**UNITED STATESSECURITIES AND EXCHANGE COMMISSION****Washington, D.C.20549**

----

**FORM 10-K**

| (Mark One) |
|------------|
| x          | **ANNUAL REPORT PURSUANT TO  SECTION 13 OR 15(d)** |
|       | **For the  fiscal year ended June 30, 2006** |
|       | **OR** |
| o          | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d)** |
|       | **OF THE SECURITIES EXCHANGE ACT OF 1934** |
|       | **For the  transition period                   to** |
|       | **Commission file number  001-08123** |

**QUIXOTECORPORATION**(Exact name ofregistrant as 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  telephone number including area code:   **(312) 467-6755** |
| Securities  Registered Pursuant to Section 12(b) of the Act:                  |
| **Common Stock ($.01-2/3 Par Value)**                                              |   | **The NASDAQ Stock Market LLC**         |
| (Title of Class)                                                                        |   | (Name of Exchange  on Which Registered) |

 

Indicate by check mark ifthe registrant is a well-known seasoned issuer, as defined in Rule 405 ofthe Act.  Yes o   No x

Indicate by check mark ifthe registrant is not required to file reports pursuant to Section 13 or Section 15(d) ofthe Act. Yes o   No x

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days. 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 x.

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

Largeaccelerated filer    o                  Acceleratedfiler x                     Non-acceleratedfiler    o      

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act).  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.   $165,491,509 as of December 31, 2005

Indicatethe number of shares outstanding of each of the issuer’s classes of commonstock, as of the latest practicable date:

8,902,670 shares of theCompany’s Common Stock ($.01-2/3 par value) were outstanding as of September 6,2006.

**DOCUMENTSINCORPORATED BY REFERENCE**

The Registrant’s Definitive Proxy Statement forthe Annual Meeting of Stockholders to be held on November 16, 2006 whichwill be filed with the Commission on or about September 29, 2006 isincorporated by reference at Part III.

 

 

----

**TABLE OF CONTENTS**

|                   | ** ** | ** **                                                                                                               | ** ** | **PAGE** |
|-------------------|------------|--------------------------------------------------------------------------------------------------------------------------|------------|----------|
| **PART I**   |       |                                                                                                                     |       |     |
| Item  1.          |       | Business                                                                                                                 |       | 4-9      |
| Item  1A.         |       | Risk Factors.                                                                                                            |       | 9-14     |
| Item 1B.          |       | Unresolved Staff  Comments                                                                                               |       | 14       |
| Item  2.          |       | Properties                                                                                                               |       | 15-16    |
| Item 3.           |       | Legal Proceedings                                                                                                        |       | 15       |
| Item 4.           |       | Submission of  Matters to a Vote of Security Holders                                                                     |       | 16       |
| **PART II**  |       |                                                                                                                     |       |     |
| Item 5.           |       | Market for the  Registrant’s Common Equity, Related Stockholder Matters and  Issuer Purchase of Equity Securities   |       | 17       |
| Item 6.           |       | Selected Financial  Data                                                                                                 |       | 18       |
| Item 7.           |       | Management’s  Discussion and Analysis of Financial Condition and  Results of Operations                             |       | 19-31    |
| Item 7A.          |       | Quantitative  and Qualitative Disclosures about Market Risk                                                              |       | 31       |
|              |       |                                                                                                                     |       |     |
| Item 8.           |       | Financial  Statements and Supplementary Data                                                                             |       | 32-61    |
| Item 9.           |       | Changes in and  Disagreements with Independent Registered Public  Accounting Firm on Accounting and Financial Disclosure |       | 62       |
| Item 9A.          |       | Controls and  Procedures                                                                                                 |       | 62-65    |
| **PART III** |       |                                                                                                                     |       |     |
| Item 10.          |       | Directors and  Executive Officers of the Registrant                                                                      |       | 66       |
| Item 11.          |       | Executive  Compensation                                                                                                  |       | 66       |
| Item 12.          |       | Security  Ownership of Certain Beneficial Owners and Management                                                          |       | 66       |
| Item 13.          |       | Certain  Relationships and Related Transactions                                                                          |       | 67       |
| **PART IV**  |       |                                                                                                                     |       |     |
| Item 14.          |       | Principal  Accountant Fees and Services                                                                                  |       | 67       |
| Item 15.          |       | Exhibits and  Financial Statement Schedule                                                                               |       | 67-71    |
| **SIGNATURES**    |       | 72                                                                                                                       |

 

2

----

**PART ITHE COMPANY**

*Forward Looking Statements*

Various statements madewithin this report constitute “forward-looking statements” for purposes of theSEC’s “safe harbor” provisions under the Private Securities Litigation ReformAct of 1995 and Rule 3b-6 under the Securities Exchange Act of 1934,as amended. Except for historical information, any statement that addressesexpectations or projections about the future, including statements about ourstrategy for growth, product development, market position, expenditures,financial results or changes in governmental legislation, policies andconditions, is a forward-looking statement. Readers are cautioned not to placeundue reliance on these forward-looking statements. All forward-lookingstatements involve risks and uncertainties, including those detailed in ourpublic filings with the SEC, news releases and other communications, whichspeak only as of the dates of those filings or communications. We do notundertake any obligation to release publicly any revisions to theseforward-looking statements to reflect events or circumstances after the datehereof or to reflect the occurrence of unanticipated events. There can be noassurance that actual results will not differ materially from our expectations.

*Overview of the Company and Its Financial Condition*

Quixote Corporation wasoriginally incorporated under the laws of the State of Delaware in 1969 asEnergy Absorption Systems, Inc. In June 1980, Energy AbsorptionSystems, Inc. changed its name to Quixote Corporation. When we use theterms “Quixote Corporation”, “the Company”, “we”, “our” or “us” in this report,we refer to Quixote Corporation and its subsidiaries, unless otherwise providedby the context in which the term is used.

We develop, manufactureand sell highway and transportation safety products to domestic andinternational markets. During the third quarter of fiscal 2006, we expanded thenumber of reportable segments from two to three segments. Our three reportablesegments are: highway and transportation safety products that “Protect andDirect” by minimizing the severity of crashes or by directing or guidingtraffic to avoid crashes; highway and transportation safety products that “Inform”motorists, state and local highway personnel about dangerous or congestedconditions or provide other useful information; and “Intersection Control”products which provide solutions for controlling intersections. Our productsare sold primarily by a distribution network, as well as a direct sales force,to customers in the highway construction and safety business, state andmunicipal departments of transportation and other governmental transportationagencies.

Our business is directlyaffected by federal, state and municipal government funding for transportationsafety, highway construction and maintenance, and other infrastructure projects.A significant part of our sales are ultimately financed by funds provided tothe states by the federal government through the federal transportation fundingbill. The last six-year federal bill expired on September 30, 2003 and wasextended eleven times over almost two years. The current bill, SAFETEA-LU,was enacted  in August 2005. Untilthe new legislation was enacted, the transportation safety allotment in federaland state budgets was uncertain. We believe that the prolonged uncertaintynegatively impacted the sales of our products and services in fiscal years2004, 2005 and the early part of 2006 and, as a result, adversely affected ourfinancial performance in those fiscal years. We believe that the passage ofSAFETEA-LU improved that situation. We believe we began to realize thebenefit of the bill’s passage in the second half of fiscal 2006 with growth insales across all our segments.

In addition, many statessuffered from budget constraints in fiscal years 2004 and 2005, given bothnational and local economies. Such budget constraints adversely affected theability of the states to fund highway and infrastructure projects, andtherefore reduced the demand for our products. Municipalities 

3

----

alsosuffered from budget restraints that reduced transportation safety spending. Dueto the improvement in general economic conditions, we believe that state andmunicipal budgetary conditions improved during fiscal 2006 and positivelyimpacted our sales growth.

Sales and operatingresults were below historic levels and expectations in fiscal years 2004 and2005. However, operating results for our Intersection Control segment weresubstantially less than expected. In fiscal year 2006, significant operatinglosses at our Intersection Control segment continued. In April 2006, weapproved a plan to restructure that business. The Plan reduces costs throughheadcount and facility reductions, as well as through the discontinuation ofnon-core and low margin product lines. The Plan also outsources non-coremanufacturing activities. As part of the restructuring plan, we sold theportable variable message sign, illuminated street lighting and tunnel lightingproduct lines in June 2006. We are in the process of moving production ofthe remaining intersection control products to our Palmetto, Florida andBedford, Pennsylvania facilities. We plan to cease production and close thefacilities in Santa Fe Springs, California and Tecate, Mexico by the end of September 2006.We expect the restructuring plan will result in profitability for theIntersection Control segment beginning in third quarter of fiscal 2007 withannualized cost savings of approximately $5 to $6 million. However, there canbe no assurance that we will achieve that level of cost savings.

**Item 1.**              Business

Quixote Corporation,through its subsidiaries, develops, manufactures and markets highway andtransportation safety products to protect, direct and inform motorists andhighway workers in both domestic and international markets. These productsinclude energy-absorbing highway crash cushions, flexible post delineators,electronic wireless measuring and sensing devices, weather information systems,highway advisory radios, intelligent intersection control devices, videodetection equipment and other highway and transportation safety devices.

As of June 30, 2006,we employed approximately 1,000 people.

*Description of Business*

Ouroperations are comprised of three 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.

·       TheIntersection Control segment provides solutions for controlling intersections.

Our products are soldworld-wide primarily by a distribution network, as well as a direct salesforce, to customers in the highway construction and safety business, state andmunicipal departments of transportation and other governmental transportationagencies.

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

*Protect and Direct Segment*

Our Protect and Directcategory of products, which reduce the severity of crashes, include ourpatented highway crash cushions which were first conceived and developed in1969. These products were 

4

----

developedand sold in response to the high number of fatalities and serious injuriessuffered by occupants of errant vehicles in collisions with roadside hazards,such as bridge abutments, overpass piers, overhead sign supports, lanedividers, traffic islands and toll booths. Since 1969, various types of highwaycrash cushions have been installed in front of thousands of life-threateningroadside hazards. The Federal Highway Administration (FHWA) endorses theinstallation of highway crash cushions as an effective safety program and theyare mandatory on interstate roads in the U.S.

We develop, manufactureand market lines of patented highway crash cushion systems, truck-mountedattenuators (TMA’s) and other barriers which absorb and dissipate the force ofimpact in collisions between vehicles and fixed roadside objects or slow movinghighway construction vehicles. The product lines utilize the principles ofmomentum transfer and kinetic energy to safely decelerate errant vehicles. Energyabsorption or energy dissipation is accomplished by using differentcombinations of water, aluminum, steel, urethane foam systems, cardboard,plastic structures, elastometric cylinders and sand.

We also manufacture andsell products that prevent crashes and help control the flow of traffic bydirecting or guiding. These products consist of a line of flexible sign andguide post systems (delineators) and a glare screen system. The guide posts areused to delineate a travel way, channel vehicles or mark the location of anobject. The post features an 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 FreezeFree® anti-icingsystem which automatically or manually dispenses deicing liquids in advance ofice formation on bridges, roads and overpasses.

*Inform Segment*

To expand our businesswithin the highway and transportation safety industry, in 1998 we beganacquiring companies that manufacture Intelligent Transportation System (ITS)products which provide information to improve traffic flow and safety. Productssold by the Inform segment include weather and traffic sensing products andhighway advisory radio products.

We manufacture and sellportable or permanent sensors that record traffic volume, speed, and lengthclassification of vehicles. These sensors also collect, analyze and storetraffic, road surface conditions and freezing point data which can be relayedon a real-time basis to a transportation department’s base computer or controlcenter via telephone, cellular link, fiber optic connection or a wireless link.We also manufacture and market road/runway weather information systems. Using atower equipped with weather instruments and special detectors, these systemscan detect freezing conditions and provide valuable weather information totransportation departments or airports in order to dispatch salt trucks orautomatically activate anti-icing systems.

We are a leadingmanufacturer of highway advisory radio (HAR) systems that broadcast trafficinformation using an AM radio frequency with reception up to six miles from theunit. HAR systems, in connection with flashing lights and message signs, advisedrivers to tune into a particular AM station to hear messages about traffic,road conditions and weather. These HAR systems can be permanent or mobile. OurIntellizone® system is designed to provide real-time information to motoristsby integrating traffic and/or weather sensors, variable message signs andcomputer controlled software.

5

----

*Intersection Control Segment*

To further expand ourbusiness within the highway and transportation safety industry, in 2003 webegan acquiring companies that manufacture Intelligent Transportation System(ITS) products which control intersections. We began to integrate andrationalize this segment in fiscal 2005. After the restructuring of the productlines within this segment, its products will include traffic controllers,traffic and pedestrian signals, traffic uninterruptible power supply (UPS)systems, video detection equipment and parking detection devices. 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. Traffic and pedestriansignals are LED or incandescent signals for intersection operations andpedestrian crossings which may include a numerical countdown warning before asignal changes. UPS systems are power supply systems with battery backup thatkeeps a lighted intersection operating either normally or in flash-mode duringa power interruption. Video detection systems are based on one or more camerasthat allow traffic authorities to monitor or manage traffic flow from a remotelocation. A toll road monitoring system is a data collection system able tocount axles of vehicles in order for the proper authorities to ensure theproper toll amount is collected.

Across all segments, wemay also provide product education, selection and application assistance. Inlimited cases, we perform site preparation and installation services for ourproducts.

*Marketing  andCompetition*

Our products are sold inall 50 U.S. states and internationally. Domestically, we sell either through adistribution network or through a direct sales force. Regional managerssupervise domestic****distributorsand make direct sales in areas not covered by distributors. We sell ourproducts principally to distributors, contractors (on behalf of state and localgovernments), 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 usually not adirect purchaser of our domestic products. For certain products, we sellthrough catalogs and inside sales personnel.

Many foreign governmentsare beginning to recognize the need for our products as a method of reducingtraffic congestion and fatalities. Our products are sold outside of the U.Sthrough a network of distributors who make sales to municipal and nationalgovernments and contractors who are responding to bids from their respectivegovernments.

We experience competitionin many of our product lines. We believe that we are a leading U.S.manufacturer of transportation safety products. Within the Protect and Directsegment, we believe that no other company presently markets as broad a line ofhighway crash cushion systems designed to shield as large a variety of fixedroadside hazards as we do. However, many of our competitors offer similarproducts to those supplied by us, and a few are better capitalized than we are.We experience competition particularly in the sand barrel, QuadGuard® crashcushion, REACT 350® crash cushion and TMA product lines. We compete in the U.S.market for crash cushions, TMA’s and sand barrels with Trinity Industries, Inc.,(NYSE: TRN), TrafFix Devices, Inc., Barrier Systems, Inc. (asubsidiary of Lindsay Manufacturing Company) and other smaller regionalcompanies. A number of other companies manufacture flexible sign and guide postsystems.  Within the Inform andIntersection Control segments, we experience rigorous competition in sellingcertain product lines because they are generally sold through a bidding process.These product lines include our road weather information systems (RWIS) withinthe Inform segment and traffic controllers and pedestrian signals within theIntersection Control segment. There are a few companies that compete with us inselling HAR systems within the Inform segment. In addition, we compete withmany different companies that sell sensors using different technologies, 

6

----

includingmicrowave and infra-red sensors and machine-vision (video), and each technologyoffers 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 Policies and Funding*

The domestic market forhighway and transportation safety products is directly affected by federal,state and local governmental policies. Federal transportation spending isfunded through a trust based on the sale of gasoline. Funds are allocated andhighway policy is developed through a six-year federal highway bill. A portionof our sales is ultimately financed by funds provided to the states by thefederal government.  Historically, thesefunds have covered 75% to 90% of the cost of highway safety projects on roadsconstructed or maintained with federal assistance. The last six-year federalhighway bill expired on September 30, 2003. The current bill, SAFETEA-LU,was enacted in August 2005. SAFETEA-LU, or the “Safe, Accountable, Flexible andEfficient Transportation Equity Act-A Legacy for Users” will provide $286.4 billion in guaranteedfunding for the federal highway, transit and safety programs through 2009. Importantly,unlike historical funding bills, it focuses on improving safety and relievingcongestion as a priority, as well as on new highway construction andresurfacing projects.  Several sectionsof SAFETEA-LU can provideincreased funding and focus on products and systems within our Inform segment. Whilethe current bill does not include projects that specifically indicate ourproducts by name and there can be no guarantee of increased sales, we expectthe market potential for applications of our sensors, counters, audio andvisual output displays and adaptive control and monitored intersections toincrease due to this legislation. However, any change in theavailability of federal funds and the timing of the release of those funds tothe state and local governments can have an adverse impact on our financialresults.

Many of our products areapproved as acceptable highway hardware according to procedures in the NationalCooperative Highway Research Program number 230 or 350 that provide varioustest levels depending on the application. This FHWA approval makes the productseligible for federal funds for certain highway projects. We are obligated toseek such approval for improvements or upgrades to such devices and for any newdevices.

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, 2006,2005 and 2004, we had a backlog of unfilled orders for transportation safetydevices of $24,481,000, $23,796,000 and $26,921,000, respectively. We generallyfill an order for our products within two days to 8 weeks of receipt dependingon the type of product. However, some orders or awarded contracts included inbacklog may not be completed for six to nine months.

*Research and Development; Patents*

Many of our products havepatented features and we conduct our own research, development and testing ofnew products before introducing them to the marketplace. The expenditures forresearch and development activities were $5,958,000, $5,391,000 and $3,605,000for the fiscal years 2006, 2005 and 2004, respectively. We maintain a crashtest facility in California for Protect and Direct products.

7

----

We develop new products byworking with customers as well as federal, state and local highway officials todetermine transportation safety needs, and then we design products to satisfythose needs. We are also active in promoting cooperation among state highwayagencies, contractors and engineers to encourage comprehensive repair andmaintenance of roadside crash attenuating systems. In addition to developingnew products, we are also seeking to acquire new products which can be soldthrough our existing distribution networks to our 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.

*Raw Materials*

The principal rawmaterials used in the production of highway safety devices are plastic andplastic resins, steel, aluminum and electronic components. These raw materialsare purchased from various suppliers and have been readily available throughoutthe last year. We believe that adequate supplies of these materials willcontinue to be available.

In fiscal 2006 and 2005 wewere affected by increased prices for certain commodities, particularlyaluminum, steel and resin, which can be a significant component of the cost ofcertain of our products. We attempt to reduce the negative impact of increasingprices by entering into certain fixed price arrangements and by passing along priceincreases to our customers. However, increased commodity prices have negativelyimpacted our gross margin for certain products. In addition, increasing fueland freight costs adversely affected our results in fiscal 2006. These trendsof increasing material, fuel and freight costs may continue into fiscal 2007.

*Major Customers*

No single customerrepresents a significant portion of our total revenues. However, approximately11% and 9% of our consolidated revenues resulted from sales to customers in thestates of California and Texas, respectively, in fiscal 2006. Our customers aretypically distributors, contractors, departments of transportation, stateagencies, local governments or municipalities and, therefore, a change inpolicy in state spending could materially affect our sales in that state.

*Seasonality*

Our sales are historicallyseasonal because domestic highway maintenance and construction seasonstypically peak in our fourth fiscal quarter.

*Foreign and Domestic Operations and Revenues*

Our business is conductedprincipally in the United States, with sales outside of the United States asfollows:  $21,821,000, $19,111,000 and$14,249,000 in 2006, 2005 and 2004 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 at less than$50,000.

*Available Information*

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 

8

----

the SECat the SEC’s Public Reference Room at 100 F. Street, N.E., Washington D. C.Information about the operation of the SEC Public Reference Room may beobtained by calling the SEC at 1-800-SEC-0330. The SECmaintains an internet website at http://www.sec.gov that contains access tofilings of issuers that file electronically with the SEC. We also maintain aninternet website at http://www.quixotecorp.com that contains access to our 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 of chargeupon request.

**Item 1A.**             RiskFactors

There are many factorsthat pose material risks to our business, operating results and financialcondition which are frequently beyond our control. These factors include, butare not limited to, the following:

**A decrease or delay in federal government funding oftransportation safety and highway construction and maintenance may cause ourrevenues and profits to decrease.**

We depend substantially onfederal, state and municipal funding for transportation safety, highwayconstruction and maintenance and other related infrastructure projects. Anydecrease or delay in government funding for transportation safety, highwayconstruction and maintenance and other related infrastructure projects couldcause our revenues and profits to decrease.

Federal government fundingfor infrastructure projects is usually accomplished through highwayauthorization bills, which establish funding over a multi-year period. The mostrecent highway authorization bill, SAFETEA-LU, became law in August 2005,after the prior law which authorized federal spending through September 30,2003 was extended at then current funding levels eleven times over almost twoyears. Until the new law was passed, the transportation safety allotment infederal and state budgets was uncertain, and we believe this uncertaintynegatively impacted spending on the products and services offered by theCompany. The delayed passage of the new highway funding bill adversely affectedour financial performance in fiscal year 2004 and fiscal year 2005. Given thelong sales cycle typical in our business, we did not begin to realize thebenefit of SAFETEA-LU’s passage until late fiscal 2006.

Even after federallegislation is enacted, funding appropriations may be revised in future congressionalsessions, and federal funding for infrastructure projects may be reduced in thefuture. In addition, Congress could pass legislation in future sessions whichwould divert highway funds for other national purposes or would restrictfunding for infrastructure projects unless states comply with certain federalpolicies.

**Constraints on state and local government budgets mayadversely affect our financial performance.**

Many states reducedspending on highways due to budget constraints given the national and localeconomies. Such budgetary constraints adversely affect the ability of states tofund transportation, highway and infrastructure projects, and therefore reducethe demand for our products. Municipalities also suffer from budget constraintsthat can reduce transportation safety spending. We believe that reduced stateand municipal spending due to budget restraints adversely affected ourperformance in fiscal year 2004 and fiscal year 2005.

**Downturns in the U.S. economy or the transportationsafety and highway construction industries may adversely affect our revenuesand operating results.**

General economicdownturns, including downturns in the transportation safety and highwayconstruction industries, could result in a material decrease in our revenuesand operating results. We believe that the economic downturn and the relatedpolitical uncertainty during fiscal years 2002 through 

9

----

2005negatively affected our expected revenue growth. Sales of our products aresensitive to foreign, domestic and regional economies in general, and inparticular, changes in government infrastructure spending. Many of our costsare fixed and cannot be quickly reduced in response to decreased demand.

**Sales of our products often are subject to governmenttesting, inspection and approval.**

We frequently supplyproducts and services pursuant to agreements with general contractors that haveentered into contracts with federal, state or municipal government agencies. Insome cases we enter into contracts directly with government agencies. At timesthese contracts require engineered systems which combine our Inform andIntersection Control products, sometimes in conjunction with our Protect andDirect products, into complex systems which may themselves be incorporated intoother systems. The successful completion of our obligations under thesecontracts is often subject to satisfactory testing, inspection and approval ofsuch products and services by a representative of the contracting agency. Althoughwe endeavor to satisfy the requirements of each of these contracts to which weare a party, no assurance can be given that the necessary approval of ourproducts and services will be granted on a timely basis or at all, and that wewill receive any payments due to us. In some cases, we may be dependent onothers to complete these projects which may also delay payments to us. Anyfailure to obtain these approvals and payments may have a material adverseeffect on our business and future financial performance.

**Past and future acquisitions involve risks that couldadversely affect our future financial results.**

Wehave completed seven acquisitions since 1997 and may acquire additionalbusinesses in the future. We may be unable to achieve the benefits expected tobe realized from our acquisitions. In addition, we may incur additional costsand our management’s attention may be diverted because of unforeseen expenses,difficulties, complications, delays and other risks inherent in acquiringbusinesses, including the following:

·       wemay have difficulty integrating the acquired businesses as planned, which mayinclude integration of systems of internal controls over financial reportingand other financial and administrative functions;

·       acquisitionsmay divert management’s attention from our existing operations;

·       wemay have difficulty in competing successfully for available acquisitioncandidates, completing future acquisitions or accurately estimating thefinancial effect of any businesses we acquire;

·       wemay have delays in realizing the benefits of our strategies for an acquiredbusiness;

·       wemay not be able to retain key employees necessary to continue the operations ofan acquired business;

·       acquisitioncosts may be met with cash or debt, increasing the risk that we will be unableto satisfy current financial obligations;

·       wemay acquire businesses that are less profitable or have lower profit marginsthan our historical profit margins; and

·       acquiredcompanies may have unknown liabilities that could require us to spendsignificant amounts of additional capital.

In May and December,2003, we made two acquisitions in the Intersection Control segment. Integrationof these businesses, combined with reduced demand for our products adverselyaffected our financial performance in fiscal 2004, 2005 and 2006. Givensubstandard performance of our Intersection 

10

----

Controlsegment, we recorded asset impairment charges in that segment of $22,735,000for the year ended June 30, 2004 and $13,374,000 for the year ended June 30,2006. Confronted with the continued underperformance of the IntersectionControl business, on April 25, 2006, our Board of Directors approved arestructuring plan for our Intersection Control business that includes furtherrationalizing of operations and divesting certain non-core product lines.

**Management’s estimates and assumptions affect reportedamounts of expenses.**

Goodwill and otherindefinite-lived intangible assets are tested for impairment at least annually,and the results of such testing may adversely affect our financial results. Weuse a third party appraisal firm to assist our determination of fair values,but the impairment review is highly judgmental and involves the use ofsignificant estimates and assumptions. These estimates and assumptions have asignificant impact on the amount of any impairment charge recorded, and actualresults may differ significantly from the estimates and assumptions used.

We recognize deferred taxassets and liabilities for the expected future tax consequences of events whichare included in the financial statements or tax returns. In assessing therealizability of the deferred tax assets, management makes certain assumptionsabout whether the deferred tax assets will be realized. We expect the deferredtax assets currently recorded to be fully realizable, however there can be noassurance that an increased valuation allowance would not need to be recordedin the future.

**Our business could be adversely affected by reducedlevels of cash, whether from operations or from bank borrowings.**

Our principal sources offunds have historically been cash flows from operations and borrowings frombanks. Our financial performance in fiscal year 2004 adversely affected ourcash flow from operations and required us to modify our bank credit agreementin order to avoid the occurrence of events of defaults relating to certaincovenants and financial ratios. Amendments to the credit agreement in fiscal2005 required us to modify certain covenants, pledge our assets as collateral,reduce the maximum amount of availability under the revolving credit facilityto $38 million, and limit our dividend payments.

Although we are currentlyin compliance with the covenants of the credit agreement, our ability to remainin compliance in the future will depend on our future performance and may beaffected by events beyond our control. There can be no assurance that we willgenerate sufficient earnings and cash flow to remain in compliance with thecredit agreement, or that we will be able to obtain future amendments to thecredit agreement to avoid a default. In the event of a default, there can be noassurance that we could negotiate a new credit agreement or that we couldobtain a new credit agreement with satisfactory terms and conditions within areasonable time period.

**If we are unable to protect our proprietary technologyfrom infringement or if our technology infringes technology owned by others,then the demand for our products may decrease or we may be forced to modify ourproducts which could increase our costs.**

We hold numerous patentscovering technology and applications related to many of our products andsystems, and numerous trademarks and trade names registered with the U.S.Patent and Trademark Office and in foreign countries. Our existing or futurepatents or trademarks may not adequately protect us against infringements, andpending patent or trademark applications may not result in issued patents ortrademarks. Our patents, registered trademarks and patent applications may notbe upheld if challenged, and competitors may develop similar or superiormethods or products outside the protection of our patents. This could increasecompetition for our products and materially decrease our revenues. If ourproducts are deemed to infringe upon the patents or proprietary rights ofothers, we could be required to modify the design of our products, change thename of our products or obtain a license for the use of some of thetechnologies used in our products. We may be unable to do any of the foregoingin a timely manner, 

11

----

uponacceptable terms and conditions, or at all, and the failure to do so couldcause us to incur additional costs or lose expected revenue.

**Our success depends on our management and otheremployees.**

The single largest factorin our ability to profitably execute our work is our ability to attract,develop and maintain qualified personnel. Our success in attracting qualifiedpeople is dependent on the resources available in individual geographic areasand the impact on the labor supply due to general economic conditions as wellas our ability to provide a competitive compensation package and workenvironment. Leslie J. Jezuit, our Chairman and President, and Daniel P. Gorey,our Chief Financial Officer, are of significant importance to our business andoperations and neither has an employment agreement with us. The loss of theirservices may adversely affect our business. In addition, our ability to attractand retain qualified engineers, skilled manufacturing and marketing personneland other professionals, either through direct hiring or acquisition of otherbusinesses employing such professionals, will also be an important factor indetermining our future success.

**Difficulties in managing and expanding in internationalmarkets could affect future growth in these markets.**

Infiscal year 2006, international sales represented approximately $21,821,000 or14%, of our total sales and we believe international markets could be animportant source of growth. We plan to continue to increase our presence inthese markets. In connection with any increase in international sales efforts,we need to hire, train and retain qualified personnel in countries wherelanguage, cultural or regulatory barriers may exist. Moreover, funding andgovernment requirements vary by country with respect to transportation safety. Ina number of countries there are no governmental requirements or funding fortransportation safety and we must educate officials and demonstrate the needfor and benefits of our products. In addition, international revenues aresubject to the following risks:

·       fluctuatingcurrency exchange rates could reduce the demand for or  profitability of foreign sales by affectingthe pricing of our products;

·       theburden of complying with a wide variety of foreign laws and regulations,including the requirements for additional testing of our products;

·       dependenceon foreign sales agents;

·       politicaland economic instability of foreign governments; and

·       theimposition of protective legislation such as import or export barriers.

**We depend on principal customers.**

We depend on principalcustomers, however no single customer of Quixote represents a significantportion of total revenues. However, in fiscal 2006, approximately 11% and 9% ofour consolidated revenues resulted from sales to customers in the States ofCalifornia and Texas, respectively. Customers may consist of distributors,contractors, departments of transportation, state agencies, local governmentsor municipalities. A change in policy in state spending could materially affectour sales in either state. The loss of, or a significant reduction in, ordersfrom these or our other major customers could have a material adverse effect onour financial condition and results of operations.

**We are in a competitive marketplace.**

To the extent one or moreof our current or future competitors introduce products that better addresscustomer requirements, or are less expensive than our products, our businesscould be adversely affected and we may be unable to maintain our leadershipposition in certain products. Competition may adversely 

12

----

affectthe selling prices and the profit margins on our products. We may not besuccessful in developing and marketing our existing products or new products orincorporating new technology on a timely basis or at a reduced cost. If we areunable to timely develop and introduce new products, or enhance existingproducts, or reduce costs, in response to changing market conditions orcustomer requirements or demands, our business and results of operations couldbe materially and adversely affected.

We have acquiredcomplementary businesses over the past several years and, as a part of ourstrategy, may continue to acquire complementary businesses. The gross profitmargins of certain acquired product lines are lower than our historical grossprofit margin, which adversely affects our gross profit margin. Givencompetitive conditions, we may be unable to improve our gross profit marginsfor these businesses and products.

We have been affected byincreased prices for certain commodities, particularly aluminum, steel andresin, which are a significant component of the cost of certain of our products.Such price increases negatively impact our gross margin for certain products,because we have been unable to pass along to our customers these cost increases.Increasing fuel and freight costs adversely affected our performance in fiscal2006. We expect these trends may continue into fiscal 2007.

**Our facilities or facilities of our customers andsuppliers could be susceptible to natural disasters.**

Two of our majorfacilities are located in the Southeastern U.S. Should a natural disaster suchas a hurricane, tornado, earthquake or flood severely damage one of our majormanufacturing facilities, or damage a major facility of one or more of oursignificant customers or suppliers, our business could be materially disrupted.

**Our insurance coverage could beinadequate.**

Inaccordance with risk management practices, we continually re-evaluate risks,their potential costs and the cost of minimizing them. To reduce our exposureto material risks, we purchase insurance in certain circumstances. We believethat we maintain adequate insurance coverage, however, certain risks areinherent in our business and our insurance may not be adequate to coverpotential claims. Although we maintain liability insurance, we cannot assurethat the coverage limits under these insurance programs will be adequate toprotect us against future claims, or that we can and will maintain thisinsurance on acceptable terms in the future.

**Our quarterly operating results are likely tofluctuate, which may affect our stock price.**

Ourquarterly revenues, expenses, operating results and gross profit margins varysignificantly from quarter to quarter. As a result, our operating results mayfall below the expectations of securities analysts and investors in somequarters, which could result in a decrease in the market price of our commonstock. The reasons our quarterly results may fluctuate include:

·       seasonalityinherent in our transportation safety and highway construction and maintenancebusiness;

·       variationsin profit margins attributable to product mix;

·       changesin the general competitive and economic conditions;

·       delaysin, or uneven timing in the delivery of, customer orders;

·       theintroduction of new products by us or our competitors; and

·       delaysin federal highway funding and budgetary restraints on state and localgovernment spending.

13

----

Period to periodcomparisons of such items should not be relied on as indications of futureperformance.

**We may experience volatility in our stock price.**

The market price of our common stock may be subject tosignificant fluctuations in response to various factors, including:

·       therelatively small public float of our stock;

·       quarterlyfluctuations in our operating results, as described in the prior risk factor;

·       changes insecurities analysts’ estimates of our future earnings; and

·       loss ofsignificant customers or significant business developments relating to us orour competitors.

Ourfailure to meet analysts’ expectations, even if minor, could cause the marketprice of our common stock to decline. In addition, stock markets have generallyexperienced a high level of price and volume volatility, and the market pricesof equity securities of many companies have experienced wide price fluctuationsnot necessarily related to the operating performance of such companies. Thesebroad market fluctuations may adversely affect our common stock’s market price.In the past, securities class action lawsuits frequently have been institutedagainst companies following periods of volatility in the market price of suchcompanies’ securities. If any such litigation is instigated against us, itcould result in substantial costs and a diversion of management’s attention andresources, which could have a material adverse effect on our business, resultsof operations and financial condition.

**Acts of war could adverselyimpact our business and operating results.**

Actsof war (wherever located around the world) may cause damage or disruption toour employees, facilities, suppliers, distributors or customers, which couldsignificantly impact our sales, costs, expenses and financial condition. Thepotential for acts of war or hostility may create many economic and politicaluncertainties, which could adversely affect our business and results ofoperations in ways that cannot presently be predicted. We are uninsured forlosses and interruption caused by acts of war.

Theforegoing list is not exhaustive. There can be no assurance that we havecorrectly identified and evaluated all factors affecting our business. Additionalrisks and uncertainties not presently known to us or that we currently believeto be immaterial also may adversely impact us. Should any risks anduncertainties develop into actual events, these developments could havematerial adverse effects on our business, financial condition and results ofoperations. For these reasons, the reader is cautioned not to place unduereliance on our forward-looking statements.

**Item 1B.**            UnresolvedStaff Comments

None.

14

----

**Item 2.**                        Properties

Informationrelating to our principal facilities is as follows:

| ** **                                              | ** ** | ** **      | ** ** | ** **                                                                       | ** ** | **Owned or** |
|---------------------------------------------------------|------------|-----------------|------------|----------------------------------------------------------------------------------|------------|--------------|
| **Location**                                            | ** ** | ** **      | ** ** | **Available Space**                                                              | ** ** | **Purpose**  | ** ** | **Leased** |
| 35 East Wacker  DriveChicago, Illinois                  |       | 18,000  sq. ft. |       | Executive Offices                                                                |       | Leased       |
| 250 Bamberg DrivePell City, Alabama                     |       | 300,000 sq. ft. |       | Manufacture of  Protect and Direct highway safety devices                        |       | Owned        |
| 3617 Cincinnati AvenueRocklin, California               |       | 22,000 sq. ft.  |       | Research and development  facility for Protect and Direct highway safety devices |       | Owned        |
| 3300 N. Kenmore StreetSouth Bend, Indiana               |       | 81,000 sq. ft.  |       | Leased to a third  party                                                         |       | Owned        |
| 9603 John StreetSanta Fe Springs, CA(1)                 |       | 183,000 sq. ft. |       | Sale and  manufacture of Intersection Control products                           |       | Leased       |
| Eucalipto y Nogal L4-7Tecate, Baja California Mexico(1) |       | 68,000 sq. ft.  |       | Manufacture of Intersection  Control products                                    |       | Leased       |
| 2511 Corporate WayPalmetto, FL                          |       | 52,000 sq. ft.  |       | Sale and  manufacture of Intersection Control products                           |       | Leased       |
| 4021 Stirrup Creek DriveDurham, North Carolina          |       | 13,000 sq. ft.  |       | Sale and  manufacture of Inform highway advisory radio equipment                 |       | Leased       |
| Route 119 University DriveUniontown, Pennsylvania       |       | 26,000 sq. ft.  |       | Sale and  manufacture of Inform traffic sensing and distance measuring devices   |       | Owned        |
| 11612 Lilburn Park RoadSt. Louis, Missouri              |       | 17,000 sq. ft.  |       | Sale and  manufacture of Inform sensing and weather forecasting products         |       | Leased       |
| 141 Railroad StreetBedford, Pennsylvania                |       | 16,000 sq. ft.  |       | Manufacture of Intersection  Control products                                    |       | Leased       |
|                                                         |            |                 |            |                                                                                  |            |              |  |  |

 

We believe that ourprincipal plants are suitable and adequate for the manufacturing and otheractivities performed at those plants. In addition to the principal facilitieslisted above, we have other small facilities, including internationallocations, used primarily for sales activities.

----

(1)          Inaccordance with our restructuring plan of the Intersection Control segmentadopted in April 2006, we are vacating these facilities and attempting tosublet them.

**Item 3.**                        LegalProceedings

On May 30, 2006, we and our subsidiary, U.S.Traffic Corporation (“UST”), settled all outstanding litigation with MyersAmerica, Inc., Myers Power Products, Inc., Myers/Nuart ElectricalProducts, Inc., Raymond International W. L. L., Raymond Overseas Holding,Limited and Basil Vasilou. The parties were involved in two cases in theCircuit Court of Cook County, Illinois:  *Myers America, Inc., f/k/a U.S.*

15

----

*TrafficCorporation vs. U.S. Traffic Corporation, f/k/a Green Light AcquisitionCompany,*No. 05 Ch 16573 and *U.S. TrafficCorporation f/k/a Green Light Acquisition Company vs. Myers America, Inc.,f/k/a U.S. Traffic Corporation, et al.,*No. 05 L 010719.

To settle the cases, Myers America, Inc. and itsaffiliates paid us $3 million in cash, and the parties agreed to waive variousclaims against each other and to modify or terminate certain agreements. Inparticular, the parties waived claims arising from the payment terms, covenantsand representations and warranties in the agreements that were the basis of ourpurchase of the intersection control business from Myers America, Inc. in May 2003.The OEM Supply Agreement between UST and Myers Power Products, Inc. dated May 16,2003 was terminated except for an abbreviated non-compete covenant and theobligations to supply and pay for products currently subject to outstandingpurchase orders. The Asset Purchase Agreement dated May 16, 2003 betweenthe parties and certain stockholder non-competition agreements were terminatedexcept for an abbreviated non-competition covenant. Pursuant to the amendedagreements, Myers America, Inc. and affiliates will refrain from sellinguninterruptible power supply products for use in intersection control to theCities of New York and Chicago until May 2008. We re-affirmed the $5million Subordinated Promissory Note of UST dated May 16, 2003 to MyersAmerica, Inc. and Myers/NuArt Electrical Products, Inc. Our Guarantydated May 16, 2003 of UST’s obligations was amended to limit its scope tothe Promissory Note. We also guaranteed payments due Myers America, Inc.and its affiliates pursuant to outstanding purchase orders and the lease of theTecate, Mexico facility.

We are involved in severalpending judicial proceedings for product liability and other damages arisingout of the normal conduct of our business. While the outcome of litigation issubject to uncertainties, we believe, after consultation with counsel, that theoutcome of these proceedings, based on current available information and aftertaking into account the availability and limits of our insurance coverage, willnot have a material effect on our consolidated financial condition and resultsof operations.

**Item 4.**                        Submissionof Matters to a Vote of Security Holders

There were no matters submitted to a vote of securityholders during the fourth quarter of fiscal 2006.

16

----

**PART II**

**Item 5.**                        Marketfor the Registrant’s Common Equity, Related Stockholder Matters and IssuerPurchase of Equity Securities

Ourcommon stock is traded on the Nasdaq Global Market, under the symbol QUIX. Setforth are the daily high and low sales prices for our common stock for theperiods indicated, as reported by the NASDAQ.

| ** **   | ** ** | **Three Months Ending** | ** ** |
|--------------|------------|-------------------------|------------|
| ** **   | ** ** | **9/30**                | ** ** | **12/31** | ** ** | **3/31** | ** ** | **6/30** | ** ** |
| FISCAL 2006: |       |                    |       |   |   |   |   |   |   |
| High         |       | $                       | 25.55      |   | $ | 21.88 |   | $ | 24.75 |   | $ | 24.75 |   |
| Low          |       | 19.29                   |       | 19.13 |   | 19.64 |   | 17.82 |   |
| FISCAL 2005: |       |                    |       |   |   |   |   |   |   |
| High         |       | $                       | 23.35      |   | $ | 22.45 |   | $ | 21.93 |   | $ | 22.49 |   |
| Low          |       | 17.80                   |       | 17.28 |   | 17.30 |   | 18.26 |   |

 

The current quoted price of the stock is listed dailyin *The Wall Street Journal* in the NasdaqIssues section. As of September 6, 2006, there were 1,018 shareholders ofrecord.

*Dividend Policy*

During 2006, we declaredsemi-annual cash dividends of eighteen cents per share and nineteen cents pershare. During 2005, we declared two semi-annual cash dividends of eighteencents per share.

***Equity Compensation PlanInformation***

As of June 30, 2006, we have two outstandingstock option plans which were approved by our shareholders in November 2001.Additional information relating to our stock option plans appears in Note 8 toour consolidated financial statements included herein.

Thefollowing table details information regarding our equity compensation plans asof June 30, 2006:

| ** **                                                  | ** ** | **(a)**    | ** ** | **(b)**                                                                                                                                         | ** ** | **(c)**                                                                                                     | ** ** |
|-------------------------------------------------------------|------------|------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------|------------|
| **Plan Category**                                      | ** ** | ** ** | ** ** | **Number of securities  to be issued upon exercise  of outstanding options,  warrants and rights** | ** ** | **Weighted-average  exercise price of  outstanding options,  warrants and rights** | ** ** | **Number of securities  remaining for future  issuance under equity  plans (excluding securities  reflected in column (a))** | ** ** |
| Equity  compensation plans  approved by security holders    | ** ** |       | 944,902    | ** **                                                                                                                                      |       |                                                                                                        | $          | 18.98 | ** ** |   |   | 682,454 | ** ** |   |
| Equity compensation plans not  approved by security holders | * *   | * *   | -0-        |                                                                                                                                            | * *   | * *                                                                                                    | -0-        | ** ** | * * | * * | -0-  | ** ** |   |
| * *                                                    | * *   | * *   | 944,902    |                                                                                                                                            | * *   | * *                                                                                                    | $          | 18.98 | ** ** | * * | * * | 682,454 | ** ** |   |
|                                                             |            |            |            |                                                                                                                                                 |            |                                                                                                             |            |  |  |  |  |  |  |  |  |  |

 

*Treasury Stock*

We did not repurchase anyof our common shares during the fourth quarter of fiscal 2006.

17

----

**Item6.**                        SelectedFinancial Data

| ** **                                                        | ** ** | **For the years ended June 30,**                        | ** ** |
|-------------------------------------------------------------------|------------|----------------------------------------------------------------------------------|------------|
| ** **                                                        | ** ** | **2006**                                                                         | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                                        | ** ** | **Dollar amounts in thousands, except share data** | ** ** |
| Operating Results:                                                |       |                                                                             |       |   |   |   |   |   |   |   |   |
| Net sales                                                         |       | $                                                                                | 161,134    |   | $ | 146,353 |   | $ | 150,290 |   | $ | 114,310 |   | $ | 89,694 |   |
| Gross profit                                                      |       | 48,039                                                                           |       | 46,489 |   | 47,303 |   | 46,240 |   | 35,932 |   |
| Selling and administrative expenses                               |       | 37,681                                                                           |       | 40,057 |   | 36,700 |   | 28,730 |   | 23,975 |   |
| Research and development expenses                                 |       | 5,958                                                                            |       | 5,391 |   | 3,605 |   | 2,356 |   | 2,468 |   |
| Operating profit (loss)                                           |       | (10,928                                                                          | )(1)       | 2,167 |   | (25,602 | )(2) | 15,154 |   | 9,489 |   |
| Other income (expense)                                            |       | (4,646                                                                           | )          | (3,264 | ) | (2,326 | ) | (802 | ) | (276 | ) |
| Earnings (loss) from continuing operations                        |       | (10,102                                                                          | )(3)       | (650 | ) | (17,027 | )(4) | 9,472 |   | 5,897 |   |
| Net earnings (loss)                                               |       | (10,102                                                                          | )(3)       | (650 | ) | (17,027 | )(4) | 9,472 |   | 6,824 |   |
| Cash dividends per common share                                   |       | .37                                                                              |       | .36 |   | .34 |   | .33 |   | .32 |   |
| Per Share Data:                                                   |       |                                                                             |       |   |   |   |   |   |   |   |   |
| Basic EPS:                                                        |       |                                                                             |       |   |   |   |   |   |   |   |   |
| Earnings (loss) from continuing operations                        |       | $                                                                                | (1.14      | )(5) | $ | (0.07 | ) | $ | (1.99 | )(6) | $ | 1.21 |   | $ | .77 |   |
| Net earnings (loss)                                               |       | $                                                                                | (1.14      | )(5) | $ | (0.07 | ) | $ | (1.99 | )(6) | $ | 1.21 |   | $ | .89 |   |
| Weighted average common                                           |       |                                                                             |       |   |   |   |   |   |   |   |   |
| shares outstanding                                                |       | 8,850,884                                                                        |       | 8,800,421 |   | 8,567,741 |   | 7,847,169 |   | 7,682,706 |   |
| Diluted EPS:                                                      |       |                                                                             |       |   |   |   |   |   |   |   |   |
| Earnings (loss) from continuing operations                        |       | $                                                                                | (1.14      | )(5) | $ | (0.07 | ) | $ | (1.99 | )(6) | $ | 1.17 |   | $ | .73 |   |
| Net earnings (loss)                                               |       | $                                                                                | (1.14      | )(5) | $ | (0.07 | ) | $ | (1.99 | )(6) | $ | 1.17 |   | $ | .84 |   |
| Weighted average common and common equivalent shares  outstanding |       | 8,850,884                                                                        |       | 8,800,421 |   | 8,567,741 |   | 8,062,397 |   | 8,121,621 |   |
| Financial Position:                                               |       |                                                                             |       |   |   |   |   |   |   |   |   |
| Total assets                                                      |       | $                                                                                | 125,203    |   | $ | 136,790 |   | $ | 139,882 |   | $ | 150,825 |   | $ | 100,044 |   |
| Working capital                                                   |       | 43,781                                                                           |       | 42,933 |   | 39,973 |   | 36,089 |   | 30,923 |   |
| Property, plant and equipment, net                                |       | 19,535                                                                           |       | 25,008 |   | 27,512 |   | 26,237 |   | 21,959 |   |
| Long-term debt, net of current  portion                           |       | 51,122                                                                           |       | 49,587 |   | 47,014 |   | 39,789 |   | 24,772 |   |
| Shareholders’ equity                                         |       | 48,946                                                                           |       | 61,846 |   | 63,907 |   | 75,555 |   | 59,226 |   |
| Book value per  common share                                      |       | 5.50                                                                             |       | 6.96 |   | 7.30 |   | 9.10 |   | 7.62 |   |

----

(1)   Includesnon-cash asset impairment charges of $13,374.

(2)   Includesnon-cash asset impairment charges of $32,600.

(3)   Includesnon-cash asset impairment charges of $8,723, net of income tax benefits.

(4)   Includesnon-cash asset impairment charges of $21,266, net of income tax benefits, andan income tax benefit of $1,249 related to the favorable settlement of a taxaudit.

(5)   Includesnon-cash asset impairment charges of $0.98 per diluted share.

(6)   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.

18

----

**Item 7.**                        Management’sDiscussion and Analysis of Financial Condition and Results of Operations

**OVERVIEW**

Quixote Corporation (theCompany, we, our or us) and its subsidiaries develop, manufacture and markethighway and transportation safety products to protect, direct and informmotorists, pedestrians and road workers in both domestic and internationalmarkets.  Our operations are comprised ofthree reportable segments within the highway and transportation safetyindustry, concentrating on safety problems and designing products to providetransportation safety solutions. During the third quarter of fiscal 2006 weexpanded the number of reportable segments from two to three segments. Ourthree reportable segments are: the manufacture and sale of highway and transportationsafety products which Protect and Direct, the manufacture and sale of productsand services which Inform, and the manufacture and sale of products which areused for Intersection Control.  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. The primary productlines within the Protect and Direct segment include energy-absorbing productssuch as crash cushions, truck-mounted attenuators, sand-filled barrels andwater-filled barriers, and directing and guiding products such as flexible postdelineators and glare screen systems.  The Inform segment provides solutions forimproving traffic flow and safety on roads and runways by providing information.The primary product lines within the Inform segment include advanced sensingproducts which measure distance, count and classify vehicles; weather sensingsystems; computerized highway advisory radio transmitting systems; and othertransportation equipment. The Intersection Control segment provides solutionsfor controlling intersections, including intelligent intersection trafficcontrol systems, pedestrian signals, video detection equipment and othertransportation equipment.

Our products are sold byboth a direct sales force and a distribution network to customers in thehighway construction and safety business, state departments of transportation,county and local governments and other governmental transportation agencies. Thedomestic market for highway and transportation safety products is directlyaffected by federal, state and local governmental policies and budgets. Aportion of our sales is ultimately financed by funds provided to the states bythe federal government. Historically, these funds have covered 75% to 90% ofthe cost of highway safety projects on roads constructed or maintained withfederal assistance. Seasonality affects our business with generally a higherlevel of sales in our fourth fiscal quarter.

**RESULTS OF OPERATIONS**

**Summary**

Ourfinancial results for fiscal 2006 were below our expectations. We beganto see improved growth prospects after the new federal highway spending bill (SAFETEA-LU) was signed in August 2005 in two of our three segments.The last six-year federal bill expired on September 30, 2003 and wasextended eleven times over almost two years. However, the performance of our Intersection Control segment continuedto be substandard.

During fiscal 2006, salesincreased over last year and we are seeing increased order activity in mostareas of our business. We believe the increase in sales and order activityreflects the early signs of improvements in our industry now that a highwaybill is in place. We were encouraged to see sales growth of 14% in our Informsegment and 10% in our Protect and Direct segment, as well as increasedprofitability, during the fiscal year. Althoughsales for the Intersection Control segment, which is comprised of theoperations of Peek Traffic Corporation (Peek Traffic) and U.S. TrafficCorporation (UST), increased from theprior year, operating results in that segment continued to besubstandard and in April 2006, we approved a plan to restructure thatbusiness. In accordance with the restructuring plan, we 

19

----

are inthe process of discontinuing certain low-margin and non-core product lines. Aspart of the restructuring plan, we sold the portable variable message sign,illuminated street lighting and tunnel lighting product lines in June 2006.We are in the process of closing two facilities, moving the remainingintersection control products to our Palmetto, Florida and Bedford,Pennsylvania facilities and also outsourcing non-core manufacturing activities.In addition, as a result of the continued poor performance of this segment, werecorded non-cash asset impairment charges of $13,374,000.  See Notes 6 and 17 to the ConsolidatedFinancial Statements and FUTURE OUTLOOK for further information.

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

| ** **                                                    | ** ** | **For the Years Ended  June 30**                                    | ** ** |
|---------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------|------------|
| ** **                                                    | ** ** | **2006**                                                                                | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                    | ** ** | **(Dollar amounts in thousands,  except per share data)** | ** ** |
| Revenues by Segment:                                          |       |                                                                                    |       |   |   |   |   |
| Protect and Direct                                            |       | $                                                                                       | 80,806     |   | $ | 73,575 |   | $ | 73,282 |   |
| Inform                                                        |       | 24,134                                                                                  |       | 21,163 |   | 21,188 |   |
| Intersection Control                                          |       | 56,194                                                                                  |       | 51,615 |   | 55,820 |   |
|                                                          |       | $                                                                                       | 161,134    |   | $ | 146,353 |   | $ | 150,290 |   |
|                                                          |       |                                                                                    |       |   |   |   |   |
| Geographic Revenues:                                          |       |                                                                                    |       |   |   |   |   |
| Domestic                                                      |       | $                                                                                       | 139,313    |   | $ | 127,242 |   | $ | 136,041 |   |
| International                                                 |       | 21,821                                                                                  |       | 19,111 |   | 14,249 |   |
|                                                          |       | $                                                                                       | 161,134    |   | $ | 146,353 |   | $ | 150,290 |   |
|                                                          |       |                                                                                    |       |   |   |   |   |
| Operating Income (Loss)  by Segment:                          |       |                                                                                    |       |   |   |   |   |
| Protect and Direct                                            |       | $                                                                                       | 15,539     |   | $ | 14,859 |   | $ | 15,904 |   |
| Inform                                                        |       | 3,403                                                                                   |       | 1,151 |   | (7,926 | )(1) |
| Intersection Control                                          |       | (22,360                                                                                 | )(2)       | (5,723 | ) | (25,687 | )(3) |
| Unallocated Corporate                                         |       | (7,510)                                                                                 |       | (8,120 | ) | (7,893 | ) |
|                                                          |       | $                                                                                       | (10,928    | ) | $ | 2,167 |   | $ | (25,602 | ) |
|                                                          |       |                                                                                    |       |   |   |   |   |
| Gross profit  percentage                                      |       | 29.8                                                                                    | %          | 31.8 | % | 31.5 | % |
|                                                          |       |                                                                                    |       |   |   |   |   |
| Selling and  administrative expenses as a percentage of sales |       | 23.4                                                                                    | %          | 27.4 | % | 24.4 | % |
|                                                          |       |                                                                                    |       |   |   |   |   |
| Diluted loss per  share                                       |       | $                                                                                       | (1.14      | ) | $ | (0.07 | ) | $ | (1.99 | ) |

----

(1)          Includes $9,865 innon-cash asset impairment charges.

(2)          Includes $13,374 innon-cash asset impairment charges.

(3)          Includes $22,735 innon-cash asset impairment charges.

20

----

*Revenues*

Ournet sales for fiscal 2006 increased 10% to $161,134,000 from $146,353,000 for2005 due to sales increases across all operating segments as described below. Ournet sales for fiscal 2005 decreased 3% to $146,353,000 from $150,290,000 for2004 primarily due to lower sales in our Intersection Control segment asfurther described below.

*Geographic*—Internationalsales for fiscal 2006 increased by $2,710,000, or 14%, to $21,821,000 comparedto $19,111,000 for fiscal 2005, primarily due to increases in the IntersectionControl segment, where international sales increased $2,402,000, or 96%, to$4,907,000. The increase in international sales in the Intersection Controlsegment was primarily due to increased sales of traffic signals in LatinAmerica and also to increased sales in Europe and Canada. International salesfor the Inform segment increased 8% to $1,809,000. International sales for theProtect and Direct segment increased only slightly after the 30% increaseachieved in the prior year.  Domesticsales for fiscal 2006 increased 9% to $139,313,000 from $127,242,000 due tosales increases in all operating segments and particularly in the Protect andDirect segment.

International sales forfiscal 2005 increased $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 17% to$1,677,000. International sales in the Intersection Control segment increased94% to $2,505,000, in part due to the acquisition of 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 products within theIntersection Control segment further described below.

*Protect and Direct—**Net* sales for theProtect and Direct segment for fiscal 2006 increased 10% to $80,806,000 from$73,575,000 for fiscal 2005 due to increases across most major product linesand particularly truck-mounted attenuators (TMA’s), delineators and permanentcrash cushions, which were offset somewhat by lower sales of parts. The salesincreases were attributable to increased spending on workzone and other highwaysafety projects since the enactment of the federal highway bill. In addition,we saw increased spending on new products such as the Quest® crash cushion andthe Safestop® trailer TMA.

Net sales for the Protectand Direct segment for fiscal 2005 increased slightly to $73,575,000 from$73,282,000 for fiscal 2004 due to strong international sales growth, asmentioned above. Domestic sales decreased by 5%. We believe that the decrease indomestic sales volume was due to state budgetary constraints and transportationfunding uncertainties caused by the continued delay in the passage of the newfederal highway funding bill.  Increasedsales of permanent crash cushions and Triton barrier products were largelyoffset by decreased sales of truck mounted attenuators, sand-filled barrels,delineator products and parts. Sales of permanent crash cushions increasedslightly and sales of parts and TMA products decreased slightly.

*Inform—**Net***sales for the Inform segment for fiscal 2006 increased 14%to $24,134,000 from $21,163,000 for fiscal 2005 due to increased sales ofhighway advisory products which achieved record sales for the year. Inaddition, sales of  weather sensingsystems increased during fiscal 2006. We believe products within the Informsegment also benefited from the passage of the federal highway bill as spendingon these products is more discretionary.

21

----

Net sales for the Informsegment for fiscal 2005 decreased to $21,163,000 from $21,188,000 for fiscal2004. The decrease in sales was primarily due to lower sales volume of highwayadvisory radio products, which were largely offset by increased sales volume ofweather and traffic sensing products.

*Intersection Control—**Net*sales for the Company’sIntersection Control segment for fiscal 2006 increased 9% to $56,194,000 from$51,615,000 for fiscal 2005 due in part to the strong international salesgrowth mentioned above. This sales growth was less than expected and along withthe continued operating underperformance, we approved a restructuring plan forthis segment as further described in Note 17 to the consolidated financialstatements.

Net sales for theIntersection Control segment for fiscal 2005 decreased 8% to $51,615,000 from$55,820,000 for fiscal 2004. The decrease was primarily due to lower saleswhich continued to be affected by ongoing state and municipal budgetary issues,and which resulted in depressed order flows and sales levels significantlylower than planned. The acquisition of Peek Traffic, effective December 2003,contributed net sales of $12,101,000 from the period July 1, 2004 to November 30,2004 not comparable to fiscal 2004.

*Gross Profit Margin*

The Company’s gross profitmargin for fiscal 2006 was 29.8% compared to 31.8% for fiscal 2005. The grossmargin in the Protect and Direct segment decreased due to increased rawmaterial costs, higher freight costs and unfavorable product mix. The grossmargin for the Inform segment increased due to volume efficiencies related tothe higher level of sales. The gross margin in the Intersection Control segmentdecreased due to unfavorable product mix and plant inefficiencies associatedwith the restructuring activities.

Our gross profit marginfor fiscal 2005 was 31.8% compared to 31.5% for fiscal 2004 as higher grossmargins for the Inform segment and Intersection Control segment were largelyoffset by lower gross profit margins in the Protect and Direct segment due to increased raw material costs,particularly steel costs which were not entirely passed along to customers. Thegross margin for the Inform and Intersection Control segments increasedmodestly due to favorable sales mix.

*Selling and Administrative Expenses*

Selling and administrativeexpenses for fiscal 2006 decreased $2,376,000, or 6%, to $37,681,000 from$40,057,000 for fiscal 2005. Selling and administrative expenses in the Protectand Direct segment decreased due to the elimination of costs incurred by ourformer captive manufacturer which was sold last year, and due to lowermarketing expenses. Selling and administrative expenses in the IntersectionControl segment decreased primarily due to the realization of cost reductionefforts over the past year. Selling and administrative costs for the Inform segmentincreased partially due to variable expenses related to the increased level oftheir sales. Selling and administrative expenses for fiscal 2006 include$1,027,000 in expense related to the adoption in fiscal 2006 of FAS 123Rrequiring the expensing of stock options as further discussed in Note 8. Sellingand administrative expenses decreased as a percentage of sales to 23.4% forfiscal 2006 compared to 27.4% for 2005 primarily due to the increase in salesand the realization of cost reduction efforts.

Selling and administrativeexpenses for fiscal 2005 increased $3,357,000, or 9%, to $40,057,000 from$36,700,000 for fiscal 2005. Expenses increased due to the inclusion of PeekTraffic expenses of $2,366,000 for the period from July 1, 2004 to November 30,2004 not comparable to fiscal 2004. Expenses relating to Sarbanes-Oxleycompliance and employee related expenses also increased. Selling andadministrative expenses increased significantly in the Intersection Controlsegment due to the inclusion of Peek Traffic. 

22

----

Sellingand administrative expenses in the Inform segment also increased, primarily dueto increased variable costs related to the higher sales level of weathersensing products. Selling and administrative expenses increased only slightlyin the Protect and Direct segment. * *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.

*Research and Development*

Research and developmentexpenditures were $5,958,000 for fiscal 2006 compared to $5,391,000 for fiscal2005. Expenditures increased across all operating segments as we work on thedevelopment of innovative new products to address safety needs both here andabroad.

Research and developmentexpenditures were $5,391,000 for fiscal 2005 compared to $3,605,000 for fiscal2004. The increase of $1,786,000 was due primarily to increased expenditures bythe Intersection Control segment to enhance and upgrade their product suite. Expendituresin the Inform and Protect and Direct segments also increased as they developnew products and application extensions to existing products.

*Gain on Sale of Assets*

We recorded a gain of$846,000 in fiscal 2006 in the Inform segment due to the sale of the weatherforecasting product line in our Inform segment. We received proceeds of $1,566,000from the sale, which occurred during the fourth quarter.

We recorded a gain of$566,000 in fiscal 2005 due to the sale of certain machinery and equipment of acaptive manufacturer of the Protect and Direct segment and received proceeds of$650,000. We also received proceeds of $992,000 from the sale of land andrecorded a gain on that sale of $560,000 for the Protect and Direct segment inthe second quarter of fiscal 2005 which was reclassified from other incomeduring the fourth quarter of fiscal 2005.

*Gain on Legal Settlements*

As further discussed inNote 18 to the consolidated financial statements, we recorded a gain of$2,975,000 in fiscal 2006 in the Intersection Control segment due to thesettlement of legal claims with the sellers of U.S. Traffic (UST) and Peek TrafficCorporation (Peek Traffic).

*Restructuring costs*

As further discussed in FUTUREOUTLOOK and in Note 17 to the Consolidated Financial Statements, werecorded $5,775,000 in restructuring costs in the Intersection Control segment.Included in the restructuring costs are proceeds of $1,500,000 related to thesale of the portable variable message sign and illuminated street lightingproduct lines and related costs resulting in a loss of $3,449,000. The saleproceeds more than offset all the cash costs of restructuring through June 30.

*Asset Impairment Charges*

In fiscal year 2006,results at our Intersection Control segment continued to be substandard and weadopted a restructuring plan in April 2006 as further discussed in Note 17.As part of the restructuring plan, we sold the portable variable message sign,illuminated street lighting and tunnel lighting product lines and wediscontinued other low-margin and non-core product lines. As a result of thecontinued poor 

23

----

performanceand the Company’s impairment review in the fourth quarter of fiscal 2006, wedetermined that the carrying amounts of certain long-lived assets were nolonger recoverable based on estimated future operating cash flows to begenerated by those assets, which were lower than previously projected. Asfurther discussed below and in Note 6, we recorded asset impairment charges inthe Intersection Control segment of $13,374,000, or $8,723,000, net of incometax benefits, or $0.98 per diluted share. The charges included $10,225,000 forgoodwill and $3,149,000 for fixed assets.

Our fiscal 2005 annualimpairment review did not result in any impairment charges. 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 our Company as a whole. In addition, USToperating results were much lower than expected. As a result of these factorsand our impairment review in the fourth quarter of fiscal 2004, we determinedthat the carrying amounts of certain long-lived assets were no longerrecoverable based on estimated future cash flows to be generated by thoseassets, which were lower than previously projected. We recorded assetimpairment charges for fiscal 2004 of $32,600,000, or $21,266,000 net of incometax benefits, or $2.48 per diluted share. The charges within the Inform segmentincluded $7,646,000 relating to goodwill and $2,219,000 for intangible assets.  The charges within the Intersection Controlsegment included $18,363,000 relating to goodwill, $1,963,000 for intangibleassets and $2,409,000 for fixed assets.

*Operating Profit (Loss)*

The operating loss of$10,928,000 for fiscal 2006 compared to operating profit of $2,167,000 forfiscal 2005. The change was primarily due to asset impairment and restructuringcosts incurred in fiscal 2006, which were only partially offset by improvedgross profit margins and lower selling and administrative costs as discussedabove and the gains on legal settlements and sale of assets. The fiscal 2006operating loss includes asset impairment charges of $13,374,000, restructuringcosts of $5,775,000, gains on legal settlements of $2,975,000 and a gain on thesale of assets of $846,000. Operating profit for the Protect and Direct segmentincreased $680,000 to $15,539,000 for fiscal 2006 from $14,859,000 for fiscal2005 which included $1,126,000 in gain on sale of assets, primarily due tolower selling and administrative costs as discussed above. Operating profit forthe Inform segment increased $2,252,000 to $3,403,000 for fiscal 2006,including $864,000 in a gain on sale of assets, from $1,151,000 for fiscal 2005primarily due to the higher sales and volume efficiencies related to the higherlevel of sales. The operating loss for the Intersection Control segment was$22,360,000, including asset impairment charges of $13,374,000, restructuringcosts of $5,775,000 and a gain on legal settlements of $2,975,000, compared toan operating loss for fiscal 2005 of $5,723,000.

Operating profit of$2,167,000 for fiscal 2005 compared to an operating loss of $25,602,000 forfiscal 2004. The change was primarily due to the asset impairment charges of$32,600,000 included in the fiscal 2004 operating loss.  Operating profit for the Protect and Directsegment decreased $1,045,000 to $14,859,000 for fiscal 2005 from $15,904,000for fiscal 2004 primarily due to lower gross margins caused by increasedmaterial costs. Operating profit for the Protect and Direct segment for fiscal2005 included $1,126,000 in gain on sale of assets.   Operating profit for the Inform segmentincreased $9,077,000 to $1,151,000 for fiscal 2005 from the operating loss of$7,926,000 for fiscal 2004 primarily due to the asset impairment charges of$9,865,000 recorded in fiscal 2004.   Theoperating loss for the Intersection Control segment was $5,723,000 compared toan operating loss for fiscal 2004 of $25,687,000 which included the assetimpairment charges of $22,735,000.

24

----

*Interest Expense*

Interest expense forfiscal 2006 increased $1,410,000 to $4,708,000 from $3,298,000 in fiscal 2005. Theincrease was due primarily to higher interest rates and also to the higherlevel of average long-term debt outstanding during fiscal 2006. The interestrate on the Company’s credit agreement is based on prime or LIBOR and a fixedrate, plus a margin. The weighted average interest rate was 7.7% as of June 30,2006 compared to a weighted average rate of 5.5% as of June 30, 2005. Theinterest rate on the Company’s convertible debt issued during fiscal 2005 is 7%.The Company expects the average interest rate during fiscal 2007 on all debt tobe approximately 7%.

Interest expense forfiscal 2005 increased $1,154,000 to $3,298,000 from $2,144,000 in fiscal 2004. Theincrease was due primarily to higher interest rates, and also to the higherlevel of average long-term debt outstanding during fiscal 2005. The interestrate on our credit agreement was based on prime or LIBOR and a fixed rate, plusa margin. The weighted average rate was 5.5% as of June 30, 2005 comparedto a weighted average rate of 3.7% as of June 30, 2004. The interest rateon our convertible debt issued during fiscal 2005 was 7%.

*Provision for Income Taxes*

The income tax benefit forfiscal 2006 was $5,472,000, reflecting a 35% effective tax rate. Included inthe income tax benefit for fiscal 2006 was $4,651,000 relating to the assetimpairment charges. We expect to provide for income taxes at a rate of 38% forfiscal 2007. However, this rate may be negatively impacted based on management’songoing evaluation as to whether it is more likely than not that some or all ofthe deferred tax assets recorded are realizable.

The income tax benefit forfiscal 2005 was $447,000, reflecting a 41% effective tax rate. The income taxbenefit for fiscal 2004 was $10,901,000, which included $11,334,000 relating tothe asset impairment charges recorded in the fourth quarter and a $1,249,000income tax benefit related to the favorable settlement of a tax audit recordedduring the third quarter.

*Net Earnings (Loss)*

The net loss for fiscal2006 was $10,102,000, or $1.14 per diluted share, compared to a net loss of$650,000, or $0.07 per diluted share, for 2005. Included in the net loss forfiscal 2006 were the asset impairment charges of $8,723,000, net of taxes, or$0.98 per diluted share. Also included in the net loss for fiscal 2006 was$812,000 in stock option expense, or $0.09 per diluted share.

The net loss for fiscal2005 was $650,000, or $0.07 per diluted share, compared to a net loss of$17,027,000, or $1.99 per diluted share, for 2004. Included in the net loss forfiscal 2004 were the asset impairment charges of $21,266,000, net of taxes, or$2.48 per diluted share.

25

----

**FINANCIAL CONDITION**

*Liquidity andCapital Resources*

Our principal sources of funds historically have beencash flows from operations and borrowings from banks and other sources. TheCompany had cash and cash equivalents of $869,000 as of June 30, 2006 and accessto additional funds of approximately $20 million in bank lines of credit. Ouroutstanding borrowings were $51,587,000, or 51.3% of total capitalization, asof June 30, 2006, of which $6,000,000 was outstanding on our bank creditfacility. This compares to $50,014,000, or 44.7% of total capitalization, as ofJune 30, 2005.

During February 2005, we sold $40,000,000 of 7%Convertible Senior Subordinated Notes due February 15, 2025 in a privateplacement and received net proceeds of $37,395,000. The net proceeds were usedto pay off our bank term loan and reduce the amount of its revolving creditagreement. The conversion price is $25.90 per share, which represented a 40%premium over the closing price of our stock on the close of the transaction.If fully converted, the notes wouldconvert into approximately 1,544,000 shares of our common stock. Theshares are not included in earnings per share as they are currentlyanti-dilutive until earnings per share reach approximately $1.20 per share. Thenotes 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 us to repurchase the notes in cash at a price equal to100% of the principal amount of the notes plus accrued and unpaid interest, ifany, on February 15, 2010, 2015 or 2020.

We entered into a newsecured credit agreement during April 2005 with one bank which currentlyexpires on February 1, 2008. We believe that this collateralized creditagreement is an important source of liquidity. The credit agreement providesfor 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 is also required to maintaina maximum senior leverage ratio. We are in compliance with these covenants andexpect to remain in compliance through fiscal 2007. Under certain conditions,we may request a release of all security interests at which time we would nolonger be 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.

*Cash Flows*

Cash flows provided by operations were $4,504,000during fiscal 2006. This compares with $3,398,000 in fiscal 2005 and $8,676,000in fiscal 2004. In each of the past three years, cash flow from operations wasprimarily derived from earnings before non-cash expenses such as depreciation,amortization and asset impairment charges. The increase in cash generated fromoperating activities in fiscal 2006 is primarily due to the increase inearnings before non-cash expenses.

Investing activities used cash of $308,000 duringfiscal 2006, compared to $910,000 in fiscal 2005 and $15,943,000 in fiscal 2004.Expenditures during fiscal 2006 included $3,048,000 for capital expenditures,which were more than offset by proceeds received from the sale of assets.

Financing activities used cash of $3,483,000 duringfiscal 2006, compared to cash used of $4,709,000 during fiscal 2005 and cashprovided of $5,910,000 in fiscal 2004. During fiscal 2006, we borrowed a net$2,000,000 on our outstanding revolving credit facility and paid $427,000 onother notes payable. We received cash of $1,031,000 from the exercise of commonstock options. The payment of our semi-annual cash dividend used cash of$3,185,000. As further discussed in Note 18 to the consolidated financial 

26

----

statements, we paid$3,105,000 to purchase 150,603 shares of our common stock from the sellersof Peek Traffic for the treasury.

For 2007, we anticipateneeding approximately $3,000,000 in cash for capital expenditures. The Companymay also need additional cash as it considers acquiring businesses thatcomplement its existing operations. The Company may require additionalinvestments in working capital to maintain growth. The Company may also needadditional funds to repurchase its own common stock from time to time. Theseexpenditures will be financed either through the Company’s cash on-hand, cashgenerated from its operations or from borrowings available under the Company’sbank credit facility. We currently expect cash generated from operations to behigher in fiscal year 2007 compared to fiscal 2006. However, due touncertainties in the restructuring of the Intersection Control segment, asdiscussed in Note 17 to the consolidated financial statements, and theseasonality of our business, there can be no assurance that this will occur, orto what extent this will occur. We believe that our existing cash, cashgenerated from operations and funds available under its existing creditfacility are sufficient for all planned operating and capital requirements inthe near term. If needed and available on favorable terms, we may also enterinto other debt or equity financing arrangements.

**OFF-BALANCE SHEETARRANGEMENTS AND CONTRACTUAL OBLIGATIONS**

We aresubject to certain debt obligations, guarantees, commitments and contingentliabilities further described in the notes to the consolidated financialstatements. The following table presents our contractual obligations to makefuture payments under contracts, such as debt and lease agreements, as of June 30,2006:

| ** **                       | ** ** | ** **                                       | ** ** | **Less than** | ** ** | ** **         | ** ** | ** **         | ** ** | **More than** | ** ** |
|----------------------------------|------------|--------------------------------------------------|------------|--------------------|------------|--------------------|------------|--------------------|------------|--------------------|------------|
| ** **                       | ** ** | **Total**                                        | ** ** | **1 Year**    | ** ** | **1-3 Years** | ** ** | **3-5 Years** | ** ** | **5 Years**   | ** ** |
| ** **                       | ** ** | **(Dollar amounts in thousands)** | ** ** |
| Long-term debt  (1)              |       | $                                                | 51,587     |               |       | $                  | 465        |               |       | $                  | 5,122      |   | $ | 40,000 |   |   | $ | 6,000 |   |   |
| Estimated  interest payments (2) |       | 14,140                                           |       |               | 3,558      |               |       | 6,752              |       | 3,370              |       |   | 460 |   |   |
| Operating leases,  net           |       | 12,952                                           |       |               | 3,466      |               |       | 4,390              |       | 1,242              |       |   | 3,854 |   |   |
| Minimum royalty  payments        |       | 2,266                                            |       |               | 816        |               |       | 850                |       | 600                |       |   | — |   |   |
| Retirement award  program (3)    |       | 759                                              |       |               | 81         |               |       | 125                |       | 83                 |       |   | 470 |   |   |
| Purchase  obligations (4)   |       | 11,260                                           |       |               | 11,260     |               |       |               |       |               |       |   |   |   |   |
| Total                            |       | $                                                | 92,964     |               |       | $                  | 19,646     |               |       | $                  | 17,239     |   | $ | 45,295 |   |   | $ | 10,784 |   |   |

----

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

(2)   Amount includesestimated interest payments based on interest rates as of the current period. Interestrates on variable-rate debt are subject to change in the future. Interest isestimated based upon current and effective maturities as well as expectedrenewals of long-term debt currently outstanding.

(3)   Retirementaward is a fixed number of Quixote Corporation shares for each of theparticipants each year for which the income tax obligation is paid in cash.

(4)   Purchaseobligations include orders with suppliers in the normal course of business on ashort-term basis.

As disclosed in thefootnotes to the consolidated financial statements, we have entered into bidand performance related bonds associated with various contracts. Potentialpayments due under these bonds are related to our performance under theapplicable contract. The total amount of bid and performance related bonds thatwere available and undrawn as of June 30, 2006 was $3,028,000. We alsohave standby letters of credit covering potential workers’ compensationliabilities. The total standby exposure relating to letters of credit as of June 30,2006 was $1,144,000.

27

----

**FUTURE OUTLOOK**

We believe that prospects for increased spending forour products in fiscal 2007 will improve given the enactment of the federaltransportation funding legislation, SAFETEA-LU, in August 2005. State andlocal governments increased spending on transportation safety in fiscal year2006 as both national and local economies improved and we expect this trend tocontinue into fiscal 2007. We are seeing increased order activity in most areasof our business. We also expect international sales to continue to be animportant driver of our sales growth. However, it is difficult to predict towhat extent we will see increased spending for our products and there can be noassurance that either domestic or international sales will continue toincrease.

As further discussed in Note 17 to theconsolidated financial statements, the continued underperformance of theIntersection Control segment resulted in our decision to rationalize thatbusiness and divest certain non-core product lines. A restructuring plan wasapproved by our Board on April 25, 2006 to reduce costs through thereduction of overhead by closing two facilities and by the reduction ofheadcount. As part of the restructuring plan, we sold the portable sign and thelighting product lines in June, 2006. We intend to discontinue the fixedoverhead sign portion of that business. Within the remaining IntersectionControl business, we will outsource non-core manufacturing, but continue toassemble and test products. In connection with the restructuring plan, we expectto record total cash and non-cash charges of approximately $14 million. Mostof the substantial restructuring charges are expected to be incurred before theend of our fiscal 2007 second quarter. We expect the plan will result inprofitability for the Intersection Control business beginning in the thirdquarter of fiscal 2007 with annualized operating cost savings of approximately$5 to $6 million. However, there can be no assurance that we will achievethat level of savings. After the sale and discontinuation of product lines,annualized revenues for the Intersection Control segment are estimated to beapproximately $38 million from $56 million for fiscal 2006. Forfiscal 2007, we estimate depreciation and amortization expense to beapproximately $5.2 million.

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 within our Inform and Intersection Controlsegments are lower than our historical gross profit margin as we experiencerigorous competition in selling certain product lines because they aregenerally sold through a bidding process, These trends are adversely affectingour gross profit margin and we do not believe these trends will improve in thenear future.

**SIGNIFICANTACCOUNTING POLICIES**

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, health care liabilities and determining stock-based compensationexpense. These estimates are made using management’s best judgment givenrelevant factors and available data. Actual results could differ materiallyfrom those estimates. Note 2 to our June 30, 2006 consolidatedfinancial statements includes a summary of the significant accounting policies,methods and estimates used in the preparation of the Company’s consolidatedfinancial statements. There have been no material changes in accountingpolicies, methods and estimates used by management except for the adoption ofSFAS No. 123 (revised 2004), “Share-Based Payment”. In the opinion ofmanagement, 

28

----

we do not have anyindividual accounting policy or use any individual estimate that is critical tothe preparation of its consolidated financial statements. In most instances, wemust use an accounting policy or method because it is the only policy or methodpermitted under U.S. GAAP. We believe the following significant accountingpolicies and methods used by the Company are the most important to thepresentation of our financial statements:

Revenue Recognition: Revenues, net of discounts andallowances, are recognized when either services have been rendered or bothtitle and risk of loss of products have been transferred to unaffiliatedcustomers. Additionally, we ensure that collection of the resulting receivableis probable, persuasive evidence that an arrangement exists, and the revenue isfixed or determinable. Provision for estimated uncollectible amounts and creditmemos is made based upon management’s analysis of bad debts and credit memos.

Inventories: Inventories are valued at the lower ofcost (first-in, first-out method) or market. Actual costs are used to value rawmaterials and supplies. Standard costs, which approximate actual costs, areused to value finished goods and work-in-process. Standard costs include rawmaterials, direct labor and manufacturing overhead. Provision for potentiallyobsolete or slow-moving inventory is made based on management’s analysis ofinventory levels, ages and salability.

Long-Lived Assets: Long-lived assets include suchitems as goodwill, patents, product rights, other intangible assets andproperty, plant and equipment. For purposes of evaluating the recoverability oflong-lived assets, we assess the possibility of obsolescence, demand, newtechnology, competition, and other pertinent economic factors and trends thatmay have an impact on the value or remaining lives of these assets.

Amortized long-lived assets (including amortizedintangible assets and property, plant and equipment) held and used by us arereviewed for impairment whenever events or changes in circumstances indicatethat the carrying amount of an asset may not be recoverable in relation tofuture undiscounted cash flows of underlying asset groups. The net carryingvalue of assets not recoverable is reduced to fair value. Fair values ofamortized long-lived assets are determined based upon the performance of a fairvalue appraisal. Patents and other finite-lived intangible assets are amortizedon a straight-line or systematic method over the life of the patent orintangible asset.

Goodwill and other indefinite-lived intangible assetsare tested for impairment annually in the fourth quarter or when a triggeringevent occurs. The indefinite-lived intangible asset impairment test isperformed by comparing the fair value of the intangible asset to its carryingvalue in a one-step analysis. If the fair value of the intangible asset is lessthan its carrying value, the intangible asset is written-down to its fair value.The goodwill impairment test is performed at the reporting unit level and is atwo-step analysis. First, the fair value of the reporting unit is compared toits book value. If the fair value of the reporting unit is less than its bookvalue, we perform a hypothetical purchase price allocation based on thereporting unit’s fair value to determine the implied fair value of thereporting unit’s goodwill. If the implied fair value of the goodwill is lessthan its carrying value, the goodwill is written-down to its implied fair value.Fair values are determined using present value techniques.

As discussed further in Note 6 to our June 30,2006 consolidated financial statements, as a result of our annual impairmentreview during fiscal 2006, we recorded non-cash asset impairment charges of$13,374,000 relating to goodwill and amortized long-lived assets of theIntersection Control segment. Our annual impairment review resulted in noimpairment charges for fiscal year 2005. As a result of our annual impairmentreview during fiscal 2004, we recorded non-cash asset impairment charges of$32,600,000 relating to goodwill, other indefinite-lived intangible assets andamortized long-lived assets of the Intersection Control and Inform segments. Theimpairment review is highly judgmental and involves the use of significantestimates and assumptions. These estimates and assumptions have a significantimpact on the amount of any impairment charge recorded. Estimates of fair valueare primarily determined using 

29

----

discounted cash flowmethods and are dependent upon assumptions of future sales trends, marketconditions and cash flows of each reporting unit over several years. Actualcash flows in the future may differ significantly from those previouslyforecasted. Other significant assumptions include growth rates and the discountrate applicable to future cash flows.

Restructuring Charges: We account for restructuring activitiesin accordance with SFAS No. 146, “Accounting for Costs Associated withExit or Disposal Activities.” Generally, costs associated with the exit ordisposal activity are recognized when the liability is incurred. Costs relatedto employee separation arrangements requiring future service beyond a specifiedminimum retention period are recognized over the service period.

Income Taxes: We recognize deferred tax assets andliabilities for the expected future tax consequences of events that have beenincluded in the financial statements or tax returns. Under this method,deferred tax assets and liabilities are determined based on the differencebetween the financial statement and tax basis of assets and liabilities usingenacted tax rates in effect for the year in which the differences are expectedto reverse. In assessing the realizability of the deferred tax assets,management considers whether it is more likely than not that some portion orall of the deferred tax assets will not be realized. To the extent that anyfuture tax benefits are not expected to be fully realized, such future taxbenefits are reduced by a valuation allowance. Realization of deferred taxassets assumes that we will be able to generate sufficient taxable income sothat the assets will be realized. The factors that we consider 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. We expect 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.

Stock-based Compensation: InDecember 2004, the FASB issued SFAS No. 123 (revised 2004) (SFAS No. 123(R)),“Share-Based Payment”. We adopted the provisions of SFAS No. 123(R) asof July 1, 2005 using the modified prospective method. Under thistransition method, share-based compensation cost recognized in the fiscal yearended June 30, 2006 includes compensation cost for all share-based awardswhich were unvested as of July 1, 2005 as well as compensation cost forall share-based awards granted subsequent to July 1, 2005, based on thegrant date fair value estimated in accordance with the provisions of SFAS No. 123(R).The fair value of the options granted is being amortized on a straight-linebasis over the requisite service period, which is generally the vesting period.Stock option plans are more fully described in Note 8.

**RECENTLY ISSUEDACCOUNTING PRONOUNCEMENTS**

In July 2006, theFinancial Accounting Standards Board (FASB) issued FASB Interpretation No. 48(FIN 48), “Accounting for Uncertainty in Income Taxes—an interpretation ofFASB Statement No. 109”. FIN 48 clarifies the accounting foruncertainty in income taxes recognized in an entity’s financial statements inaccordance with FASB Statement No. 109, “Accounting for Income Taxes”. FIN 48prescribes a recognition threshold and measurement attribute for financialstatement disclosure of tax positions taken or expected to be taken on a taxreturn. Additionally, FIN 48 provides guidance on derecognition,classification, interest and penalties, accounting in interim periods,disclosure and transition. FIN 48 will be effective for our 2008 fiscalyear. We are evaluating the impact that this statement will have on our resultsof operations and financial position.

**FORWARD LOOKINGSTATEMENTS**

Various statements made within the Management’sDiscussion and Analysis of Financial Condition and Results of Operations andelsewhere in this report constitute “forward-looking statements” for purposesof the SEC’s “safe harbor” provisions under the Private Securities LitigationReform Act of 1995 

30

----

and Rule 3b-6under the Securities Exchange Act of 1934, as amended. Except for historicalinformation, any statement that addresses expectations or projections about thefuture, including statements about our strategy for growth, productdevelopment, market position, expenditures, financial results or changes ingovernmental legislation, policies and conditions, is a forward-lookingstatement.

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

**Item 7A.**                Quantitativeand Qualitative Disclosures about Market Risk

We are exposed to market risk from fluctuations ininterest rates on our revolving credit agreement. The exposure to interest ratefluctuations was significantly reduced in the third quarter of fiscal 2005 whenwe issued convertible debt and used the proceeds to pay down the debt issuedpursuant to the revolving credit agreement. Due to the lower exposure to ratefluctuations, the use of derivative instruments in the form of non-tradinginterest rate swaps to manage the risk has been discontinued. As described inNote 7****to the consolidatedfinancial statements, the amount of long-term debt outstanding as of June 30,2006 and 2005 was $51,122,000 and $49,587,000, respectively. A hypothetical 1%increase in interest rates would have adversely affected our 2006 and 2005 netearnings and cash flows by approximately $117,000 and $273,000, respectively.

The majority of ourbusiness is transacted in U.S. dollars and the U.S. dollar is considered theprimary currency for the majority of our operations. Although we continue toevaluate derivative financial instruments to manage foreign currency exchangerate changes, we did not hold such derivatives during 2006 or 2005. Assets,liabilities and commitments that are to be settled in cash and are denominatedin foreign currencies for transaction purposes are sensitive to changes in currencyexchange rates. However, there were no significant transaction gains or lossesduring 2006, 2005 or 2004 and we do not believe we are currently exposed to anymaterial risk of loss from currency exchange fluctuations.

31

----

**Item 8.**                        FinancialStatements and Supplementary Data

**REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

Board of Directors and ShareholdersQuixote Corporation

We have audited the accompanying consolidated balancesheets of Quixote Corporation and subsidiaries as of June 30, 2006 and 2005,and the related consolidated statements of operations, shareholders’ equity,and cash flows for the years then ended. We have also audited the accompanyingSchedule II—Valuation and Qualifying Accounts and Reserves as of June 30,2006 and 2005. The financial statements and schedule are the responsibility ofthe Company’s management. Our responsibility is to express an opinion on thefinancial statements and schedule based on our audit.

We conducted our audits in accordance with thestandards of 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 audits provide 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 30,2006 and 2005, and the results of their operations and their cash flows for theyear then ended in conformity with accounting principles generally accepted inthe United States of America.

As described in Note 2 to the financialstatements the Company has adopted the provisions of SFAS No. 123(R) “Share-BasedPayment” as of July 1, 2005 using the modified prospective method.

We have also audited the adjustments to the 2004information included in Note 16—Industry Segment Information. In ouropinion, such adjustments are appropriate and have been properly applied. Wewere not engaged to audit, review or apply any procedures to the 2004 financialstatements of the Company other than with respect to the segment informationand accordingly, we do not express an opinion or any other form of assurance onthe 2004 financial statements taken as a whole.

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, 2006, based on criteria established in *InternalControl—Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO) and our report dated September 12,2006 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, 2006

32

----

**REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

To the Board of Directors and Shareholders of QuixoteCorporation:

In our opinion, the consolidated statements ofoperations, shareholders’ equity and cash flows for the year ended June 30,2004, before the effects of the adjustments to retrospectively reflect thechange in the composition of reportable segments described in Note 16,present fairly, in all material respects, the results of operations and cashflows of Quixote Corporation and its subsidiaries for the year ended June 30,2004 in conformity with accounting principles generally accepted in the UnitedStates of America (the 2004 consolidated financial statements before theeffects of the adjustments discussed in Note 16 are not presented herein).In addition, in our opinion, the financial statement schedule for the yearended June 30, 2004 presents fairly, in all material respects, theinformation set forth therein when read in conjunction with the relatedconsolidated financial statements before the effects of the adjustmentsdescribed above. These financial statements and financial statement scheduleare the responsibility of the Company’s management. Our responsibility is toexpress an opinion on these financial statements and financial statementschedule based on our audit. We conducted our audit, before the effects of theadjustments described above, of these statements 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, assessing theaccounting principles used and significant estimates made by management, andevaluating the overall financial statement presentation. We believe that ouraudit provides a reasonable basis for our opinion.

We were not engaged to audit, review, or apply anyprocedures to the adjustments to retrospectively reflect the change in thecomposition of reportable segments described in Note 16 and, accordingly,we do not express an opinion or any other form of assurance about whether suchadjustments are appropriate and have been properly applied. Those adjustmentswere audited by other auditors.

/s/ PricewaterhouseCoopers LLP

Chicago, IllinoisSeptember 13, 2004

33

----

**QUIXOTECORPORATION AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

| ** **                                                        | ** ** | **For each of the three years ended June 30,** | ** ** |
|-------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------|------------|
| ** **                                                        | ** ** | **2006**                                                                               | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                        | ** ** | **Dollar amounts in thousands, except share data**       | ** ** |
| Net sales                                                         |       | $                                                                                      | 161,134    |   | $ | 146,353 |   | $ | 150,290 |   |
| Cost of sales                                                     |       | 113,095                                                                                |       | 99,864 |   | 102,987 |   |
| Gross profit                                                      |       | 48,039                                                                                 |       | 46,489 |   | 47,303 |   |
| Operating  (income) expenses:                                     |       |                                                                                   |       |   |   |   |   |
| Selling and administrative                                        |       | 37,681                                                                                 |       | 40,057 |   | 36,700 |   |
| Research and development                                          |       | 5,958                                                                                  |       | 5,391 |   | 3,605 |   |
| Gain on sale of assets                                            |       | (846                                                                                   | )          | (1,126 | ) |   |   |
| Gain on legal settlements                                         |       | (2,975                                                                                 | )          |   |   |   |   |
| Restructuring costs                                               |       | 5,775                                                                                  |       |   |   |   |   |
| Asset impairment charge                                           |       | 13,374                                                                                 |       |   |   | 32,600 |   |
|                                                              |       | 58,967                                                                                 |       | 44,322 |   | 72,905 |   |
| Operating profit (loss)                                           |       | (10,928                                                                                | )          | 2,167 |   | (25,602 | ) |
| Other income  (expense):                                          |       |                                                                                   |       |   |   |   |   |
| Interest income                                                   |       | 62                                                                                     |       | 34 |   | 30 |   |
| Interest expense                                                  |       | (4,708                                                                                 | )          | (3,298 | ) | (2,144 | ) |
| Other                                                             |       |                                                                                   |       |   |   | (212 | ) |
|                                                              |       | (4,646                                                                                 | )          | (3,264 | ) | (2,326 | ) |
| Loss before benefit for income taxes.                             |       | (15,574                                                                                | )          | (1,097 | ) | (27,928 | ) |
| Income tax  benefit                                               |       | (5,472                                                                                 | )          | (447 | ) | (10,901 | ) |
| Net loss                                                          |       | $                                                                                      | (10,102    | ) | $ | (650 | ) | $ | (17,027 | ) |
| Basic loss per  share:                                            |       |                                                                                   |       |   |   |   |   |
| Net loss                                                          |       | $                                                                                      | (1.14      | ) | $ | (0.07 | ) | $ | (1.99 | ) |
| Weighted average common shares outstanding                        |       | 8,850,884                                                                              |       | 8,800,421 |   | 8,567,741 |   |
| Diluted loss per  share:                                          |       |                                                                                   |       |   |   |   |   |
| Net loss                                                          |       | $                                                                                      | (1.14      | ) | $ | (0.07 | ) | $ | (1.99 | ) |
| Weighted average  common and common equivalent shares outstanding |       | 8,850,884                                                                              |       | 8,800,421 |   | 8,567,741 |   |

 

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

34

----

**QUIXOTE CORPORATION AND SUBSIDIARIES**

**CONSOLIDATED BALANCE SHEETS**

| ** **                                                                                                                                  | ** ** | **As of June 30,**                                        | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------|------------|
| ** **                                                                                                                                  | ** ** | **2006**                                                                 | ** ** | **2005** | ** ** |
| ** **                                                                                                                                  | ** ** | **Dollar amounts  in thousands,  except share data** | ** ** |
| ASSETS                                                                                                                                      |       |                                                                     |       |   |   |
| Current assets:                                                                                                                             |       |                                                                     |       |   |   |
| Cash and cash  equivalents                                                                                                                  |       | $                                                                        | 869        |   | $ | 156 |   |
| Accounts  receivable, net of allowance for doubtful accounts of $1,816 in 2006 and  $1,581 in 2005                                          |       | 36,481                                                                   |       | 32,745 |   |
| Refundable income  taxes                                                                                                                    |       | 238                                                                      |       |   |   |
| Inventories, net                                                                                                                            |       | 25,465                                                                   |       | 27,411 |   |
| Deferred income  taxes                                                                                                                      |       | 3,824                                                                    |       | 5,765 |   |
| Other current  assets                                                                                                                       |       | 952                                                                      |       | 1,160 |   |
| Total current  assets                                                                                                                       |       | 67,829                                                                   |       | 67,237 |   |
| Property, plant and equipment at cost:                                                                                                      |       |                                                                     |       |   |   |
| Land                                                                                                                                        |       | 1,088                                                                    |       | 1,054 |   |
| Buildings and  improvements                                                                                                                 |       | 15,811                                                                   |       | 15,710 |   |
| Machinery and  equipment                                                                                                                    |       | 17,385                                                                   |       | 20,058 |   |
| Furniture and  fixtures                                                                                                                     |       | 2,150                                                                    |       | 2,019 |   |
| Computer equipment  and software                                                                                                            |       | 8,346                                                                    |       | 7,892 |   |
| Leasehold  improvements                                                                                                                     |       | 1,638                                                                    |       | 1,624 |   |
| Construction in  progress                                                                                                                   |       | 296                                                                      |       | 629 |   |
|                                                                                                                                        |       | 46,714                                                                   |       | 48,986 |   |
| Less: accumulated  depreciation                                                                                                             |       | (27,179                                                                  | )          | (23,978 | ) |
|                                                                                                                                        |       | 19,535                                                                   |       | 25,008 |   |
| Goodwill                                                                                                                                    |       | 17,385                                                                   |       | 29,313 |   |
| Intangible assets,  net                                                                                                                     |       | 6,467                                                                    |       | 7,340 |   |
| Deferred income  taxes                                                                                                                      |       | 11,844                                                                   |       | 5,083 |   |
| Other assets                                                                                                                                |       | 2,143                                                                    |       | 2,809 |   |
|                                                                                                                                        |       | $125,203                                                                 |       | $136,790 |   |
| LIABILITIES AND SHAREHOLDERS’ EQUITY                                                                                                   |       |                                                                     |       |   |   |
| Current liabilities:                                                                                                                        |       |                                                                     |       |   |   |
| Current portion of  long-term debt                                                                                                          |       | $                                                                        | 465        |   | $ | 427 |   |
| Accounts payable                                                                                                                            |       | 13,234                                                                   |       | 11,061 |   |
| Dividends payable                                                                                                                           |       | 1,688                                                                    |       | 1,595 |   |
| Accrued expenses:                                                                                                                           |       |                                                                     |       |   |   |
| Payroll and  commissions                                                                                                                    |       | 3,507                                                                    |       | 3,164 |   |
| Warranty                                                                                                                                    |       | 927                                                                      |       | 2,510 |   |
| Accrued insurance                                                                                                                           |       | 1,431                                                                    |       | 1,558 |   |
| Accrued interest                                                                                                                            |       | 1,108                                                                    |       | 1,054 |   |
| Other                                                                                                                                       |       | 1,688                                                                    |       | 2,935 |   |
| Total current  liabilities                                                                                                                  |       | 24,048                                                                   |       | 24,304 |   |
| Long-term debt,  net of current portion                                                                                                     |       | 51,122                                                                   |       | 49,587 |   |
| Other long-term  liabilities                                                                                                                |       | 1,087                                                                    |       | 1,053 |   |
| Commitments and contingent liabilities                                                                                                      |       |                                                                     |       |   |   |
| Shareholders’ equity:                                                                                                                  |       |                                                                     |       |   |   |
| Preferred stock,  no par value; authorized 100,000 shares; none issued                                                                      |       |                                                                     |       |   |   |
| Common stock, par  value $.01-2/3; authorized 15,000,000 shares; issued 10,904,678  shares—2006 and issued 10,799,784 shares—2005 |       | 182                                                                      |       | 180 |   |
| Capital in excess  of par value of stock                                                                                                    |       | 62,434                                                                   |       | 59,382 |   |
| Retained earnings                                                                                                                           |       | 10,226                                                                   |       | 23,605 |   |
| Accumulated  comprehensive income                                                                                                           |       | 227                                                                      |       | 345 |   |
| Treasury stock, at  cost, 2,008,636 shares—2006 and 1,915,353 shares—2005                                                         |       | (24,123                                                                  | )          | (21,666 | ) |
| Total  shareholders’ equity                                                                                                            |       | 48,946                                                                   |       | 61,846 |   |
|                                                                                                                                        |       | $                                                                        | 125,203    |   | $ | 136,790 |   |

 

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

35

----

**QUIXOTE CORPORATION AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY**

| ** **                                                             | ** ** | **For the three years ended June 30, 2006**   | ** ** |
|------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------|------------|
| ** **                                                             | ** ** | ** **                                                                       | ** ** | ** ** | ** ** | **Capital in** | ** ** | **Accumulated** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Compre-** | ** ** |
| ** **                                                             | ** ** | ** **                                                                       | ** ** | **Excess of** | ** ** | **Compre-** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **hensive** | ** ** |
| ** **                                                             | ** ** | **Common Stock**                                                                 | ** ** | **Par Value** | ** ** | **hensive** | ** ** | **Retained** | ** ** | **Treasury Stock** | ** ** | **Income** | ** ** |
| ** **                                                             | ** ** | **Shares**                                                                       | ** ** | **Dollars** | ** ** | **of Stock** | ** ** | **Income(Loss)** | ** ** | **Earnings** | ** ** | **Shares** | ** ** | **Dollars** | ** ** | **(Loss)** | ** ** |
| ** **                                                             | ** ** | **Dollar amounts in thousands, except share data** | ** ** |
| BALANCES, JULY 1, 2003                                                 |       | 10,437,436                                                                       |       |   | $ | 174 |   |   |   | $ | 52,173 |   |   |   | $ | (44 | ) |   |   | $ | 47,368 |   |   | 2,131,963 |   | $ | (24,116 | ) |   |   |   |   |
| 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 | ) |   |
| Exercise of options, net of tax                                        |       | 94,100                                                                           |       |   | 2 |   |   |   | 1,234 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net loss - 2006                                                        |       |                                                                             |       |   |   |   |   |   |   |   |   |   |   |   |   |   | (10,102 | ) |   |   |   |   |   |   | $ | (10,102 | ) |   |
| Other comprehensive income                                             |       |                                                                             |       |   |   |   |   |   |   |   |   |   | (118 | ) |   |   |   |   |   |   |   |   |   |   | (118 | ) |   |
| Declaration of semi-annual cash dividends  ($0.18 and $0.19 per share) |       |                                                                             |       |   |   |   |   |   |   |   |   |   |   |   |   |   | (3,277 | ) |   |   |   |   |   |   |   |   |   |
| Issuance of shares for 401K plan                                       |       |                                                                             |       |   |   |   |   |   | 575 |   |   |   |   |   |   |   |   |   |   | (57,320 | ) | 648 |   |   |   |   |   |
| FAS 123R stock compensation expense                                    |       |                                                                             |       |   |   |   |   |   | 1,027 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Shares for settlement of legal issue                                   |       |                                                                             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 150,603 |   | (3,105 | ) |   |   |   |   |
| Issuance of shares pursuant to the stock  retirement plan              |       | 10,794                                                                           |       |   |   |   |   |   | 216 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| BALANCES, JUNE 30,  2006                                               |       | 10,904,678                                                                       |       |   | $ | 182 |   |   |   | $ | 62,434 |   |   |   | $ | 227 |   |   |   | $ | 10,226 |   |   | 2,008,636  |   | $ | (24,123 | ) |   | $ | (10,220 | ) |   |

 

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

36

----

**QUIXOTE CORPORATION AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

| ** **                                                                                         | ** ** | **For each of the three years  ended June 30,** | ** ** |
|----------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------|------------|
| ** **                                                                                         | ** ** | **2006**                                                                           | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                                         | ** ** | **Dollar amounts in thousands**                                     | ** ** |
| OPERATING ACTIVITIES:                                                                              |       |                                                                               |       |   |   |   |   |
| Net earnings (loss)                                                                                |       | $                                                                                  | (10,102    | ) | $ | (650 | ) | $ | (17,027 | ) |
| ADJUSTMENTS TO  RECONCILE NET EARNINGS (LOSS) TO NET CASH PROVIDED BY CONTINUING  OPERATIONS: |       |                                                                               |       |   |   |   |   |
| Asset impairment charges                                                                           |       | 13,374                                                                             |       |   |   | 32,600 |   |
| Depreciation                                                                                       |       | 4,701                                                                              |       | 4,587 |   | 4,763 |   |
| Amortization                                                                                       |       | 1,736                                                                              |       | 1,224 |   | 1,757 |   |
| (Gain) loss on disposition of assets                                                               |       | 2,603                                                                              |       | (1,126 | ) | 212 |   |
| Non-cash restructuring charges                                                                     |       | 864                                                                                |       |   |   |   |   |
| Deferred income taxes                                                                              |       | (5,880                                                                             | )          | 2,253 |   | (9,380 | ) |
| Provisions for losses on accounts receivable                                                       |       | 235                                                                                |       | 647 |   | 686 |   |
| Issuance of stock retirement plan shares                                                           |       | 216                                                                                |       | 210 |   | 227 |   |
| Income tax benefit from employee stock options                                                     |       |                                                                               |       | 160 |   | 431 |   |
| Issuance of stock to 401K plan                                                                     |       | 1,223                                                                              |       | 704 |   |   |   |
| FAS 123R stock compensation expense                                                                |       | 1,027                                                                              |       |   |   |   |   |
| Issuance of restricted stock                                                                       |       |                                                                               |       |   |   | 393 |   |
| Changes in operating  assets and liabilities, net of acquisitions:                                 |       |                                                                               |       |   |   |   |   |
| Accounts receivable                                                                                |       | (3,972                                                                             | )          | 218 |   | 4,956 |   |
| Inventories                                                                                        |       | (1,869                                                                             | )          | (2,109 | ) | 726 |   |
| Other assets                                                                                       |       | 221                                                                                |       | (614 | ) | 267 |   |
| Accounts payable and accrued expenses                                                              |       | (729                                                                               | )          | (929 | ) | (6,907 | ) |
| Income taxes payable/refundable                                                                    |       | 822                                                                                |       | (950 | ) | (4,676 | ) |
| Other long-term liabilities                                                                        |       | 34                                                                                 |       | (227 | ) | (352 | ) |
| Net cash provided by operating activities                                                          |       | 4,504                                                                              |       | 3,398 |   | 8,676 |   |
| INVESTING  ACTIVITIES:                                                                             |       |                                                                               |       |   |   |   |   |
| Cash paid for acquired businesses, net of cash  acquired                                           |       |                                                                               |       |   |   | (11,263 | ) |
| Capital expenditures                                                                               |       | (3,048                                                                             | )          | (3,805 | ) | (4,638 | ) |
| Proceeds from sale of assets                                                                       |       | 3,066                                                                              |       | 1,642 |   |   |   |
| Proceeds from sale/leaseback of assets                                                             |       |                                                                               |       | 1,206 |   |   |   |
| Patent expenditures                                                                                |       | (326                                                                               | )          | (170 | ) | (42 | ) |
| Payments on notes receivable                                                                       |       |                                                                               |       | 217 |   |   |   |
| Net cash used in investing activities                                                              |       | (308)                                                                              |       | (910) |   | (15,943 | ) |
| FINANCING  ACTIVITIES:                                                                             |       |                                                                               |       |   |   |   |   |
| Proceeds from convertible debt offering                                                            |       |                                                                               |       | 40,000 |   |   |   |
| Fees on convertible debt offering                                                                  |       |                                                                               |       | (2,605 | ) |   |   |
| Payments on notes payable                                                                          |       | (427                                                                               | )          | (393 | ) | (910 | ) |
| Payments on revolving credit agreement                                                             |       | (37,350                                                                            | )          | (37,400 | ) | (22,250 | ) |
| Proceeds from revolving credit agreement                                                           |       | 39,350                                                                             |       | 14,400 |   | 32,750 |   |
| Payments on term loan                                                                              |       |                                                                               |       | (17,000 | ) | (3,000 | ) |
| Proceeds from interest rate swap arrangement                                                       |       |                                                                               |       | 394 |   |   |   |
| Payment of semi-annual cash dividends                                                              |       | (3,185                                                                             | )          | (3,066 | ) | (2,827 | ) |
| Proceeds from exercise of common stock options                                                     |       | 1,031                                                                              |       | 961 |   | 2,147 |   |
| Income tax benefit from employee stock options                                                     |       | 203                                                                                |       |   |   |   |   |
| Repurchase of common stock for treasury                                                            |       | (3,105                                                                             | )          |   |   |   |   |
| Net cash (used in) provided by financing activities                                                |       | (3,483                                                                             | )          | (4,709 | ) | 5,910 |   |
| Effect of exchange rate changes on cash                                                            |       |                                                                               |       | (12 | ) | (7 | ) |
| Net change in cash and cash equivalents                                                            |       | 713                                                                                |       | (2,233 | ) | (1,364 | ) |
| Cash and cash equivalents at beginning of year                                                     |       | 156                                                                                |       | 2,389 |   | 3,753 |   |
| Cash and cash  equivalents at end of year                                                          |       | $                                                                                  | 869        |   | $ | 156 |   | $ | 2,389 |   |

 

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

37

----

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

**1.   NATURE OF BUSINESS**

Quixote Corporation andits subsidiaries (the Company, we, our or us) develop, manufacture and market,to both domestic and international markets, energy-absorbing highway crashcushions, flexible post delineators, electronic wireless measuring and sensingdevices, computerized highway advisory radio transmitting systems, intelligentintersection control devices, video detection systems and other highway andtransportation safety products to protect, direct and inform motorists and highwayworkers.

**2.   ACCOUNTINGPOLICIES**

**CONSOLIDATION**

The consolidated financialstatements include the accounts of Quixote Corporation and its wholly-ownedsubsidiaries. All significant intercompany accounts and transactions have beeneliminated in consolidation.

**MANAGEMENT ESTIMATES**

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States of America (U.S. GAAP) requires management tomake estimates and assumptions that affect the reported amounts of assets and liabilitiesand the disclosure of contingent assets and liabilities at the date of thefinancial statements. Management’s estimates also affect the reported amountsof revenues and expenses during the reporting period. Actual results coulddiffer from those estimates.

**CASH AND CASH EQUIVALENTS**

Cash in excess ofoperating requirements is invested in income-producing investments generallyhaving initial maturities of three months or less. These investments are statedat cost, which approximates market value. We consider these short-terminstruments to be cash equivalents.

**INVENTORIES**

Inventories are valued atthe lower of cost (first-in, first-out method) or market. Actual costs are usedto value raw materials and supplies. Standard costs, which approximate actualcosts, are used to value finished goods and work-in-process. Standard costsinclude raw materials, direct labor and manufacturing overhead. Provision forpotentially obsolete or slow-moving inventory is made based on management’sanalysis of inventory levels, ages and salability.

**PROPERTY, PLANT AND EQUIPMENT**

Wecapitalize expenditures for major renewals and improvements and charge currentearnings with the cost of maintenance and repairs. Provisions for depreciationhave been computed on a straight-line or systematic method based on theexpected useful lives 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  |   |

 

38

----

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

**2.**   ACCOUNTING POLICIES(Continued)

The cost and accumulateddepreciation relating to assets retired or otherwise disposed of are eliminatedfrom the respective accounts at the time of retirement or other dispositionwith the gain or loss credited or charged to earnings.

**COMPUTER SOFTWARE**

We capitalize certaincosts incurred in connection with developing or obtaining internal use computersoftware. During 2006 and 2005, approximately $1,653,000 and $419,000,respectively, of computer software was capitalized, primarily relating to newmanufacturing, engineering and accounting systems.

**LONG-LIVED ASSETS**

Long-lived assets includesuch items as goodwill, patents, product rights, other intangible assets andproperty, plant and equipment. For purposes of evaluating the recoverability oflong-lived assets, we assess the possibility of obsolescence, demand, newtechnology, competition, and other pertinent economic factors and trends thatmay have an impact on the value or remaining lives of these assets.

Amortized long-livedassets (including amortized intangible assets and property, plant andequipment) held and used by us are reviewed for impairment whenever events orchanges in circumstances indicate that the carrying amount of an asset may notbe recoverable in relation to future undiscounted cash flows of underlyingasset groups. The net carrying value of assets not recoverable is reduced tofair value. Fair values of amortized long-lived assets are determined basedupon the performance of a fair value appraisal. Patents and other finite-livedintangible assets are amortized on a straight-line or systematic method overthe life of the patent or intangible asset.

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

**INCOME TAXES**

We recognize deferred taxassets and liabilities for the expected future tax consequences of events thathave been included in the financial statements or tax returns. Under thismethod, deferred tax assets and liabilities are determined based on thedifference between the financial statement and tax basis of assets andliabilities using enacted tax rates in effect for the year in which thedifferences are expected to reverse. In assessing the realizability of thedeferred tax assets, management considers whether it is more likely than notthat some portion or all of the deferred tax assets will not be realized. Tothe extent that any future tax benefits are not expected to be fully realized,such future tax benefits are reduced by a valuation allowance. Realization ofdeferred tax assets assumes that we will be able to generate sufficient futuretaxable income so that the assets will be realized. The factors that weconsider in assessing the likelihood of 

39

----

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

**2.**   ACCOUNTING POLICIES(Continued)

realizationinclude the forecast of future taxable income and available tax planningstrategies that could be implemented to realize the deferred tax assets. Weexpect the deferred tax assets currently recorded to be fully realizable,however there can be no assurance that an increased valuation allowance wouldnot need to be recorded in the future.

**FINANCIAL INSTRUMENTS**

The fair value of cash andcash equivalents approximates the carrying value of these assets due to the short-termmaturity of these instruments. The fair value of our long-term debt isestimated to approximate the carrying value based upon borrowing ratescurrently available to us for borrowings with similar terms and maturity.

**DERIVATIVES**

Until the issuance offixed rate convertible debt in the third quarter of fiscal 2005, we managed ourexposure to interest rate fluctuations through the use of derivativeinstruments in the form of non-trading interest rate swaps. The objective ofthe swap was to fix the interest rate on certain variable rate debt tostabilize interest rates and to more effectively balance our long-termborrowing costs and interest rate risk. During July 2003, we entered intoa five-year interest rate swap agreement (the Agreement) to set a fixedinterest rate relating to $20 million of its outstanding debt at variableinterest rates. The terms of the Agreement matched the terms of the underlyingdebt. In addition, the Agreement was designated as, and was effective as, acash-flow hedge of an outstanding debt obligation. Changes in fair value of theAgreement were reported as other comprehensive income and were recognized intoearnings when the hedge transaction affected earnings. Our derivativeinstrument was liquidated during February 2005 and we received $394,000 incash. The current market value of the interest rate swap arrangement as of thedate of liquidation included in accumulated other comprehensive income is beingamortized over the remaining life of the originally forecasted transaction.

**GEOGRAPHIC CONCENTRATION**

Our customers may consistof distributors, contractors, departments of transportation, state agencies,local governments or municipalities. No single customer represents asignificant portion of our total revenues. However, in fiscal 2006, 2005 and2004, approximately 9%, 11% and 10%, respectively, of revenues were fromcustomers in the state of Texas, and 11%, 9% and 14%, respectively, of revenuesin fiscal 2006, 2005 and 2004, were from customers in the state of California.

**REVENUE RECOGNITION**

Revenues, net of discountsand allowances, are recognized when either services have been rendered or bothtitle and risk of loss of products have been transferred to unaffiliatedcustomers. Additionally, we ensure that collection of the resulting receivableis probable, persuasive evidence that an arrangement exists, and the revenue isfixed or determinable. Provision for estimated uncollectible amounts and creditmemos is made based upon management’s analysis of bad debts and credit memos.

**SHIPPING AND HANDLING**

Shipping and handling feescharged to customers are included in net sales, and shipping and handling costsincurred by us are included in cost of sales.

40

----

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

**2.**   ACCOUNTINGPOLICIES (Continued)

**RESEARCH ANDDEVELOPMENT**

Research and development(R&D) costs are expensed as incurred.

**STOCK-BASEDCOMPENSATION**

In December 2004, theFASB issued SFAS No. 123 (revised 2004) (SFAS No. 123(R)), “Share-BasedPayment”. We adopted the provisions of SFAS No. 123(R) as of July 1,2005 using the modified prospective method. Under this transition method,share-based compensation cost recognized in the fiscal year ended June 30,2006 includes compensation cost for all share-based awards which were unvestedas of July 1, 2005 as well as compensation cost for all share-based awardsgranted subsequent to July 1, 2005, based on the grant date fair valueestimated in accordance with the provisions of SFAS No. 123(R).  The fair value of the options granted is beingamortized on a straight-line basis over the requisite service period, which isgenerally the vesting period. Stock option plans are more fully described inNote 8.

**RESTRUCTURINGCHARGES**

We account forrestructuring activities in accordance with SFAS No. 146, “Accounting forCosts Associated with Exit or Disposal Activities.”  Generally, costs associated with the exit ordisposal activity are recognized when the liability is incurred. Costs relatedto employee separation arrangements requiring future service beyond a specifiedminimum retention period are recognized over the service period.

**EARNINGS PER SHARE**

Basic earnings per share(EPS) are computed by dividing net earnings available to holders of commonstock by the weighted average number of shares of common stock outstanding. DilutedEPS are computed assuming the exercise of all stock options that are profitableto the recipients and are dilutive to results of operations. Under thisassumption, the weighted average number of shares is increased accordingly.

**RECLASSIFICATIONS**

Certain prior yearbalances have been reclassified to conform to current year presentations.

**RECENT ACCOUNTINGPRONOUCEMENTS**

In July 2006, theFinancial Accounting Standards Board (FASB) issued FASB Interpretation No. 48(FIN 48), “Accounting for Uncertainty in Income Taxes—an interpretation of FASBStatement No. 109”. FIN 48 clarifies the accounting for uncertainty inincome taxes recognized in an entity’s financial statements in accordance withFASB Statement No. 109, “Accounting for Income Taxes”. FIN 48 prescribes arecognition threshold and measurement attribute for financial statementdisclosure of tax positions taken or expected to be taken on a tax return.  Additionally, FIN 48 provides guidance on derecognition,classification, interest and penalties, accounting in interim periods,disclosure and transition. FIN 48 will be effective for our 2008 fiscal year. Weare evaluating the impact that this statement will have on our results ofoperations and financial position.

41

----

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

**3. ACQUISITIONS ANDDISPOSITIONS**

Effective June 30, 2006, we sold our weatherforecasting product line within the Inform segment for a sale price of$1,851,000, including $1,566,000 in cash received during fiscal 2006 and$285,000 in future contingent payments. We sold contracts, intellectualproperty, allocated goodwill, software, equipment and inventory and recorded anet gain on the sale of $846,000 in operating income.

Effective June 22, 2006, as part of therestructuring of the Intersection Control segment, we sold our portablevariable message sign, tunnel lighting and illuminated street sign productlines for cash of $1,500,000. As the result of the sale of inventory,equipment, intellectual property, contracts and orders, we recorded a loss of$3,449,000 included as part of restructuring costs in operating income.

Effective June 30, 2005, we sold certainmachinery and equipment of a captive manufacturer of our Protect and Directsegment for approximately $650,000 in cash and recorded a gain on the sale of$566,000 in operating income. During fiscal 2005, we sold land and receivedproceeds of $992,000 and recorded a gain on the sale of $560,000 in operatingincome for our Protect and Direct segment.

Effective December 1, 2003, we acquiredsubstantially all of the assets and assumed certain liabilities of the NorthAmerican operations of Peek Traffic Corporation (Peek Traffic). We paid apurchase price of $15,693,000. The purchase price consisted of $11,263,000 incash and 180,723 shares of our common stock, issued from Treasury Stock, valuedat $4,430,000. The cash portion of the purchase price was obtained from ourrevolving credit facility. The excess of purchase price over the estimated fairvalue of the assets acquired approximated $7,611,000, of which approximately$6,528,000 is deductible for tax purposes. Peek Traffic is a designer,manufacturer and supplier of intelligent intersection control systems, redlight enforcement systems and other transportation equipment. The results ofPeek Traffic are included in the Intersection Control segment.

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 |   |   |

 

42

----

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

**3.** ACQUISITIONS AND DISPOSITIONS (Continued)

The intangible assetsacquired in connection with the acquisition of Peek Traffic were assigned asfollows:

| ** **                    | ** ** | **Gross**                                        | ** ** | **Weighted-average**   | ** ** |
|-------------------------------|------------|--------------------------------------------------|------------|------------------------|------------|
| ** **                    | ** ** | **Carrying Amount**                         | ** ** | **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 |   |   |

 

We anticipated that the Peek Traffic business wouldprovide future operating synergies in the traffic control market, expand ourcustomer base in the municipal and county markets and leverage our existingtechnologies within the Intersection Control segment, which also includes thelegacy U.S. Traffic Corporation (UST) operations acquired in May 2003.

Thefollowing pro forma summary presents our consolidated results of operations forthe year ended June 30, 2004 as if the Peek Traffic acquisition hadoccurred at the beginning of fiscal year 2004:

| ** **                             | ** ** | **2004**                                                                                | ** ** |
|----------------------------------------|------------|-----------------------------------------------------------------------------------------|------------|
| ** **                             | ** ** | **(Dollar amounts in thousands,  except per share data)** | ** ** |
| Net sales                              |       |                                                                                    | $          | 159,887 |   |   |
| Net earnings  (loss)                   |       |                                                                                    | $          | (17,198 | ) |   |
| Net earnings (loss) per  diluted share |       |                                                                                    | $          | (1.99 | ) |   |

 

The consolidated pro formainformation is not necessarily indicative of the combined results that wouldhave occurred had the acquisitions occurred on that date, nor is it indicativeof the results that may occur in the future. During the fourth quarter offiscal 2006, we recorded impairment charges relating to goodwill and other long-livedassets as discussed further in Note 6 to the Consolidated Financial Statements.

**4.   INVENTORIES**

Inventoriesconsist of the following at June 30:

| ** **      | ** ** | **    2006    ** | ** ** | **    2005    ** | ** ** |
|-----------------|------------|----------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **      | ** ** | **(Dollar amounts  in thousands)**             | ** ** |
| Finished goods  |       | $                                                        | 8,467      |                                                     | $          | 8,757 |   |
| Work-in-process |       | 6,642                                                    |       | 4,666                                                    |       |
| Raw materials   |       | 10,356                                                   |       | 13,988                                                   |       |
|            |       | $                                                        | 25,465     |                                                     | $          | 27,411 |   |

 

43

----

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

**5.   INTANGIBLE ASSETSAND GOODWILL**

Intangibleassets consist of the following as of June 30:

| ** **                     | ** ** | **2006**                                         | ** ** | **2005**         | ** ** |
|--------------------------------|------------|--------------------------------------------------|------------|------------------|------------|
| ** **                     | ** ** | **Gross**                                        | ** ** | ** **       | ** ** | **Net** | ** ** | **Gross** | ** ** | ** ** | ** ** | **Net** | ** ** |
| ** **                     | ** ** | **Carrying**                                     | ** ** | **Accumulated**  | ** ** | **Intangible** | ** ** | **Carrying** | ** ** | **Accumulated** | ** ** | **Intangible** | ** ** |
| ** **                     | ** ** | **Amount**                                       | ** ** | **Amortization** | ** ** | **Assets** | ** ** | **Amount** | ** ** | **Amortization** | ** ** | **Assets** | ** ** |
| ** **                     | ** ** | **(Dollar amounts in thousands)** | ** ** |
| Amortized intangible assets:   |       |                                             |       |             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Patents and licenses           |       | $                                                | 3,135      |             |       | $ | 1,758 |   |   |   | $ | 1,377 |   |   | $ | 2,990 |   |   | $ | 1,755 |   |   |   | $ | 1,235 |   |   |
| Technology and installed  base |       | 2,491                                            |       |             | 1,097      |   |   |   | 1,394 |   |   | 2,491 |   |   | 899 |   |   |   | 1,592 |   |   |
| Customer relationships         |       | 3,807                                            |       |             | 1,698      |   |   |   | 2,109 |   |   | 3,807 |   |   | 1,181 |   |   |   | 2,626 |   |   |
| Trade names                    |       | 2,250                                            |       |             | 663        |   |   |   | 1,587 |   |   | 2,250 |   |   | 363 |   |   |   | 1,887 |   |   |
| Other                          |       | 640                                              |       |             | 640        |   |   |   | — |   |   | 640 |   |   | 640 |   |   |   | — |   |   |
| Total                          |       | $                                                | 12,323     |             |       | $ | 5,856 |   |   |   | $ | 6,467 |   |   | $ | 12,178 |   |   | $ | 4,838 |   |   |   | $ | 7,340 |   |   |

 

During the fourth quarter of fiscal 2004, we recordedimpairment charges relating to certain intangible assets includingindefinite-lived trade names. The remaining carrying values of these tradenames were redesignated as amortized intangible assets. The impairment chargesare further described in Note 6 to the Consolidated Financial Statements.

Amortization expense was $1,196,000, $1,079,000 and$1,757,000 for the years ended June 30, 2006, 2005 and 2004, respectively.The estimated amortization expense for the five fiscal years subsequent to 2006is as follows: $1,151,000 in 2007, $1,086,000 in 2008, $875,000 in 2009,$762,000 in 2010 and $663,000 in 2011. Intangible assets are amortized overtheir useful lives, which is four to seventeen years for patents and licenses,five to 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.

Thefollowing table displays a rollforward of the carrying amount of goodwill from July 1,2004 to June 30, 2006 by business segment:

| ** **                   | ** ** | **2006**                                         | ** ** | **2005**    | ** ** |
|------------------------------|------------|--------------------------------------------------|------------|-------------|------------|
| ** **                   | ** ** | **Protect**                                      | ** ** | ** **  | ** ** | **Intersection** | ** ** | **Protect** | ** ** | ** ** | ** ** | **Intersection** | ** ** |
| ** **                   | ** ** | **and Direct**                              | ** ** | **Inform**  | ** ** | **Control** | ** ** | **and Direct** | ** ** | **Inform** | ** ** | **Control** | ** ** |
| ** **                   | ** ** | **Segment**                                      | ** ** | **Segment** | ** ** | **Segment** | ** ** | **Segment** | ** ** | **Segment** | ** ** | **Segment** | ** ** |
| ** **                   | ** ** | **(Dollar amounts in thousands)** | ** ** |
| Beginning balance            |       |                                             | $          | 8,139       |       |   |   | $ | 9,777 |   |   |   | $ | 11,397 |   |   |   | $ | 8,139 |   |   |   | $ | 9,777 |   |   |   | $ | 11,587 |   |   |
| Acquired                     |       |                                             |       |        |       |   | — |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Adjustments                  |       |                                             |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | (190 | ) |   |
| Sale of product lines        |       |                                             |       |        |       |   | (531 | ) |   |   | (1,172 | ) |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Impairment charges (Note  6) |       |                                             |       |        |       |   |   |   |   |   | (10,225 | ) |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Ending balance               |       |                                             | $          | 8,139       |       |   |   | $ | 9,246 |   |   |   | $ | — |   |   |   | $ | 8,139 |   |   |   | $ | 9,777 |   |   |   | $ | 11,397 |   |   |

 

During the fourth quarterof fiscal 2006, we recorded impairment charges relating to goodwill and otherlong-lived assets as discussed further in Note 6 to the Consolidated FinancialStatements. In addition, during the fourth quarter of fiscal 2006, goodwill wasreduced related to the sale of the weather forecasting product line discussedin Note 3 to the Consolidated Financial Statements and the sale of the portablevariable message sign and lighting product lines as discussed in Note 17 to theConsolidated Financial Statements. An adjustment of $190,000 to decreasegoodwill in the Intersection Control segment was recorded in fiscal 2005 inconnection with the finalization of valuations of certain assets andliabilities of Peek Traffic.

44

----

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

**6.   ASSET IMPAIRMENTCHARGES**

In fiscal year 2006, results at our IntersectionControl segment continued to be substandard and we adopted a restructuring planin April 2006 as further discussed in Note 17 to the ConsolidatedFinancial Statements. As part of the restructuring plan, we sold the portablevariable message sign, illuminated street lighting and tunnel lighting productlines and we discontinued other low-margin and non-core product lines. As aresult of the continued poor performance and the Company’s impairment review inthe fourth quarter of fiscal 2006, we 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. We recorded asset impairment charges in the IntersectionControl segment of $13,374,000, or $8,723,000 net of income tax benefits, or$0.98 per diluted share. The charges included $10,225,000 for goodwill and$3,149,000 for fixed assets.

In fiscal year 2005, our annual impairment reviewresulted in no impairment charges being recorded. During fiscal year 2004, theprolonged delay in the passage of new federal highway funding legislation aswell as ongoing state and municipal budget issues had a significant negativeimpact on the Company as a whole. In addition, legacy UST operating results weremuch lower than expected, although we were pursuing the initial integration of UST and Peek Traffic in order toimprove profitability. These factors and our impairment review in thefourth quarter of fiscal 2004 resulted in our determination that the carryingamounts of certain long-lived assets were no longer recoverable based onestimated future operating cash flows to be generated by those assets, whichwere lower than previously projected. We recorded asset impairment charges of$32,600,000, or $21,266,000 net of income tax benefits, or $2.48 per dilutedshare. The charges included $18,363,000 for goodwill in the IntersectionControl segment; $7,646,000 for goodwill in the Inform segment; $1,963,000 forintangible assets in the Intersection Control segment; $2,219,000 forintangible assets in the Inform segment and $2,409,000 for fixed assets in theIntersection Control segment. The intangible asset impairment charges included$1,449,000 for technology and installed base, $1,623,000 for customer relationshipsand $1,110,000 for trade names. In addition, the remaining carrying values ofthe trade names were redesignated as amortized intangible assets and are beingamortized over ten years.

In performing ourimpairment assessments, we first assess our indefinite-lived intangibles;second, assess our amortized long-lived assets (including amortized intangibleassets and property, plant and equipment); and third, assess our goodwill. Additionally,we re-assess the remaining useful lives of our amortized long-lived assets.

45

----

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

**7.**   LONG-TERMDEBT

Long-termdebt consists of the following at June 30:

| ** **                                                                   | ** ** | **2006**                                     | ** ** | **2005** | ** ** |
|------------------------------------------------------------------------------|------------|----------------------------------------------|------------|----------|------------|
| ** **                                                                   | ** ** | **(Dollar amounts  in thousands)** | ** ** |
| Convertible debt  7% interest rate due February 15, 2025.               |       | $                                            | 40,000     |     | $          | 40,000 |   |
| Revolving credit  note due February 1, 2008, interest at variable rates |       | 6,000                                        |       | 4,000    |       |
| Subordinated  promissory note                                                |       | 5,000                                        |       | 5,000    |       |
| Notes payable,  net of discounts of $38 - 2006 and $111 - 2005               |       | 587                                          |       | 1,014    |       |
| Total long-term debt                                                         |       | 51,587                                       |       | 50,014   |       |
| Less current portion                                                         |       | 465                                          |       | 427      |       |
| Long-term debt, net                                                          |       | $                                            | 51,122     |     | $          | 49,587 |   |

 

During February 2005, we sold $40,000,000 of 7%Convertible Senior Subordinated Notes due February 15, 2025 in a privateplacement and received net proceeds of $37,395,000. Debt issue costsrepresenting direct costs incurred related to the issuance of the Notes in theamount of $2,605,000 were recorded in other assets and are being amortized intointerest expense over five years, the effective term of the Notes. The netproceeds were used to pay off our bank term loan and reduce the amount of ourrevolving credit agreement. The conversion price is $25.90 per share, whichrepresented a 40% premium over the closing price of our stock on the close ofthe transaction. The Notes are fullyredeemable by us at any time after February 20, 2008 at 100% of theprincipal amount plus accrued and unpaid interest.  The investors may require us to repurchase thenotes in cash at a price equal to 100% of the principal amount of the notesplus accrued and unpaid interest, if any, on February 15, 2010, 2015 or 2020. Interest is payable semi-annually on February 15and August 15 of each year, beginning August 15, 2005.

During April 2005, we entered into a new bankcredit agreement with a secured revolving credit facility of $30 million. Therevolving credit availability is based on a formula of eligible accountsreceivable, eligible inventory, machinery & equipment and real estate,subject to a minimum excess collateral availability factor. Effective June 30,2006, we are also required to maintain a maximum senior leverage ratio. Thecovenants also limit the incurrence of additional indebtedness, acquisitions,liens and encumbrances and other matters customarily restricted in suchagreements. The borrowing is secured by a first security interest in allexisting and hereafter acquired assets of the company, including accountsreceivable, inventory, machinery and equipment, real estate and the equitysecurities of our subsidiaries. Under certain conditions, we may request arelease of all security interests, at which time we would no longer be subjectto a borrowing base formula, but would be subject to several financialcovenants.

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%.

46

----

**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 and the effective maturity of the convertibledebt is as follows:  $122,000 in 2007,$5,000,000 in 2008, $0 in 2009, $40,000,000 in 2010 and $6,000,000 thereafter.

**8.**   STOCKOPTIONS AND STOCK TRANSACTIONS

In December 2004, theFASB issued SFAS No. 123 (revised 2004) (SFAS No. 123(R)), “Share-BasedPayment”. We adopted the provisions of SFAS No. 123(R) as of July 1,2005 using the modified prospective method. Under this transition method,share-based compensation cost recognized in the fiscal year ended June 30,2006 includes compensation cost for all share-based awards which were unvestedas of July 1, 2005 as well as compensation cost for all share-based awardsgranted subsequent to July 1, 2005, based on the grant date fair valueestimated in accordance with the provisions of SFAS No. 123(R).  The fair value of the options granted is beingamortized on a straight-line basis over the requisite service period, which isgenerally the vesting period. We have two current share-based compensationplans, which are described below.

*Plan Descriptions*

Our 2001 Employee Stock Incentive Plan (the Plan),which is shareholder-approved, permits the grant of share options andrestricted shares to our employees for up to 1,125,000 shares, of which 150,000shares were reserved for the grant of restricted stock awards. We believe thatgrants of stock options to employees generate an increased incentive for theemployee to contribute to our future success and prosperity, thus enhancing thevalue of the Company for the benefit of our stockholders. The Plan provides forgrants of stock options and restricted stock for employees as may be determinedby the Compensation Committee of the Board of Directors. No grantee may receiveoption grants in excess of 100,000 shares per year. The stock options aregranted with an exercise price equal to or greater than the fair market valueof our stock on the date of grant. Employee options granted under the currentplan expire not more than ten years from the grant date with vesting to bedetermined by the Committee. For grants currently outstanding, vesting is overa three year period, with one-third of the grant becoming exercisable at theend of each of the three years. Option awards provide for accelerated vestingif there is a change in control, as defined in the Plan.

Our 2001 Non-Employee Directors Stock Option Plan (theDirector Plan), which is also shareholder-approved, permits the grant of shareoptions to our non-employee directors for up to 135,000 shares. We believe thatgrants of stock options to non-employee directors encourage the directors toacquire a long term proprietary interest in the growth and performance of theCompany, and generate an increased incentive for the directors to contribute toour future success and prosperity, thus enhancing the value of the Company forthe benefit of our stockholders. The Director Plan provides for an annual grantof stock options for directors based on a fixed amount, which is currently5,000 stock options per each non-employee director annually. The stock optionsare granted with an exercise price equal to the fair market value of our stockon the date of grant. Options granted under the Director Plan expire not morethan seven years from the grant date. Vesting is over not less than a six-monthperiod. Option awards provide for accelerated vesting if there is a change incontrol, as defined in the Director Plan. Vesting is also accelerated upon thedeath of a director optionee.

47

----

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

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

A summary of the principal features of our currentstock incentive plans, as well as copies of those plans are provided in ourProxy Statement for the Annual Meeting of Stockholders on November 18,2004. Shares issued as a result of stock option exercises or restricted stockgrants may be issued as new shares, funded from Treasury stock or may be sharespurchased on the open market.  We believethat we currently have adequate treasury and authorized unissued shares to meetany requirements to issue shares during fiscal 2007. The authorization forissuance will terminate on November 1, 2011 for both the Plan and theDirector Plan.

We also have a retirementstock award program for certain of our key executives that was authorized underthe 1993 Long-Term Stock Ownership Incentive Plan, which has since beenreplaced by the Plan. This retirement stock award program is further describedin Footnote 10 on retirement plans.

*Share-basedCompensation Expense*

The share-based compensation cost that has beencharged against income for those plans was $1,027,000 for the twelve monthsended June 30, 2006. The total income tax benefit recognized in the incomestatement for share-based compensation arrangements was $215,000 for thatperiod, and the net expense recorded was $812,000, which was $0.09 per basicand diluted share outstanding.

As of June 30, 2006,the total compensation cost related to unvested share-based awards grantedunder our stock option plans not yet recognized was approximately $859,000. Thiscost will be amortized on a straight-line basis over a weighted average periodof approximately 0.7 years and will be adjusted for subsequent changes inestimated forfeitures. The 230,889 unvested options outstanding at June 30,2006 had a weighted-average fair value of $7.04.

*Determining FairValue*

The fair value of stock options granted is estimatedusing the Black-Scholes option-pricing model that uses the assumptions notedbelow for fiscal years 2006, 2005 and 2004. Expected volatilities are based onhistorical volatility of the Company’s stock. We use historical data toestimate option exercise patterns, employee termination and forfeiture rateswithin the valuation model; separate groups of optionees that have similarhistorical exercise behavior are considered separately for valuation purposes. Theexpected term of options granted is derived from the output of the optionvaluation model and represents the period of time that options granted areexpected to be outstanding; the range given below results from certain groupsof employees exhibiting different behavior. The risk-free rate for periodswithin the contractual life of the option is based on the U.S. Treasury yieldcurve in effect at the time of the grant. The expected dividend yield isdetermined by dividing the current level of per share dividend by the grantdate stock price. We do not incorporate changes in dividends anticipated bymanagement unless those changes have been communicated to marketplaceparticipants.

48

----

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

**8.**   STOCK OPTIONS ANDSTOCK TRANSACTIONS (Continued)

| ** **                              | ** ** | **Fiscal 2006**  | ** ** | **Fiscal 2005**  | ** ** | **Fiscal 2004**  | ** ** |
|-----------------------------------------|------------|-----------------------|------------|-----------------------|------------|-----------------------|------------|
| Risk free  interest rate                |       | 4.0  – 4.5%      |       | 3.9  – 4.2%      |       | 2.1  – 3.6%      |       |
| Expected dividend  yield                |       | 1.73%                 |       | 1.72%                 |       | 1.55%                 |       |
| Weighted average  expected volatility   |       | 42%                   |       | 41%                   |       | 41%                   |       |
| Expected term                           |       | 3.7  – 6.0 years |       | 4.0  – 7.0 years |       | 4.0  – 6.0 years |       |
| Weighted average  expected term         |       | 4.5  years            |       | 4.3  years            |       | 4.3  years            |       |
| Weighted average  grant-date fair value |       | $7.32                 |       | $6.87                 |       | $8.17                 |       |

 

*Stock OptionActivity*

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

| ** **                         | ** ** | ** **             | ** ** | ** **    | ** ** | **Weighted-**   | ** ** | ** **    | ** ** |
|------------------------------------|------------|------------------------|------------|---------------|------------|-----------------|------------|---------------|------------|
| ** **                         | ** ** | ** **             | ** ** | **Weighted-** | ** ** | **Average**     | ** ** | ** **    | ** ** |
| ** **                         | ** ** | ** **             | ** ** | **Average**   | ** ** | **Remaining**   | ** ** | **Aggregate** | ** ** |
| ** **                         | ** ** | ** **             | ** ** | **Exercise**  | ** ** | **Contractual** | ** ** | **Intrinsic** | ** ** |
| ** **                         | ** ** | **Common Shares** | ** ** | **Price**     | ** ** | **Term**        | ** ** | **Value**     | ** ** |
| Outstanding at  July 1, 2003  |       |                   | 1,256,230  |          |       |            | $          | 15.90         |       |   |   |   |   |   |   |   |
| Granted                            |       |                   | 122,900    |          |       |            | $          | 25.68         |       |   |   |   |   |   |   |   |
| Exercised                          |       |                   | (349,007   | )             |       |            | $          | 13.81         |       |   |   |   |   |   |   |   |
| Cancelled or  expired              |       |                   | (29,165    | )             |       |            | $          | 21.16         |       |   |   |   |   |   |   |   |
| Outstanding at  June 30, 2004 |       |                   | 1,000,958  |          |       |            | $          | 17.68         |       |   |   | 3.5 Years |   |   | $ | 3,875,000 |   |
| Granted                            |       |                   | 205,700    |          |       |            | $          | 19.51         |       |   |   |   |   |   |   |   |
| Exercised                          |       |                   | (129,754   | )             |       |            | $          | 14.87         |       |   |   |   |   |   |   |   |
| Cancelled or  expired              |       |                   | (66,933    | )             |       |            | $          | 21.14         |       |   |   |   |   |   |   |   |
| Outstanding at  June 30, 2005 |       |                   | 1,009,971  |          |       |            | $          | 18.19         |       |   |   | 3.6 Years |   |   | $ | 2,973,000 |   |
| Granted                            |       |                   | 114,200    |          |       |            | $          | 21.02         |       |   |   |   |   |   |   |   |
| Exercised                          |       |                   | (165,036   | )             |       |            | $          | 15.41         |       |   |   |   |   |   |   |   |
| Cancelled or  expired              |       |                   | (14,233    | )             |       |            | $          | 20.77         |       |   |   |   |   |   |   |   |
| Outstanding at  June 30, 2006 |       |                   | 944,902    |          |       |            | $          | 18.98         |       |   |   | 3.1 Years |   |   | $ | 1,660,000 |   |
| Vested at June 30, 2006       |       |                   | 714,013    |          |       |            | $          | 18.35         |       |   |   | 2.6 Years |   |   | $ | 1,660,000 |   |

 

Options outstanding at June 30,2006 are exercisable as follows: 714,013 currently, 116,923 within one year,85,299 in two years and 28,667 thereafter. Options outstanding as of June 30,2005 and 2004 included 711,076 and 734,194 which were exercisable as of thosedates, respectively.  As of June 30,2006, we have 682,454 common shares reserved for our option and award plansavailable for future grants. The total intrinsic value of stock optionsexercised was $1,267,000 in 2006, $732,000 in 2005 and $3,546,000 in 2004. Thetotal fair value of stock options vested during fiscal 2006, 2005 and 2004 was$1,143,000, $1,030,000 and $1,499,000, respectively.

49

----

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

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

**Pro forma Disclosures**

Prior to adoption of SFAS No. 123(R), weaccounted for stock options granted under the recognition and measurementprinciples of APB Opinion No. 25, “Accounting for Stock Issued to Employees,”and related interpretations. The cost of restricted stock granted was expensedin the period the stock was issued. No charges were made to earnings inconnection with stock options granted, as all stock options granted had anexercise price equal to the market value of the underlying common stock on thedate of grant.

Thefollowing table illustrates the effect on net earnings and earnings per shareif we had applied the fair value recognition provisions of FASB Statement No. 123,“Accounting for Stock-Based Compensation,” to the stock options granted duringthe comparable prior year periods:

| ** **                                                                                                                                    | ** ** | **Twelve months ended**                                                       | ** ** | **Twelve months ended** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                                                                                                    | ** ** | **June 30,**                                                                       | ** ** | **June 30,**                 | ** ** |
| ** **                                                                                                                                    | ** ** | **2005**                                                                                | ** ** | **2004**                          | ** ** |
| ** **                                                                                                                                    | ** ** | **(Dollar amounts in thousands,  except per share data)** | ** ** |
| Net loss, as  reported                                                                                                                        |       |                                                                                    | $          | (650                              | )          |   |   | $ | (17,027 | ) |   |
| Add: Stock-based  employee compensation expense included in reported net earnings, net of  related tax effects                                |       |                                                                                    | 209        |                              |       |   | 481 |   |   |
| Deduct: Total  stock-based employee compensation expense determined under fair value based  method for all awards, net of related tax effects |       |                                                                                    | (1,170     | )                                 |       |   | (1,528 | ) |   |
| Pro-forma net loss                                                                                                                            |       |                                                                                    | $          | (1,611                            | )          |   |   | $ | (18,074 | ) |   |
| Loss per share:                                                                                                                               |       |                                                                                    |       |                              |       |   |   |   |   |
| Basic—as reported                                                                                                                        |       |                                                                                    | $          | (0.07                             | )          |   |   | $ | (1.99 | ) |   |
| Basic—pro forma                                                                                                                          |       |                                                                                    | $          | (0.18                             | )          |   |   | $ | (2.11 | ) |   |
| Diluted—as reported                                                                                                                      |       |                                                                                    | $          | (0.07                             | )          |   |   | $ | (1.99 | ) |   |
| Diluted—pro forma                                                                                                                        |       |                                                                                    | $          | (0.18                             | )          |   |   | $ | (2.11 | ) |   |

 

Disclosures for thetwelve-month period ended June 30, 2006 are not presented becausestock-based payments were recorded using the fair-value method required underSFAS No. 123(R).

**9.**   SHAREHOLDERRIGHTS PLAN

We have a ShareholderRights Plan (the Plan) which was established to deter coercive takeover tacticsand to prevent an acquirer from gaining control of the Company without offeringa fair price to all of our stockholders. The Plan calls for stockholders ofrecord as of July 14, 1998 to receive a dividend distribution of one rightfor each outstanding share of our common stock. Each share issued after thatdate is also granted a right. Each right entitles the holder, upon the occurrenceof certain events, to purchase a unit consisting of one one-thousandth of ashare of Series B Junior Participating Preferred Stock, no par value, for$40 per unit. In addition, if an acquiring person becomes the beneficial ownerof more than 15% of our outstanding common stock, each right will entitle theholder (other than such acquiring person) to receive, upon exercise, commonstock of the Company having a value equal to two times the exercise price ofthe right.

50

----

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

**9.**   SHAREHOLDER RIGHTS PLAN (Continued)

If after an acquiringperson becomes the beneficial holder of more than 15% of our outstanding commonstock and then we are acquired in a merger or other business combination inwhich we would not be the surviving corporation or 50% or more of our assets orearning power is sold, each holder shall have the right to receive, uponexercise, common stock of the acquiring corporation having a value equal to twotimes the exercise price of the right. We may redeem the rights, for $.01 perright, under certain circumstances.

**10.**   RETIREMENTPLANS

We have a retirement stockaward program for certain of our key executives. The award consists of sharesof our 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 us through the end of thefiscal year, unless excused by reason of death or other involuntary termination.Participants are also required to retain the shares awarded for as long as theyare employed by us or until age 65. The size of each participant’s annual awardis determined under accepted actuarial principles to provide a retirementincome based upon a percentage of the executive’s projected compensation andlength of service at retirement, but only if our stock price appreciates at asustained target rate. The retirement stock award program resulted in a chargeto earnings of $357,000 in 2006, $352,000 in 2005 and $374,000 in 2004.

We have an incentivesavings plan covering substantially all of our employees. The plan allowsqualified employees to make tax deferred contributions pursuant to InternalRevenue Code Section 401(k). We contribute a matching contribution basedupon a percentage of the participants’ contributions which is invested directlyin our common stock. During fiscal 2005, we began contributing our matchingcontributions under the incentive savings plan by issuing common stock from ourtreasury stock. Additional discretionary company contributions may be made atthe option of our Board of Directors. The expense for the plan was $1,224,000in 2006, $1,186,000 in 2005 and $1,126,000 in 2004.

**11.**   INCOMETAXES

Theincome tax provision (benefit) consists of the following:

| ** **                 | ** ** | **2006**                                         | ** ** | **2005** | ** ** | **2004** | ** ** |
|----------------------------|------------|--------------------------------------------------|------------|----------|------------|----------|------------|
| ** **                 | ** ** | **(Dollar amounts in thousands)** | ** ** |
| Current:                   |       |                                             |       |     |       |     |       |
| Federal and  international |       | $                                                | 37         |     | $          | (2,839   | )          | $ | (1,676 | ) |
| State                      |       | 371                                              |       | 139      |       | 155      |       |
|                       |       | 408                                              |       | (2,700   | )          | (1,521   | )          |
| Deferred:                  |       |                                             |       |     |       |     |       |
| Federal and  international |       | (5,248                                           | )          | 2,194    |       | (8,153   | )          |
| State                      |       | (632                                             | )          | 59       |       | (1,227   | )          |
|                       |       | (5,880                                           | )          | 2,253    |       | (9,380   | )          |
| Total income tax benefit   |       | $                                                | (5,472     | )        | $          | (447     | )          | $ | (10,901 | ) |

 

51

----

**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:

| ** **                                | ** ** | **2006**                                     | ** ** | **2005** | ** ** |
|-------------------------------------------|------------|----------------------------------------------|------------|----------|------------|
| ** **                                | ** ** | **(Dollar amounts  in thousands)** | ** ** |
| Deferred tax  assets:                     |       |                                         |       |     |       |
| Accounts  receivable allowance            |       | $                                            | 386        |     | $          | 262 |   |
| Warranty reserve                          |       | 321                                          |       | 404      |       |
| Intangible assets                         |       | 2,433                                        |       | 2,433    |       |
| Goodwill                                  |       | 11,783                                       |       | 7,986    |       |
| Inventory  valuation                      |       | 725                                          |       | 744      |       |
| Compensated  absences and medical claims  |       | 498                                          |       | 449      |       |
| Stock option  expense                     |       | 204                                          |       |     |       |
| Other liabilities  and reserves           |       | 555                                          |       | 621      |       |
| Net operating  loss and R&D credits   |       | 7,255                                        |       | 6,601    |       |
| Valuation  allowance                      |       | (445                                         | )          | (445     | )          |
|                                      |       | 23,715                                       |       | 19,055   |       |
| Deferred tax liabilities:                 |       |                                         |       |     |       |
| Book over tax  basis of fixed assets      |       | (1,253                                       | )          | (2,408   | )          |
| Book over tax  basis of intangible assets |       | (6,794                                       | )          | (5,799   | )          |
|                                      |       | (8,047                                       | )          | (8,207   | )          |
| Net deferred tax asset                    |       | $                                            | 15,668     |     | $          | 10,848 |   |

 

The valuation allowance relates principally todeferred tax assets that we estimate may not be realizable and consist of taxover book basis in affiliates. Based on management’s assessment, it is morelikely than not that the net deferred tax assets will be realized throughfuture taxable earnings or implementation of tax planning strategies.

At June 30, 2006, we have approximately$9,162,000 of state and $13,820,000 of federal net operating losses that can beeither carried back or carried forward for tax purposes. All of the stateoperating losses are being carried forward. We are in the process of preparingthe necessary amended tax return filings to carry back approximately $9 millionof federal operating losses to prior years. The benefit associated with theselosses of approximately $3 million is included in current deferred taxassets until such time that the amended returns are filed. Certain limitationson utilization of the net operating loss carryforwards are present andrealization of a portion of the carryforwards is uncertain. These carryforwardsexpire in years from 2013 through 2026.

Thenet deferred tax asset consists of the following at June 30:

| ** **                     | ** ** | **2006**                                | ** ** | **2005** | ** ** |
|--------------------------------|------------|-----------------------------------------|------------|----------|------------|
| ** **                     | ** ** | **(Dollar amounts  in thousands)** | ** ** |
| Current deferred  tax asset    |       | $                                       | 3,824      |     | $          | 5,765 |   |
| Noncurrent  deferred tax asset |       | 11,844                                  |       | 5,083    |       |
| Total net deferred tax  asset  |       | $                                       | 15,668     |     | $          | 10,848 |   |

 

52

----

**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:

| ** **                       | ** ** | **2006**                                         | ** ** | **2005** | ** ** | **2004** | ** ** |
|----------------------------------|------------|--------------------------------------------------|------------|----------|------------|----------|------------|
| ** **                       | ** ** | **(Dollar amounts in thousands)** | ** ** |
| Taxes at  statutory rate         |       | $                                                | (5,295     | )        | $          | (373     | )          | $ | (9,775 | ) |
| State income  taxes              |       | (387                                             | )          | 150      |       | (697     | )          |
| Research and  development credit |       | (381                                             | )          | (410     | )          | (652     | )          |
| Goodwill                         |       | 736                                              |       |     |       | 1,054    |       |
| Other                            |       | (145                                             | )          | 186      |       | (831     | )          |
| Income tax benefit               |       | $                                                | (5,472     | )        | $          | (447     | )          | $ | (10,901 | ) |

 

During the third quarterof fiscal 2004, we recorded a $1,249,000 income tax benefit related to thefavorable settlement of a tax audit.

**12.**   ACCUMULATEDCOMPREHENSIVE INCOME (LOSS)

Accumulatedother comprehensive income (loss) consists of the following as of June 30:

| ** **                                          | ** ** | **2006**                                     | ** ** | **2005** | ** ** |
|-----------------------------------------------------|------------|----------------------------------------------|------------|----------|------------|
| ** **                                          | ** ** | **(Dollar amounts  in thousands)** | ** ** |
| Currency  translation adjustment:                   |       |                                         |       |     |       |
| Beginning balance                                   |       | $                                            |       |     | $          | (46 | ) |
| Currency  translation adjustment                    |       |                                         |       | (27      | )          |
| Liquidation of  foreign entity                      |       |                                         |       | 73       |       |
| Ending balance                                      |       | —                                       |       | —   |       |
| Unrealized gain on derivative instrument (Note 2):  |       |                                         |       |     |       |
| Beginning balance                                   |       | 345                                          |       | 660      |       |
| Change in  derivative instrument                    |       |                                         |       | (265     | )          |
| Amortization to  earnings                           |       | (118                                         | )          | (50      | )          |
| Ending balance.                                     |       | 227                                          |       | 345      |       |
| Accumulated  comprehensive income—June 30 |       | $                                            | 227        |     | $          | 345 |   |

 

During fiscal 2005, weliquidated a foreign entity and recorded $73,000 in currency translationexpense. In addition, we liquidated our derivative instrument, an interest rateswap arrangement during fiscal 2005 and received $394,000 in cash. The marketvalue of the interest rate swap arrangement as of the date of liquidationincluded in accumulated other comprehensive income is being amortized over the remaininglife of the originally forecasted transaction.

53

----

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

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

Thecomputation of basic and diluted loss per share is as follows:

| ** **                                              | ** ** | **2006**                                                                                | ** ** | **2005**  | ** ** | **2004**  | ** ** |
|---------------------------------------------------------|------------|-----------------------------------------------------------------------------------------|------------|-----------|------------|-----------|------------|
| ** **                                              | ** ** | **(Dollar amounts in thousands,  except per share data)** | ** ** |
| *Numerator:*                                            |       |                                                                                    |       |      |       |      |       |
| Net loss  available to common shareholders              |       | $                                                                                       | (10,102    | )         | $          | (650      | )          | $ | (17,027 | ) |
| *Denominator:*                                          |       |                                                                                    |       |      |       |      |       |
| Weighted average  shares outstanding—basic         |       | 8,850,884                                                                               |       | 8,800,421 |       | 8,567,741 |       |
| Effect of dilutive securities—common stock options |       | —                                                                                  |       | —    |       | —    |       |
| Weighted average shares outstanding—diluted        |       | 8,850,884                                                                               |       | 8,800,421 |       | 8,567,741 |       |
| *Net loss per share of common stock:*                   |       |                                                                                    |       |      |       |      |       |
| Basic                                                   |       | $                                                                                       | (1.14      | )         | $          | (0.07     | )          | $ | (1.99 | ) |
| Diluted                                                 |       | $                                                                                       | (1.14      | )         | $          | (0.07     | )          | $ | (1.99 | ) |

 

Employee stock options totaling 126,399 shares for theyear ended June 30, 2006, 146,620 shares for the year ended June 30,2005 and 239,350 shares for the year ended June 30, 2004 were not includedin the diluted weighted average shares calculation because the effects of thesesecurities 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:

| ** **                        | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|-----------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Average exercise  price per share |       | $        | 24.22      |     | $          | 24.66    |       | $ | 25.13 |   |
| Number of shares                  |       | 350,800  |       | 304,300  |       | 268,100  |       |
|                                   |            |          |            |          |            |          |            |  |  |  |

 

As discussed in Note 7, ifthe Convertible Senior Subordinated Notes are fully converted at the conversionprice of $25.90 per share, the Notes wouldconvert into approximately 1,544,000 shares of our common stock. The shares arenot included in earnings per share as they are currently anti-dilutive untilearnings per share reach approximately $1.20 per share.

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

Disclosures about eachgroup of similar guarantees and commitments are provided below.

**LEASE COMMITMENTS**

We use various leasedfacilities and equipment in our operations. The terms for these leased assetsvary depending on the lease agreements. Aggregate rental expense underoperating leases, principally for 

54

----

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

**14.**   GUARANTEES, COMMITMENTS AND CONTINGENT LIABILITIES(Continued)

office and manufacturing facilities, was $4,009,000 in2006, $3,748,000 in 2005 and, $4,239,000 in 2004. These operating leasesinclude options for renewal. Annual minimum future rentals for leasecommitments are approximately $3,466,000 in 2007, $3,003,000 in 2008,$1,387,000 in 2009, 794,000 in 2010 and $448,000 in 2011 for an aggregate of$9,098,000 for the five-year period. Minimum future rentals after 2011 total$3,854,000.

**PRODUCT WARRANTYLIABILITY**

We warrant to the original purchaser of our productsthat we will, at our option, repair or replace, without charge, such productsif they fail due to a manufacturing defect. The term of these warranties varies(30 days to 5 years) by product. We accrue for product warranties when, basedon available information, it is probable that customers will make claims underwarranties relating to products that have been sold, and a reasonable estimateof the costs can be made.

Ourestimated product warranty liability for the years ended June 30 is asfollows:

| ** **                    | ** ** | **2006**                                     | ** ** | **2005** | ** ** |
|-------------------------------|------------|----------------------------------------------|------------|----------|------------|
| ** **                    | ** ** | **(Dollar amounts  in thousands)** | ** ** |
| Beginning balance             |       | $                                            | 2,510      |     | $          | 4,691 |   |
| Current  provisions, net      |       | (805                                         | )          | (702     | )          |
| Expenditures and  settlements |       | (741                                         | )          | (1,523   | )          |
| Adjustments                   |       | (37                                          | )          | 44       |       |
| Ending balance                |       | $                                            | 927        |     | $          | 2,510 |   |

 

The amount of $1,523,000presented as “Expenditures and settlements” for fiscal 2005 includes $1,036,000related to the settlement of a lawsuit which occurred in the first quarter offiscal 2005. “Current provisions, net” include changes in estimates.

**LEGAL**

We record losscontingencies where appropriate within the guidelines established by FASBStatement No. 5 “Accounting for Contingencies”. We are involved in severalpending judicial proceedings for product liability and other damages arisingout of the normal conduct of our business. While the outcome of litigation issubject to uncertainties, we believe, after consultation with counsel, that theoutcome of these proceedings, based on current available information and aftertaking into account the availability and limits of our insurance coverage, willnot have a material effect on our consolidated financial condition and resultsof operations.

**EXECUTIVEAGREEMENTS**

We have agreements withcertain executives which are designed to retain the services of key employeesand to provide for continuity of management in the event of an actual orthreatened change in control of the Company. Upon occurrence of a triggeringevent after a change in control, as defined, we would be liable for payment ofbenefits under these agreements, to a maximum amount of $4,886,000. We have by-lawsand agreements under which we indemnify our directors and officers fromliability for certain events or occurrences while the directors or officersare, or were, serving at our request in such capacities. 

55

----

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

**14.**   GUARANTEES, COMMITMENTS AND CONTINGENT LIABILITIES (Continued)

The term of the indemnification period is for thedirector’s or officer’s lifetime. We believe that any obligations relating tothis indemnification are predominantly covered by insurance subject to certainexclusions and deductibles. Historically, we have not made payments under theseexecutive agreements, and no amount has been accrued in the accompanyingconsolidated financial statements.

**BUSINESS PURCHASE AGREEMENTS**

As part of the purchase ofUST in May 2003, we are leasing UST’s Santa Fe Springs, Californiafacility and its Tecate, Mexico facility from affiliates of the sellers forfive year terms. We are guaranteeing the payments under the Tecate, Mexicolease. The lease commitment under the lease is included above. As part of ourrestructuring plan for the Intersection Control segment discussed in Note 17,we are vacating this facility and are attempting to sublet it.

**INDEMNIFICATION OF LENDERS AND AGENTS UNDER CREDITFACILITIES**

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

**BID AND PERFORMANCE BONDS**

We have entered into bidand performance related bonds associated with various contracts. Potentialpayments due under these bonds are related to our performance under theapplicable contract. The total amount of bid and performance related bonds thatwere available and undrawn was $3,028,000 as of June 30, 2006. Historically,we have not made significant payments on bid and performance bonds, and noamount has been accrued in the accompanying consolidated financial statements.

**OTHER COMMITMENTS**

We have standby letters ofcredit covering potential workers’ compensation liabilities. The total standbyexposure at June 30, 2006 was $1,144,000. We have included $971,000 inaccrued liabilities for this exposure as of June 30, 2006.

We have certainnon-cancelable royalty agreements, which contain certain minimum payments inthe aggregate of $2,266,000 through fiscal year 2011. We have included $496,000in accrued liabilities for this exposure as of June 30, 2006.

**15.**   SUPPLEMENTALCASH FLOW STATEMENT DISCLOSURES

Cash paid for interest was$4,226,000 in 2006, $2,395,000 in 2005 and $2,049,000 in 2004. Net cashreceived from income taxes was $774,000 in 2006 and $2,075,000 in 2005 and cashpaid for income taxes was $2,878,000 in 2004. We declared dividends that werepayable at year end of $1,688,000 in 2006, $1,595,000 in 2005 and $1,486,000 in2004. In connection with the acquisition of Peek Traffic in 

56

----

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

**15.**   SUPPLEMENTAL CASH FLOW STATEMENT DISCLOSURES(Continued)

December 2003,the purchase price for the net assets acquired included 180,723 shares of ourcommon stock, issued from Treasury Stock, valued at $4,430,000.

**16.**   INDUSTRYSEGMENT INFORMATION

During the third quarter offiscal 2006, we expanded the number of reportable segments from two to threesegments. The segment financial data presented herein has been restated topresent our three reportable segments—the manufacture and sale of productswhich Protect and Direct, the manufacture and sale of products which Inform,and the manufacture and sale of Intersection Control products. The primaryproduct lines within the Protect and Direct segment include energy-absorbingproducts such as crash cushions, truck-mounted attenuators, sand-filled barrelsand barriers as well as highway delineators. The products within this segmentabsorb and dissipate the force of impact in collisions between vehicles andfixed roadside objects as well as prevent collisions and help to control theflow of traffic by directing or guiding. The primary product lines within theInform segment include highway advisory radio systems; advanced sensingproducts which measure distance, count and classify vehicles; weather sensingsystems and other transportation equipment. The products within this segmentprovide information to prevent collisions from occurring and to ease trafficcongestion. The primary product lines within the Intersection Control segmentinclude intelligent intersection traffic control systems, pedestrian signals,video detection equipment and other transportation equipment. The productswithin this segment control traffic and ease traffic congestion, primarilyrelated to intersections.

The majority of our salesof highway and transportation safety products are to distributors andcontractors who then provide product and services to federal, state and localgovernmental units. Our business is conducted principally in the United States,our country of domicile, with sales outside the United States as follows: $21,821,000in 2006, $19,111,000 in 2005 and $14,249,000 in 2004. Inter-company salesbetween segments represented less than one percent of consolidated net sales infiscal 2006, 2005 and 2004.

Our reportable segmentsare based on similarities in products and represent the aggregation ofoperating units for which financial information is regularly evaluated indetermining resource allocation and assessing performance. We evaluate theperformance of our segments and allocate resources to them based on operatingincome as well as other factors. Operating income is determined by deductingoperating expenses from all revenues. In computing operating income, none ofthe following has been added or deducted: unallocated corporate expenses, interestincome or expense, 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.

57

----

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

**16.**   INDUSTRY SEGMENT INFORMATION (Continued)

The following table presents financial informationabout reported segments as of and for the years ended June 30, 2006, 2005and 2004 comprising the totals reported in the consolidated financialstatements.

| ** **                                   | ** ** | **2006**                                         | ** ** | **2005** | ** ** | **2004** | ** ** |
|----------------------------------------------|------------|--------------------------------------------------|------------|----------|------------|----------|------------|
| ** **                                   | ** ** | **(Dollar amounts in thousands)** | ** ** |
| Revenues:                                    |       |                                             |       |     |       |     |       |
| Protect and Direct                           |       | $                                                | 80,806     |     | $          | 73,575   |       | $ | 73,282 |   |
| Inform                                       |       | 24,134                                           |       | 21,163   |       | 21,188   |       |
| Intersection Control                         |       | 56,194                                           |       | 51,615   |       | 55,820   |       |
| Total                                        |       | $                                                | 161,134    |     | $          | 146,353  |       | $ | 150,290 |   |
| Depreciation and  amortization:              |       |                                             |       |     |       |     |       |
| Protect and Direct                           |       | $                                                | 2,601      |     | $          | 2,737    |       | $ | 2,719 |   |
| Inform                                       |       | 746                                              |       | 792      |       | 859      |       |
| Intersection Control                         |       | 2,552                                            |       | 2,107    |       | 2,907    |       |
| Total segment  depreciation and amortization |       | 5,899                                            |       | 5,636    |       | 6,485    |       |
| Unallocated corporate                        |       | 538                                              |       | 175      |       | 35       |       |
| Total                                        |       | $                                                | 6,437      |     | $          | 5,811    |       | $ | 6,520 |   |
| Income (loss) before  income taxes:          |       |                                             |       |     |       |     |       |
| Protect and Direct                           |       | $                                                | 15,539     |     | $          | 14,859   |       | $ | 15,904 |   |
| Inform                                       |       | 3,403                                            |       | 1,151    |       | (7,926   | )(1)       |
| Intersection Control                         |       | (22,360                                          | )(2)       | (5,723   | )          | (25,687  | )(3)       |
| Total segment operating  profit (loss)       |       | (3,418                                           | )          | 10,287   |       | (17,709  | )          |
| Unallocated corporate                        |       | (7,510                                           | )          | (8,120   | )          | (7,893   | )          |
| Total operating profit  (loss)               |       | (10,928                                          | )          | 2,167    |       | (25,602  | )          |
| Unallocated interest and  other              |       | (4,646                                           | )          | (3,264   | )          | (2,326   | )          |
| Total                                        |       | $                                                | (15,574    | )        | $          | (1,097   | )          | $ | (27,928 | ) |
| Identifiable assets:                         |       |                                             |       |     |       |     |       |
| Protect and Direct                           |       | $                                                | 55,415     |     | $          | 52,204   |       | $ | 53,347 |   |
| Inform                                       |       | 22,301                                           |       | 21,975   |       | 22,064   |       |
| Intersection Control                         |       | 28,359                                           |       | 48,864   |       | 49,678   |       |
| Total segment  identifiable assets           |       | 106,075                                          |       | 123,043  |       | 125,089  |       |
| Unallocated corporate                        |       | 19,128                                           |       | 13,747   |       | 14,793   |       |
| Total                                        |       | $                                                | 125,203    |     | $          | 136,790  |       | $ | 139,882 |   |
| Capital expenditures:                        |       |                                             |       |     |       |     |       |
| Protect and Direct                           |       | $                                                | 1,538      |     | $          | 1,593    |       | $ | 3,425 |   |
| Inform                                       |       | 801                                              |       | 490      |       | 194      |       |
| Intersection Control                         |       | 709                                              |       | 1,722    |       | 1,014    |       |
| Total segment capital  expenditures          |       | 3,048                                            |       | 3,805    |       | 4,633    |       |
| Unallocated corporate                        |       |                                             |       |     |       | 5        |       |
| Total                                        |       | $                                                | 3,048      |     | $          | 3,805    |       | $ | 4,638 |   |

----

(1)        Includes $9,865 in non-cash asset impairmentcharges.

(2)        Includes $13,374 in non-cash asset impairmentcharges.

(3)        Includes $22,735 in non-cash asset impairmentcharges.

58

----

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

**17.**   RESTRUCTURINGCOSTS

The continued underperformance of the IntersectionControl segment during fiscal 2006 resulted in our decision to furtherrationalize that business and divest certain non-core product lines. On April 25,2006, our Board of Directors approved a restructuring plan for our IntersectionControl segment which is comprised of the legacy operations of UST and PeekTraffic to reduce costs through the reduction of overhead by closing twofacilities and through the reduction of headcount.

Under the restructuring plan, we are divesting anddiscontinuing certain low-margin and non-core product lines primarilymanufactured in our leased facilities located in Tecate, Mexico and Santa FeSprings, California. These product lines include portable and permanentvariable message signs, tunnel lighting, illuminated street signs and in-groundloop detectors. We are in the process of moving the remaining intersectioncontrol family of products, including traffic controllers, traffic signals andpedestrian signals to our Palmetto, Florida and Bedford, Pennsylvaniafacilities. We are adopting an outsourcing strategy for non-core manufacturingprocesses and will continue to assemble and test products. We plan to close thefacilities in Santa Fe Springs, California and Tecate, Mexico by the end of September 2006.

In connection with the restructuring plan, we recorded$5,775,000 in restructuring charges during fiscal 2006, net of proceedsreceived on the sale of assets. The remaining cash portion of the plan is currentlyestimated to be approximately $5 million, net of cash to be received on thedisposal of assets, consisting principally of approximately $2 million inemployee severance and related benefit costs, $2 million in facility exitcosts, consulting expense and other related costs and $1 million in leaseobligations over the next two years. The remaining non-cash portion of the planis currently estimated to be approximately $3 million consisting of assetwrite-offs associated with inventory that no longer will be part of our ongoingoperations within the Intersection Control segment. We expect implementation ofthe plan to be completed by the end of our fiscal 2007 second quarter.

Effective June 22, 2006, as part of therestructuring of the Intersection Control segment, we sold our portablevariable message sign, tunnel lighting and illuminated street sign productlines for cash of $1,500,000. As the result of the sale of inventory,equipment, intellectual property, allocated goodwill, contracts and orders, we recordeda loss of $3,449,000 included as part of restructuring costs in operatingincome.

Activityrelated to the restructuring plan during fiscal year 2006 was as follows:

| ** **                                 | ** ** | ** **                        | ** ** | **Costs**          | ** ** | ** **     | ** ** | ** **      | ** ** | ** **                  | ** ** | **Remaining** | ** ** | **Total**    | ** ** |
|--------------------------------------------|------------|-----------------------------------|------------|--------------------|------------|----------------|------------|-----------------|------------|-----------------------------|------------|---------------|------------|--------------|------------|
| ** **                                 | ** ** | **Accrual**                       | ** ** | **Incurred**       | ** ** | **Cash**       | ** ** | ** **      | ** ** | **Accrual**                 | ** ** | **Expected**  | ** ** | **Expected** | ** ** |
| ** **                                 | ** ** | **Balance**                       | ** ** | **and other** | ** ** | **Proceeds**   | ** ** | **Non-cash**    | ** ** | **Balance**                 | ** ** | **Plan**      | ** ** | **Plan**     | ** ** |
| ** **                                 | ** ** | **July 1, 2005**        | ** ** | **Adjustments**    | ** ** | **(Payments)** | ** ** | **Adjustments** | ** ** | **June 30, 2006** | ** ** | **Costs**     | ** ** | **Costs**    | ** ** |
|                                       |       | **(Dollar amounts in thousands)** |       |               |
| Employee severance and related benefits    |       |                              | $          | —             |       |           |       | $               | 179        |                        |       |          | $          | (179         | )          |   |   | $ | — |   |   |   | $ | — |   |   |   | $ | 1,821 |   |   |   | $ | 2,000 |   |   |
| Lease obligations                          |       |                              |       |               |       |           | 90         |            |       |                        | (90        | )             |       |         |       |   |   |   |   |   |   |   | 972 |   |   |   | 1,062 |   |   |
| Asset sales and write-offs                 |       |                              |       |               |       |           | 4,571      |            |       |                        | 1,500      |          |       |         | (5,908     | ) |   |   | (163 | ) |   |   | 3,452 |   |   |   | 8,023 |   |   |
| Facility exit costs, consultants and legal |       |                              |       |               |       |           | 935        |            |       |                        | (601       | )             |       |         |       |   |   |   | (334 | ) |   |   | 2,205 |   |   |   | 3,140 |   |   |
| Total                                      |       |                              | $          | —             |       |           |       | $               | 5,775      |                        |       |          | $          | 630          |       |   |   | $ | (5,908 | ) |   |   | $ | (497 | ) |   |   | $ | 8,450 |   |   |   | $ | 14,225 |   |   |

 

Employee severance andrelated benefits include severance pay, related benefits and retention bonuses.Through June 30, 2006, the total workforce reduction associated withrestructuring activities 

59

----

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

**17.**   RESTRUCTURING COSTS (Continued)

initiatedduring fiscal 2006 included approximately 25 employees. We expect approximately200 additional employees to be included in the workforce reduction in fiscal2007. The amounts accrued for related to the restructuring plan as of June 30,2006 are included in current liabilities.

**18.**   LEGALSETTLEMENTS

On May 30, 2006, we settled all outstandinglitigation with the sellers of UST. The sellers paid us $3 million incash, and the parties agreed to waive all claims arising from the originalpurchase and related agreements dated in May 2003. We also terminated someof these agreements and modified the terms of the non-competition covenant withthe sellers. Specifically, the sellers agreed to refrain from sellinguninterruptible power supply products for use in intersection control to thecities of New York and Chicago until May 2008. We reaffirmed the $5million subordinated note to the sellers, and we continue to guarantee paymentspursuant to the lease of the Tecate, Mexico facility. During the fourthquarter, we recorded a gain of $2,348,000, net of legal and other directlyrelated expenses of which $336,000 were recorded in fiscal 2006 prior to thefourth quarter.

On September 23,2005, we settled all claims arising from our 2003 acquisition of the PeekTraffic business, by releasing all claims arising under the purchase agreement.As part of the settlement, the sellers of that business paid us $627,000 incash, net of legal expenses, and sold to us 150,603 shares of our common stockthat they initially acquired as part of the purchase price for $3,105,000, or$20.62 per share. We had claimed damages from the sellers of the Peek Trafficbusiness arising from the sellers’ breaches of representations and warrantiesin the asset purchase agreement and from certain liabilities of the PeekTraffic business that we did not specifically assume or were misrepresented tous.

60

----

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

**19.**   QUARTERLYFINANCIAL DATA (UNAUDITED)

Summarized unaudited quarterly financial data foryears 2006 and 2005 follows:

| ** **                        | ** ** | **Three months ended**                                                            | ** ** |
|-----------------------------------|------------|---------------------------------------------------------------------------------------------|------------|
| ** **                        | ** ** | **9/30**                                                                                    | ** ** | **12/31** | ** ** | **3/31** | ** ** | **6/30** | ** ** |
| ** **                        | ** ** | **(Dollar amounts in thousands, except per share data)** | ** ** |
| FISCAL 2006                       |       |                                                                                        |       |   |   |   |   |   |   |
| Net sales                         |       | $                                                                                           | 39,391     |   | $ | 39,186 |   | $ | 37,470 |   | $ | 45,087 |   |
| Gross profit                      |       | 10,946                                                                                      |       | 11,214 |   | 11,050 |   | 14,829 |   |
| Operating profit (loss)           |       | 1,627                                                                                       |       | 488 |   | (178 | ) | (12,865) | (1) |
| Net earnings (loss)               |       | 276                                                                                         |       | (383 | ) | (878 | ) | (9,117) | (2) |
| Basic earnings (loss) per share   |       | .03                                                                                         |       | (.04 | ) | (.10 | ) | (1.03) | (3) |
| Diluted earnings (loss) per share |       | .03                                                                                         |       | (.04 | ) | (.10 | ) | (1.03) | (3) |
|                              |       | **9/30**                                                                                    | ** ** | **12/31** | ** ** | **3/31** | ** ** | **6/30** |   |
| 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 |   |

----

(1)        Includes non-cash asset impairment charges of $13,374.

(2)        Includes non-cash asset impairment charges of $8,723, net of incometax benefits.

(3)        Includes non-cash asset impairment charges of $0.98 per dilutedshare.

61

----

**Item 9.**                        Changesin and Disagreements with Independent Registered Public Accounting Firm on Accounting and FinancialDisclosures

None.

**Item 9A.**                Controlsand Procedures

**(a)**                               EVALUATIONOF DISCLOSURE CONTROLS AND PROCEDURES

Our management, under thesupervision of and with the participation of our Chief Executive Officer andChief Financial Officer, has evaluated the effectiveness of the design andoperation of the Company’s disclosure controls and procedures pursuant toExchange Act Rules 13a-15(e). Based upon that evaluation, our ChiefExecutive Officer and Chief Financial Officer concluded that solely as a resultof the material weakness in our controls over financial reporting as describedbelow, our disclosure controls and procedures were not effective as of the endof the period covered by this Annual Report 10-K, June 30, 2006.However, we performed analysis and other procedures to ensure that ourconsolidated financial statements were prepared in accordance with accountingprinciples generally accepted in the United States. Accordingly, managementbelieves that (i) the financial statements filed fairly present in allmaterial respects the Company’s financial condition, results of operations andcash flow for the periods presented, and (ii) this report does not containany untrue statement of a material fact or omit 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

Our management is responsible for establishing andmaintaining adequate internal control over financial reporting, as that term isdefined in Exchange Act Rules 13a-15(f). Our internal control systemwas designed to provide reasonable assurance to our management and Board ofDirectors regarding the reliability of financial reporting and the preparationof financial statements for external purposes in accordance with generallyaccepted accounting principles in the United States of America. Our management,including the Chief Executive Officer and Chief Financial Officer, assessed theeffectiveness of our internal control over financial reporting as of June 30,2006, based on criteria established in *Internal Control*—*Integrated Framework,* issued by the Committee of SponsoringOrganizations of the Treadway Commission (“COSO”).

Based on this assessment, management determined that amaterial weakness existed in our internal controls over certain financial reportingcontrols as of June 30, 2006. Specifically, a number of control breakdownsin the operations at two facilities within our Intersection Control segmentcomprised of U.S. Traffic Corporation (UST) and Peek Traffic Corporation wereidentified. As further described in Note 17 to the consolidated financialstatements, these two facilities in Santa Fe Springs and Tecate, Mexico will beclosed in connection with a restructuring plan approved in the fourth quarterof fiscal 2006. The control breakdowns were noted in financial reporting,revenue, expenditures, inventory and capital assets, which resulted in a fewmisstatements identified by our external auditors, Grant Thornton LLP. Thesebreakdowns in the control environment were attributed to the turnover ofpersonnel within the accounting department at these two facilities. Managementhas not identified a specific remediation plan, because production at thefacilities will cease by September 30, 2006. Management expects to vacatethese facilities in the second quarter of fiscal year 2007, which we expectwill result in the remediation of this material control weakness.

Management’s assessment ofthe effectiveness of the Company’s internal control over financial reporting asof June 30, 2006 has been audited by Grant Thornton LLP, an independentregistered public accounting firm, as stated in their report which is includedherein.

62

----

*Limitation on theEffectiveness of Controls*

Our management, including the Chief Executive Officerand Chief Financial Officer, does not expect that our disclosure controls orour internal control over financial reporting will prevent all errors and allfraud.

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.

*Remediation of the2005 Material Weakness*

As of June 30, 2005, we had concluded that we hada material weakness in internal controls over certain Information TechnologyGeneral Controls, including lack of (i) monitoring of informationtechnology managers who have full access to the application and underlyingdata, (ii) mechanisms to track changes made to the application itself, and(iii) adequate security administration of users access to the application.

During fiscal year2006, we developed a comprehensive, detailed remediation plan to address thematerial weakness described above. As of June 30, 2006, we completed theexecution of our remediation plan, and in our assessment have remediated thismaterial weakness. Our remediation plan included the following activities:

·       Weupgraded our primary information technology software to a more current version,which allowed us to identify changes made to certain data within the software;

·       Weimplemented mechanisms to track changes to the financial applications;

·       Weoutsourced the management of the underlying data within our primary technologysoftware to limit information technology managers access to the underlyingdata; and

·       We implemented controlprocedures to mitigate excessive access to the financial application.

63

----

*Attestation ofRegistered Public Accounting Firm*

**REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

Board of Directors and ShareholdersQuixote Corporation

We have audited management’s assessment, included inthe accompanying *Management’s Report on Internal Control OverFinancial Reporting*, that Quixote Corporation and subsidiaries didnot maintain effective internal control over financial reporting as of June 30,2006, 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 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.

A material weaknessis a control deficiency, or combination of control deficiencies, that resultsin more than a remote likelihood that a material misstatement of the annual orinterim financial statements will not be prevented or detected. Our assessmentidentified the following control weaknesses at the Santa Fe Springs, Californiaand Tecate, Mexico locations that in the aggregate constitute a materialweakness in the Company’s internal control over financial reporting:

(i)            Misstatementsidentified during audit procedures

(ii)        Insufficientpersonnel resources within the accounting and financial reporting function dueto staff turnover

(iii)    Deficienciesin the analysis and reconciliation of general ledger accounts

(iv)      Policies and procedureslacking for tracking and recording fixed assets

64

----

This material weakness was considered in determiningthe nature, timing, and extent of audit tests applied in our audit of the June 30,2006 financial statements, and this report does not affect our report dated September 12,2006 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, 2006, is fairly stated, in all materialrespects, based on criteriaestablished in*Internal Control—IntegratedFramework*issued by the Committee of Sponsoring Organizations of theTreadway Commission (COSO). Also in our opinion, because of the effectof the material weakness described above on the achievement of the objectivesof the control criteria, Quixote Corporation has not maintained effectiveinternal control over financial reporting as of June 30, 2006, based on criteria established in*Internal Control—Integrated Framework*issuedby the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

We have also audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the consolidated balance sheet of Quixote Corporation andsubsidiaries as of June 30, 2006 and 2005, and the related consolidatedstatements of operations, shareholders’ equity, and cash flows for the yearsthen ended and our report dated September 12, 2006 expressed anunqualified opinion on those financial statements.

/s/ GRANT THORNTON LLP

Chicago, IllinoisSeptember 12, 2006

**(c)**                                CHANGESIN INTERNAL CONTROL OVER FINANCIAL REPORTING

There were changes in our internal control overfinancial reporting, as such term is defined in Rules 13a-15(f) and15d-15(f) under the Exchange Act during the fiscal quarter ended June 30,2006 that have materially affected, or are reasonably likely to materiallyaffect, our internal control over financial reporting. . During the fourthquarter of fiscal 2006, in conjunction with our remediation plan related to our2005 material weakness, we outsourced the management of the underlying datawithin our primary technology software and implemented control procedure tomitigate excessive access to the financial application. We completed ourassessment over Information Technology General Controls and assessed that our2005 material weakness was remediated. During the fourth quarter of fiscal2006, we also identified a deterioration of the control environment at twofacilities within our Intersection Control segment further discussed above.However, in connection with this material weakness in internal control over financialreporting, we performed additional analysis and other post-closing procedures,as described above in Evaluation of Disclosure Controls and Procedures.

65

----

**PART III**

**Item10.**                 Directors andExecutive Officers of the 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 16, 2006 tobe filed with the Commission on or about September 29, 2006 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 2006 are as follows:

| Leslie J. Jezuit |   | 60 |   | Chairman &  Chief Executive Officer—Quixote Corporation                  |   |
|------------------|--------|----|--------|----------------------------------------------------------------------------------------|--------|
| Daniel P. Gorey  |   | 55 |   | Chief  Financial Officer, Vice President & Treasurer—Quixote Corporation |   |
| Joan R. Riley    |   | 53 |   | 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 Controls Company.In October, 1999 Mr. Jezuit assumed the position of Chief Executive Officerand in July 2001 was elected Chairman of the Board of Directors.

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.

**Item11.**                 Executive Compensation

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 16,2006 to be filed with the Commission on or about September 29, 2006 and isincorporated herein by reference.

**Item12.**                 SecurityOwnership of Certain Beneficial 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 16, 2006 to befiled with the Commission on or about September 29, 2006 and isincorporated herein by reference.

66

----

**Item13.**                 CertainRelationships and Related Transactions

The information requiredin response to this item is set forth under the caption “Certain Transactionsand Business Relationships” of the Registrant’s Definitive Proxy Statement forthe Annual Meeting of Stockholders to be held on November 16, 2006 to befiled with the Commission on or about September 29, 2006 and isincorporated herein by reference.

**PART IV**

**Item 14.**                 PrincipalAccountant Fees and Services

The information required inresponse to this item is set forth under the caption “Audit and Other Fees Paidto Grant Thornton LLP” of the Registrant’s Definitive Proxy Statement for theAnnual Meeting of Stockholders to be held on November 16, 2006 to be filedwith the Commission on or about September 29, 2006 and is incorporatedherein by reference.

**Item 15.**                 Exhibitsand Financial Statement Schedule

| Item       | ** ** | ** **                                                                                                  | ** ** | **Page Number in** |   |
|------------|------------|-------------------------------------------------------------------------------------------------------------|------------|-------------------------|--------|
| **Number** | ** ** | ** **                                                                                                  | ** ** | **This Report**         |   |
| (a).1.     |       | Financial Statements                                                                                        |       |                    |   |
|       |       | Reports of Independent Registered Public Accounting  Firm                                                   |       | 32-33                   |   |
|       |       | Consolidated Statements of Operations for the years  ended June 30, 2006,  2005 and 2004               |       | 34                      |   |
|       |       | Consolidated Balance Sheets as of June 30, 2006  and 2005                                              |       | 35                      |   |
|       |       | Consolidated Statements of Shareholders’ Equity for  the years ended June 30, 2006, 2005 and 2004 |       | 36                      |   |
|       |       | Consolidated Statements of Cash Flows for the years  ended June 30, 2006,  2005 and 2004               |       | 37                      |   |
|       |       | Notes to Consolidated Financial Statements                                                                  |       | 38-61                   |
| (a).2.     |       | Financial Statement  Schedule                                                                               |       |                    |   |

 

The financialstatement schedule listed under Item 15(d) is filed as part of this annualreport. All other schedules have been omitted because the required informationis included in the consolidated financial statements or notes thereto orbecause they are not applicable or not required.

(b).                  Exhibits

* Management contract or compensatory plan oragreement

| 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. 001-08123,  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. 001-08123, and incorporated herein by reference.     |

67

----

 

| 3.     | (a)  | Restated Certificate of  Incorporation as amended November 22, 2005 filed as  Exhibit 3(a) to the Company’s Form 10-Q Report for the  quarter ended December 31, 2005, File No. 001-08123, 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 January 24, 2006, filed as  Exhibit 3(b) to the Company’s Current Report on Form 8-K  , File No. 001-08123, dated January 26, 2006, and  incorporated herein by reference.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 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. 001-08123, 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. 001-08123, 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. 001-08123, 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. 001-08123, 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; 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. 001-08123, 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. 001-08123, and incorporated herein by  reference.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |

68

----

 

|        | (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. 001-08123, 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. 001-08123, 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. 001-08123, 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. 001-08123,  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. 001-08123, 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. 001-08123  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. 001-08123,  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. 001-08123,  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. 001-08123,  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. 001-08123,  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. 001-08123,  and incorporated herein by reference; Lease dated September 22, 2005 by  and between Gulfcoast Property No. 1, LLC and Peek Traffic Corporation  filed as Exhibit 10(f) to the Company’s Form 10-Q Report  for the quarter ended |

69

----

 

|        |      | September 30, 2005,  File No. 001-08123, and incorporated herein by reference; Lease  Addendum dated January 17, 2006 by and between Gulfcoast Property  No. 1, LLC and Peek Traffic Corporation filed as  Exhibit 10(f) to the Company’s Form 10-Q for the quarter  ended December 31, 2005, File No. 001-08123 and incorporated  herein by reference; Sublease dated June 22, 2006 by and between U.S.  Traffic Corporation and National Signal, Inc. filed herewith.                                                                                                                                                                                                                                                                                                                                                                              |
|--------|-----------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | (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. 001-08123, 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. 001-08123, 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. 001-08123, 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. 001-08123, 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. 001-08123,  and incorporated herein by reference.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   | (j)       | 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. 001-08123,  and incorporated herein by reference.                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|   | (k)       | 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. 001-08123,  and incorporated herein by reference.                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|   | (l)       | 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. 001-08123, and incorporated herein by  reference.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|   | (m)       | Settlement Agreement  dated May 30, 2006 by and among U.S. Traffic corporation, Quixote  Corporation, Myers America, Inc., Myers Power Products, Inc.,  Myers/NuArt Electrical Products, Inc., Raymond International W.L.L.,  Raymond Overseas Holding, Limited and Basil Vasilou, filed as  Exhibit 10(u) to the Company’s Current Report on Form 8-K  dated May 30, 2006, File No. 001-08123, and incorporated  herein by reference.                                                                                                                                                                                                                                                                                                                                                                                                                         |

70

----

 

|        | (n) | 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. 001-08123,  and incorporated herein by reference. |
|--------|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | (o) | 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. 001-08123,  and incorporated herein by reference.                                             |
|   | (p) | Asset Purchase Agreement  dated June 22, 2006 by and between U.S. Traffic Corporation and National  Signal, Inc., filed herewith.                                                                                                                                                                                                                                                                                  |
|   | (q) | Asset Purchase Agreement  dated June 30, 2006 between Data Transmission Network Corporation and  Surface Systems, Inc., filed herewith.                                                                                                                                                                                                                                                                            |

 

21.          Subsidiariesof the Company

23.          Consentof Grant Thornton LLP as an Independent Registered Public Accounting Firm

23.1   Consentof PricewaterhouseCoopers LLP as an Independent Registered Public AccountingFirm

31.          Certificationsof the Chief Executive Officer and Chief Financial Officer under Section 302of the Sarbanes-Oxley Act of 2002, filed herewith.

32.          Certificationsof the Chief Executive Officer and Chief Financial Officer under Section 906of the Sarbanes-Oxley Act of 2002, filed herewith.

*Schedule*:

II—Valuation and Qualifying Accounts and Reserves

71

----

**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)        |                                      |
| Dated: |   | September 12, 2006 |                | By: /s/ Leslie J. Jezuit                  |
|   |   |                    |                | Leslie J. Jezuit, Chief Executive Officer |

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, this report has been signed below by the following personson behalf of the registrant and in the capacities and on the dates indicated.

|                                     | **SIGNATURE** | ** **                                | ** ** | ** **               | **TITLE** | ** ** | ** ** | ** ** | **DATE** | ** ** |
|-------------------------------------|---------------|-------------------------------------------|------------|--------------------------|-----------|------------|------------|------------|----------|------------|
| /s/ Leslie J.  Jezuit               |          | Chairman and  Director                    |       | September 12,  2006 |
| Leslie J. Jezuit                    |          | (President, Chief  Executive Officer)     |       |                     |
|                                |          |                                      |       |                     |
|                                |          |                                      |       |                     |
| /s/ Daniel P.  Gorey                |          | Vice President, Chief  Financial Officer, |       | September 12, 2006  |
| Daniel P. Gorey                     |          | Treasurer and Director                    |       |                     |
|                                |          |                                      |       |                     |
| /s/ Joan R. Riley                   |          | Vice President,  General Counsel          |       | September 12,  2006 |
| Joan R. Riley                       |          | and Secretary                             |       |                     |
|                                |          |                                      |       |                     |
|                                |          |                                      |       |                     |
| /s/ James H.  DeVries               |          | Director                                  |       | September 11, 2006  |
| James H. DeVries                    |          |                                      |       |                     |
|                                |          |                                      |       |                     |
| /s/ Lawrence C.  McQuade            |          | Director                                  |       | September 11, 2006  |
| Lawrence C. McQuade                 |          |                                      |       |                     |
|                                |          |                                      |       |                     |
| /s/ Duane M.  Tyler                 |          | Director                                  |       | September 12, 2006  |
| Duane M. Tyler                      |          |                                      |       |                     |
|                                |          |                                      |       |                     |
| /s/ Robert D. van  Roijen, Jr. |          | Director                                  |       | September 11, 2006  |
| Robert D. van Roijen, Jr.      |          |                                      |       |                     |

 

 

72

----

**QUIXOTECORPORATION AND SUBSIDIARIESSCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVESFor the years ended June 30, 2006, 2005 and 2004**

| **Column A**                                | ** ** | **Column B**     | ** ** | **Column C**   | ** ** | **Column D(a)** | ** ** | **Column E**                                  | ** ** |
|--------------------------------------------------|------------|-----------------------|------------|---------------------|------------|----------------------|------------|----------------------------------------------------|------------|
| ** **                                       | ** ** | ** **            | ** ** | **Additions**       | ** ** | ** **           | ** ** | ** **                                         | ** ** |
| ** **                                       | ** ** | **Balance at**   | ** ** | **Charged to** | ** ** | ** **           | ** ** | **Balance at**                                | ** ** |
| ** **                                       | ** ** | **Beginning of** | ** ** | **Costs and**  | ** ** | ** **           | ** ** | **End of**                                    | ** ** |
| **Description**                                  | ** ** | ** **            | ** ** | **Period**          | ** ** | **Expenses**         | ** ** | **   Deductions   ** | ** ** | **Period** | ** ** |
| Reserve for Doubtful  Accounts and Credit Memos: |       |                  |       |                |       |                 |       |                                               |       |   |   |   |   |
| Year ended                                       |       |                  |       |                |       |                 |       |                                               |       |   |   |   |   |
| June 30,  2006                              |       | $                     | 1,581,000  |                |       | $                    | 693,000    |                                               |       |   | $ | (458,000 | ) |   | $ | 1,816,000 |   |
| 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 |   |
|                                                  |            |                       |            |                     |            |                      |            |                                                    |            |  |  |  |  |  |  |  |  |  |  |

----

NOTE:

(a)         Column D represents accounts written off as uncollectible, net ofcollections on accounts previously written off.

73

----

**EXHIBITINDEX**

| EXHIBIT NUMBER | ** ** | **EXHIBITS**                                                                                                                     |
|----------------|------------|----------------------------------------------------------------------------------------------------------------------------------|
| 10(f)          |       | Sublease dated  June 22, 2006 by and between U.S. Traffic Corporation and National Signal, Inc.                        |
| 10(p)          |       | Asset Purchase Agreement  dated June 22, 2006 by and between U.S. Traffic Corporation and National  Signal, Inc.       |
| 10(q)          |       | Asset Purchase Agreement  dated June 30, 2006 between Data Transmission Network Corporation and  Surface Systems, Inc. |
| 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                                                                          |

 

74

----