |                                   | (129,754   | )                                     |       | 6.88                                           |       | to |   | 16.04 |   |   | 14.87 |   |   |
| Cancelled or  expired |       |                                   | (66,933    | )                                     |       | 10.00                                          |       | to |   | 25.63 |   |   | 21.14 |   |   |
| June 30,  2005   |       |                                   | 1,009,971  |                                  |       | $                                              | 6.88       |   | to |   | $ | 26.02 |   |   | $ | 18.19 |   |   |

 

Options outstanding at June 30, 2005 areexercisable as follows: 711,076 currently, 147,007 in 2006, 91,753 in 2007 and60,135 thereafter. Options outstanding at June 30, 2004 and 2003 included734,194 and 849,000, which were exercisable at those dates, respectively. Theweighted average fair value of options granted during 2005, 2004 and 2003 was$6.87, $8.17 and $5.36, respectively. As of June 30, 2005, the Company has793,215 common shares reserved for its option and award plans.

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**QUIXOTE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**8.**   STOCKOPTIONS AND STOCK TRANSACTIONS (Continued)

Thefollowing is the composition of the June 30, 2005 stock option balance:
| ** **                                                                       | ** ** | ** ** | ** ** | **Outstanding**                            | ** ** | **Currently Exercisable_**                            | ** ** |
|----------------------------------------------------------------------------------|------------|------------|------------|--------------------------------------------|------------|------------------------------------------------------------|------------|
| **Options having a per  share exercise price of:** | ** ** | ** ** | ** ** | **Weighted  average  remaining life** | ** ** | **Weighted  average  exercise price  per share** | ** ** | **Number of  shares** | ** ** | **Weighted  average  exercise price** | ** ** | **Number of  shares** | ** ** |
| $  6.88  to $10.00                                                     |       |       | 2.3 years  |                                       |       |                                                       | $          | 8.28 |   |   | 54,000 |   |   | $ | 8.28 |   |   |   | 54,000 |   |   |
|   10.01  to   15.00                                          |       |       | 4.1 years  |                                       |       |                                                       | 13.16      |   |   | 220,000 |   |   | 13.16 |   |   |   | 220,000 |   |   |
|   15.01  to   20.00                                          |       |       | 4.5 years  |                                       |       |                                                       | 17.43      |   |   | 431,671 |   |   | 16.02 |   |   |   | 196,039 |   |   |
|   20.01  to   25.00                                          |       |       | 2.1 years  |                                       |       |                                                       | 24.07      |   |   | 193,400 |   |   | 24.07 |   |   |   | 193,400 |   |   |
|   25.01  to   26.02                                          |       |       | 5.1 years  |                                       |       |                                                       | 25.69      |   |   | 110,900 |   |   | 25.76 |   |   |   | 47,637 |   |   |
| $  6.88  to $26.02                                                     |       |       | 3.9 years  |                                       |       |                                                       | $          | 18.19 |   |   | 1,009,971 |   |   | $ | 17.39 |   |   |   | 711,076 |   |   |

 

**9.**   SHAREHOLDERRIGHTS PLAN

The Company has a Shareholder Rights Plan (the Plan)which was established to deter coercive takeover tactics and to prevent anacquirer from gaining control of the Company without offering a fair price toall of the Company’s stockholders. The Plan calls for stockholders of record asof July 14, 1998 to receive a dividend distribution of one right for eachoutstanding share of the Company’s common stock. Each share issued after thatdate is also granted a right. Each right entitles the holder, upon theoccurrence of certain events, to purchase a unit consisting of oneone-thousandth of a share of Series B Junior Participating PreferredStock, no par value, for $40 per unit. In addition, if an acquiring personbecomes the beneficial owner of more than 15% of the Company’s outstandingcommon stock, each right will entitle the holder (other than such acquiringperson) to receive, upon exercise, common stock of the Company having a valueequal to two times the exercise price of the right.

If after an acquiringperson becomes the beneficial holder of more than 15% of the Company’soutstanding common stock and then the Company is acquired in a merger or otherbusiness combination in which the Company would not be the survivingcorporation or 50% or more of the Company’s assets or earning power is sold,each holder shall have the right to receive, upon exercise, common stock of theacquiring corporation having a value equal to two times the exercise price ofthe right. The Company may redeem the rights, for $.01 per right, under certaincircumstances.

**10.**   RETIREMENTPLANS

The Company has a retirement stock award program forcertain key executives of the Company. The award consists of shares of theCompany’s common stock and cash ending with the fiscal year in which eachexecutive attains his or her 62nd birthday. In order to receive each year’sstock award, the executive must remain employed with the Company through theend of the fiscal year, unless excused by reason of death or other involuntarytermination. Participants are also required to retain the shares awarded for aslong as they are employed by the Company or until age 65. The size of eachparticipant’s annual award is determined under accepted actuarial principles toprovide a retirement income based upon a percentage of the executive’sprojected compensation and length of service at retirement, but only if theCompany’s stock price appreciates at a sustained target rate. The retirementstock award program resulted in a charge to earnings of $352,000 in 2005,$374,000 in 2004 and $420,000 in 2003.

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**QUIXOTE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**10.**   RETIREMENT PLANS (Continued)

The Company has an incentive savings plan coveringsubstantially all employees of the Company. The plan allows qualified employeesto make tax deferred contributions pursuant to Internal Revenue Code Section 401(k).The Company contributes a matching contribution based upon a percentage of theparticipants’ contributions which is invested directly in the common stock ofthe Company. Additional discretionary company contributions may be made at theoption of the Company’s Board of Directors. The expense for the plan was$1,186,000 in 2005, $1,126,000 in 2004 and $738,000 in 2003. During fiscal2005, the Company began contributing its matching contributions under theincentive savings plan through issuing common stock from its treasury stock.

**11.**   INCOMETAXES

Theincome tax provision (benefit) for consists of the following:
| ** **                            | ** ** | **2005**                                         | ** ** | **2004** | ** ** | **2003** | ** ** |
|---------------------------------------|------------|--------------------------------------------------|------------|----------|------------|----------|------------|
| ** **                            | ** ** | **(Dollar amounts in thousands)** | ** ** |
| Current:                              |       |                                             |       |     |       |     |       |
| Federal and international             |       | $                                                | (2,839     | )        | $          | (1,676   | )          | $ | 2,759 |   |
| State                                 |       | 139                                              |       | 155      |       | 163      |       |
|                                  |       | (2,700                                           | )          | (1,521   | )          | 2,922    |       |
| Deferred:                             |       |                                             |       |     |       |     |       |
| Federal and international             |       | 2,194                                            |       | (8,153   | )          | 1,573    |       |
| State                                 |       | 59                                               |       | (1,227   | )          | 385      |       |
|                                  |       | 2,253                                            |       | (9,380   | )          | 1,958    |       |
| Total income tax  provision (benefit) |       | $                                                | (447       | )        | $          | (10,901  | )          | $ | 4,880 |   |

 

43

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**QUIXOTE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**11.**   INCOME TAXES (Continued)

The components of the netdeferred tax asset (liability) are as follows:
| ** **                               | ** ** | **2005**                                     | ** ** | **2004** | ** ** |
|------------------------------------------|------------|----------------------------------------------|------------|----------|------------|
| ** **                               | ** ** | **(Dollar amounts  in thousands)** | ** ** |
| Deferred tax  assets:                    |       |                                         |       |     |       |
| Accounts receivable allowance            |       | $                                            | 262        |     | $          | 608 |   |
| Warranty reserve                         |       | 404                                          |       | 671      |       |
| Intangible assets                        |       | 2,433                                        |       | 1,589    |       |
| Goodwill                                 |       | 7,986                                        |       | 8,829    |       |
| Inventory valuation                      |       | 744                                          |       | 841      |       |
| Compensated absences and medical claims  |       | 449                                          |       | 473      |       |
| Tax over book basis in affiliates        |       | —                                       |       | 438      |       |
| Other liabilities and reserves           |       | 621                                          |       | 1,162    |       |
| Net operating loss and R&D credits   |       | 6,601                                        |       | 1,379    |       |
| Valuation allowance                      |       | (445                                         | )          | (884     | )          |
|                                     |       | 19,055                                       |       | 15,106   |       |
| Deferred tax liabilities:                |       |                                         |       |     |       |
| Book over tax basis of fixed assets      |       | (2,408                                       | )          | (1,099   | )          |
| Book over tax basis of intangible assets |       | (5,799                                       | )          | (5,226   | )          |
|                                     |       | (8,207                                       | )          | (6,325   | )          |
| Net deferred tax  asset                  |       | $                                            | 10,848     |     | $          | 8,781 |   |

 

The valuation allowance relates principally todeferred tax assets that the Company estimates may not be realizable, includingportions of tax over book basis in affiliates, and net operating and capitalloss carryforwards. Based on management’s assessment, it is more likely thannot that the net deferred tax assets will be realized through future taxableearnings or implementation of tax planning strategies.

At June 30,2005, certain subsidiaries of the Company have approximately $3,863,000 ofstate and $12,002,000 of federal net operating loss carryforwards for taxpurposes. Certain limitations on utilization of the net operating losscarryforwards are present and realization of a portion of the carryforwards isuncertain. These carryforwards expire in years from 2013 through 2025.

Thenet deferred tax asset  consists of thefollowing at June 30:
| ** **                     | ** ** | **2005**                                     | ** ** | **2004** | ** ** |
|--------------------------------|------------|----------------------------------------------|------------|----------|------------|
| ** **                     | ** ** | **(Dollar amounts in  thousands)** | ** ** |
| Current deferred  tax asset    |       | $                                            | 5,765      |     | $          | 2,682 |   |
| Noncurrent deferred  tax asset |       | 5,083                                        |       | 6,099    |       |
| Total net  deferred tax asset  |       | $                                            | 10,848     |     | $          | 8,781 |   |

 

44

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**QUIXOTE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**11.**   INCOME TAXES (Continued)

The income tax provision(benefit) differed from the taxes calculated at the statutory federal tax rateas follows:
| ** **                       | ** ** | **2005**                                         | ** ** | **2004** | ** ** | **2003** | ** ** |
|----------------------------------|------------|--------------------------------------------------|------------|----------|------------|----------|------------|
| ** **                       | ** ** | **(Dollar amounts in thousands)** | ** ** |
| Taxes at  statutory rate         |       | $                                                | (373       | )        | $          | (9,775   | )          | $ | 4,923 |   |
| State income  taxes              |       | 150                                              |       | (697     | )          | 493      |       |
| Research and  development credit |       | (410                                             | )          | (652     | )          | (139     | )          |
| Goodwill                         |       |                                             |       | 1,054    |       |     |       |
| Other                            |       | 186                                              |       | (831     | )          | (397     | )          |
| Income tax  provision (benefit)  |       | $(447                                            | )          | $        | (10,901    | )        | $          | 4,880 |   |
|                                  |            |                                                  |            |          |            |          |            |  |  |  |

 

During the third quarterof fiscal 2004, the Company recorded a $1,249,000 income tax benefit related tothe favorable settlement of a tax audit.

**12.**   ACCUMULATEDCOMPREHENSIVE INCOME (LOSS)

Accumulatedother comprehensive income (loss) consists of the following as of June 30:
| ** **                                          | ** ** | **2005**                                     | ** ** | **2004** | ** ** |
|-----------------------------------------------------|------------|----------------------------------------------|------------|----------|------------|
| ** **                                          | ** ** | **(Dollar amounts  in thousands)** | ** ** |
| Currency  translation adjustment:                   |       |                                         |       |     |       |
| Beginning balance                                   |       | $                                            | (46        | )        | $          | (44 | ) |
| Currency  translation adjustment                    |       | (27                                          | )          | (2       | )          |
| Liquidation of  foreign entity                      |       | 73                                           |       | —   |       |
| Ending balance                                      |       | —                                       |       | (46      | )          |
| Unrealized gain on derivative instrument (Note 2):  |       |                                         |       |     |       |
| Beginning balance                                   |       | 660                                          |       | —   |       |
| Change in  derivative instrument                    |       | (265                                         | )          | 660      |       |
| Amortization to  earnings                           |       | (50                                          | )          | —   |       |
| Ending balance                                      |       | 345                                          |       | 660      |       |
| Accumulated  comprehensive income—June 30 |       | $                                            | 345        |     | $          | 614 |   |

 

During fiscal 2005, thecompany liquidated a foreign entity and recorded $73,000 in currencytranslation expense. In addition, the company liquidated its derivativeinstrument, an interest rate swap arrangement during fiscal 2005 and received$394,000 in cash. The market value of the interest rate swap arrangement as ofthe date of liquidation included in accumulated other comprehensive income isbeing amortized over the remaining life of the originally forecastedtransaction.

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**QUIXOTE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**13.**   EARNINGS(LOSS) PER SHARE

Thecomputation of basic and diluted earnings (loss) per share is as follows:
| ** **                                              | ** ** | **2005**                                                                                | ** ** | **2004**  | ** ** | **2003**  | ** ** |
|---------------------------------------------------------|------------|-----------------------------------------------------------------------------------------|------------|-----------|------------|-----------|------------|
| ** **                                              | ** ** | **(Dollar amounts in thousands, except  per share data)** | ** ** |
| *Numerator:*                                            |       |                                                                                    |       |      |       |      |       |
| Net earnings  (loss) available to common shareholders   |       | $                                                                                       | (650       | )         | $          | (17,027   | )          | $ | 9,472 |   |
| *Denominator:*                                          |       |                                                                                    |       |      |       |      |       |
| Weighted average  shares outstanding—basic         |       | 8,800,421                                                                               |       | 8,567,741 |       | 7,847,169 |       |
| Effect of dilutive securities—common stock options |       | —                                                                                  |       | —    |       | 215,228   |       |
| Weighted average shares outstanding—diluted        |       | 8,800,421                                                                               |       | 8,567,741 |       | 8,062,397 |       |
| *Net earnings (loss) per share of common stock:*        |       |                                                                                    |       |      |       |      |       |
| Basic                                                   |       | $                                                                                       | (0.07      | )         | $          | (1.99     | )          | $ | 1.21 |   |
| Diluted                                                 |       | $                                                                                       | (0.07      | )         | $          | (1.99     | )          | $ | 1.17 |   |

 

Employee stock options totaling 146,620 shares for theyear ended June 30, 2005 and 239,350 shares for the year ended June 30,2004 were not included in the diluted weighted average shares calculationbecause the effects of these securities were antidilutive.

Therewere outstanding options to purchase common stock at prices that exceeded theaverage market price for the statement of operations period. These options havebeen excluded from the computation of diluted earnings (loss) per share and areas follows:
| ** **                        | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|-----------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Average exercise  price per share |       | $        | 24.66      |     | $          | 25.13    |       | $ | 23.78 |   |
| Number of shares                  |       | 304,300  |       | 268,100  |       | 246,000  |       |
|                                   |            |          |            |          |            |          |            |  |  |  |

 

As discussed in Note 7, ifthe Convertible Senior  SubordinatedNotes are fully converted at the conversion price of $25.09 per share, theNotes  would convert into approximately 1,544,000 shares of the Company’s commonstock.  The shares are not included inearnings per share as they are currently anti-dilutive until earnings per sharereach approximately $1.20 per share

**14.**   GUARANTEES,COMMITMENTS AND CONTINGENT LIABILITIES

Disclosures abouteach group of similar guarantees and commitments are provided below.

**LEASE COMMITMENTS  **TheCompany uses various leased facilities and equipment in its operations. Theterms for these leased assets vary depending on the lease agreements. Aggregaterental expense under operating leases, principally for office and manufacturingfacilities, was $3,748,000 in 2005, $4,239,000 in 2004 and $1,895,000 in 2003. Theseoperating leases include options for renewal. Annual minimum future rentals forlease commitments are approximately $3,754,000 in 2006, $3,285,000 in 2007, 

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**QUIXOTE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**14.**   GUARANTEES, COMMITMENTSAND CONTINGENT LIABILITIES (Continued)

$2,555,000 in 2008,$1,052,000 in 2009 and $681,000 in 2010, for an aggregate of $11,327,000 forthe five-year period. Minimum future rentals after 2010 total $3,854,000.

**PRODUCT WARRANTY LIABILITY  **TheCompany warrants to the original purchaser of its products that it will, at itsoption, repair or replace, without charge, such products if they fail due to amanufacturing defect. The term of these warranties varies (30 days to 5 years)by product. The Company accrues for product warranties when, based on availableinformation, it is probable that customers will make claims under warrantiesrelating to products that have been sold, and a reasonable estimate of thecosts can be made.

TheCompany’s estimated product warranty liability for the years ended June 30is as follows:
| ** **                    | ** ** | **2005**                                     | ** ** | **2004** | ** ** |
|-------------------------------|------------|----------------------------------------------|------------|----------|------------|
| ** **                    | ** ** | **(Dollar amounts  in thousands)** | ** ** |
| Beginning balance             |       | $                                            | 4,691      |     | $          | 1,986 |   |
| Current  provisions, net      |       | (702                                         | )          | 1,000    |       |
| Expenditures and  settlements |       | (1,523                                       | )          | (240     | )          |
| Acquisitions                  |       | —                                       |       | 2,144    |       |
| Adjustments                   |       | 44                                           |       | (199     | )          |
| Ending balance                |       | $                                            | 2,510      |     | $          | 4,691 |   |

 

**LEGAL  **The Company issubject to legal actions of a routine manner and common to its businesses. TheCompany records loss contingencies where appropriate within the guidelinesestablished by FASB Statement No. 5 “Accounting for Contingencies”. In theopinion of management, based on the advice of legal counsel, the amount ofliability, if any, arising from legal actions should not have a material effecton the Company’s results of operations,  financial condition, or cash flows.

**EXECUTIVE AGREEMENTS  **TheCompany has agreements with certain executives which are designed to retain theservices of key employees and to provide for continuity of management in theevent of an actual or threatened change in control of the Company. Uponoccurrence of a triggering event after a change in control, as defined, theCompany would be liable for payment of benefits under these agreements, to amaximum amount of $4,487,000.  TheCompany has by-laws and agreements under which it indemnifies its directors andofficers from liability for certain events or occurrences while the directorsor officers are, or were, serving at the Company’s request in such capacities.  The term of the indemnification period is forthe director’s or officer’s lifetime. The Company believes that any obligationsrelating to this indemnification are predominantly covered by insurance subjectto certain exclusions and deductibles. Historically, the Company has not madepayments under these executive agreements, and no amount has been accrued inthe accompanying consolidated financial statements.

**BUSINESS PURCHASE AGREEMENTS  **Aspart of the purchase price of UST, the Company agreed to pay the sellerscontingent consideration based on a percentage of revenues for sales of certainproducts between May 1, 2003 and December 31, 2009, up to a maximumof $5,250,000. No amounts have been paid for fiscal 2005, 2004 or fiscal 2003representing additional purchase price. The Company is leasing UST’s Sante FeSprings, California facility and its Tecate Mexico facility from affiliates ofthe sellers, for five year terms which can be renewed for five years. TheCompany has guaranteed its 

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**QUIXOTE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**14.**   GUARANTEES, COMMITMENTSAND CONTINGENT LIABILITIES (Continued)

performance of itsobligations under the leases. The lease commitments under the lease areincluded above.

**INDEMNIFICATION OF LENDERS AND AGENTS UNDER CREDITFACILITIES  **Under its credit facilities, the Company hasagreed to indemnify its lenders under such facilities against costs or lossesresulting from changes in laws and regulations which would increase the lenders’costs, and from any legal action brought against the lenders related to the useof loan proceeds. These indemnifications generally extend for the term of thecredit facilities and do not provide for any limit on the maximum potentialliability.  Historically, the Company hasnot made any significant indemnification payments under such agreements and noamount has been accrued in the accompanying consolidated financial statementswith respect to these indemnification guarantees.

**BID AND PERFORMANCE BONDS  **TheCompany has entered into bid and performance related bonds associated withvarious contracts. Potential payments due under these bonds are related to theCompany’s performance under the applicable contract. The total amount of bidand performance related bonds that were available and undrawn was $8,094,000 asof June 30, 2005. Historically, the Company has not made significantpayments on bid and performance bonds, and no amount has been accrued in theaccompanying consolidated financial statements.

**OTHER COMMITMENTS  **TheCompany has standby letters of credit covering potential workers’ compensationliabilities. The total standby exposure relating to letters of credit at June 30,2005 was $1,144,000. The Company has included $1,158,000 in accrued liabilitiesfor this exposure as of June 30, 2005.

The Company has certainnon-cancelable royalty agreements, which contain certain minimum payments inthe aggregate of $2,313,000 through fiscal year 2012. The Company has included$312,000 in accrued liabilities for this exposure as of June 30, 2005.

**15.**   SUPPLEMENTALCASH FLOW STATEMENT DISCLOSURES

Cash paid for interest was$ 2,395,000 in 2005, $2,049,000 in 2004 and $908,000 in 2003. Net cash receivedfrom income taxes was $2,075,000 in 2005 and cash paid for income taxes was$2,878,000 in 2004 and $2,691,000 in 2003. The Company declared dividends thatwere payable at year end of $1,595,000 in 2005, $1,486,000 in 2004 and$1,402,000 in 2003. In connection with the acquisition of Peek Traffic in December 2003,the purchase price for the net assets acquired included 180,723 shares of theCompany’s common stock, issued from Treasury Stock, valued at $4,430,000. Inconnection with the acquisition of UST in May 2003, the purchase price forthe net assets acquired included a $5,000,000 five-year, 5.25% subordinatedpromissory note and 558,534 shares of the Company’s common stock with a fairvalue of $10,567,000.

**16.**   INDUSTRYSEGMENT INFORMATION

The Company’s operations are comprised of twoprincipal reportable segments within the highway and transportation safetyindustry—the manufacture and sale of highway and transportation safety productswhich Protect and Direct, and the manufacture and sale of products which Informthat are often referred to as Intelligent Transportation Systems (ITS) products.The primary product lines within the 

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**QUIXOTE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**16.**   INDUSTRY SEGMENTINFORMATION (Continued)

Protect and Direct segmentinclude energy-absorbing products such as crash cushions, truck-mountedattenuators, sand-filled barrels and barriers as well as highway delineators. Theproducts within this segment absorb and dissipate the force of impact incollisions between vehicles and fixed roadside objects as well as products thatprevent collisions and help to control the flow of traffic by directing orguiding. The primary product lines within the Inform segment includeintelligent intersection control systems, automated enforcement systems, videodetection equipment, highway advisory radio systems, variable message signs,advanced sensing products which measure distance, count and classify vehicles,and sense weather conditions and other transportation equipment. The productswithin this segment provide information to prevent collisions from occurringand ease traffic congestion. The majority of the Company’s sales of its highwayand transportation safety products are to distributors and contractors who thenprovide product and services to federal, state and local governmental units. TheCompany’s business is conducted principally in the United States, its countryof domicile, with sales outside the United States as follows:  $19,111,000 in 2005, $14,249,000 in 2004 and$13,545,000 in 2003. Inter-company sales between segments represented less thanone percent of consolidated net sales in fiscal 2005, 2004 and 2003.

The Company’s reportable segments are based onsimilarities in products and represent the aggregation of operating units forwhich financial information is regularly evaluated in determining resourceallocation and assessing performance.  The Company evaluates the performance of itssegments and allocates resources to them based on operating income as well asother factors. Operating income is determined by deducting operating expensesfrom all revenues. In computing operating income, none of the following hasbeen added or deducted: unallocated corporate expenses, interest income orexpense, other income or loss or income tax provisions or benefits. Corporateassets consist primarily of cash and cash equivalents, depreciable assets andincome tax assets. Accounting policies for the segments are the same as thosefor the Company.

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**QUIXOTE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**16.**   INDUSTRYSEGMENT INFORMATION (Continued)

Thefollowing table presents financial information about reported segments as ofand for the years ended June 30, 2005, 2004 and 2003 comprising the totalsreported in the consolidated financial statements.
| ** **                                  | ** ** | **2005**                                         | ** ** | **2004** | ** ** | **2003** | ** ** |
|---------------------------------------------|------------|--------------------------------------------------|------------|----------|------------|----------|------------|
| ** **                                  | ** ** | **(Dollar amounts in thousands)** | ** ** |
| Revenues:                                   |       |                                             |       |     |       |     |       |
| Protect and Direct                          |       | $                                                | 73,575     |     | $          | 73,282   |       | $ | 77,243 |   |
| Inform                                      |       | 72,778                                           |       | 77,008   |       | 37,067   |       |
| Total                                       |       | $                                                | 146,353    |     | $          | 150,290  |       | $ | 114,310 |   |
| Depreciation and  amortization:             |       |                                             |       |     |       |     |       |
| Protect and Direct                          |       | $                                                | 2,737      |     | $          | 2,719    |       | $ | 2,684 |   |
| Inform                                      |       | 2,899                                            |       | 3,766    |       | 1,267    |       |
| Total segment depreciation and amortization |       | 5,636                                            |       | 6,485    |       | 3,951    |       |
| Unallocated corporate                       |       | 175                                              |       | 35       |       | 27       |       |
| Total                                       |       | $                                                | 5,811      |     | $          | 6,520    |       | $ | 3,978 |   |
| Operating profit  (loss):                   |       |                                             |       |     |       |     |       |
| Protect and Direct                          |       | $                                                | 14,859     |     | $          | 15,904   |       | $ | 18,846 |   |
| Inform                                      |       | (4,572                                           | )          | (33,613  | )(1)       | 3,151    |       |
| Total segment operating profit (loss)       |       | 10,287                                           |       | (17,709  | )          | 21,997   |       |
| Unallocated corporate                       |       | (8,120                                           | )          | (7,893   | )          | (6,843   | )          |
| Total                                       |       | $                                                | 2,167      |     | $          | (25,602  | )          | $ | 15,154 |   |
| Identifiable  assets:                       |       |                                             |       |     |       |     |       |
| Protect and Direct                          |       | $                                                | 52,204     |     | $          | 53,347   |       | $ | 53,780 |   |
| Inform                                      |       | 70,839                                           |       | 71,742   |       | 90,112   |       |
| Total segment identifiable assets           |       | 123,043                                          |       | 125,089  |       | 143,892  |       |
| Unallocated corporate                       |       | 13,747                                           |       | 14,793   |       | 6,933    |       |
| Total                                       |       | $                                                | 136,790    |     | $          | 139,882  |       | $ | 150,825 |   |
| Capital  expenditures:                      |       |                                             |       |     |       |     |       |
| Protect and Direct                          |       | $                                                | 1,593      |     | $          | 3,425    |       | $ | 1,748 |   |
| Inform                                      |       | 2,212                                            |       | 1,208    |       | 429      |       |
| Total segment capital expenditures          |       | 3,805                                            |       | 4,633    |       | 2,177    |       |
| Unallocated corporate                       |       |                                             |       | 5        |       | 80       |       |
| Total                                       |       | $                                                | 3,805      |     | $          | 4,638    |       | $ | 2,257 |   |

----

(1)          Includes$32,600 in non-cash asset impairment charges.

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**QUIXOTE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**17.**   QUARTERLYFINANCIAL DATA (UNAUDITED)

Summarizedunaudited quarterly financial data for years 2005 and 2004 follows:
|                                    | ** ** | **Three months ended**                                                        | ** ** |
|------------------------------------|------------|-----------------------------------------------------------------------------------------|------------|
| ** **                         | ** ** | **9/30**                                                                                | ** ** | **12/31** | ** ** | **3/31** | ** ** | **6/30** | ** ** |
| ** **                         | ** ** | **(Dollar amounts in thousands,  except per share data)** | ** ** |
| **FISCAL 2005**                    |       |                                                                                    |       |   |   |   |   |   |   |
| Net sales                          |       | $                                                                                       | 37,987     |   | $ | 33,447 |   | $ | 34,952 |   | $ | 39,967 |   |
| Gross profit                       |       | 11,272                                                                                  |       | 8,707 |   | 12,013 |   | 14,497 |   |
| Operating profit  (loss)           |       | 137                                                                                     |       | (873 | ) | (231 | ) | 3,134 |   |
| Net earnings (loss)                |       | (261                                                                                    | )          | (1,039 | ) | (741 | ) | 1,391 |   |
| Basic earnings  (loss) per share   |       | (.03                                                                                    | )          | (.12 | ) | (.08 | ) | .16 |   |
| Diluted earnings (loss) per  share |       | (.03                                                                                    | )          | (.12 | ) | (.08 | ) | .16 |   |
|                               |       | **9/30**                                                                                | ** ** | **12/31** | ** ** | **3/31** | ** ** | **6/30** |   |
| **FISCAL 2004**                    |       |                                                                                    |       |   |   |   |   |   |   |
| Net sales                          |       | $                                                                                       | 39,184     |   | $ | 35,494 |   | $ | 36,169 |   | $ | 39,443 |   |
| Gross profit                       |       | 12,776                                                                                  |       | 11,070 |   | 9,984 |   | 13,473 |   |
| Operating profit  (loss)           |       | 4,109                                                                                   |       | 1,227 |   | (459 | ) | (30,479 | )(3) |
| Net earnings (loss)                |       | 2,321                                                                                   |       | 466 |   | 446 | (1) | (20,260 | )(4) |
| Basic earnings  (loss) per share   |       | .28                                                                                     |       | .06 |   | .05 | (2) | (2.32 | )(5) |
| Diluted earnings (loss) per  share |       | .27                                                                                     |       | .05 |   | .05 | (2) | (2.32 | )(5) |

----

(1)          Includes an income taxbenefit of $1,249 related to the favorable settlement of a tax audit.

(2)          Includes an income taxbenefit of $0.14 related to the favorable settlement of a tax audit.

(3)          Includes non-cash assetimpairment charges of $32,600.

(4)          Includes non-cash assetimpairment charges of $21,266, net of income tax benefits.

(5)          Includes non-cash assetimpairment charges of $2.43 per diluted share.

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**Item9.**   Changes in and Disagreements withIndependent Registered Public Accounting Firm on Accounting and FinancialDisclosures

None.

**Item 9A.**   Controls andProcedures

(a)           Evaluation ofDisclosure Controls and Procedures

The Company maintains disclosure controls andprocedures that are designed to ensure that information required to bedisclosed in the Company’s reports under the Securities Exchange Act of 1934,as amended (the “Exchange Act”), is recorded, processed, summarized andreported within the time periods specified in the SEC’s rules and forms, andthat such information is accumulated and communicated to management, includingthe Company’s Chief Executive Officer and Chief Financial Officer, asappropriate, to allow timely decisions regarding required disclosures. The design of any system of disclosure controls and procedures is based in partupon certain assumptions about the likelihood of future events, and there canbe no assurance that any disclosure controls and procedures will succeed inachieving their stated goals under all potential future conditions.

The Company’s management, under the supervision of andwith the participation of the Company’s Chief Executive Officer and ChiefFinancial Officer, has evaluated the effectiveness of the Company’s disclosurecontrols and procedures, as such term is defined in Rules 13a-15(e) and15d-15(e) under the Exchange Act, as of the end of the period covered by thisreport.  Based on this evaluation, the Company’s Chief Executive Officerand Chief Financial Officer concluded that solely as a result of the materialweakness in the Company’s internal controls over certain information technologygeneral controls as described below, the Company’s disclosure controls andprocedures were not effective as of the end of the fiscal period covered bythis Annual Report on Form 10-K, June 30, 2005.  However, the Companyperformed analysis and other procedures to ensure that the Company’sconsolidated financial statements were prepared in accordance with accountingprinciples generally accepted in the United States.  Accordingly,management believes that (i) the financial statements filed fairly present inall material respects the Company’s financial condition, results of operationsand cash flow for the periods presented, and (ii) this report does not containany untrue statement of a material fact or omit or a material fact necessary tomake the statements, in light of the circumstances under which such statementswere made, not misleading with respect to the period covered by this report.

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

The Company’s management is responsible forestablishing and maintaining adequate internal control over financialreporting, as that term is defined in Exchange Act Rules 13a-15(f).The Company’s internal control system was designed to provide reasonableassurance to the Company’s management and Board of Directors regarding thereliability of financial reporting and the preparation of financial statementsfor external purposes in accordance with generally accepted accountingprinciples in the United States of America. The Company’s management, includingthe Chief Executive Officer and Chief Financial Officer, assessed theeffectiveness of the Company’s internal control over financial reporting as of June 30,2005, based on criteria established in *Internal Control—IntegratedFramework,* issued by the Committee of Sponsoring Organizations ofthe Treadway Commission (“COSO”).

Based on this assessment, management determined that amaterial weakness existed in the Company’s internal controls over certainInformation Technology General Controls (“ITCG”) as of June 30, 2005. Specifically,the Company did not have (i) monitoring of information technology managerswho have access to the application and underlying data, (ii) mechanisms totrack changes made to the application itself, and (iii) adequate securityadministration of users’ access to the application. These control deficienciesdid not result in any known financial statement misstatements. However, theaggregation of 

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these control deficienciesrepresent a material weakness in internal control over financial reporting onthe basis that there is more than a remote likelihood that a materialmisstatement of the Company’s annual or interim financial statements will notbe prevented or detected by its internal control over financial reporting. Accordingly,management concluded that, as of June 30, 2005, the Company’s internalcontrol over financial reporting was not effective based on the criteria setforth by COSO. Management is developing remediation plans to address theseknown deficiencies within a reasonable period of time.

Management’s assessment ofthe effectiveness of the Company’s internal control over financial reporting asof June 30, 2005 has been audited by Grant Thornton LLP, an independentregistered public accounting firm, as stated in their report which is includedherein.

*Limitation on theEffectiveness of Controls*

The Company’s management, including the ChiefExecutive Officer and Chief Financial Officer, does not expect that the Company’sdisclosure controls or the Company’s internal control over financial reportingwill prevent all errors and all fraud.

A company’s internal control over financial reportingis a process designed to provide reasonable assurance regarding the reliabilityof financial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles. A company’sinternal control over financial reporting includes those policies andprocedures that (i) pertain to the maintenance of records that, inreasonable detail, accurately and fairly reflect the transactions anddispositions of the assets of the company; (ii) provide reasonableassurance that transactions are recorded as necessary to permit preparation offinancial statements in accordance with generally accepted accountingprinciples, and that receipts and expenditures of the company are being madeonly in accordance with authorizations of management and directors of thecompany; and (iii) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal controlover financial reporting may not prevent or detect misstatements. Also,projections of any evaluation of effectiveness to future periods are subject tothe risk that controls may become inadequate because of changes in conditions,or that the degree of compliance with the policies or procedures maydeteriorate.

Further, the design ofdisclosure controls and procedures and internal control over financialreporting must reflect the fact that there are resource constraints, and thebenefits of controls must be considered relative to their costs. Because of theinherent limitations in all control systems, no evaluation of controls canprovide absolute assurance that all control issues and instances of fraud, ifany, within the Company have been detected.

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*Attestation of IndependentRegistered Public Accounting Firm*

**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM**

Board of Directors and ShareholdersQuixote Corporation

We have audited management’s assessment, included inthe accompanying *Management’s Report on Internal Control OverFinancial Reoporting*, that Quixote Corporation and subsidiaries didnot maintain effective internal control over financial reporting as of June 30,2005, because of the effect of the material weakness identified in management’sassessment, based on criteriaestablished in*Internal Control—IntegratedFramework*issued by the Committee of Sponsoring Organizations of theTreadway Commission (COSO). Quixote Corporation’s management isresponsible for maintaining effective internal control over financial reportingand for its assessment of the effectiveness of internal control over financialreporting. Our responsibility is to express an opinion on management’sassessment and an opinion on the effectiveness of the company’s internalcontrol over financial reporting based on our audit.

We conducted our audit in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether effective internal control over financial reporting wasmaintained in all material respects. Our audit included obtaining anunderstanding of internal control over financial reporting, evaluatingmanagement’s assessment, testing and evaluating the design and operatingeffectiveness of internal control, and performing such other procedures as weconsidered necessary in the circumstances. We believe that our audit provides areasonable basis for our opinions.

A company’s internal control over financial reportingis a process designed to provide reasonable assurance regarding the reliabilityof financial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles. A company’sinternal control over financial reporting includes those policies andprocedures that (1) pertain to the maintenance of records that, inreasonable detail, accurately and fairly reflect the transactions anddispositions of the assets of the company; (2) provide reasonableassurance that transactions are recorded as necessary to permit preparation offinancial statements in accordance with generally accepted accountingprinciples, and that receipts and expenditures of the company are being madeonly in accordance with authorizations of management and directors of thecompany; and (3) provide reasonable assurance regarding prevention or timelydetection of unauthorized acquisition, use, or disposition of the company’sassets that could have a material effect on the financial statements.

Because of its inherent limitations, internal controlover financial reporting may not prevent or detect misstatements. Also,projections of any evaluation of effectiveness to future periods are subject tothe risk that controls may become inadequate because of changes in conditions,or that the degree of compliance with the policies or procedures may deteriorate.

A material weakness is a control deficiency, orcombination of control deficiencies, that results in more than a remotelikelihood that a material misstatement of the annual or interim financialstatements will not be prevented or detected. The following material weaknesshas been identified and included in management’s assessment.

The Company’s controls over certain informationtechnology general controls related to the Company’s material financialapplications were not effective. The Company did not have (i) monitoringof information technology managers who have access to the application andunderlying data, (ii) mechanisms to track changes made to the applicationsitself, and (iii) adequate security administration of users’ access to theapplication.

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This material weakness was considered in determiningthe nature, timing, and extent of audit tests applied in our audit of the June 30,2005 financial statements, and this report does not affect our report dated September 12,2005 on those financial statements.

In our opinion, management’s assessment that QuixoteCorporation and subsidiaries did not maintain effective internal control overfinancial reporting as of June 30, 2005, is fairly stated, in all materialrespects, based on criteria establishedin*Internal Control—Integrated Framework*issuedby the Committee of Sponsoring Organizations of the Treadway Commission (COSO).Also in our opinion, because of the effect of the material weaknessdescribed above on the achievement of the objectives of the control criteria,Quixote Corporation has not maintained effective internal control overfinancial reporting as of June 30, 2005, based on criteria established in*InternalControl—Integrated Framework*issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO).

We have also audited, in accordance with the standardsof the Public Company Accounting Oversight Board (United States), theconsolidated balance sheet of Quixote Corporation and subsidiaries as of June 30,2005, and the related consolidated statements of operations, shareholders’equity, and cash flows for the year then ended and our report dated September 12,2005 expressed an unqualified opinion on those financial statements.

/s/ GRANT THORNTON LLP

Chicago, IllinoisSeptember 12, 2005

(c)           Changes in InternalControl Over Financial Reporting

There have not been any significant changes in theCompany’s internal control over financial reporting, as such term is defined inRules 13a-15(f) and 15d-15(f) under the Exchange Actduring the Company’s fiscal quarter ended June 30, 2005 that havematerially affected, or are reasonably likely to materially affect, the Company’sinternal control over financial reporting.

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**PART III**

**Item10.**   Directors and Executive Officers ofthe Registrant

Some of the information required in response to thisitem regarding Directors of the Registrant is set forth in the sections “Auditcommittee financial expert”, “Information concerning nominees for director anddirectors continuing in office” and “Compliance with Section 16 of theSecurities Exchange Act of 1934” of the Registrant’s Definitive Proxy Statementfor the Annual Meeting of Stockholders to be held on November 17, 2005 tobe filed with the Commission on or about October 6, 2005 and isincorporated herein by reference.

In addition, the Company’s Code of Ethics that appliesto the Registrant’s principal executive officer, principal financial officerand principal accounting officer or controller, is posted on the Registrant’swebsite at www.quixotecorp.com/investor/corpgovernance.asp.

Theexecutive officers of the Company, their ages and offices held by each duringfiscal 2005 are as follows:
| Leslie J. Jezuit |   | 59 |   | Chairman, Chief Executive  Officer & Director—Quixote Corporation        |
|------------------|--------|----|--------|----------------------------------------------------------------------------------------|
| Daniel P. Gorey  |   | 54 |   | Chief Financial  Officer, Vice President & Treasurer—Quixote Corporation |
| Joan R. Riley    |   | 52 |   | Vice President, General  Counsel & Secretary—Quixote Corporation         |

 

Mr. Jezuit joined the Company as President andChief Operating Officer of Quixote Corporation in 1996. Prior to that time, Mr. Jezuitserved as President and Chief Operating Officer of Robert Shaw ControlsCompany. In October, 1999 Mr. Jezuit assumed the position of ChiefExecutive Officer and in July 2001 was elected Chairman of the Board ofDirectors.

Mr. Gorey joined the Company as Manager ofCorporate Accounting in July 1985. He was made Controller of the Companyin 1987, elected Vice President in 1994, and was elected Chief FinancialOfficer and Treasurer in November 1996. In August 2001, Mr. Goreywas elected to the Board of Directors.

Ms. Riley joined the Company as Assistant GeneralCounsel and Assistant Secretary in 1991, was elected General Counsel andSecretary in 1997 and a Vice President in 1999.

There is no family relationship between any of theofficers described above.

None of the officersdescribed above are party or otherwise involved in any legal proceedingsadverse to the Company or its subsidiaries.

**Item 11.**   ExecutiveCompensation

The information requiredin response to this item is set forth under the caption “Remuneration ofDirectors and Executive Officers” of the Registrant’s Definitive ProxyStatement for the Annual Meeting of Stockholders to be held on November 17,2005 to be filed with the Commission on or about October 6, 2005 and isincorporated herein by reference.

**Item12.**   Security Ownership of CertainBeneficial Owners and Management

The information requiredin response to this item is set forth under the caption “Stock Ownership ofCertain Beneficial Owners” of the Registrant’s Definitive Proxy Statement forthe Annual Meeting of Stockholders to be held on November 17, 2005 to befiled with the Commission on or about October 6, 2005 and is incorporatedherein by reference.

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**Item13.**   Certain Relationships and RelatedTransactions

The information required in response to this item isset forth under the caption “Certain Transactions and Business Relationships”of the Registrant’s Definitive Proxy Statement for the Annual Meeting of Stockholdersto be held on November 17, 2005 to be filed with the Commission on orabout October 6, 2005 and is incorporated herein by reference.

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**PART IV**

**Item14.**   Principal Accountant Fees and Services

The information requiredin response to this item is set forth under the caption “Audit and Other FeesPaid to Grant Thornton LLP” of the Registrant’s Definitive Proxy Statement forthe Annual Meeting of Stockholders to be held on November 17, 2005 to befiled with the Commission on or about October 6, 2005 and is incorporatedherein by reference.

**Item15.**   Exhibits and Financial StatementSchedules
| Item  Number                                                                                                | ** ** | ** ** | ** ** | **Page Number in  This Report** |
|-------------------------------------------------------------------------------------------------------------|------------|------------|------------|--------------------------------------|
| (a).1.   *Financial  Statements*                                                                  |       |       |
| Reports of Independent Registered Public Accounting  Firm                                                   |       | 25-26      |
| Consolidated Statements of Operations for the years  ended June 30, 2005, 2004 and 2003                |       | 27         |
| Consolidated Balance Sheets as of June 30, 2005  and 2004                                              |       | 28         |
| Consolidated Statements of Shareholders’ Equity for  the years ended June 30, 2005, 2004 and 2003 |       | 29         |
| Consolidated Statements of Cash Flows for the years  ended June 30, 2005, 2004 and 2003                |       | 30         |
| Notes to Consolidated Financial Statements                                                                  |       | 31-51      |

 

(a).2.   Financial Statement Schedule

The financial statement schedule listed under Item 15(d) isfiled as part of this annual report. All other schedules have been omittedbecause the required information is included in the consolidated financialstatements or notes thereto or because they are not applicable or not required.

(b).     *Exhibits*
|   2.1                         |   | The Asset Purchase Agreement between Green Light  Acquisition Company, U.S. Traffic Corporation and Myers/Nuart Electrical  Products, Inc. dated as of May 16, 2003, filed as Exhibit 2.1  to the Company’s Form 8-K Current Report dated May 21, 2003  and filed on June 5, 2003, File No. 0-7903, and incorporated  herein by reference.                                                                                                                                                                                             |
|-----------------------------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   2.2                         |   | The Asset Purchase  Agreement dated December 10, 2003 between Vision Acquisition  Corporation, Peek Traffic, Inc. and Peek Traffic Systems, Inc.,  filed as Exhibit 2.1 to the Company’s Form 8-K Current Report  dated December 10, 2003 and filed on December 19, 2003, File  No. 0-7903, and incorporated herein by reference.                                                                                                                                                                                                 |
|   3. (a)                 |   | Restated Certificate of  Incorporation dated February 4, 1998 filed as Exhibit 3(a) to  the Company’s Form 10-Q Report for the quarter ended  December 31, 1997, File No. 0-7903, and incorporated herein  by reference; Certificate of Designation, Preferences and Rights of  Series B Junior Participating Preferred Stock dated July 24, 1998,  filed as Exhibit 1 to the Company’s Form 8-A Registration  Statement dated July 23, 1998, File No. 001-08123, and  incorporated herein by reference. |
|       (b) |   | Amended and Restated  By-Laws of the Company as amended through February 24, 2000, filed as  Exhibit 3(b) to the Company’s Form 10-Q Report for the  quarter ended March 31, 2000, File No. 0-7903, and  incorporated herein by reference.                                                                                                                                                                                                                                                                                                  |

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|   4. (a)                  |   | Rights Agreement dated  as of July 24, 1998, between the Company and BankBoston, N.A, as Rights  Agent, filed as Exhibit 1 to the Company’s Form 8-A  Registration Statement dated July 23, 1998, File No. 001-08123,  and incorporated herein by reference; Amendment to Rights Agreement dated as  of October 15, 2001, filed as Exhibit 4(a) to the Company’s  Form 10-Q for the quarter ended December 31, 2001, File  No. 0-7903, and incorporated herein by reference.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|------------------------------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   4. (b)                  |   | Indenture dated as of  February 9, 2005 between Quixote Corporation and LaSalle Bank National  Association, as Trustee, filed on February 10, 2005 as  Exhibit 4(a) to the Company’s Current Report on Form 8-K,  File No. 0-7903, dated February 9, 2005, and incorporated  herein by reference.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|   4. (c)                  |   | Form of 7%  Convertible Senior Subordinated Note Due 2025, filed on February 10,  2005 as Exhibit 4(b) to the Company’s Current Report on Form 8-K,  File No. 0-7903, dated February 9, 2005 and incorporated  herein by reference.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|   4. (d)                  |   | Registration Rights  Agreement dated as of February 9, 2005 by and among Quixote Corporation,  and the Buyers as defined therein, filed on February 10, 2005 as  Exhibit 4(c) to the Company’s Current Report on Form 8-K,  dated February 9, 2005, File No. 0-7903, and incorporated  herein by reference.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10 (a)                              |   | Amended and Restated  Credit Agreement dated as of April 20, 2005 among Quixote Corporation as  the borrower (the “Borrower”) and LaSalle Bank National Association as lender  (the “Lender”); Revolving Loan Note dated April 20, 2005 from Borrower  to the Lender; and the following additional auxiliary documents all dated as  of April 20, 2005: Reaffirmation and Amendment of California Deed of  Trust between Energy Absorption Systems, Inc. and Lender; Reaffirmation  and Amendment of Pennsylvania Mortgage between Nu-Metrics, Inc. and  Lender; Reaffirmation and Amendment of Alabama Mortgage between Energy  Absorption Systems (AL) LLC and Lender; Mortgage and Security Agreement  between Spin-Cast Plastics, Inc. and Lender; Reaffirmation and Amendment  of Security Agreement in favor of the Lender by certain identified  subsidiaries of the Borrower; Reaffirmation and Amendment of Trademark  Security Agreement in favor of Lender by Energy Absorption Systems, Inc.;  Reaffirmation and Amendment of Patent Security Agreement in favor of Lender  by Energy Absorption Systems, Inc.; and Reaffirmation and Amendment of  Subsidiary Stock Pledge Agreements in favor of Lender by the Company, Quixote  Transportation Safety, Inc., TranSafe Corporation and Energy Absorption  Systems, Inc. filed as Exhibit 10(a) to the Company’s  Form 10-Q for the quarter ended March 31, 2005, File  No. 0-7903, and incorporated herein by reference. |
|      (b) * |   | 1991 Director Stock  Option Plan, as amended through August 16, 2000, filed as  Exhibit 10(b) to the Company’s Form 10-K Report for the  fiscal year ended June 30, 2000, File No. 0-7903, and  incorporated herein by reference.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |

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|      (c) * |   | 1993 Long-Term Stock  Ownership Incentive Plan, as amended through August 16, 2000, filed as  Exhibit 10(c) to the Company’s Form 10-K Report for the  fiscal year ended June 30, 2000, File No. 0-7903, and  incorporated herein by reference; Retirement Award Agreement dated as of  June 30, 1997 between the Company and Daniel P. Gorey, filed as  Exhibit 10(d) to the Company’s Form 10-K Report for the  fiscal year ended June 30, 1997, File No. 0-7903, and  incorporated herein by reference; Retirement Award Agreement dated as of  February 19, 1998 between the Company and Leslie J. Jezuit filed as  Exhibit 10(a) to the Company’s Form 10-Q Report for the  quarter ended March 31, 1998 and incorporated herein by reference;  Retirement Award Agreement dated as of February 19, 1998 between the  Company and Joan R. Riley, filed as Exhibit 10(d) to the Company’s  Form 10-K Report for the fiscal year ended June 30, 1998,  File No. 0-7903, and incorporated herein by reference.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|------------------------------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|      (d) * |   | 2001 Employee Stock  Incentive Plan, as amended November 18, 2004 and filed as Exhibit F  to the Company’s DEF Schedule 14A Proxy Statement, File No. 001-08123,  filed on October 6, 2004 and incorporated herein by reference;  Form of Employee Stock Option Agreement and Form of Restricted  Stock Award Agreement, filed as Exhibits 99(d) and 99(e), respectively,  to the Company’s Form S-8, File No. 333-120852, filed  on November 30, 2004 and incorporated herein by reference.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|      (e) * |   | 2001 Non-Employee  Directors Stock Option Plan as amended November 18, 2004 and filed as  Exhibit G to the Company’s DEF Schedule 14A Proxy Statement, File  No. 001-08123, filed on October 6, 2004 and incorporated  herein by reference; Form of Director Non-Qualified Stock Option  Agreement filed on November 19, 2004 as Exhibit 10(c) to the  Company’s Current Report on Form 8-K, File No. 0-7903,  dated November 18, 2004, and incorporated herein by reference.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|      (f)   |   | Office Lease between the  Company and TDC Canada, Inc. and Wacker GP, Inc. (collectively  “Landlord”) dated August 30, 2003, filed as Exhibit 10(f) to  the Company’s Form 10-Q Report for the quarter ended  March 31, 2004, File No. 0-7903, and incorporated herein by  reference; First Amendment to Office Lease dated as of July 1, 2004  between the Company and Landlord, filed herewith; Office Lease between  Amberjack, Ltd. and Litigation Sciences, Inc. dated July 2, 1990,  filed as Exhibit 10(a) to the Company’s Form 10-Q Report  for the quarter ended December 31, 1993, File No. 0-7903 and  incorporated herein by reference; First Amendment to Office Lease between  Amberjack Ltd. and Stenograph Corporation dated as of June 23, 1994,  filed as Exhibit 10(h) to the Company’s Form 10-K Report  for the fiscal year ended June 30, 1994, File No. 0-7903, and  incorporated herein by reference; Lease Agreement between TBC Place Partners,  LLC and Highway Information Systems, Inc. dated August 9, 1999,  filed as Exhibit 10(d) to the Company’s Form 10-K Report  for the fiscal year ended June 30, 1999, File No. 0-7903, and  incorporated herein by reference; Office/Warehouse Lease dated August, 2002  between Teduke Investment Company c/o Bakewell Corporation and Surface  Systems, Inc., filed as Exhibit 10 (f) to the Company’s 10-K  Report for the fiscal year ended June 30, 2002, File No. 0-7903,  and incorporated herein by reference; Lease between Green Light Acquisition  Company and Cambridge Real Estate Corporation dated as of May 16, 2003,  filed as Exhibit 10.7 to the Company’s Form 8-K Current  Report dated May 21, 2003 and filed on June 5, 2003, File  No. 0-7903, and incorporated herein by reference; Lease Contract  between Quixote Safety Transportation Mexico S. de R. L. C. V. and  Intersection Development Corporation S. A. de C. V. dated as of May 16,  2003, filed as Exhibit 10.8 to the Company’s Form 8-K Current  Report dated May 21, 2003 and filed on June 5, 2003, File  No. 0-7903, and incorporated herein by reference. |

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|      (g) * |   | Letter Agreement dated  December 15, 1995 between the Company and Leslie J. Jezuit, filed as  Exhibit 10(d) to the Company’s Form 10-Q Report for the  quarter ended December 31, 1995, File No. 0-7903, and  incorporated herein by reference; Change of Control Agreements dated  December 1,1997 by and between the Company and each of Leslie J. Jezuit  and Daniel P. Gorey, filed as Exhibit 10(f) to the Company’s  Form 10-Q Report for the quarter ended December 31, 1997,  File No. 0-7903, and incorporated herein by reference; Change of  Control Agreement dated December 1, 1997 between the Company and Joan R.  Riley, filed as Exhibit 10(f) to the Company’s 10-K Report  for the fiscal year ended June 30, 1998, File No. 0-7903, and  incorporated herein by reference. |
|------------------------------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|      (h)        |   | Asset Purchase Agreement  made October 10, 1997, and effective October 1, 1997, by and  between Quixote Corporation, TranSafe Corporation, Roadway Safety  Service, Inc., Momentum Management, Inc., and Fitch Barrier  Corporation; Exclusive License Agreement made October 10, 1997, and  effective October 1, 1997, by and between Robert A. Mileti, Roadway  Safety Systems, Inc., Quixote Corporation and TranSafe Corporation;  Consulting Agreement made October 10, 1997, and effective  October 1, 1997, by and between TranSafe Corporation and E. Scott  Walter, all filed as Exhibits 2.1, 2.2, and 2.3 to the Company’s Form 8-K  Report dated October 10, 1997, File No. 0-7903, and  incorporated herein by reference.                                                                                            |
|      (i)        |   | Subordinated Promissory  Note of Green Light Acquisition Company dated as of May 16, 2003, filed  as Exhibit 10.2 to the Company’s Form 8-K Current Report  dated May 21, 2003 and filed on June 5, 2003, File No. 0-7903,  and incorporated herein by reference.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|      (j)        |   | Guaranties of Raymond  International W.L.L., Raymond Overseas Holding Limited and Basil K. Vasiliou  dated as of May 16, 2003, filed as Exhibit 10.3 to the Company’s  Form 8-K Current Report dated May 21, 2003 and filed on  June 5, 2003, File No. 0-7903, and incorporated herein by  reference.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|      (k)        |   | Guaranties of Quixote  Corporation to U.S. Traffic Corporation, Myers/Nuart Electrical  Products, Inc., Cambridge Leasing Corporation and Intersection  Development Corporation S. A. de C. V. dated as of May 16, 2003, filed  as Exhibit 10.4 to the Company’s Form 8-K Current Report  dated May 21, 2003 and filed on June 5, 2003, File No. 0-7903,  and incorporated herein by reference.                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|      (l)        |   | The Myers Pedestal  Transition Agreement between Green Light Acquisition Company and U.S. Traffic  Corporation and Myers/Nuart Electrical Products, Inc. dated as of  May 16, 2003, filed as Exhibit 10.9 to the Company’s Form 8-K  Current Report dated May 21, 2003 and filed on June 5, 2003, File  No. 0-7903, and incorporated herein by reference.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|      (m)        |   | Stockholders Covenant  Not to Compete and Other Post-Asset Sale Obligations between Green Light  Acquisition Company and Raymond International W.L.L., Raymond Overseas  Holding Limited and Basil K. Vasiliou dated as of May 16, 2003, filed as  Exhibit 10.10 to the Company’s Form 8-K Current Report dated  May 21, 2003 and filed on June 5, 2003, File No. 0-7903,  and incorporated herein by reference.                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|      (n)        |   | The OEM Supply Agreement  between Green Light Acquisition Company and Myers Power Products, Inc.  dated as of May 16, 2003, filed as Exhibit 10.11 to the Company’s  Form 8-K Current Report dated May 21, 2003 and filed on  June 5, 2003, File No. 0-7903, and incorporated herein by  reference.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |

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|      (o) |   | Guaranty of Quixote  Corporation dated December 10, 2003 to Peek Traffic, Inc. and Peek  Systems, Inc. filed as Exhibit 10.1 to the Company’s Form 8-K  Current Report dated December 11, 2003 and filed on December 19,  2003, File No. 0-7903, and incorporated herein by reference.                                                                                                    |
|-----------------------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|      (p) |   | Standstill Agreement  dated December 10, 2003 between Quixote Corporation and Peek Corporation  filed as Exhibit 10.2 to the Company’s Form 8-K Current  Report dated December 11, 2003 and filed on December 19, 2003, File  No. 0-7903, and incorporated herein by reference.                                                                                                                     |
|      (q) |   | Escrowed Shares  Registration Rights Agreement dated December 10, 2003 between Quixote  Corporation and Peek Corporation filed as Exhibit 10.3 to the Company’s  Form 8-K Current Report dated December 11, 2003 and filed on  December 19, 2003, File No. 0-7903, and incorporated herein  by reference.                                                                                           |
|      (r) |   | Non-Competition  Agreement dated December 10, 2003 between Vision Acquisition  Corporation, Peek Holding Corporation, Peek Corporation, Peek  Traffic, Inc., and Peek Traffic Systems, Inc. filed as Exhibit 10.5  to the Company’s Form 8-K Current Report dated December 11,  2003 and filed on December 19, 2003, File No. 0-7903, and  incorporated herein by reference.              |
|      (s) |   | Perpetual License  Agreement dated December 10, 2003 between Peek Traffic, Inc., Peek  Traffic Systems, Inc. and Vision Acquisition Corporation filed as  Exhibit 10.6 to the Company’s Form 8-K Current Report dated  December 11, 2003 and filed on December 19, 2003, File No. 0-7903,  and incorporated herein by reference.                                                          |
|      (t) |   | Escrow Agreement dated  December 10, 2003 between Vision Acquisition Corporation, Peek  Corporation, Peek Traffic, Inc., Peek Traffic Systems, Inc., BNP  Paribas, and LaSalle Bank National Association filed as Exhibit 10.7 to  the Company’s Form 8-K Current Report dated December 11, 2003  and filed on December 19, 2003, File No. 0-7903, and  incorporated herein by reference. |
| 21.                               |   | Subsidiaries of the  Company                                                                                                                                                                                                                                                                                                                                                                                                           |
| 23.                               |   | Consent of Grant  Thornton LLP as an Independent Registered Public Accounting Firm                                                                                                                                                                                                                                                                                                                                                     |
| 23.1                              |   | Consent of PricewaterhouseCoopers  LLP as an Independent Registered Public Accounting Firm                                                                                                                                                                                                                                                                                                                                             |
| 31.                               |   | Certifications of the  Chief Executive Officer and Chief Financial Officer under Section 302 of  the Sarbanes-Oxley Act of 2002, filed herewith.                                                                                                                                                                                                                                                                                  |
| 32.                               |   | Certifications of the  Chief Executive Officer and Chief Financial Officer under Section 906 of  the Sarbanes-Oxley Act of 2002, filed herewith.                                                                                                                                                                                                                                                                                  |

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*                    Managementcontract or compensatory plan or agreement

*Schedules:*

II—Valuation andQualifying Accounts and Reserves

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**SIGNATURES**

Pursuantto the requirement of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunder duly authorized.
|                                | QUIXOTE CORPORATION |
|--------------------------------|---------------------|
|                           | (Registrant)        |
|                           | By:                 | /s/ LESLIE J.  JEZUIT |
| Dated: September 12, 2005 |                | Leslie J. Jezuit,*Chief Executive Officer* |

 

Pursuantto the requirements of the Securities Exchange Act of 1934, this report hasbeen signed below by the following persons on behalf of the registrant and inthe capacities and on the dates indicated.
|                                     | **SIGNATURE** | ** **                                | ** ** |                          | **TITLE** | ** ** | ** ** |  | **DATE** | ** ** |
|-------------------------------------|---------------|-------------------------------------------|------------|--------------------------|-----------|------------|------------|--|----------|------------|
| /s/  LESLIE J. JEZUIT               |          | Chairman and Director                     |       | September 12,  2005 |
| Leslie J. Jezuit                    |          | (President, Chief  Executive Officer)     |       |                     |
| /s/  DANIEL P. GOREY                |          | Vice President, Chief  Financial Officer, |       | September 12,  2005 |
| Daniel P. Gorey                     |          | Treasurer and Director                    |       |                     |
| /s/  JOAN R. RILEY                  |          | Vice President, General  Counsel          |       | September 12,  2005 |
| Joan R. Riley                       |          | and Secretary                             |       |                     |
| /s/  JAMES H. DEVRIES               |          | Director                                  |       | September 12,  2005 |
| James H. DeVries                    |          |                                      |       |                     |
| /s/ WILLIAM G.  FOWLER              |          | Director                                  |       | September 12,  2005 |
| William G. Fowler                   |          |                                      |       |                     |
| /s/  LAWRENCE C. MCQUADE            |          | Director                                  |       | September 12,  2005 |
| Lawrence C.  McQuade                |          |                                      |       |                     |
| /s/  DUANE M. TYLER                 |          | Director                                  |       | September 12,  2005 |
| Duane M. Tyler                      |          |                                      |       |                     |
| /s/  ROBERT D. VAN ROIJEN, JR. |          | Director                                  |       | September 12,  2005 |
| Robert D. van  Roijen, Jr.     |          |                                      |       |                     |

 

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**QUIXOTECORPORATION & SUBSIDIARIESSCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS AND RESERVESFor the years ended June 30, 2005, 2004 and 2003**
| **Column A**                                | ** ** | **Column B**                              | ** ** | **Column C(a)**                                     | ** ** | **Column D(a)** | ** ** | **Column E**                        | ** ** |
|--------------------------------------------------|------------|------------------------------------------------|------------|----------------------------------------------------------|------------|----------------------|------------|------------------------------------------|------------|
| **Description**                                  | ** ** | **Balance at  Beginning of  Period** | ** ** | **Additions  Charged to  Costs and  Expenses** | ** ** | **Deductions**       | ** ** | **Balance at  End of  Period** | ** ** |
| Reserve for Doubtful  Accounts and Credit Memos: |       |                                           |       |                                                     |       |                 |       |                                     |       |   |   |   |   |
| Year ended  June 30, 2005                   |       | $                                              | 1,872,000  |                                                     |       | $                    | 647,000    |                                     |       |   | $ | (938,000 | ) |   | $ | 1,581,000 |   |
| Year ended  June 30, 2004                   |       | $                                              | 1,267,000  |                                                     |       | $                    | 686,000    |                                     |       |   | $ | (81,000 | ) |   | $ | 1,872,000 |   |
| Year ended  June 30, 2003                   |       | $                                              | 1,546,000  |                                                     |       | $                    | 276,000    |                                     |       |   | $ | (555,000 | ) |   | $ | 1,267,000 |   |

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NOTE:

(a)           Column D representsaccounts written off as uncollectible, net of collections on accountspreviously written off.

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**EXHIBIT INDEX**
| EXHIBIT  NUMBER      | ** ** | **EXHIBITS**                                                                                                           |
|----------------------|------------|------------------------------------------------------------------------------------------------------------------------|
| 21    |       | Subsidiaries of  the Company                                                                                           |
| 23    |       | Consent of  Independent Registered Public Accounting Firm                                                              |
| 23.1                 |       | Consent of  Independent Registered Public Accounting Firm                                                              |
| 31    |       | Certifications  Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002  (Rule 13a-14(a) / 15d-14(a)) |
| 32    |       | Certifications  Pursuant to 18 U.S.C. Section 1350                                                                |

 

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