**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington,D.C. 20549**

**FORM 10-K**

**(Mark One)**

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

**Forthe fiscal year ended June 30, 2007**

**OR**

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

**Forthe transition period                              to                              **

**Commissionfile number 001-08123**

**QUIXOTE CORPORATION**

(Exact name of registrantas specified in its charter)

| **DELAWARE**                     | ** ** | **36-2675371**       |
|----------------------------------|------------|----------------------|
| (State or other  jurisdiction of |       | (I.R.S. Employer     |
| incorporation or  organization)  |       | Identification  No.) |

 

| **THIRTY FIVE EAST WACKER DRIVE, CHICAGO, ILLINOIS** | ** ** | **60601**  |
|------------------------------------------------------|------------|------------|
| (Address of  principal executive offices)            |       | (Zip Code) |

 

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

Securities Registered Pursuant to Section 12(b) ofthe 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 or15(d) of the 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 mark whether the registrant is alarge accelerated filer, an accelerated filer, or a non-accelerated filer. Seedefinition of “accelerated filer and large accelerated filer” in Rule 12b-2of the Act. (Check one)

| Large accelerated filer  o |   | Accelerated  filer  x |   | Non-accelerated filer  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.   $160,016,886 as of December 31, 2006

Indicate the number ofshares outstanding of each of the issuer’s classes of common stock, as of thelatest practicable date: 9,048,237 shares of the Company’s Common Stock ($.01-2/3par value) were outstanding as of September 4, 2007.

**DOCUMENTS INCORPORATED BY REFERENCE**

TheRegistrant’s Definitive Proxy Statement for the Annual Meeting of Stockholdersto be held on November 15, 2007 which will be filed with the Commission onor about October 3, 2007 is incorporated by reference at Part III.

 

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**TABLEOF CONTENTS**
|               | ** ** | ** **                                                                                                             | ** ** | **PAGE**   | ** ** |
|---------------|------------|------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|
| ** **    | ** ** | **PART I**                                                                                                        | ** ** | ** ** | ** ** |
| Item 1.  |       | Business                                                                                                               |       | 4-8        |       |
| Item 1A. |       | Risk Factors                                                                                                           |       | 8-14       |       |
| Item 1B. |       | Unresolved Staff Comments                                                                                              |       | 14         |       |
| Item 2.  |       | Properties                                                                                                             |       | 15         |       |
| Item 3.  |       | Legal  Proceedings                                                                                                     |       | 15         |       |
| Item 4.  |       | Submission of Matters to a Vote of Security Holders                                                                    |       | 15         |       |
| ** **    | ** ** | **PART II**                                                                                                       | ** ** | ** ** | ** ** |
| Item 5.  |       | Market for the Registrant’s Common Equity, Related  Stockholder Matters and Issuer Purchases of Equity Securities |       | 16         |       |
| 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                                                                            |       | 32-57      |       |
| Item 9.  |       | Changes in and Disagreements with Accountants on  Accounting and Financial Disclosure                                  |       | 58         |       |
| Item 9A. |       | Controls and Procedures                                                                                                |       | 58-60      |       |
| Item 9B. |       | Other  Information                                                                                                     |       | 60         |       |
| ** **    | ** ** | **PART III**                                                                                                      | ** ** | ** ** | ** ** |
| Item 10. |       | Directors, Executive Officers and Corporate Governance                                                                 |       | 61         |       |
| Item 11. |       | Executive Compensation                                                                                                 |       | 61         |       |
| Item 12. |       | Security Ownership of Certain Beneficial Owners and  Management and Related Stockholder Matters         |       | 61         |       |
| Item 13. |       | Certain Relationships, Related Transactions, and  Director Independence                                                |       | 62         |       |
| Item 14. |       | Principal Accountant Fees and Services                                                                                 |       | 62         |       |
| ** **    | ** ** | **PART IV**                                                                                                       | ** ** | ** ** | ** ** |
| Item 15. |       | Exhibits and Financial Statement Schedule                                                                              |       | 63-66      |       |
| SIGNATURES    |       | 67                                                                                                                     |       |

 

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**PART I**

**THE COMPANY**

**Forward LookingStatements**

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 and that 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 theCompany and Its Financial Condition**

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

We develop, manufacture and sell highway andtransportation safety products to domestic and international markets. Our threereportable segments are: highway and transportation safety products that “Protectand Direct” 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 worldwide through a distribution network, as well as by a direct salesforce, to customers in the highway construction and safety business, state andmunicipal departments of transportation and other governmental transportationagencies.

In the United States our business is directly affectedby federal, state and municipal government funding for transportation safety,highway construction and maintenance, and other infrastructure projects. A significantpart of our sales are ultimately financed by funds provided to the states bythe federal government through the federal transportation funding bill. Thecurrent bill, SAFETEA-LU, was enacted in August 2005, delayed almost twoyears. Until the new legislation was enacted, the transportation safetyallotment in federal and state budgets was uncertain. We believe this prolongeduncertainty adversely impacted sales of our products and services in fiscalyears 2005 and 2006 and our financial performance in those fiscal years. Webelieve that the passage of SAFETEA-LU has provided a more predictable fundingstream for our products.

At the same time, many states suffered budgetconstraints in fiscal year 2005. Such budget constraints adversely affected theability of the states to fund highway and infrastructure projects, andtherefore reduced the demand for our products. Municipalities also sufferedfrom budget restraints that reduced transportation safety spending. Due to theimprovement in general economic conditions, we believe that state and municipalbudgetary conditions improved.

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Sales and operatingresults were below historic levels and expectations in fiscal year 2005 andoperating results for our Intersection Control segment were substantially lessthan expected. In fiscal year 2006, continued significant operating losses atour Intersection Control segment caused us to restructure that segment. Therestructuring lowered costs through headcount and facility reductions, as wellas through the discontinuation of non-core and low margin product lines. Wealso outsourced non-core manufacturing activities. The restructuring resultedin a significant reduction in operating losses for the Intersection Controlsegment beginning in the third quarter of fiscal 2007. However, this segmentexperienced losses in fiscal 2007 because sales were below break-even levels.

**Item 1.**                        Business

Quixote Corporation, through its subsidiaries,develops, manufactures and markets highway and transportation safety productsto protect, direct and inform motorists and highway workers in both domesticand international markets. Our products include energy-absorbing highway crashcushions, flexible post delineators, electronic wireless measuring and sensingdevices, weather information systems, highway advisory radios, intelligentintersection control devices, video detection equipment and other highway andtransportation safety devices.

As of June 30, 2007,we employed approximately 700 people.

**Description ofBusiness**

Our operations arecomprised 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 sold world-wide through a distributionnetwork, as well as by a direct sales force, to customers in the highwayconstruction and safety business, state and municipal departments oftransportation and other governmental transportation agencies.

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

**Protect and DirectSegment**

Our Protect and Direct segment of products include ourpatented highway crash cushions which were first conceived and developed in1969. These products were developed and sold in response to the high number offatalities and serious injuries suffered by occupants of errant vehicles incollisions with roadside hazards, such as bridge abutments, overpass piers, overheadsign supports, lane dividers, traffic islands and toll booths. Since 1969,various types of highway crash cushions have been installed in front ofthousands of life-threatening roadside hazards. The Federal HighwayAdministration (FHWA) endorses the installation of highway crash cushions as aneffective safety program and they are mandatory on interstate roads in the U.S.

We develop, manufacture and market lines of patentedhighway crash cushion systems, truck-mounted attenuators (TMA’s) and other barrierswhich absorb and dissipate the force of impact in collisions between vehiclesand fixed roadside objects or slow moving highway construction vehicles. Theproduct lines utilize the principles of momentum transfer and kinetic energy tosafely decelerate errant 

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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 and sell products that preventcrashes and help control the flow of traffic by directing or guiding. Theseproducts consist of a line of flexible sign and guide post systems(delineators) and a glare screen system. The guide posts are used to delineatea travel way, channel vehicles or mark the location of an object. The postfeatures an in-ground anchor system that permits inexpensive repair andreplacement. The glare screen system, made from polyethylene, is installed ontop of median barriers to eliminate the distraction of lights from oncomingvehicles.

Our products within theProtect and Direct segment also include a crashworthy barrier arm for use atareas such as railroad crossings and toll roads and as security for accessways, driveways and parking lots. In addition, we market a FreezeFree®anti-icing system which automatically or manually dispenses deicing liquids inadvance of ice formation on bridges, roads and overpasses.

**Inform Segment**

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

These products include portable and permanent sensorsthat record traffic volume, speed, and length classification of vehicles. Thesesensors also collect, analyze and store traffic, road surface conditions andfreezing point data which can be relayed on a real-time basis to atransportation department’s base computer or control center via telephone,cellular link, fiber optic connection or a wireless link. We also manufactureand market road/runway weather information systems. Using a tower equipped withweather instruments and special detectors, these systems can detect freezingconditions and provide valuable weather information to transportationdepartments or airports in order to dispatch salt trucks or automatically activateanti-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 motorists byintegrating traffic and/or weather sensors, variable message signs and computercontrolled software.

**IntersectionControl Segment**

To further expand our business within the highway andtransportation safety industry, in 2003 we acquired two companies thatmanufacture Intelligent Transportation System (ITS) products which controlintersections. After substantial losses as discussed earlier, in April 2006,we approved a plan to restructure this segment which included the sale anddiscontinuation of several product lines. After restructuring, its productsinclude traffic controllers, traffic and pedestrian signals, trafficuninterruptible power supply (UPS) systems, video detection equipment, tollroad monitoring systems and parking detection devices. Traffic controllers anddetectors are devices that control traffic signal operations at intersectionseither with pre-set timers or with detectors that enable the signals to changein response to variations in traffic. Traffic and pedestrian signals are LED orincandescent signals for intersection operations and pedestrian crossings whichmay include a numerical countdown warning before a signal changes. UPS systemsare power supply systems with battery backup that keeps a lighted intersectionoperating either normally or in flash-mode during a power interruption. Videodetection systems are based on one or more cameras that detect a vehicle’spresence and then activate a left turn arrow. A toll road monitoring system isa data 

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collection system able tocount axles of vehicles in order for the authorities to ensure the proper tollamount is collected.

Across all segments, wemay provide product education, selection and application assistance. In limitedcases, we perform site preparation and installation services for our products.

**Marketing andCompetition**

Our products are sold in all 50 U.S. states andinternationally. Domestically, we sell either through a distribution network orthrough a direct sales force. Regional managers supervise domestic****distributors and make direct sales inareas not covered by distributors. We sell our products principally todistributors, contractors (on behalf of state and local governments), statedepartments of transportation, state agencies, local governments,municipalities, and airports. Although the federal government provides matchingfunds for the purchase of certain highway safety products by state and localgovernmental agencies, the federal government is usually not a direct purchaserof our domestic products. For certain products, we sell through catalogs andinside sales personnel.

Many foreign governments are beginning to recognizethe need for our products as a method of reducing traffic congestion andimproving safety. Our products are sold outside of the U.S through a network ofdistributors who make sales to municipal and national governments andcontractors who are responding to bids from their respective governments.

Although we experience competition in many of ourproduct lines, we believe that we are a leading U.S. manufacturer oftransportation safety products. Within the Protect and Direct segment, webelieve that no other company presently markets as broad a line of highwaycrash cushion systems designed to shield as large a variety of fixed roadsidehazards as we do. However, many of our competitors in all three of our businesssegments offer products similar to those supplied by us. We experience somecompetition in most product lines. We compete in the U.S. market for crashcushions, TMA’s and sand barrels with Trinity Industries, Inc., (NYSE:TRN), TrafFix Devices, Inc., Barrier Systems, Inc. (a subsidiary ofLindsay Corporation, (NYSE: LNN)) and other smaller regional companies. Anumber of other companies manufacture flexible sign and guide post systems. Withinthe Inform and Intersection Control segments, we experience rigorouscompetition in selling certain product lines because they are generally soldthrough a bidding process. These product lines include our road weatherinformation systems (RWIS) within the Inform segment and traffic controllersand pedestrian signals within the Intersection Control segment. There are a fewcompanies that compete with us in selling HAR systems within the Inform segment.In addition, we compete with many different companies that sell sensors usingdifferent technologies, including microwave and infra-red sensors andmachine-vision (video), with each technology offering its own advantages.

Competition may have anadverse effect on our 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 ownin-house product development, patent protection, quality and price, and theeffectiveness of our strong distribution network.

**Government Policiesand Funding**

The domestic market for highway and transportationsafety products is directly affected by federal, state and local governmentalpolicies. Federal transportation spending is funded through a trust based onthe sale of gasoline. Funds are allocated and highway policy is developedthrough a six-year federal highway bill. A portion of our sales is ultimatelyfinanced by funds provided to the states by the federal government. Historically,these funds cover 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, and the current bill,SAFETEA-LU, was enacted in August 2005. SAFETEA-LU, 

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“Safe,Accountable, Flexible and Efficient Transportation Equity Act - A Legacy forUsers”, will provide $286.4 billion in guaranteed funding for the federalhighway, transit and safety programs through September 2009. Importantly,unlike historical funding bills, SAFETEA-LU focuses on improving safety andrelieving congestion as a priority, as well as on new highway construction andresurfacing projects. Several sections of SAFETEA-LU provide for increasedfunding and focus on products and systems within our Inform segment. While thecurrent bill does not include projects that specifically indicate our productsby name and there can be no guarantee of increased sales, we expect the marketpotential for applications of our sensors, counters, audio and visual outputdisplays and adaptive control and monitored intersections to increase due tothis legislation. However, any change in the availability of federalfunds and the timing of the release of those funds to the state and localgovernments can have an adverse impact on our financial results.

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

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

**Backlog**

As of June 30, 2007,2006 and 2005, we had a backlog of unfilled orders for our products of$45,100,000, $24,481,000 and $23,796,000, respectively. We generally fill anorder for our products within two days to eight weeks of receipt depending onthe type of product. However, some orders or awarded contracts included inbacklog may not be completed for up to five years. In particular, the backlogas of June 30, 2007 includes a $20 million contract, awarded in January 2007,to provide traffic controllers to New York City over the next three years.

**Research andDevelopment; Patents**

Many of our products have patented features and weconduct our own research, development and testing of new products beforeintroducing them to the marketplace. The expenditures for research anddevelopment activities were $5,174,000, $5,958,000 and $5,391,000 for thefiscal years 2007, 2006 and 2005, respectively. We maintain a crash testfacility in California for Protect and Direct products.

We develop new products by working with customers aswell as federal, state and local highway officials to determine transportationsafety needs, and then we design products to satisfy those needs. We are alsoactive in promoting cooperation among state highway agencies, contractors andengineers to encourage comprehensive repair and maintenance of roadside crashattenuating systems. In addition to developing new products, we are alsoseeking to acquire new products which can be sold through our distributionnetworks 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 raw materials used in the production oftransportation safety devices are plastic and plastic resins, steel, aluminumand electronic components. These raw materials are purchased from varioussuppliers and have been readily available throughout the last year. We believethat adequate supplies of these materials will continue to be available.

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In fiscal 2007, 2006 and2005 we were 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 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 2007 and 2006.Increasing material, fuel and freight costs may continue into fiscal 2008.

**Major Customers**

No single customer represents a significant portion ofour total revenues. However, approximately 9%, 8% and 7% of our consolidatedrevenues resulted from sales to customers in the states of California, Floridaand Texas, respectively, in fiscal 2007. Our customers are typicallydistributors, contractors, departments of transportation, state agencies, localgovernments or municipalities and, therefore, a change in policy in statespending could materially affect our sales in that state.

**Seasonality**

Our sales are historicallyseasonal with domestic highway construction and maintenance projects typicallypeaking in our fourth fiscal quarter.

**Foreign andDomestic Operations and Revenues**

Our business is conducted principally in the UnitedStates, with sales outside of the United States as follows:  $23,399,000, $21,821,000 and $19,111,000 in2007, 2006 and 2005 respectively.

Our assets outside of theUnited States are not material except for our manufacturing facility inBeijing, China (See Properties at Item 2) established during fiscal 2007. Ourlong-lived assets used in the leased Beijing facility are less than $200,000 asof June 30, 2007.

**AvailableInformation**

We file annual reports on Form 10-K,quarterly reports on Form 10-Q, current reports on Form 8-K,special reports, proxy and information statements, and amendments to thosereports, with the Securities and Exchange Commission (SEC). The public may readand copy any materials filed by us with the SEC at the SEC’s Public Reference Room at100 F. Street, N.E., Washington D. C. Information about the operation of theSEC Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330.Our filings can also be obtained for free on the SEC’s Internet site at sec.gov.We also maintain an internet website at http://www.quixotecorp.com thatcontains access to our public filings and other information regarding us. Wemake our public filings available as soon as reasonably practicable after suchmaterial is filed, or furnished, to the SEC. A copy of our filings will also befurnished free of charge upon request to our Corporate Secretary, Joan R.Riley, at our address listed on the cover of this Form 10-K.

**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:

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**A decrease or delayin federal government funding of transportation safety and highway constructionand maintenance may cause our revenues and profits to decrease.**

We depend substantially on federal, state andmunicipal funding for transportation safety, highway construction andmaintenance and other related infrastructure projects. Any decrease or delay ingovernment funding could cause our revenues and profits to decrease.

Federal government funding for infrastructure projectsis usually accomplished through highway authorization bills, which establishfunding over a multi-year period. The most recent highway authorization bill,SAFETEA-LU, became law in August 2005, after the prior law, whichauthorized federal spending through September 30, 2003, was extended atthen current funding levels eleven times. Until the new law was passed, thetransportation safety allotment in federal and state budgets was uncertain, andwe believe this uncertainty negatively impacted spending on our products andservices. The delayed passage of the new highway funding bill adverselyaffected our financial performance in fiscal year 2005 and fiscal year 2006.

SAFETEA-LU currentlyexpires September 30, 2009. Delays in a new highway bill could occur andcould relate to political uncertainties. Even after federal legislation isenacted, 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 onstate and local government budgets may adversely affect our financialperformance.**

States and municipalitiesmay reduce spending on highways due to budget constraints as well as otherbudget priorities. Such budgetary constraints adversely affect the ability ofstates to fund transportation, highway and infrastructure projects, andtherefore reduce the demand for our products. Municipalities also suffer frombudget constraints that can reduce transportation safety spending.

**Downturns indomestic or foreign economies or the transportation safety and highwayconstruction industries may adversely affect our 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 related domesticfunding uncertainty during fiscal years 2002 into 2006 negatively affected ourexpected revenue growth. Sales of our products are sensitive to foreign,domestic and regional economies in general, and in particular, changes ingovernment infrastructure spending. In addition, trends toward privatization ofhighways may impact the nature of spending on transportation safety products. Manyof our costs are fixed and cannot be quickly reduced in response to decreaseddemand.

**Our products oftenare subject to government testing, inspection and approval.**

We frequently supplyproducts and services pursuant to agreements with general contractors ordirectly with government agencies. The successful completion of our obligationsunder these contracts is often subject to satisfactory testing, inspection andapproval of such products and services. Although we endeavor to satisfy therequirements of each of these contracts to which we are a party, no assurancecan be given that the necessary approval of our products and services will begranted on a timely basis or at all, and that we will receive any payments dueto us. In some cases, we may be dependent on others to complete these projectswhich may also delay payments to us. Any failure to obtain these approvals andpayments may have a material adverse effect on our business and futurefinancial performance.

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**Past and futureacquisitions involve risks that could adversely affect our future financialresults.**

We grow our Companyby acquisitions and may acquire additional businesses in the future. We may beunable to achieve the benefits expected to be realized from our acquisitions.We may incur additional costs and our management’s attention may be divertedbecause of unforeseen expenses, complications, delays and other risks inherentin acquiring businesses, 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 the financialeffect 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 2005 and 2006. Given substandardperformance of our Intersection Control segment, we recorded asset impairmentcharges in that segment of  $13,374,000for the year ended June 30, 2006. Confronted with the underperformance ofthe Intersection Control business, in April 2006, our Board of Directorsapproved a restructuring plan for that business which included furtherrationalizing of operations and divesting certain non-core product lines. Wecompleted the restructuring plan in the second quarter of fiscal 2007. However,the restructuring activities may not result in profitability for theIntersection Control segment.

**Management’sestimates and assumptions affect reported amounts of expenses and changes inthose estimates could impact operating results.**

Goodwill and other indefinite-lived intangible assetsare tested for impairment at least annually, and the results of such testingmay adversely affect our financial results. We use a variety of valuationtechniques in determining fair value. The impairment review is highlyjudgmental and involves the use of significant estimates and assumptions. Theseestimates and assumptions have a significant impact on the amount of anyimpairment charge recorded, and actual results may differ significantly fromthe 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.

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**Our business couldbe adversely affected by reduced levels of cash, whether from operations orfrom bank borrowings.**

Historically, ourprincipal sources of funds have been cash flows from operations and borrowingsfrom banks. Our operating and financial performance may generate less cash andresult in our failing to comply with  ourbank credit agreement covenants. We are currently in compliance with thecovenants of the credit agreement and expect to be during fiscal 2008. However,our ability to remain in compliance in the future will depend on our futurefinancial performance and may be affected by events beyond our control. Therecan be no assurance that we will generate sufficient earnings and cash flow toremain in compliance with the credit agreement, or that we will be able toobtain future amendments to the credit agreement to avoid a default. In theevent of a default, there can be no assurance that we could negotiate a newcredit agreement or that we could obtain a new credit agreement withsatisfactory terms and conditions within a reasonable time period.

**If we are unable toprotect our proprietary technology from infringement or if our technologyinfringes technology owned by others, then the demand for our products maydecrease or we may be forced to modify our products which could increase ourcosts.**

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 and futurepatents and trademarks may not adequately protect us against infringements,especially in certain foreign countries, and pending patent or trademarkapplications may not result in issued patents or trademarks. Our patents,registered trademarks and patent applications may not be upheld if challenged,and competitors may develop similar or superior methods or products outside theprotection of our patents. This could increase competition for our products andmaterially decrease our revenues. If our products are deemed to infringe thepatents or proprietary rights of others, we could be required to modify thedesign of our products, change the name of our products or obtain a license forthe use of some of the technologies used in our products. We may be unable todo any of the foregoing in a timely manner, upon acceptable terms andconditions, or at all, and the failure to do so could cause us to incuradditional costs or lose expected revenue.

**Our success dependson our management and other employees.**

A factor in our ability toprofitably execute our work is our ability to attract, develop and retainqualified personnel. Our success in attracting qualified people is dependent onthe resources available in individual geographic areas and the impact on the laborsupply due to general economic conditions as well as our ability to provide acompetitive compensation package and work environment. Leslie J. Jezuit, ourChairman and President, and Daniel P. Gorey, our Chief Financial Officer, areof significant importance to our business and operations. 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, is an important factor in determiningour future success.

**Difficulties inmanaging and expanding in international markets could affect future growth inthese markets.**

In fiscal year2007, international sales were $23,399,000 or 17%, of our total sales and webelieve international markets are an important source of growth. We plan tocontinue to increase our presence in these markets. In connection with anincrease in international sales efforts, we need to hire, train and retainqualified personnel in countries where language, cultural or regulatorybarriers may exist. Moreover, funding and government requirements vary bycountry with respect to transportation safety. In a number of countries thereare no governmental requirements or funding for transportation safety and wemust 

11

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educateofficials and demonstrate the need for and the benefits of our products. Inaddition, international revenues are subject 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

·       the imposition ofprotective legislation such as import or export barriers.

**There are risks associated with doing business in China.**

Some of our future business projects will be located in China, where weopened a new facility in Beijing during fiscal 2007. As a consequence, theeconomic, political, legal and social conditions in China could have an adverseeffect on our business, results of operations and financial condition. Some ofthe risks related to doing business in China include:

·       The legal environment in China is uncertain and our ability to legallyprotect our investment could be limited;

·       The Chinese government exerts substantial influence over the manner inwhich we must conduct our business activities;

·       Future inflation in China may inhibit our activity to conduct business inChina;

·       Restrictions on currency exchange may limit our ability to receive anduse our cash effectively; and

·       Morerestrictive rules on foreign investment could adversely affect our abilityto expand our operation in China or repatriate any profits earned there.

**We depend onprincipal customers.**

Although we depend onprincipal customers, no single customer of Quixote represents a significantportion of total revenues. In fiscal 2007, approximately 9%, 8% and 7% of ourconsolidated revenues resulted from sales to customers in the States ofCalifornia, Florida and Texas, respectively. Customers may includedistributors, contractors, departments of transportation, state agencies, localgovernments or municipalities. A change in spending policy could materiallyaffect our sales in those states. The loss of, or a significant reduction in,orders from these or our other major customers could have a material adverseeffect on our financial condition and results of operations.

**We are in acompetitive marketplace.**

To the extent one or more of our current or futurecompetitors introduce products that better address customer requirements, orare less expensive than our products, our business could be adversely affectedand we may be unable to maintain our leadership position in certain products. Competitionmay adversely affect the selling prices and the profit margins on our products.We may not be successful in developing and marketing our existing products ornew products or incorporating new technology on a timely basis or at a reducedcost. If we are unable to timely develop and introduce new products, or enhanceexisting products, or reduce costs in response to changing market conditions orcustomer requirements or demands, our business and results of operations couldbe materially and adversely affected.

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We have acquired complementary businesses over thepast several years and, as a part of our strategy, may continue to acquirecomplementary businesses. The gross profit margins of certain acquired productlines are lower than our historical gross profit margin, which adverselyaffects our gross profit margin. Given competitive conditions, we may be unableto improve our gross profit margins for 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,if we are unable to pass along to our customers cost increases. Increasing fueland freight costs adversely affected our performance in fiscal 2006 and 2007. Weexpect these trends will continue in fiscal 2008.

**Our facilities orfacilities of our customers and suppliers could be susceptible to naturaldisasters.**

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 be inadequate.**

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 to effectively mitigate risk whenpossible. However, certain risks are inherent in our business and our insurancemay not be adequate to cover potential claims or may be unavailable.

**Our quarterlyoperating results are likely to fluctuate, which may affect our stock price.**

Our quarterlyrevenues, 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 the transportation safety and highway construction and maintenance industry;

·       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.

Period to periodcomparisons of our results should not be relied on as indications of futureperformance.

**We may experiencevolatility in our stock price.**

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

·       the relatively small public float of our stock;

13

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·       quarterly fluctuations in our operating results, as described in theprior risk factor;

·       changes in securities analysts’ estimates of our future earnings; and

·       loss of significant customers or significant business developmentsrelating to us or our 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 have been instituted againstcompanies following periods of volatility in the market price of such companies’securities. If any such litigation is instigated against us, it could result insubstantial costs and a diversion of management’s attention and resources,which could have a material adverse effect on our business, results ofoperations and financial condition.

**Acts of war could adversely impact 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.

**Item 1B.**               UnresolvedStaff Comments

None.

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**Item 2.**                        Properties

We believe that our principal plants are suitable andadequate for manufacturing and other activities performed at those sites. Inaddition to the principal facilities listed below, we have other smallfacilities, including international locations, used primarily for salesactivities.
|                                                                                                                     | ** ** | ** **          | ** ** | ** **                                                                                                     | ** ** | **Owned or** |
|---------------------------------------------------------------------------------------------------------------------|------------|---------------------|------------|----------------------------------------------------------------------------------------------------------------|------------|--------------|
| **Location**                                                                                                        | ** ** | **Available Space** | ** ** | **Purpose**                                                                                                    | ** ** | **Leased**   |
| 35 East Wacker Drive  Chicago, Illinois                                                                             |       | 18,000 sq. ft.      |       | Executive Offices                                                                                              |       | Leased       |
| 250 Bamberg Drive  Pell City, Alabama                                                                               |       | 300,000 sq. ft.     |       | Manufacture of Protect  and Direct transportation safety products                                              |       | Owned        |
| 3617 Cincinnati Avenue  Rocklin, California                                                                         |       | 22,000 sq. ft.      |       | Research and development  facility for Protect and Direct transportation safety products                       |       | Owned        |
| No. 16 Guanghua  Road  Township Zhangijawan,  District Tongzhou, Beijing City, People’s Republic of China |       | 16,000 sq. ft.      |       | Sale and manufacture of  Protect and Direct transportation safety products                                     |       | Leased       |
| 9603 John Street  Santa Fe Springs, CA                                                                              |       | 183,000 sq. ft.     |       | Research and development  facility for Intersection Control products and partially subleased to a third  party |       | Leased       |
| 2511 Corporate Way  Palmetto, FL                                                                                    |       | 52,000 sq. ft.      |       | Sale and manufacture of  Intersection Control products                                                         |       | Leased       |
| 4021 Stirrup Creek Drive  Durham, North Carolina                                                                    |       | 13,000 sq. ft.      |       | Sale and manufacture of  Inform products                                                                       |       | Leased       |
| Route 119 University  Drive  Uniontown, Pennsylvania                                                                |       | 26,000 sq. ft.      |       | Sale and manufacture of  Inform products                                                                       |       | Owned        |
| 11612 Lilburn Park Road  St. Louis, Missouri                                                                        |       | 17,000 sq. ft.      |       | Sale and manufacture of  Inform products                                                                       |       | Leased       |
| 141 Railroad Street  Bedford, Pennsylvania                                                                          |       | 16,000 sq. ft.      |       | Manufacture of  Intersection Control products                                                                  |       | Leased       |

 

**Item 3.**                        LegalProceedings

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 2007.

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**PART II**

**Item 5.**                        Marketfor the Registrant’s Common Equity, Related StockholderMatters and Issuer Purchases of Equity Securities

Our common stock is traded on the NASDAQ GlobalMarket, under the symbol QUIX. Set forth are the daily high and low sales pricesfor our common stock for the periods indicated, as reported by the NASDAQ.

| ** **   | ** ** | **Three Months Ending** | ** ** |
|--------------|------------|-----------------------------------|------------|
| ** **   | ** ** | **9/30**                          | ** ** | **12/31** | ** ** | **3/31** | ** ** | **6/30** | ** ** |
| FISCAL 2007: |       |                              |       |   |   |   |   |   |   |
| High         |       | $                                 | 18.43      |   | $ | 21.96 |   | $ | 21.46 |   | $ | 21.09 |   |
| Low          |       | 15.40                             |       | 15.92 |   | 18.35 |   | 17.92 |   |
| FISCAL 2006: |       |                              |       |   |   |   |   |   |   |
| High         |       | $                                 | 25.55      |   | $ | 21.88 |   | $ | 24.75 |   | $ | 24.75 |   |
| Low          |       | 19.29                             |       | 19.13 |   | 19.64 |   | 17.82 |   |

 

As of September 4,2007, there were 963 shareholders of record.

**Dividend Policy**

During 2007, we declaredtwo semi-annual cash dividends of nineteen cents per share. During 2006, wedeclared semi-annual cash dividends of eighteen cents per share and nineteencents per share.

**Issuer Purchases ofEquity Securities**

We have an ongoingauthorization from the Board of Directors to repurchase up to 1,749,042 of ourcommon shares. During fiscal 2006, we purchased 150,603 shares from the sellersof Peek Traffic for $20.62 per share, as further discussed in Note 18 to theconsolidated financial statements, bringing the total repurchased to 1,563,645.No shares were repurchased in fiscal 2005 or fiscal 2007. Our remainingauthorization is for the repurchase of 185,397 shares.

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**Stock PerformanceGraph**

The line graph belowcompares the cumulative total stockholder return on our common stock with thecumulative total return of the NASDAQ Non-Financial Index and the Russell 2000Index for the five fiscal years ended June 30, 2007. The graph and tableassume that $100 was invested on the last day of trading for the fiscal yearended June 30, 2002 in each of our common stock, the NASDAQ Non-FinancialIndex and the Russell 2000 Index, and that all dividends were reinvested.

**COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN***

**Among Quixote Corporation, The Russell 2000 IndexAnd The NASDAQ Non-Financial Index**

****

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*                    $100 investedon 6/30/02 in stock or index-including reinvestment of dividends. Fiscal yearending June 30.
|                          | ** ** | **6/02**   | ** ** | **6/03**   | ** ** | **6/04**   | ** ** | **6/05**   | ** ** | **6/06**   | ** ** | **6/07**   | ** ** |
|--------------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|
| **Quixote  Corporation** | ** ** | **100.00** | ** ** | **152.08** | ** ** | **121.90** | ** ** | **121.40** | ** ** | **113.62** | ** ** | **120.32** | ** ** |
| **Russell  2000**        | ** ** | **100.00** | ** ** | **98.36**  | ** ** | **131.18** | ** ** | **143.57** | ** ** | **164.50** | ** ** | **191.53** | ** ** |
| **NASDAQ Non-Financial** | ** ** | **100.00** | ** ** | **110.47** | ** ** | **138.97** | ** ** | **136.77** | ** ** | **145.59** | ** ** | **176.30** | ** ** |

 

*Source:  Research Data Group, Inc.*

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**Item 6.**         SelectedFinancial Data
|                                                                                  | ** ** | **For the years ended June 30,** | ** ** |
|----------------------------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| **Dollar amounts in thousands, except share data** | ** ** | **2007**                                                  | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| Operating Results:                                                               |       |                                                      |       |   |   |   |   |   |   |   |   |
| Net sales                                                                        |       | $                                                         | 137,478    |   | $ | 161,134 |   | $ | 146,353 |   | $ | 150,290 |   | $ | 114,310 |   |
| Gross profit                                                                     |       | 45,432                                                    |       | 48,039 |   | 46,489 |   | 47,303 |   | 46,240 |   |
| Selling and  administrative expenses                                             |       | 35,117                                                    |       | 37,681 |   | 40,057 |   | 36,700 |   | 28,730 |   |
| Research and  development expenses                                               |       | 5,174                                                     |       | 5,958 |   | 5,391 |   | 3,605 |   | 2,356 |   |
| Gains on sale of  assets                                                         |       | (1,191                                                    | )          | (846 | ) | (1,126 | ) |   |   |   |   |
| Restructuring costs.                                                             |       | 7,655                                                     |       | 5,775 |   |   |   |   |   |   |   |
| Gains on legal  settlements                                                      |       |                                                      |       | (2,975 | ) |   |   |   |   |   |   |
| Asset impairment  charge                                                         |       |                                                      |       | 13,374 |   |   |   | 32,600 |   |   |   |
| Operating profit  (loss)                                                         |       | (1,323                                                    | )(1)       | (10,928 | )(2) | 2,167 | (3) | (25,602 | )(4) | 15,154 |   |
| Other income  (expense)                                                          |       | (4,459                                                    | )          | (4,646 | ) | (3,264 | ) | (2,326 | ) | (802 | ) |
| Net earnings  (loss)                                                             |       | (3,579                                                    | )(1)       | (10,102 | )(2) | (650 | )(3) | (17,027 | )(4) | 9,472 |   |
| Cash dividends per common share.                                                 |       | $                                                         | 0.38       |   | $ | 0.37 |   | $ | 0. 36 |   | $ | 0.34 |   | $ | 0.33 |   |
| Per Share Data:                                                                  |       |                                                      |       |   |   |   |   |   |   |   |   |
| Basic EPS:                                                                       |       |                                                      |       |   |   |   |   |   |   |   |   |
| Net earnings  (loss)                                                             |       | $                                                         | (0.40      | )(1) | $ | (1.14 | )(2) | $ | (0.07 | )(3) | $ | (1.99 | )(4) | $ | 1.21 |   |
| Weighted average  common shares outstanding                                      |       | 8,945,855                                                 |       | 8,850,884 |   | 8,800,421 |   | 8,567,741 |   | 7,847,169 |   |
| Diluted EPS:                                                                     |       |                                                      |       |   |   |   |   |   |   |   |   |
| Net earnings  (loss)                                                             |       | $                                                         | (0.40      | )(1) | $ | (1.14 | )(2) | $ | (0.07 | )(3) | $ | (1.99 | )(4) | $ | 1.17 |   |
| Weighted average  common and common equivalent shares outstanding           |       | 8,945,855                                                 |       | 8,850,884 |   | 8,800,421 |   | 8,567,741 |   | 8,062,397 |   |
| Financial Position:                                                              |       |                                                      |       |   |   |   |   |   |   |   |   |
| Total assets                                                                     |       | $                                                         | 119,374    |   | $ | 125,203 |   | $ | 136,790 |   | $ | 139,882 |   | $ | 150,825 |   |
| Working capital                                                                  |       | 38,128                                                    |       | 43,781 |   | 42,933 |   | 39,973 |   | 36,089 |   |
| Property, plant  and equipment, net                                              |       | 17,660                                                    |       | 19,535 |   | 25,008 |   | 27,512 |   | 26,237 |   |
| Long-term debt,  net of current portion                                          |       | 47,000                                                    |       | 51,122 |   | 49,587 |   | 47,014 |   | 39,789 |   |
| Shareholders’  equity.                                                      |       | 45,208                                                    |       | 48,946 |   | 61,846 |   | 63,907 |   | 75,555 |   |
| Book value per common  share.                                                    |       | 5.00                                                      |       | 5.50 |   | 6.96 |   | 7.30 |   | 9.10 |   |

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(1)             The operating loss included restructuring charges of$7,655, related inventory write-off charges of $3,620 and gains on sale ofassets of $1,191. The amount included in the net loss for these charges was$6,252, net of income tax benefits. The amount included in the diluted loss pershare for these items was $0.70.

(2)             The operating loss included non-cash asset impairmentcharges of $13,374, restructuring charges of $5,775, gains on legal settlementsof $2,975 and a gain on sale of assets of $846. The amount included in the netloss for these charges was $9,976, net of income tax benefits. The amountincluded in diluted loss per share for these items was $1.13.

(3)             Operating profit included gains on sales of assets of$1,126. The amount included in the net loss for these gains was $667, net ofincome tax provisions. The amount included in the diluted loss per share forthese gains was $0.08.

(4)             The operating loss included non-cash asset impairmentcharges of $32,600. The amount included in the net loss for the assetimpairment charges was $21,266, net of income tax benefits. Also included inthe net loss was $1,249 related to the favorable settlement of a tax audit. Thenet amount included in the diluted loss per share for these amounts was $2.34.

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

**OVERVIEW**

We develop, manufacture and market highway andtransportation safety products to protect, direct and inform motorists,pedestrians and road workers in both domestic and international markets.  Our operations are comprised of threereportable segments within the highway and transportation safety industry,concentrating on safety problems and designing products to providetransportation safety solutions. Our three reportable segments are:  the manufacture and sale of highway andtransportation safety products which Protect and Direct, the manufacture andsale of products and services which Inform, and the manufacture and sale ofproducts which are used for Intersection Control.  The Protect and Direct segment providessolutions for improving safety on the roads either by minimizing the severityof crashes that occur or by preventing crashes from occurring by directing orguiding traffic. The primary product lines within the Protect and Directsegment include energy-absorbing products such as crash cushions, truck-mountedattenuators, sand-filled barrels and water-filled barriers, and directing andguiding products such as flexible post delineators 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 soldworldwide by a direct sales force and through a distribution network tocustomers in the highway construction and safety business, state and municipaldepartments of transportation, 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 OFOPERATIONS**

**Summary**

We believe that fiscal 2007 was a transitional yearfor us. As expected, our results for the year were affected by therestructuring of our Intersection Control segment which was completed in thesecond quarter of this year. Overall sales decreased for fiscal 2007 primarilydue to discontinued product lines related to our restructuring activities inthe Intersection Control segment. Our Protect and Direct segment and our Informsegment achieved strong sales for the year aided by strong international saleswhich increased 7% to $23,399,000. During the year, we improved our operatingefficiency and lowered our overall cost structure which led to an increasedgross profit margin for fiscal 2007 compared to fiscal 2006. The operatingmargin for our Protect and Direct segment reached our targeted level of 20% forfiscal 2007. The operating margin for our Inform segment was at a strong levelof 14%. The Intersection Control segment recorded an operating loss for thefiscal year, as sales were below break-even levels. However, the operating losswas less than it was in fiscal 2006 because we have significantly reduced overheadand fixed costs through the restructuring activities in this segment.

Sales growth for fiscal 2007 wasdriven primarily by international sales growth. Domestic sales were not asrobust as we expected in fiscal 2007 since the passage of the federal fundinglegislation, SAFETEA-LU, inAugust 2005. Sales for both the Protect and Direct and the Inform segmentswere flat domestically compared to fiscal 2006. Given our history as a late-stage benefactor of industry spending, 

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webelieve that domestic demand for our products has not yet fully benefited fromopportunities developing as a result of the federal funding. See FUTURE OUTLOOKfor further information.

The following table sets forth selected key operatingstatistics relating to our financial results:
| (Dollar amounts in thousands,except per share data) | ** ** | **For the Years Ended** | ** ** |
|-----------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                        | ** ** | **June 30**                       | ** ** |
| ** **                                                                        | ** ** | **2007**                               | ** ** | **2006** | ** ** | **2005** | ** ** |
| Revenues by  Segment:                                                             |       |                                   |       |   |   |   |   |
| Protect and Direct                                                                |       | $                                      | 83,593     |   | $ | 80,806 |   | $ | 73,575 |   |
| Inform                                                                            |       | 24,181                                 |       | 24,134 |   | 21,163 |   |
| Intersection Control                                                              |       | 29,704                                 |       | 56,194 |   | 51,615 |   |
|                                                                              |       | $                                      | 137,478    |   | $ | 161,134 |   | $ | 146,353 |   |
| Geographic Revenues:                                                              |       |                                   |       |   |   |   |   |
| Domestic                                                                          |       | $                                      | 114,079    |   | $ | 139,313 |   | $ | 127,242 |   |
| International                                                                     |       | 23,399                                 |       | 21,821 |   | 19,111 |   |
|                                                                              |       | $                                      | 137,478    |   | $ | 161,134 |   | $ | 146,353 |   |
| Operating Income (Loss) by Segment:                                               |       |                                   |       |   |   |   |   |
| Protect and Direct                                                                |       | $                                 | 16,965     | (1) | $ | 15,539 |   | $  | 14,859 | (2) |
| Inform                                                                            |       | 3,445                                  | (3)        | 3,403 | (4) | 1,151 |   |
| Intersection Control                                                              |       | (13,561                                | )(5)       | (22,360 | )(6) | (5,723 | ) |
| Unallocated Corporate                                                             |       | (8,172                                 | )          | (7,510 | ) | (8,120 | ) |
|                                                                              |       | $                                      | (1,323     | ) | $ | (10,928 | ) | $ | 2,167 |   |
| Gross profit percentage                                                           |       | 33.0                                   | %          | 29.8 | % | 31.8 | % |
| Selling and administrative expenses as a percentage  of sales                     |       | 25.5                                   | %          | 23.4 | % | 27.4 | % |
| Diluted loss per  share                                                           |       | $                                      | (0.40      | ) | $ | (1.14 | ) | $ | (0.07 | ) |

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(1)          Includes a $236 gain onsale of assets.

(2)          Includes a $1,126 gainon sale of assets.

(3)          Includes a $282 gain onsale of assets.

(4)          Includes a $846 gain onsale of assets.

(5)          Includes $7,655 inrestructuring charges, $3,620 in related inventory write-offs, and a gain onsale of assets of $673.

(6)          Includes $13,374 innon-cash asset impairment charges, $5,775 in restructuring charges and $2,975in legal settlement gains.

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**Revenues**

Our net sales for fiscal2007 decreased 15% to $137,478,000 from $161,134,000 for 2006 due to lowersales in the Intersection Control segment as further described below. Our netsales for fiscal 2006 increased 10% to $161,134,000 from $146,353,000 for 2005due to sales increases across all operating segments.

*Geographic—*Internationalsales for fiscal 2007 increased by $1,578,000, or 7%, to $23,399,000 comparedto $21,821,000 for fiscal 2006, primarily due to increases in the Protect andDirect segment, where international sales increased $3,169,000, or 21%, to$18,273,000. The increase in international sales in the Protect and Directsegment was primarily due to increased sales of Triton® water-filled barriers and crash cushions inthe Asia-Pacific region. International sales for the Inform segment increased19% to $2,159,000 primarily due to increased sales of sensing products inCanada. International sales for the Intersection Control segment decreased 40%to $2,967,000 due to the discontinuation of product lines related to our restructuringactivities.  Domestic sales for fiscal2007 decreased 18% to $114,079,000 from $139,313,000 primarily due to decreasesin the Intersection Control segment caused by the discontinuation of certain productlines.

International sales forfiscal 2006 increased by $2,710,000, or 14%, to $21,821,000 compared to$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 fiscal 2005.  Domestic salesfor fiscal 2006 increased 9% to $139,313,000 from $127,242,000 due to salesincreases in all operating segments, particularly in the Protect and Directsegment.

*Protect and Direct—**Net*sales for theProtect and Direct segment for fiscal 2007 increased 3% to $83,593,000 from$80,806,000 for fiscal 2006 due principally to strong sales internationally asthose markets are increasingly recognizing the importance of our safety devices.Domestically sales were flat with increased sales of truck-mounted attenuators(TMA’s) offset somewhat by decreased sales of permanent crash cushions. Thesales increases of certain product lines were attributable to increasedspending on workzone and other highway safety projects since the enactment ofthe federal highway bill. In addition, we saw increased spending on newproducts such as the SST Safestop®  trailerTMA.

Net sales for the Protectand 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 and toincreased spending on new products such as the SST Safestop® trailer TMA and the Quest® crash cushion.

*Inform—**Net*sales for theInform segment for fiscal 2007 increased slightly to $24,181,000 from$24,134,000 for fiscal 2006. Excluding $1,831,000 in sales related to the saleof the weather forecasting product line which was sold at the end of fiscal2006, sales for the Inform segment increased 8% due to record sales of highwayadvisory radio products and increased sales of traffic sensing products.

Net sales for the Informsegment for fiscal 2006 increased 14% to $24,134,000 from $21,163,000 forfiscal 2005 due to increased sales of highway advisory radio products whichachieved record sales for the year. In addition, sales of weather sensingsystems increased during fiscal 2006. We believe products within the Informsegment also benefited from the passage of the federal highway bill in 2005 asspending on these products is more discretionary.

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*Intersection Control—**Net*sales for ourIntersection Control segment for fiscal 2007 decreased 47% to $29,704,000 from$56,194,000 for fiscal 2006 due to the discontinuation of product lines as partof our restructuring activities for this segment as further described in Note17 to the consolidated financial statements.

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 strong international sales growth. However,this sales growth was less than expected and resulted in the approval of arestructuring plan in April 2006 for this segment.

**Gross Profit Margin**

Our gross profit marginfor fiscal 2007 was 33.0% compared to 29.8% for fiscal 2006. The gross marginin the Protect and Direct segment improved due to volume-related efficienciesoffset somewhat by increased raw material costs, higher freight costs andunfavorable product sales mix. The gross margin for the Inform segmentdecreased due to unfavorable product sales mix. The gross margin in theIntersection Control segment decreased due to inventory write-offs of$3,620,000, recorded in the first quarter as part of the restructuring plan. Excludingthe $3,620,000 in inventory write-offs, our gross profit margin for fiscal 2007would have been 35.7%.

Our gross profit marginfor fiscal 2006 was 29.8% compared to 31.8% for fiscal 2005. The gross marginin the Protect and Direct segment decreased due to increased raw materialcosts, higher freight costs and unfavorable product sales mix. The gross marginfor the Inform segment increased due to volume efficiencies related to thehigher level of sales. The gross margin in the Intersection Control segmentdecreased due to unfavorable product sales mix and plant inefficienciesassociated with the restructuring activities.

**Selling and Administrative Expenses**

Selling and administrativeexpenses for fiscal 2007 decreased $2,564,000, or 7%, to $35,117,000 from$37,681,000 for fiscal 2006. Selling and administrative expenses in the Protectand Direct segment increased due to variable expenses related to the increasedlevel of sales and to expenses incurred in establishing our new facility inBeijing, China. Selling and administrative costs for the Inform segmentdecreased primarily due to lower personnel-related expenses. Selling andadministrative expenses in the Intersection Control segment decreased primarilyas a result of our restructuring efforts. Selling and administrative expensesfor fiscal 2007 include $970,000 in expense related to the adoption in fiscal2006 of FAS 123R requiring the expensing of stock options as further discussedin Note 8 to the consolidated financial statements. Selling and administrativeexpenses increased as a percentage of sales to 25.5% for fiscal 2007 comparedto 23.4% for 2006 primarily due to the lower level of sales for fiscal 2007.

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 Informsegment increased partially due to variable expenses related to the increasedlevel of their sales. Selling and administrative expenses for fiscal 2006include $1,027,000 in stock option expense related to the adoption in fiscal2006 of FAS 123R, for which no related expense was recorded in fiscal 2005. 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.

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**Research and Development**

Research and developmentexpenditures decreased 13% to $5,174,000 for fiscal 2007 from $5,958,000 forfiscal 2006. Expenditures for the Intersection Control segment decreasedrelated to the restructuring of the Intersection Control segment. Expendituresfor fiscal 2007 for both the Protect and Direct and Inform segments were consistentwith fiscal 2006.

Research and developmentexpenditures were $5,958,000 for fiscal 2006 compared to $5,391,000 for fiscal2005. Expenditures increased across all operating segments as work continued onthe development of innovative new products to address safety needs both hereand abroad.

**Gain on Sale of Assets**

As further discussed inNote 3 to the consolidated financial statements, we recorded a gain on the saleof assets of $1,191,000 in fiscal 2007. This gain included a gain of $236,000on the sale of a former manufacturing facility of the Protect and Directsegment, a gain of $282,000 resulting from final contingent proceeds relatingto the sale of the weather forecasting product line in the Inform segment and again of $673,000 on the sale of the assets of the automated traffic enforcementproduct line in the Intersection Control segment.

We recorded a gain of$846,000 in fiscal 2006 in the Inform segment related to the sale of the assetsof the weather forecasting product line. During fiscal 2005, we recorded a gainon the sale of assets of $1,126,000 related to the sale of certain machinery,equipment and land in the Protect and Direct segment.

**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 Corporation andPeek Traffic Corporation.

**Restructuring costs**

As further discussed inNote 17 to the Consolidated Financial Statements, we recorded $11,275,000 inrestructuring costs in the Intersection Control segment in the first and secondquarters of fiscal 2007. Included in the restructuring costs are $1,792,000 inemployee severance and benefits, $1,903,000 in lease obligations, $3,620,000 innet asset sales and asset and inventory write-offs and $3,960,000 in facilityexit costs, consultants and legal costs.

We recorded $5,775,000 inrestructuring costs in the Intersection Control segment in fiscal 2006. Includedin the restructuring costs are $179,000 in employee severance and benefits,$90,000 in lease obligations, $4,571,000 in net asset sales and write-offs and$935,000 in facility exit costs, consultants and legal costs.

**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 17to the consolidated financial statements. As part of the restructuring plan, wesold the portable variable message sign, illuminated street lighting and tunnellighting product lines and we discontinued other low-margin and non-coreproduct lines. As a result of the continued poor performance and the Company’simpairment review in the fourth quarter of fiscal 2006, we determined that thecarrying amounts of certain long-lived assets were no longer recoverable basedon estimated future operating cash flows to be generated by those assets, whichwere lower than previously projected. As further discussed below and in Note 6to the consolidated financial statements, we recorded non-cash asset impairmentcharges in the Intersection Control segment of 

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$13,374,000,or $8,723,000, net of income tax benefits, or $0.98 per diluted share. Thecharges included $10,225,000 for goodwill and $3,149,000 for fixed assets.

**Operating Profit (Loss)**

The operating loss decreasedto $1,323,000 for fiscal 2007 from an operating loss of $10,928,000 for fiscal2006. The decreased operating loss was primarily due to large asset impairmentcharges incurred in fiscal 2006, as well as an improved gross profit margin andlower selling and administrative costs in fiscal 2007 as discussed above. Thefiscal 2007 operating loss included gains on sales of assets of $1,191,000,restructuring costs of $7,655,000 and related inventory write-offs of$3,620,000. The fiscal 2006 operating loss included asset impairment charges of$13,374,000, restructuring costs of $5,775,000, gains on legal settlements of$2,975,000 and a gain on the sale of assets of $846,000. Without these items,operating profit would have increased to $8,761,000 for fiscal 2007 compared to$4,400,000 for fiscal 2006. Operating profit for the Protect and Direct segmentincreased $1,426,000 to $16,965,000 for fiscal 2007, which included a gain onsale of assets of $236,000, from $15,539,000 for fiscal 2006 primarily due toimproved gross margins as discussed above. Operating profit for the Informsegment increased $42,000 to $3,445,000 for fiscal 2007, including a $282,000gain on sale of assets, from $3,403,000 for fiscal 2006, which included an$846,000 gain on sale of assets, primarily due to the reduction in selling andadministrative costs as discussed above. The operating loss for theIntersection Control segment was $13,561,000, including restructuring costs of$7,655,000, related inventory write-offs recorded in cost of sales of$3,620,000, and a gain on sale of assets of $673,000, compared to an operatingloss for fiscal 2006 of $22,360,000, which included $13,374,000 in assetimpairment charges, $5,775,000 in restructuring charges and $2,975,000 in gainson legal settlements.

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 an improvedgross profit margin and lower selling and administrative costs as discussedabove and the gains on legal settlements and sale of assets. The fiscal 2006operating loss included 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. Without these items, operating profit would haveincreased to $4,400,000 for fiscal 2006 compared to $1,041,000 for fiscal 2005.Operating profit for the Protect and Direct segment increased $680,000 to$15,539,000 for fiscal 2006 from $14,859,000 for fiscal 2005 which included$1,126,000 in gain on sale of assets, primarily due to lower selling andadministrative costs as discussed above. Operating profit for the Informsegment increased $2,252,000 to $3,403,000 for fiscal 2006, including an$864,000 gain on the sale of assets, from $1,151,000 for fiscal 2005 primarilydue to the higher sales and volume efficiencies related to the higher level ofsales. The operating loss for the Intersection Control segment was $22,360,000,including asset impairment charges of $13,374,000, restructuring costs of$5,775,000 and a gain on legal settlements of $2,975,000, compared to anoperating loss for fiscal 2005 of $5,723,000.

**Interest Expense**

Interest expense forfiscal 2007 decreased slightly to $4,459,000 from $4,646,000 in fiscal 2006. Thedecrease was due primarily to our lower level of average long-term debtoutstanding during fiscal 2007 and partially due to lower interest rates on ourrevolving bank debt. The interest rate on our bank credit facility is based onprime or LIBOR, plus a margin. Our overall weighted average interest rate was6.9% as of June 30, 2007 compared to our weighted average rate of 7.7% asof June 30, 2006. The interest rate on the Company’s convertible debtissued during fiscal 2005 is 7%. The Company expects the average interest rateduring fiscal 2008 on all debt to be approximately 7%.

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.

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**Income Taxes**

The income tax benefit for fiscal 2007 was $2,203,000,reflecting a 38% effective tax rate. We expect to provide for income taxes at arate of 38% for fiscal 2008. However, this rate may be negatively impactedbased on management’s ongoing evaluation as to whether it is more likely thannot that some or all of the deferred tax assets recorded are realizable.

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.

**Net Earnings (Loss)**

The net loss for fiscal 2007 was $3,579,000, or $0.40per diluted share, compared to a net loss of $10,102,000, or $1.14 per dilutedshare, for 2006. Included in the net loss for fiscal 2007 were gains on salesof assets, restructuring costs and related inventory write-offs totaling$6,252,000, net of income taxes, or $0.70 per diluted share. Included in thenet loss for fiscal 2006 were asset impairment charges, restructuring costs, again on sale of assets and legal settlement gains totaling $9,976,000, net ofincome taxes, or $1.13 per diluted share. Without these items, net earningswould have increased to $2,673,000, or $0.30 per diluted share for fiscal 2007compared to a net loss of $126,000, or $0.01 per diluted share for fiscal 2006.

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 asset impairment charges, restructuring costs, a gain on saleof assets and legal settlement gains totaling $9,976,000, net of income taxes,or $1.13 per diluted share. Included in the net loss for fiscal 2005 was a gainon sale of assets of $667,000, or $0.08 per diluted share. Without these items,the net loss would have been $126,000, or $0.01 per diluted share for fiscal2006 compared to a net loss of $1,317,000, or $0.15 per diluted share forfiscal 2005.

**FINANCIAL CONDITION**

**Liquidity andCapital Resources**

Our principal sources of funds historically have beencash flows from operations and borrowings from banks and other sources. We hadcash and cash equivalents of $674,000 as of June 30, 2007 and access toadditional funds of approximately $19 million under our secured bank creditagreement. We believe that this bank credit facility is an important source ofliquidity. The credit agreement provides for a $30 million revolving creditfacility with a $10 million sub-facility for letters of credit. We mustmaintain a minimum availability of $5 million under the revolving creditfacility. Total availability is based on a formula of eligible accountsreceivable, eligible inventory, machinery and equipment and real estate. We arealso required to maintain a maximum senior leverage ratio. Our covenants limitthe incurrence of additional indebtedness, acquisitions, liens and encumbrancesand other matters customarily restricted in such agreements. We are incompliance with these covenants and expect to remain in compliance throughfiscal 2008. Under certain conditions, we may request a release of all securityinterests at which time we would no longer be subject to a borrowing baseformula, but would be subject to several additional financial covenants. The agreementcurrently expires in February 2009, but may be renewed one additional yearon each anniversary date upon mutual consent of the Company and the bank. Ouroutstanding borrowings were $52,122,000, or 53.6% of total capitalization, asof June 30, 2007, of which $7,000,000 was outstanding on our bank creditfacility. This compares to $51,587,000, or 51.3% of total capitalization, as ofJune 30, 2006, of which $6,000,000 was outstanding on our bank creditfacility. Included in long-term debt as of June 30, 2007 and June 30,2006 was $40 million in 7% Convertible Senior Subordinated Notes due February 2025and a $5 million five-year subordinated promissory note due April, 2008. Theamount of standby letters of credit outstanding was $1,294,000 as of June 30,2007 and $1,144,000 as of June 30, 2006.

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During February 2005,we sold $40,000,000 of 7% Convertible Senior Subordinated Notes due February 15,2025 in a private placement and received net proceeds of $37,395,000. The netproceeds were used to pay off our bank term loan and reduce the amount of itsrevolving 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. If fully converted,the notes would convert into approximately 1,544,000 shares of our common stock. The shares are not included in earningsper share as they are currently anti-dilutive until earnings per share reachapproximately $1.20 per share. The notes are fully redeemable by the Company atany time after February 20, 2008 at 100% of the principal amount plusaccrued and unpaid interest.  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.

**Cash Flows**

Cash flows provided by operations were $1,903,000during fiscal 2007. This compares with $4,504,000 in fiscal 2006 and $3,398,000in fiscal 2005. 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 decrease in cash generated fromoperating activities in fiscal 2007 is primarily due cash restructuringcharges.

Investing activities used cash of $483,000 duringfiscal 2007, compared to $308,000 in fiscal 2006 and $910,000 in fiscal 2005. Expendituresduring fiscal 2007 were $2,982,000 for capital and patent expenditures, whichwere offset somewhat by proceeds received from the sale of assets.

Financing activities used cash of $1,615,000 duringfiscal 2007, compared to cash used of $3,483,000 during fiscal 2006 and cashused of $4,709,000 in fiscal 2005. During fiscal 2007, we borrowed a net$1,000,000 on our outstanding revolving credit facility and paid $465,000 onother notes payable. We received cash of $970,000 from the exercise of commonstock options. The payment of our semi-annual cash dividend used cash of$3,381,000.

For 2008, we anticipateneeding approximately $4,000,000 in cash for capital expenditures. We alsoexpect to invest approximately $1,000,000 in our Beijing, China facility infiscal 2008. We will also need $5,000,000 to pay the subordinated promissorynote on its due date in April, 2008.  Wemay require additional investments in working capital to maintain growth. Wemay also need additional funds to repurchase our common stock from time to timeor if we acquire product lines or businesses that complement our existingoperations. These expenditures will be financed either through our cashon-hand, cash generated from its operations or from borrowings available underour bank credit facility. We currently expect cash generated from operations tobe higher in fiscal year 2008 compared to fiscal 2007. However, there can be noassurance that this will occur, or to what extent this will occur. We believethat our existing cash, cash generated from operations and funds availableunder our existing credit facility are sufficient for all planned operating andcapital requirements in the near term. If needed and available on favorableterms, we may also enter into other debt or equity financing arrangements.

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**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 ofJune 30, 2007:

| ** **                      | ** ** | ** **                                       | ** ** | **Less than** | ** ** | ** **         | ** ** | ** **         | ** ** | **More than** | ** ** |
|---------------------------------|------------|--------------------------------------------------|------------|--------------------|------------|--------------------|------------|--------------------|------------|--------------------|------------|
| ** **                      | ** ** | **Total**                                        | ** ** | **1 Year**    | ** ** | **1-3 Years** | ** ** | **3-5 Years** | ** ** | **5 Years**   | ** ** |
| ** **                      | ** ** | **(Dollar amounts in thousands)** | ** ** |
| Long-term debt(1)               |       | $                                                | 52,122     |               |       | $                  | 5,122      |               |       | $                  | 40,000     |   |   | $ | — |   |   |   | $ | 7,000 |   |   |
| Estimated  interest payments(2) |       | 11,022                                           |       |               | 3,526      |               |       | 5,770              |       |               | 986        |   |   |   | 740 |   |   |
| Operating leases,  net          |       | 10,557                                           |       |               | 3,087      |               |       | 2,601              |       |               | 1,084      |   |   |   | 3,785 |   |   |
| Minimum royalty  payments       |       | 1,960                                            |       |               | 760        |               |       | 600                |       |               | 600        |   |   |   | — |   |   |
| Retirement award  program(3)    |       | 364                                              |       |               | 84         |               |       | 82                 |       |               | 87         |   |   |   | 111 |   |   |
| Purchase  obligations(4)        |       | 3,754                                            |       |               | 3,754      |               |       | —             |       |               | —     |   |   |   | — |   |   |
| Total                           |       | $                                                | 79,779     |               |       | $                  | 16,333     |               |       | $                  | 49,053     |   |   | $ | 2,757 |   |   |   | $ | 11,636 |   |   |

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(1)          Amount includes expectedcash payments on long-term debt based upon current and effective maturities aswell as expected renewals.

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

(3)          Retirement award is afixed number of Quixote Corporation shares for each of the participants eachyear for which the income tax obligation is paid in cash.

(4)          Purchase obligationsinclude non-cancellable orders with suppliers in the normal course of businesson a short-term basis.

As disclosed in the footnotes to the consolidatedfinancial statements, we have entered into bid and performance related bondsassociated with various contracts. Potential payments due under these bonds arerelated to our performance under the applicable contract. The total amount ofbid and performance related bonds that were available and undrawn as ofJune 30, 2007 was $761,000. We also have standby letters of creditcovering potential workers’ compensation liabilities and other liabilities. Thetotal standby exposure relating to letters of credit as of June 30, 2007was $1,294,000.

**FUTURE OUTLOOK**

We believe that the enactment of the federaltransportation funding legislation, SAFETEA-LU, in August 2005 willimprove prospects for increased domestic spending for our products in fiscal2008. Currently, we believe that domestic demand for our products has not yetfully benefited from opportunities developing as a result of SAFETEA-LU and animproving industry environment. Given our history as a late-stage benefactor ofindustry spending, we remain optimistic that we have properly positioned ourbusiness for growth once spending increases the demand for our products. Wealso expect international sales to continue to be an important driver of oursales growth and may reach between $27 and $28 million for fiscal 2008. However,it is difficult to predict to what extent we will see increased spending forour products and there can be no assurance that either domestic orinternational sales will increase.

To meet increasing international sales demands andfurther penetrate emerging markets, we are investing in international growthopportunities. This includes the formation of a new company in Beijing, Chinaduring 2007. Our investment in this new company is currently expected to beapproximately $1 million in fiscal 2008. We expect our Beijing facility to beprofitable in fiscal 2008 and to be able to fund its 

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own operations, howeverthere is no guarantee. The development of sales may be slower than expectedwhich would require us to fund their operations for an indefinite period.

We believe fiscal 2007 was a transitional year for us.We expect to see growth in sales and profitability for each of our segments. Weexpect that sales for both the Protect and Direct and the Inform segments mayreach record levels again in fiscal 2008. We are beginning to see bids forlarge contracts for the Intersection Control segment after a decline in bidactivity over the past couple years. In January 2007, we were awarded a$20 million contract from the New York City Department of Transportation fortraffic controllers to be delivered over three years. We expect to beginrecording revenue relating to this contract in the second half of fiscal 2008.We believe that this award and the completion of the restructuring plan areimportant steps in reaching profitability for the Intersection Control segmentin fiscal 2008. However, there is no guarantee that the segment will reach asufficient level of sales to be profitable.

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

**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, 2007 consolidated financialstatements includes a summary of the significant accounting policies, methodsand estimates used in the preparation of the Company’s consolidated financialstatements.  There have been no materialchanges in accounting policies, methods and estimates used by management exceptfor the adoption of SFAS No. 123 (revised 2004), “Share-Based Payment” on July 1,2005. In the opinion of management, we do not have any individual accountingpolicy or use any individual estimate that is critical to the preparation ofits consolidated financial statements. In most instances, we must use anaccounting policy or method because it is the only policy or method permittedunder U.S. GAAP. We believe the following significant accounting policies andmethods used by the Company are the most important to the presentation of ourfinancial statements:

Revenue Recognition: Revenues, net of discounts and allowances, are recognized when eitherservices have been rendered or both title and risk of loss of products havebeen transferred to unaffiliated customers. Additionally, we ensure thatcollection of the resulting receivable is probable, persuasive evidence that anarrangement exists, and the revenue is fixed or determinable. Provision forestimated uncollectible amounts and credits is made based upon management’sanalysis of bad debts, credits and returns.

Inventories: Inventories are valued at the lower of cost (first-in, first-out method)or market. Actual costs are used to value raw materials and supplies. Standardcosts, which approximate actual costs, are used to value finished goods andwork-in-process. Standard costs include raw materials, direct labor and 

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manufacturing overhead. Provisionfor potentially obsolete or slow-moving inventory is made based on management’sanalysis of inventory levels, ages and salability.

Long-Lived Assets: Long-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 methodologies.

As discussed further in Note 6 to our June 30,2007 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 no impairmentcharges for fiscal years 2007 or 2005. The impairment review is highlyjudgmental and involves the use of significant estimates and assumptions. Theseestimates and assumptions have a significant impact on the amount of anyimpairment charge recorded. Estimates of fair value are primarily determinedusing discounted cash flow methods and are dependent upon assumptions of futuresales trends, market conditions and cash flows of each reporting unit overseveral years. Actual cash flows in the future may differ significantly fromthose previously forecasted. Other significant assumptions include growth ratesand the discount rate applicable to future cash flows.

Restructuring Charges: We account for restructuring activities in accordance with SFAS No. 146,“Accounting for Costs 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.

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 

29

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able to generatesufficient taxable income so that the assets will be realized. The factors thatwe consider in assessing the likelihood of realization include the forecast offuture taxable income and available tax planning strategies that could beimplemented to realize the deferred tax assets. We expect the deferred taxassets currently recorded to be fully realizable, however there can be noassurance that an increased valuation allowance would not need to be recordedin the future.

Stock-basedCompensation:  We adopted the provisionsof SFAS No. 123 (revised 2004) (SFAS No. 123(R)), “Share-Based Payment”as of July 1, 2005 using the modified prospective method. Under thistransition method, share-based compensation cost recognized in the fiscal yearended June 30, 2007 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 isbeing amortized on a straight-line basis over the requisite service period,which is generally the vesting period. Our stock option plans are more fullydescribed in Note 8 to the consolidated financial statements.

**RECENTLY ISSUEDACCOUNTING PRONOUNCEMENTS**

In September 2006, the Financial AccountingStandards Board (FASB) issued SFAS No. 157, “Fair Value Measurements”(SFAS No.157). This statement clarifies the definition of fair value,establishes a framework for measuring fair value, and expands the disclosureson fair value measurements. SFAS No. 157 is effective for fiscal yearsbeginning after November 15, 2007. We do not expect the adoption of thisstatement to have a material affect on our results of operations or financialposition.

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 onderecognition, classification, interest and penalties, accounting in interimperiods, disclosure and transition. We will adopt FIN 48 effective July 1,2007 and we are currently in the process of evaluating the impact that theadoption of FIN 48 will have on our financial position, consolidated results ofoperations and cash flows. Material differences between the amounts recognizedin the statements of financial position prior to the adoption of FIN 48 and theamounts reported after adoption will be accounted for as a cumulative-effectadjustment recorded to retained earnings.

**FORWARD LOOKING STATEMENTS**

Various statements madewithin the Management’s Discussion and Analysis of Financial Condition and Resultsof Operations and elsewhere in this report constitute “forward-lookingstatements” for purposes of the SEC’s “safe harbor” provisions under thePrivate Securities Litigation Reform Act of 1995 and Rule 3b-6 underthe 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 in governmentallegislation, policies and conditions, is a forward-looking statement.

Readers are cautioned notto place undue reliance on these forward-looking statements and that allforward-looking statements involve risks and uncertainties, including thosedetailed in our public filings with the SEC, news releases and othercommunications, which speak only as of the dates of those filings orcommunications. We do not undertake any obligation to release publicly anyrevisions to these forward-looking statements to reflect events orcircumstances after the date hereof or to reflect the occurrence ofunanticipated events. There can be no assurance that actual results will notdiffer materially from our 

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expectations.Factors which could cause materially different results include, among others,uncertainties related to continued federal, state and municipal funding forhighways and risks related to reductions in government expenditures; thesuccessful completion, integration and rationalization of acquisitions; theability to generate sufficient future cash flows to be in compliance withfinancing agreements; the introduction and acceptance of our products andservices; an unfavorable change in product sales mix; seasonality along withthe extent and timing of the award of large contracts; the cyclical nature ofour governmental markets; competitive and pricing pressures; increasing rawmaterial costs; excess manufacturing capacity; weather conditions and naturaldisasters; acts of war and terrorist activities; the possible impairment ofgoodwill and other intangible assets; and general economic conditions.

**Non-GAAP Financial Information**

We believe that the saleof assets, gain on legal settlements, restructuring costs and asset impairmentcharge affect the comparability of the results of operations and net loss ofthe 2007 fiscal year to the results of operations for the 2006 and 2005 fiscalyears. We also believe that disclosing operating income and net loss excludingthose items will allow investors to more easily compare fiscal year 2007results to fiscal years 2006 and 2005 results.

**Item7A.**                Quantitative andQualitative Disclosures about Market Risk

We are exposed to marketrisk from fluctuations in interest rates on our revolving credit facility.  The exposure to interest rate fluctuations wassignificantly reduced in the third quarter of fiscal 2005 when we issuedconvertible debt and used the proceeds to pay down the debt issued pursuant tothe revolving credit agreement. Due to the lower exposure to rate fluctuations,the use of derivative instruments in the form of non-trading interest rateswaps to manage the risk has been discontinued. As described in Note 7****to the consolidated financial statements,the amount of long-term debt outstanding as of June 30, 2007 and 2006 was$47,000,000 and $51,122,000, respectively. A hypothetical 1% increase ininterest rates on our revolving credit facility would have adversely affectedour 2007 and 2006 net earnings and cash flows by approximately $99,000 and$117,000, respectively.

Assets, liabilities andcommitments that are to be settled in cash and are denominated in foreigncurrencies for transaction purposes are sensitive to changes in currencyexchange rates. The majority of our business is transacted in U.S. dollars andthe U.S. dollar is considered the primary currency for the majority of ouroperations. There were no significant transaction gains or losses during 2007,2006 or 2005 and we do not believe we are currently exposed to any materialrisk of loss from currency exchange fluctuations. Although we continue toevaluate derivative financial instruments to manage foreign currency exchangerate changes, we did not hold such derivatives during 2007 or 2006.   In the next few years we may confront greaterrisks from currency exchange fluctuations as our business internationallyexpands.

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**Item8.**                        FinancialStatements and Supplementary Data

**REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

**Boardof Directors and ShareholdersQuixote Corporation**

We have audited the accompanying consolidated balancesheets of Quixote Corporation (a Delaware Corporation) and subsidiaries as of June 30,2007 and 2006, and the related consolidated statements of operations,shareholders’ equity, and cash flows for the years ended June 30, 2007,2006 and 2005. We have also audited the accompanying Schedule II—Valuation andQualifying Accounts and Reserves as of June 30, 2007, 2006 and 2005. Thefinancial statements and schedule are the responsibility of the Company’smanagement. Our responsibility is to express an opinion on the financialstatements and schedule based on our audit.

We conducted our 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 30,2007 and 2006, and the results of their operations and their cash flows for theyears ended June 30, 2007, 2006 and 2005 in conformity with accountingprinciples generally accepted in the United States of America.

We also have audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the effectiveness of Quixote Corporation’s internal controlover financial reporting as of June 30, 2007, based on criteria established in *Internal Control—Integrated Framework*issued by the Committee of Sponsoring Organizations of the Treadway Commission(COSO) and our report dated September 10, 2007 expressed anunqualified opinion on the effective operation of internal control overfinancial reporting.

/s/ GRANT THORNTON LLP

Chicago, IllinoisSeptember 10, 2007

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**QUIXOTE CORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF OPERATIONS**

| ** **                                                        | ** ** | **For each of the three years ended June 30,** | ** ** |
|-------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------|------------|
| ** **                                                        | ** ** | **2007**                                                                               | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                                        | ** ** | **Dollar amounts in thousands,  except share data**           | ** ** |
| Net sales                                                         |       | $                                                                                      | 137,478    |   | $ | 161,134 |   | $ | 146,353 |   |
| Cost of sales                                                     |       | 92,046                                                                                 |       | 113,095 |   | 99,864 |   |
| Gross profit                                                      |       | 45,432                                                                                 |       | 48,039 |   | 46,489 |   |
| Operating  (income) expenses:                                     |       |                                                                                   |       |   |   |   |   |
| Selling and administrative                                        |       | 35,117                                                                                 |       | 37,681 |   | 40,057 |   |
| Research and development                                          |       | 5,174                                                                                  |       | 5,958 |   | 5,391 |   |
| Gain on sale of assets                                            |       | (1,191                                                                                 | )          | (846 | ) | (1,126 | ) |
| Restructuring costs                                               |       | 7,655                                                                                  |       | 5,775 |   |   |   |
| Gain on legal settlements                                         |       |                                                                                   |       | (2,975 | ) |   |   |
| Asset impairment charge                                           |       |                                                                                   |       | 13,374 |   |   |   |
|                                                              |       | 46,755                                                                                 |       | 58,967 |   | 44,322 |   |
| Operating profit (loss)                                           |       | (1,323                                                                                 | )          | (10,928 | ) | 2,167 |   |
| Other income  (expense):                                          |       |                                                                                   |       |   |   |   |   |
| Interest income                                                   |       | 19                                                                                     |       | 62 |   | 34 |   |
| Interest expense                                                  |       | (4,478                                                                                 | )          | (4,708 | ) | (3,298 | ) |
|                                                              |       | (4,459                                                                                 | )          | (4,646 | ) | (3,264 | ) |
| Loss before benefit for income taxes                              |       | (5,782                                                                                 | )          | (15,574 | ) | (1,097 | ) |
| Income tax  benefit                                               |       | (2,203                                                                                 | )          | (5,472 | ) | (447 | ) |
| Net loss                                                          |       | $                                                                                      | (3,579     | ) | $ | (10,102 | ) | $ | (650 | ) |
| Basic loss per  share:                                            |       |                                                                                   |       |   |   |   |   |
| Net loss                                                          |       | $                                                                                      | (0.40      | ) | $ | (1.14 | ) | $ | (0.07 | ) |
| Weighted average common shares outstanding                        |       | 8,945,855                                                                              |       | 8,850,884 |   | 8,800,421 |   |
| Diluted loss per  share:                                          |       |                                                                                   |       |   |   |   |   |
| Net loss                                                          |       | $                                                                                      | (0.40      | ) | $ | (1.14 | ) | $ | (0.07 | ) |
| Weighted average  common and common equivalent shares outstanding |       | 8,945,855                                                                              |       | 8,850,884 |   | 8,800,421 |   |

 

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

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**QUIXOTE CORPORATION AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS**

| ** **                                                                                                                                  | ** ** | **As of June 30,**                                              | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------|------------|
| ** **                                                                                                                                  | ** ** | **2007**                                                                       | ** ** | **2006** | ** ** |
| ** **                                                                                                                                  | ** ** | **Dollar amounts  in thousands,   except share data** | ** ** |
| ASSETS                                                                                                                                      |       |                                                                           |       |   |   |
| Current assets:                                                                                                                             |       |                                                                           |       |   |   |
| Cash and cash equivalents                                                                                                                   |       | $                                                                              | 674        |   | $ | 869 |   |
| Accounts receivable, net  of allowance for doubtful accounts of $1,687 in 2007  and $1,816 in 2006                                          |       | 31,415                                                                         |       | 36,481 |   |
| Refundable income  taxes                                                                                                                    |       | 2,508                                                                          |       | 238 |   |
| Inventories, net                                                                                                                            |       | 25,591                                                                         |       | 25,465 |   |
| Deferred income  taxes                                                                                                                      |       | 2,798                                                                          |       | 3,824 |   |
| Other current  assets                                                                                                                       |       | 1,263                                                                          |       | 952 |   |
| Total current assets                                                                                                                        |       | 64,249                                                                         |       | 67,829 |   |
| Property, plant and equipment at cost:                                                                                                      |       |                                                                           |       |   |   |
| Land                                                                                                                                        |       | 988                                                                            |       | 1,088 |   |
| Buildings and  improvements                                                                                                                 |       | 13,989                                                                         |       | 15,811 |   |
| Machinery and equipment                                                                                                                     |       | 14,977                                                                         |       | 17,385 |   |
| Furniture and fixtures                                                                                                                      |       | 2,022                                                                          |       | 2,150 |   |
| Computer equipment and  software                                                                                                            |       | 9,097                                                                          |       | 8,346 |   |
| Leasehold improvements                                                                                                                      |       | 1,638                                                                          |       | 1,638 |   |
| Construction in progress                                                                                                                    |       | 384                                                                            |       | 296 |   |
|                                                                                                                                        |       | 43,095                                                                         |       | 46,714 |   |
| Less: accumulated  depreciation                                                                                                             |       | (25,435                                                                        | )          | (27,179 | ) |
|                                                                                                                                        |       | 17,660                                                                         |       | 19,535 |   |
| Goodwill                                                                                                                                    |       | 17,385                                                                         |       | 17,385 |   |
| Intangible assets,  net                                                                                                                     |       | 5,805                                                                          |       | 6,467 |   |
| Deferred income  taxes                                                                                                                      |       | 12,815                                                                         |       | 11,844 |   |
| Other assets                                                                                                                                |       | 1,460                                                                          |       | 2,143 |   |
|                                                                                                                                        |       | $                                                                              | 119,374    |   | $ | 125,203 |   |
| LIABILITIES AND SHAREHOLDERS’ EQUITY                                                                                                   |       |                                                                           |       |   |   |
| Current liabilities:                                                                                                                        |       |                                                                           |       |   |   |
| Current portion of  long-term debt                                                                                                          |       | $                                                                              | 5,122      |   | $ | 465 |   |
| Accounts payable                                                                                                                            |       | 10,272                                                                         |       | 13,234 |   |
| Dividends payable                                                                                                                           |       | 1,715                                                                          |       | 1,688 |   |
| Accrued expenses:                                                                                                                           |       |                                                                           |       |   |   |
| Accrued payroll and  commissions                                                                                                            |       | 3,026                                                                          |       | 3,507 |   |
| Accrued warranty                                                                                                                            |       | 435                                                                            |       | 927 |   |
| Accrued insurance                                                                                                                           |       | 1,150                                                                          |       | 1,431 |   |
| Accrued interest                                                                                                                            |       | 1,142                                                                          |       | 1,108 |   |
| Accrued restructuring                                                                                                                       |       | 912                                                                            |       | 497 |   |
| Other accrued expenses                                                                                                                      |       | 2,347                                                                          |       | 1,191 |   |
| Total current  liabilities                                                                                                                  |       | 26,121                                                                         |       | 24,048 |   |
| Long-term debt,  net of current portion                                                                                                     |       | 47,000                                                                         |       | 51,122 |   |
| Other long-term  liabilities                                                                                                                |       | 1,045                                                                          |       | 1,087 |   |
| 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 30,000,000 shares; issued 10,997,129 shares—2007  and issued 10,904,678 shares—2006 |       | 183                                                                            |       | 182 |   |
| Capital in excess of par  value of stock                                                                                                    |       | 65,230                                                                         |       | 62,434 |   |
| Retained earnings                                                                                                                           |       | 3,238                                                                          |       | 10,226 |   |
| Accumulated comprehensive  income                                                                                                           |       | 109                                                                            |       | 227 |   |
| Treasury stock, at cost,  1,958,119 shares—2007 and 2,008,636 shares—2006                                                         |       | (23,552                                                                        | )          | (24,123 | ) |
| Total  shareholders’ equity                                                                                                            |       | 45,208                                                                         |       | 48,946 |   |
|                                                                                                                                        |       | $                                                                              | 119,374    |   | $ | 125,203 |   |

 

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

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**QUIXOTE CORPORATIONAND SUBSIDIARIESCONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY**

| ** **                                                             | ** ** | **For the three years ended June 30, 2007**   | ** ** |
|------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------|------------|
| ** **                                                             | ** ** | ** **                                                                       | ** ** | ** ** | ** ** | **Capital in** | ** ** | **Accumulated** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Compre-** | ** ** |
| ** **                                                             | ** ** | ** **                                                                       | ** ** | ** ** | ** ** | **Excess of** | ** ** | **Comprehensive** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **hensive** | ** ** |
| ** **                                                             | ** ** | **Common Stock**                                                            | ** ** | **Par Value** | ** ** | **Income** | ** ** | **Retained** | ** ** | **Treasury Stock** | ** ** | **Income** | ** ** |
| ** **                                                             | ** ** | **Shares**                                                                       | ** ** | **Dollars** | ** ** | **of Stock** | ** ** | **(Loss)** | ** ** | **Earnings** | ** ** | **Shares** | ** ** | **Dollars** | ** ** | **(Loss)** | ** ** |
| ** **                                                             | ** ** | **Dollar amounts in thousands, except share data** | ** ** |
| BALANCES, JULY 1,  2004                                                |       | 10,707,440                                                                       |       |   | $ | 178 |   |   |   | $ | 57,757 |   |   |   | $ | 614 |   |   | $ | 27,430 |   | 1,951,240 |   | $ | (22,072 | ) |   |   |
| 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 | ) |
| Exercise of  options, net of tax                                       |       | 81,657                                                                           |       |   | 1 |   |   |   | 1,231 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net loss—2007                                                     |       |                                                                             |       |   |   |   |   |   |   |   |   |   |   |   |   | (3,579 | ) |   |   |   |   | $ | (3,579 | ) |
| Other  comprehensive income                                            |       |                                                                             |       |   |   |   |   |   |   |   |   |   | (118 | ) |   |   |   |   |   |   |   | (118 | ) |
| Declaration of  semi-annual cash dividends ($0.19 per share)           |       |                                                                             |       |   |   |   |   |   |   |   |   |   |   |   |   | (3,409 | ) |   |   |   |   |   |   |
| Issuance of shares  for 401K plan                                      |       |                                                                             |       |   |   |   |   |   | 392 |   |   |   |   |   |   |   |   | (50,517 | ) | 571 |   |   |   |
| FAS 123R stock  compensation expense                                   |       |                                                                             |       |   |   |   |   |   | 970 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Issuance of shares  pursuant to the stock retirement plan              |       | 10,794                                                                           |       |   |   |   |   |   | 203 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| BALANCES, JUNE 30,  2007                                               |       | 10,997,129                                                                       |       |   | $ | 183 |   |   |   | $ | 65,230 |   |   |   | $ | 109 |   |   | $ | 3,238 |   | 1,958,119 |   | $ | (23,552) |   | $ | (3,697 | ) |

 

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

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**QUIXOTE CORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS**

| ** **                                                                        | ** ** | **For each of the three years ended June 30,** | ** ** |
|-----------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------|------------|
| ** **                                                                        | ** ** | **2007**                                                                               | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                                                        | ** ** | **Dollar amounts in thousands**                                         | ** ** |
| OPERATING ACTIVITIES:                                                             |       |                                                                                   |       |   |   |   |   |
| Net loss                                                                          |       | $                                                                                      | (3,579     | ) | $ | (10,102 | ) | $ | (650 | ) |
| ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH  PROVIDED BY CONTINUING OPERATIONS: |       |                                                                                   |       |   |   |   |   |
| Depreciation                                                                      |       | 3,448                                                                                  |       | 4,701 |   | 4,587 |   |
| Amortization                                                                      |       | 1,730                                                                                  |       | 1,736 |   | 1,224 |   |
| Asset impairment  charges                                                         |       |                                                                                   |       | 13,374 |   |   |   |
| Non-cash inventory  disposal                                                      |       | 3,620                                                                                  |       |   |   |   |   |
| (Gain) loss on disposition  of assets                                             |       | (1,191                                                                                 | )          | 2,603 |   | (1,126 | ) |
| Non-cash  restructuring charges                                                   |       |                                                                                   |       | 864 |   |   |   |
| Deferred income  taxes                                                            |       | 54                                                                                     |       | (5,880 | ) | 2,253 |   |
| Provisions for  losses on accounts receivable                                     |       | 359                                                                                    |       | 235 |   | 647 |   |
| Issuance of stock  retirement plan shares                                         |       | 203                                                                                    |       | 216 |   | 210 |   |
| Income tax benefit  from employee stock options                                   |       |                                                                                   |       |   |   | 160 |   |
| Issuance of stock  to 401K plan                                                   |       | 963                                                                                    |       | 1,223 |   | 704 |   |
| Share-based  compensation expense                                                 |       | 970                                                                                    |       | 1,027 |   |   |   |
| Changes in operating assets and liabilities:                                      |       |                                                                                   |       |   |   |   |   |
| Accounts  receivable                                                              |       | 4,407                                                                                  |       | (3,972 | ) | 218 |   |
| Inventories                                                                       |       | (4,053                                                                                 | )          | (1,869 | ) | (2,109 | ) |
| Other assets                                                                      |       | (284                                                                                   | )          | 221 |   | (614 | ) |
| Accounts payable  and accrued expenses                                            |       | (2,432                                                                                 | )          | (729 | ) | (929 | ) |
| Income taxes  payable/refundable                                                  |       | (2,270                                                                                 | )          | 822 |   | (950 | ) |
| Other long-term  liabilities                                                      |       | (42                                                                                    | )          | 34 |   | (227 | ) |
| Net cash provided  by operating activities                                        |       | 1,903                                                                                  |       | 4,504 |   | 3,398 |   |
| INVESTING ACTIVITIES:                                                             |       |                                                                                   |       |   |   |   |   |
| Capital  expenditures                                                             |       | (2,453                                                                                 | )          | (3,048 | ) | (3,805 | ) |
| Proceeds from sale  of assets                                                     |       | 2,499                                                                                  |       | 3,066 |   | 1,642 |   |
| Proceeds from  sale/leaseback of assets                                           |       |                                                                                   |       |   |   | 1,206 |   |
| Patent  expenditures                                                              |       | (529                                                                                   | )          | (326 | ) | (170 | ) |
| Payments on notes  receivable                                                     |       |                                                                                   |       |   |   | 217 |   |
| Net cash used in  investing activities                                            |       | (483                                                                                   | )          | (308 | ) | (910 | ) |
| FINANCING ACTIVITIES:                                                             |       |                                                                                   |       |   |   |   |   |
| Proceeds from  convertible debt offering                                          |       |                                                                                   |       |   |   | 40,000 |   |
| Fees on  convertible debt offering                                                |       |                                                                                   |       |   |   | (2,605 | ) |
| Payments on notes  payable                                                        |       | (465                                                                                   | )          | (427 | ) | (393 | ) |
| Payments on  revolving credit agreement                                           |       | (24,650                                                                                | )          | (37,350 | ) | (37,400 | ) |
| Proceeds from  revolving credit agreement                                         |       | 25,650                                                                                 |       | 39,350 |   | 14,400 |   |
| Payments on term loan                                                             |       |                                                                                   |       |   |   | (17,000 | ) |
| Proceeds from  interest rate swap arrangement                                     |       |                                                                                   |       |   |   | 394 |   |
| Payment of  semi-annual cash dividends                                            |       | (3,381                                                                                 | )          | (3,185 | ) | (3,066 | ) |
| Proceeds from  exercise of common stock options                                   |       | 970                                                                                    |       | 1,031 |   | 961 |   |
| Income tax benefit  from employee stock options                                   |       | 261                                                                                    |       | 203 |   |   |   |
| Repurchase of  common stock for treasury                                          |       |                                                                                   |       | (3,105 | ) |   |   |
| Net cash used in  financing activities                                            |       | (1,615                                                                                 | )          | (3,483 | ) | (4,709 | ) |
| Effect of exchange  rate changes on cash                                          |       |                                                                                   |       |   |   | (12 | ) |
| Net change in cash  and cash equivalents                                          |       | (195                                                                                   | )          | 713 |   | (2,233 | ) |
| Cash and cash  equivalents at beginning of year                                   |       | 869                                                                                    |       | 156 |   | 2,389 |   |
| Cash and cash  equivalents at end of year                                         |       | $                                                                                      | 674        |   | $ | 869 |   | $ | 156 |   |

 

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

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**QUIXOTECORPORATION AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**1.**   NATUREOF 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 andhighway workers.

**2.   ACCOUNTING POLICIES**

**CONSOLIDATION**

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

**MANAGEMENTESTIMATES**

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 CASHEQUIVALENTS**

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 ANDEQUIPMENT**

We capitalize expendituresfor major renewals and improvements and charge current earnings with the costof maintenance and repairs. Provisions for depreciation have been computed on astraight-line or systematic method based on the expected useful lives of theassets 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  |

 

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

**COMPUTER SOFTWARE**

We capitalize certaincosts incurred in connection with developing computer software which will beused in our products once we achieve technological feasibility. During 2007 and2006, approximately $496,000 and $466,000, respectively, of computer softwarewas capitalized, primarily relating to software embedded in new products beingdeveloped in the Inform and Intersection Control segments.

**LONG-LIVED ASSETS**

Long-lived assets include such items as goodwill,patents, product rights, other intangible assets and property, plant andequipment. For purposes of evaluating the recoverability of long-lived assets,we assess the possibility of obsolescence, demand, new technology, competition,and other pertinent economic factors and trends that may have an impact on thevalue 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 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 methodologies.

**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 realization include the forecast offuture taxable income and available tax planning strategies that could beimplemented to realize the deferred tax assets. We expect the deferred taxassets currently recorded to be fully realizable, however there can be noassurance that an increased valuation allowance would not need to be recordedin the future.

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**FINANCIALINSTRUMENTS**

The fair value of cash andcash equivalents approximates the carrying value of these assets due to theshort-term maturity of these instruments. The fair value of our long-term debtis estimated 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.

**GEOGRAPHICCONCENTRATION**

Our customers consist ofdistributors, contractors, departments of transportation, state agencies, localgovernments or municipalities. No single customer represents a significantportion of our total revenues. However, in fiscal 2007, 2006 and 2005, approximately7%, 9% and 11%, respectively, of revenues were from customers in the state ofTexas; 8%, 9% and 9%, respectively, of revenues in fiscal 2007, 2006 and 2005were from customers in the state of Florida; and 9%, 11% and 9%, respectively,of revenues in fiscal 2007, 2006 and 2005, were from customers in the state ofCalifornia.

**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 creditsis made based upon management’s analysis of bad debts, credits and returns.

**SHIPPING ANDHANDLING**

Shipping and handling fees charged to customers areincluded in net sales, and shipping and handling costs incurred by us areincluded in cost of sales.

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**RESEARCH ANDDEVELOPMENT**

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

**STOCK-BASEDCOMPENSATION**

We adopted the provisionsof SFAS No. 123 (revised 2004) (SFAS No. 123(R)), “Share-BasedPayment” as of July 1, 2005 using the modified prospective method. Underthis transition method, share-based compensation cost recognized in the fiscalyear ended June 30, 2007 includes compensation cost for all share-basedawards which were unvested as of July 1, 2005 as well as compensation costfor all share-based awards granted subsequent to July 1, 2005, based onthe grant 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.

**RESTRUCTURINGCHARGES**

We account forrestructuring activities in accordance with SFAS No. 146, “Accounting forCosts Associated with Exit or Disposal Activities.” Generally, costs associatedwith the exit or disposal activity are recognized when the liability isincurred. Costs related to employee separation arrangements requiring futureservice beyond a specified minimum retention period are recognized over theservice period.

**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 September 2006, the Financial AccountingStandards Board (FASB) issued SFAS No. 157, “Fair Value Measurements”(SFAS No.157). This statement clarifies the definition of fair value,establishes a framework for measuring fair value, and expands the disclosureson fair value measurements. SFAS No. 157 is effective for fiscal yearsbeginning after November 15, 2007. We do not expect the adoption of thisstatement to have a material affect on our results of operations or financialposition.

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 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. We will adopt FIN 48 effective July 1,2007 and we are currently in the process of evaluating the impact that theadoption of FIN 48 will have on our financial position, consolidatedresults of operations and cash flows. Material differences between the amountsrecognized in the statements of financial position prior to the adoption of FIN 48and the amounts reported after adoption will be accounted for as acumulative-effect adjustment recorded to retained earnings.

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**3.      ACQUISITIONS AND DISPOSITIONS**

We sold our automated traffic enforcement product linewithin the Intersection Control segment to Traffipax, Inc. during thefirst quarter of fiscal 2007 for total cash proceeds of $795,000. Wetransferred to Traffipax city and county contracts to provide red lightenforcement and speed enforcement services, as well as related assets. Severalof our employees were hired by Traffipax to service the transferred contracts. Duringfiscal 2007, we recognized a gain on the sale of assets of the automatedtraffic enforcement product line of $673,000.

Also during the first quarter of fiscal 2007, we solda former captive manufacturing facility of the Protect and Direct segmentlocated in South Bend, Indiana to Elkhart Plastics, Inc. Since June 30,2005, we had been renting the facility to the buyer. Our net proceeds from thesale of this facility were $1,423,000 and we recognized a gain on the sale ofassets of $236,000.

Effective June 30, 2006, we sold our weatherforecasting product line within the Inform segment for a sale price of$1,848,000, including $1,566,000 in cash received during fiscal 2006 and$282,000 in contingent payments received in fiscal 2007. We sold contracts,intellectual property, allocated goodwill, software, equipment and inventoryand recorded a net gain on the sale of $846,000 in fiscal 2006 and $282,000 infiscal 2007.

Effective June 30,2005, we sold certain machinery and equipment of a captive manufacturer of ourProtect and Direct segment for approximately $650,000 in cash and recorded again on the sale of $566,000 in operating income. Also during fiscal 2005, wesold land and received proceeds of $992,000 and recorded a gain on the sale of$560,000 in operating income.

**4.**                 INVENTORIES

Inventoriesconsist of the following at June 30:

| ** **      | ** ** | **2007**                                     | ** ** | **2006**      | ** ** |
|-----------------|------------|----------------------------------------------|------------|---------------|------------|
| ** **      | ** ** | **(Dollar amounts  in thousands)** | ** ** |
| Finished goods  |       | $ 9,002                                 | * *   | $ 8,467  |       |
| Work-in-process |       | 5,007                                        | * *   | 6,642         |       |
| Raw materials   |       | 11,582                                       |       | 10,356        |       |
|            |       | $ 25,591                                | * *   | $ 25,465 |       |

 

**5.**                 INTANGIBLE ASSETSAND GOODWILL

Intangibleassets consist of the following as of June 30:

| ** **                    | ** ** | **2007**                                         | ** **    | **2006**         | ** ** |
|-------------------------------|------------|--------------------------------------------------|---------------|------------------|------------|
| ** **                    | ** ** | **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          |       |                                             | $ 3,664  |             |       |   | $ 1,942 |   |   |   | $ 1,722 |   |   |   | $ 3,135 |   |   |   | $ 1,758 |   |   |   | $ 1,377 |   |   |
| Technology and installed base |       |                                             | 2,491         |             |       |   | 1,296 |   |   |   | 1,195 |   |   |   | 2,491 |   |   |   | 1,097 |   |   |   | 1,394 |   |   |
| Customer relationships        |       |                                             | 3,807         |             |       |   | 2,222 |   |   |   | 1,585 |   |   |   | 3,807 |   |   |   | 1,698 |   |   |   | 2,109 |   |   |
| Trade names                   |       |                                             | 2,250         |             |       |   | 947 |   |   |   | 1,303 |   |   |   | 2,250 |   |   |   | 663 |   |   |   | 1,587 |   |   |
| Other                         |       | * *                                         | 640           |             |       |   | 640 |   |   |   | — |   |   |   | 640 |   |   |   | 640 |   |   |   | — |   |   |
| Total                         |       |                                             | $ 12,852 |             |       |   | $ 7,047 |   |   |   | $ 5,805 |   |   |   | $ 12,323 |   |   |   | $ 5,856 |   |   |   | $ 6,467 |   |   |

 

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We paid $529,000 for patents and licenses duringfiscal 2007, including $494,000 for a patent relating to a sensor product linein the Inform segment. Intangible amortization expense was $1,190,000,$1,196,000 and $1,079,000 for the years ended June 30, 2007, 2006 and2005, respectively. The estimated amortization expense for the five fiscalyears subsequent to 2007 is as follows: $1,153,000 in 2008, $942,000 in 2009,$829,000 in 2010, $731,000 in 2011 and $640,000 in 2012. Intangible assets areamortized over their useful lives, which is four to seventeen years for patentsand licenses, five to fifteen years for technology and installed base, five toten years for customer relationships, ten years for trade names and one to twoyears for other intangible assets.

Thefollowing table displays a roll-forward of the carrying amount of goodwill fromJuly 1, 2005 to June 30, 2007 by business segment:

| ** **                        | ** ** | **2007**                                         | ** **   | **2006**    | ** ** |
|-----------------------------------|------------|--------------------------------------------------|--------------|-------------|------------|
| ** **                        | ** ** | **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 |        |       |   | $ 9,246 |   |   |   | $    — |   |   |   | $ 8,139 |   |   |   | $ 9,777 |   |   |   | $ 11,397 |   |   |
| Acquired                          |       |                                             |         |        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Adjustments                       |       |                                             |         |        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Sale of product  lines            |       |                                             |         |        |       |   |   |   |   |   |   |   |   |   |   |   |   |   | (531 | ) |   |   | (1,172 | ) |   |
| Impairment  charges (Note 6) |       |                                             |         |        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | (10,225 | ) |   |
| Ending balance                    |       |                                             | $ 8,139 |        |       |   | $ 9,246 |   |   |   | $    — |   |   |   | $ 8,139 |   |   |   | $ 9,246 |   |   |   | $      — |   |   |

 

During the fourth quarterof fiscal 2006, we recorded impairment charges relating to goodwill and otherlong-lived assets as discussed further in Note 6. In addition, during thefourth quarter of fiscal 2006, goodwill was reduced related to the sale of theweather forecasting product line and the sale of the portable variable messagesign and lighting product lines as discussed in Notes 3 and 17.

**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. As part of therestructuring plan, we sold the portable variable message sign, illuminatedstreet lighting and tunnel lighting product lines and we discontinued otherlow-margin and non-core product lines. As a result of the continued poorperformance and the Company’s impairment review in the fourth quarter of fiscal2006, we determined that the carrying amounts of certain long-lived assets wereno longer recoverable based on estimated future operating cash flows to begenerated by those assets, which were lower than previously projected. Werecorded asset impairment charges in the Intersection Control segment of$13,374,000, or $8,723,000 net of income tax benefits, or $0.98 per dilutedshare. The charges included $10,225,000 for goodwill and $3,149,000 for fixedassets. In fiscal years 2007 and 2005, our annual impairment reviews resultedin no impairment charges being recorded.

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 amortizedlong-lived assets.

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**7.**                 LONG-TERM DEBT

Long-termdebt consists of the following at June 30:

| ** **                                                                                                   | ** ** | **2007**                                     | ** ** | **2006** | ** ** |
|--------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------|------------|----------|------------|
| ** **                                                                                                   | ** ** | **(Dollar amounts  in thousands)** | ** ** |
| Convertible debt  7% interest rate due February 15, 2025                                                |       | $                                            | 40,000     |     | $          | 40,000 |   |
| Revolving credit  note due February 1, 2009, interest at variable rates, ranging between  6.8% and 8.3% |       | 7,000                                        |       | 6,000    |       |
| Subordinated  promissory note                                                                                |       | 5,000                                        |       | 5,000    |       |
| Note payable, net  of discount of $3–2007 and $38–2006                                             |       | 122                                          |       | 587      |       |
| Total long-term  debt                                                                                        |       | 52,122                                       |       | 51,587   |       |
| Less current portion                                                                                         |       | 5,122                                        |       | 465      |       |
| Long-term debt, net                                                                                          |       | $                                            | 47,000     |     | $          | 51,122 |   |

 

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 usto repurchase the notes in cash at a price equal to 100% of the principalamount of the notes plus accrued and unpaid interest, if any, on February 15,2010, 2015 or 2020. Interest is payable semi-annually on February 15 and August 15of 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. The revolvingcredit availability is based on a formula of eligible accounts receivable,eligible inventory, machinery & equipment and real estate, subject toa minimum excess collateral availability factor. Effective June 30, 2006,we are also required to maintain a maximum senior leverage ratio. The covenantsalso limit the incurrence of additional indebtedness, acquisitions, liens andencumbrances and other matters customarily restricted in such agreements. Wewere in compliance with these covenants as of June 30, 2007 and 2006. Theborrowing is secured by a first security interest in all existing and hereafteracquired assets of the company, including accounts receivable, inventory,machinery and equipment, real estate and the equity securities of our subsidiaries.Under certain conditions, we may request a release of all security interests,at which time we would no longer be subject to a borrowing base formula, butwould be subject to several additional financial covenants.

The subordinated promissory note is a five-year note,payable at the end of its term, April 2008. It was entered into inconnection with the acquisition of the assets of U.S. Traffic Corporation(UST), part of the Intersection Control segment, in May 2003 and ispayable to the former owners. It bears interest at 5.25%, with interest payablesemi-annually. The note payable was entered into in connection with theacquisition of Roadway Safety Service, Inc. and is payable to a formerowner. The final payment on the note is payable in September 2007 withinterest imputed at 8.5%.

The aggregate amount ofmaturities of long-term debt for the four years subsequent to 2007 assumingrenewal of the credit agreement and the effective maturity of the convertibledebt is as follows: $5,122,000 in 2008, $0 in 2009, $40,000,000 in 2010,$0 in 2011 and 2012 and $7,000,000 thereafter.

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**8.**                 STOCK OPTIONS ANDSTOCK TRANSACTIONS

We adopted the provisionsof SFAS No. 123 (revised 2004) (SFAS No. 123(R)), “Share-BasedPayment”) as of July 1, 2005 using the modified prospective method. Underthis transition method, share-based compensation cost recognized in the fiscalyear ended June 30, 2007 includes compensation cost for all share-basedawards which were unvested as of July 1, 2005 as well as compensation costfor all share-based awards granted subsequent to July 1, 2005, based onthe grant 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-line basisover the requisite service period, which is generally the vesting period. Wehave two current share-based compensation plans, which are described below.

*Plan Descriptions*

Our 2001 Employee Stock Incentive Plan (the Plan),which is shareholder-approved, permits the grant of share options andrestricted shares to our employees for up to 1,125,000 shares, of which 150,000shares were reserved for the grant of restricted stock awards. We believe thatgrants of stock options to employees generate an increased incentive for theemployees to contribute to our future success and prosperity, thus enhancingthe value of the Company for the benefit of our stockholders. The Plan providesfor grants of stock options and restricted stock for employees as may be determinedby the Compensation Committee of the Board of Directors. No grantee may receiveawards, which include option grants and restricted stock awards, in excess of100,000 shares per year. The stock options are granted with an exercise priceequal to or greater than the fair market value of our stock at the time ofgrant. Employee options granted under the current plan expire not more than tenyears from the grant date with vesting to be determined by the Committee. Forgrants currently outstanding, vesting is over a three year period, withone-third of the grant becoming exercisable at the end of each of the threeyears. Option awards provide for accelerated vesting if there is a change incontrol, 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 stock atthe time of grant. Options granted under the Director Plan expire not more thanseven 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.

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 believe that we currently have adequatetreasury and authorized unissued shares to meet any requirements to issueshares during fiscal 2008. The authorization for issuance will terminate on November 1,2011 for both the Plan and the Director 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. The award consists of shares of our common stock and cashending with the fiscal year in which each executive attains his or her 62ndbirthday. In order to receive each year’s stock award, the executive must 

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remainemployed with us through the end of the fiscal year, unless excused by reasonof death or other involuntary termination. Participants are also required toretain the shares awarded for as long as they are employed by us or until age65. The size of each participant's annual award is determined under acceptedactuarial principles to provide a retirement income based upon a percentage ofthe executive's projected compensation and length of service at retirement, butonly if our stock price appreciates at a sustained target rate. The retirementstock award program resulted in a charge to earnings of $340,000 in 2007,$357,000 in 2006 and $352,000 in 2005.

*Share-based Compensation Expense*

The share-based compensation cost that has beencharged against income for stock options under the Plan and the Director Plan was$970,000 and $1,027,000 for the years ended June 30, 2007 and 2006,respectively. The total income tax benefit recognized in the income statementfor share-based compensation arrangements was $191,000 and $215,000 for thoseperiods, respectively, and the net expense recorded was $779,000 and $812,000,which was $0.09 per basic and diluted share outstanding for both periods.

As of June 30, 2007,the total compensation cost related to unvested share-based awards granted underour stock option plans not yet recognized was approximately $765,000. This costwill be amortized on a straight-line basis over a weighted average period ofapproximately 1.7 years and will be adjusted for subsequent changes inestimated forfeitures. The 250,333 unvested options outstanding at June 30,2007 have a weighted-average fair value of $5.58.

*Determining Fair Value*

Thefair value of stock options granted is estimated using the Black-Scholesoption-pricing model that uses the assumptions noted below for fiscal years2007, 2006 and 2005. Expected volatilities are based on historical volatilityof the Company’s stock. We use historical data to estimate option exercisepatterns, employee termination and forfeiture rates within the valuation model;separate groups of optionees that have similar historical exercise behavior areconsidered separately for valuation purposes. The expected term of optionsgranted is derived from the output of the option valuation model and representsthe period of time that options granted are expected to be outstanding; therange given below results from certain groups of employees exhibiting differentbehavior. The risk-free rate for periods within the contractual life of theoption is based on the U.S. Treasury yield curve in effect at the time of thegrant. The expected dividend yield is determined by dividing the current levelof per share dividend by the grant date stock price. We do not incorporatechanges in dividends anticipated by management unless those changes have beencommunicated to marketplace participants. The following summarizes theassumptions used in determining the fair value of stock options for the yearsended June 30:

| ** **                              | ** ** | **2007**                | ** ** | **2006**                | ** ** | **2005**                | ** ** |
|-----------------------------------------|------------|-------------------------|------------|-------------------------|------------|-------------------------|------------|
| Risk free  interest rate                |       | 4.5–4.8%           |       | 4.0–4.5%           |       | 3.9–4.2%           |       |
| Expected dividend  yield                |       | 2.28%                   |       | 1.73%                   |       | 1.72%                   |       |
| Weighted average  expected volatility   |       | 39%                     |       | 42%                     |       | 41%                     |       |
| Expected term                           |       | 3.9–5.8 years |       | 3.7–6.0 years |       | 4.0–7.0 years |       |
| Weighted average  expected term         |       | 4.4 years          |       | 4.5 years          |       | 4.3 years          |       |
| Weighted average  grant-date fair value |       | $4.95                   |       | $7.32                   |       | $6.87                   |       |

 

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*Stock OptionActivity*

Information with respectto 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, 2004  |       |                   | 1,000,958  |          |       |            | $          | 17.68         |       |   |   |   |   |   |   |   |
| 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 |   |
| Granted                            |       |                   | 187,000    |          |       |            | $          | 18.65         |       |   |   |   |   |   |   |   |
| Exercised                          |       |                   | (82,500    | )             |       |            | $          | 11.99         |       |   |   |   |   |   |   |   |
| Cancelled or  expired              |       |                   | (190,199   | )             |       |            | $          | 23.65         |       |   |   |   |   |   |   |   |
| Outstanding at  June 30, 2007 |       |                   | 859,203    |          |       |            | $          | 18.54         |       |   |   | 3.2 Years |   |   | $ | 1,451,000 |   |
| Vested at  June 30, 2007      |       |                   | 608,870    |          |       |            | $          | 18.19         |       |   |   | 3.0 Years |   |   | $ | 1,354,000 |   |

 

Options outstanding at June 30,2007 are exercisable as follows: 608,870 currently, 126,143 within one year,75,190 in two years and 49,000 thereafter. Options outstanding as of June 30,2006 and 2005 included 714,013 and 711,076 which were exercisable as of thosedates, respectively. As of June 30, 2007, we have 543,359 common sharesreserved for our option and award plans available for future grants. The totalintrinsic value of stock options exercised was $686,000 in 2007, $1,267,000 in2006 and $732,000 in 2005. The total fair value of stock options vested duringfiscal 2007, 2006 and 2005 was $750,000, $1,143,000 and $1,030,000,respectively.

*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 toEmployees,” and related interpretations. The cost of restricted stock grantedwas expensed in the period the stock was issued. No charges were made toearnings in connection with stock options granted, as all stock options grantedhad an exercise price equal to the market value of the underlying common stockon the date of grant.

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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 duringfiscal 2005:

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

 

Pro-forma information forthe years ended June 30, 2007 and 2006 are not presented as stock-basedpayments were recorded using the fair-value method required under SFAS No. 123(R).

**9.**                 SHAREHOLDER RIGHTSPLAN

We have a Shareholder Rights Plan (the Rights Plan)which was established to deter coercive takeover tactics and to prevent anacquirer from gaining control of the Company without offering a fair price toall of our stockholders. The Rights Plan calls for stockholders of record as ofJuly 14, 1998 to receive a dividend distribution of one right for eachoutstanding share of our common stock. Each share issued after that date isalso granted a right. Each right entitles the holder, upon the occurrence ofcertain events, to purchase a unit consisting of one one-thousandth of a shareof Series B Junior Participating Preferred Stock, no par value, for $40per unit. In addition, if an acquiring person becomes the beneficial owner ofmore 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.

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.**          INCENTIVESAVINGS PLAN

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 most of ourmatching contributions under the incentive savings plan by issuing common stockfrom our treasury stock. Additional discretionary company contributions may bemade at the option of our Board of Directors. The expense for the plan was$1,160,000 in 2007, $1,224,000 in 2006 and $1,186,000 in 2005.

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**11.**          INCOMETAXES

Theincome tax provision (benefit) consists of the following:

| ** **                 | ** ** | **2007**                                         | ** ** | **2006** | ** ** | **2005** | ** ** |
|----------------------------|------------|--------------------------------------------------|------------|----------|------------|----------|------------|
| ** **                 | ** ** | **(Dollar amounts in thousands)** | ** ** |
| Current:                   |       |                                             |       |     |       |     |       |
| Federal and  international |       | $                                                | (2,207     | )        | $          | 37       |       | $ | (2,839 | ) |
| State                      | * *   | (50                                              | )          | 371      |       | 139      |       |
|                       | * *   | (2,257                                           | )          | 408      |       | (2,700   | )          |
| Deferred:                  |       |                                             |       |     |       |     |       |
| Federal and  international |       | 50                                               |       | (5,248   | )          | 2,194    |       |
| State                      |       | 4                                                |       | (632     | )          | 59       |       |
|                       |       | 54                                               |       | (5,880   | )          | 2,253    |       |
| Total income tax  benefit  |       | $                                                | (2,203     | )        | $          | (5,472   | )          | $ |  (447 | ) |

 

Thecomponents of the net deferred tax asset (liability) are as follows:

| ** **                               | ** ** | **2007**                                     | ** ** | **2006** | ** ** |
|------------------------------------------|------------|----------------------------------------------|------------|----------|------------|
| ** **                               | ** ** | **(Dollar amounts  in thousands)** | ** ** |
| Deferred tax  assets:                    |       |                                         |       |     |       |
| Accounts  receivable allowance           |       | $                                            | 551        |     | $          | 386 |   |
| Warranty reserve                         |       | 330                                          |       | 321      |       |
| Goodwill and  intangible assets          |       | 7,085                                        |       | 7,422    |       |
| Inventory  valuation                     |       | 758                                          |       | 725      |       |
| Compensated  absences and medical claims |       | 358                                          |       | 498      |       |
| Stock option  expenses                   |       | 374                                          |       | 204      |       |
| Other liabilities  and reserves          |       | 713                                          |       | 555      |       |
| Net operating  loss and R&D credits  |       | 7,702                                        |       | 7,255    |       |
| Valuation  allowance                     |       | (1,115                                       | )          | (445     | )          |
|                                     |       | 16,756                                       |       | 16,921   |       |
| Deferred tax liabilities:                |       |                                         |       |     |       |
| Book over tax  basis of fixed assets     |       | (1,143                                       | )          | (1,253   | )          |
| Net deferred tax assets                  |       | $                                            | 15,613     |     | $          | 15,668 |   |

 

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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, 2007, we have approximately $11,019,000of state and $12,834,000 of federal net operating losses that can be carriedforward for tax purposes. All of the state operating losses are being carriedforward. We have prepared the necessary amended tax return filings to carryback approximately $9 million of federal operating losses to prior years. Thebenefit associated with these losses of approximately $2.5 million isincluded in refundable income taxes. Certain limitations on utilization of thenet operating loss carryforwards are present and realization of a portion ofthe carryforwards is uncertain. These carryforwards expire in years from 2013through 2027.

Thenet deferred tax assets consist of the following at June 30:

| ** **                      | ** ** | **2007**                                     | ** ** | **2006** | ** ** |
|---------------------------------|------------|----------------------------------------------|------------|----------|------------|
| ** **                      | ** ** | **(Dollar amounts  in thousands)** | ** ** |
| Current deferred  tax assets    |       | $                                            | 2,798      |     | $          | 3,824 |   |
| Noncurrent  deferred tax assets |       | 12,815                                       |       | 11,844   |       |
| Total net deferred tax  assets  |       | $                                            | 15,613     |     | $          | 15,668 |   |

 

Theincome tax provision (benefit) differed from the taxes calculated at thestatutory federal tax rate as follows:

| ** **                       | ** ** | **2007**                                         | ** ** | **2006** | ** ** | **2005** | ** ** |
|----------------------------------|------------|--------------------------------------------------|------------|----------|------------|----------|------------|
| ** **                       | ** ** | **(Dollar amounts in thousands)** | ** ** |
| Taxes at  statutory rate         |       | $                                                | (1,966     | )        | $          | (5,295   | )          | $ | (373 | ) |
| State income  taxes              |       | 261                                              |       | (387     | )          | 150      |       |
| Research and  development credit |       | (190                                             | )          | (381     | )          | (410     | )          |
| Goodwill                         |       |                                             |       | 736      |       |     |       |
| Change in  valuation allowance   |       | (670                                             | )          |     |       | 439      |       |
| Other                            |       | 362                                              |       | (145     | )          | (253     | )          |
| Income tax benefit               |       | $(2,203                                          | )          | $        | (5,472     | )        | $          | (447 | ) |
|                                  |            |                                                  |            |          |            |          |            |  |  |  |

 

**12.**          ACCUMULATEDCOMPREHENSIVE INCOME (LOSS)

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

| ** **                                               | ** ** | **2007**                                     | ** ** | **2006** | ** ** |
|----------------------------------------------------------|------------|----------------------------------------------|------------|----------|------------|
| ** **                                               | ** ** | **(Dollar amounts  in thousands)** | ** ** |
| Unrealized gain  on derivative instrument (note 2): |       |                                         |       |     |       |
| Beginning balance                                        |       | $                                            | 227        |     | $          | 345 |   |
| Amortization to  earnings                                |       | (118                                         | )          | (118     | )          |
| Ending balance                                           |       | 109                                          |       | 227      |       |
| Accumulated  comprehensive income—June 30      |       | $                                            | 109        |     | $          | 227 |   |

 

During fiscal 2005, weliquidated our derivative instrument, an interest rate swap arrangement, andreceived $394,000 in cash. The market value of the interest rate swaparrangement as of the date of liquidation included in accumulated othercomprehensive income is being amortized over the remaining life of theoriginally forecasted transaction.

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

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

| ** **                                               | ** ** | **2007**                                                                      | ** ** | **2006**  | ** ** | **2005**  | ** ** |
|----------------------------------------------------------|------------|-------------------------------------------------------------------------------|------------|-----------|------------|-----------|------------|
| ** **                                               | ** ** | **(Dollar amounts in thousands  except share data)** | ** ** |
| Numerator:                                               |       |                                                                          |       |      |       |      |       |
| Net loss available to  common stockholders               |       | $                                                                             | (3,579     | )         | $          | (10,102   | )          | $ | (650 | ) |
| Denominator:                                             |       |                                                                          |       |      |       |      |       |
| Weighted average shares  outstanding—basic          |       | 8,945,855                                                                     |       | 8,850,884 |       | 8,800,421 |       |
| Effect of dilutive  securities—common stock options |       | —                                                                        |       | —    |       | —    |       |
| Weighted average shares  outstanding—diluted        |       | 8,945,855                                                                     |       | 8,850,884 |       | 8,800,421 |       |
| Net loss per  share of common stock:                     |       |                                                                          |       |      |       |      |       |
| Basic                                                    |       | $                                                                             | (0.40      | )         | $          | (1.14     | )          | $ | (0.07 | ) |
| Diluted                                                  |       | $                                                                             | (0.40      | )         | $          | (1.14     | )          | $ | (0.07 | ) |

 

Employee stock options totaling 80,491 shares for theyear ended June 30, 2007, 126,399 shares for the year ended June 30,2006 and 146,620 shares for the year ended June 30, 2005 were not includedin the diluted weighted average shares calculation because the effects of thesesecurities were anti-dilutive.

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 loss per share and are asfollows:

| ** **                        | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|-----------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Average exercise price  per share |       | $        | 21.40      |     | $          | 24.22    |       | $ | 24.66 |   |
| Number of shares                  |       | 486,867  |       | 350,800  |       | $        | 304,300    |   |
|                                   |            |          |            |          |            |          |            |  |  |  |

 

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. Theshares are not included in earnings per share as they are currentlyanti-dilutive until earnings 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 office and manufacturing facilities, was$3,336,000 in 2007, $4,009,000 in 2006 and $3,748,000 in 2005. These operatingleases include options for renewal. Annual minimum future rentals for leasecommitments are approximately $3,087,000 in 2008, $1,652,000 in 2009, $949,000in 2010, $548,000 in 2011 and $536,000 in 2012 for an aggregate of $6,772,000for the five-year period. Minimum future rentals after 2012 total $3,785,000.

**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 

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varies (30 days to 5 years)by product. We accrue for product warranties when, based on availableinformation, it is probable that customers will make claims under warrantiesrelating to products that have been sold, and a reasonable estimate of thecosts can be made.

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

| ** **                                                               | ** ** | **2007**                                     | ** ** | **2006** | ** ** |
|--------------------------------------------------------------------------|------------|----------------------------------------------|------------|----------|------------|
| ** **                                                               | ** ** | **(Dollar amounts  in thousands)** | ** ** |
| Beginning balance                                                        |       | $                                            | 927        |     | $          | 2,510 |   |
| Warranties issued                                                        |       | 382                                          |       | 573      |       |
| Repairs, replacements  and settlements                                   |       | (466                                         | )          | (733     | )          |
| Changes in liability for  pre-existing warranties, including expirations |       | (408                                         | )          | (1,423   | )          |
| Ending balance                                                           |       | $                                            | 435        |     | $          | 927 |   |

 

**Theamounts of $408,000 for fiscal 2007 and $1,423,000 for fiscal 2006 includeamounts previously reserved for claims from customers which were resolvedfavorably or warranty exposures which expired during the year.**

**LEGAL**

We record loss contingencieswhere appropriate within the guidelines established by FASB Statement No. 5“Accounting for Contingencies”. We are involved in several pending judicialproceedings for product liability and other damages arising out of the normalconduct of our business. While the outcome of litigation is subject touncertainties, we believe, after consultation with counsel, that the outcome ofthese proceedings, based on current available information and after taking intoaccount the availability and limits of our insurance coverage, will not have amaterial effect on our consolidated financial condition and results ofoperations.

**EXECUTIVEAGREEMENTS**

We have agreements 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 $4,974,000. We haveby-laws and 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. The term of theindemnification period is for the director’s or officer’s lifetime. We believethat any obligations relating to this indemnification are predominantly coveredby insurance subject to certain exclusions and deductibles. Historically, wehave not made payments under these executive agreements, and no amount has beenaccrued in the accompanying consolidated financial statements.

**INDEMNIFICATION OFLENDERS AND AGENTS UNDER CREDIT FACILITIES**

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

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**BID AND PERFORMANCEBONDS**

We have entered into bidand performance related bonds associated with various contracts. Potential paymentsdue under these bonds are related to our performance under the applicablecontract. The total amount of bid and performance related bonds that wereavailable and undrawn was $761,000 as of June 30, 2007. Historically, wehave not made significant payments on bid and performance bonds, and no amounthas 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, 2007 was $1,294,000. We have included $650,000 inaccrued liabilities for this exposure as of June 30, 2007.

We have certainnon-cancelable royalty agreements, which contain certain minimum payments inthe aggregate of $1,960,000 through fiscal year 2011. We have included $424,000in accrued liabilities for royalties as of June 30, 2007.

**15.**          SUPPLEMENTALCASH FLOW STATEMENT DISCLOSURES

Cash paid for interest was$4,384,000 in 2007, $4,226,000 in 2006 and $2,395,000 in 2005. Net cashreceived from income taxes was $243,000 in 2007, $774,000 in 2006 and$2,075,000 in 2005. We declared dividends that were payable at year end of$1,715,000 in 2007, $1,688,000 in 2006 and $1,595,000 in 2005.

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**16.**          INDUSTRYSEGMENT INFORMATION

During the third quarter of fiscal 2006, we expandedthe number of reportable segments from two to three segments. The segmentfinancial data presented herein has been restated to present our threereportable segments—the manufacture and sale of products which Protect andDirect, the manufacture and sale of products which Inform, and the manufactureand sale of Intersection Control products. The primary product lines within theProtect and Direct segment include energy-absorbing products such as crashcushions, truck-mounted attenuators, sand-filled barrels and barriers as wellas highway delineators. The products within this segment absorb and dissipatethe force of impact in collisions between vehicles and fixed roadside objectsas well as prevent collisions and help to control the flow of traffic bydirecting or guiding. The primary product lines within the Inform segmentinclude highway advisory radio systems; advanced sensing products which measuredistance, count and classify vehicles; weather sensing systems and othertransportation equipment. The products within this segment provide informationto prevent collisions from occurring and to ease traffic congestion. Theprimary product lines within the Intersection Control segment includeintelligent intersection traffic control systems, pedestrian signals, videodetection equipment and other transportation equipment. The products withinthis segment control traffic and ease traffic congestion, primarily related tointersections.

The majority of our sales of highway andtransportation safety products are to distributors and contractors who thenprovide product and services to federal, state and local governmental units.Our business is conducted principally in the United States, our country ofdomicile, with sales outside the United States as follows: $23,399,000 in2007, $21,821,000 in 2006 and $19,111,000 in 2005. Inter-company sales betweensegments represented less than one percent of consolidated net sales in fiscal2007, 2006 and 2005.

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 the performance of our segmentsand allocate resources to them based on operating income as well as otherfactors. Operating income is determined by deducting operating expenses fromall revenues. In computing operating income, none of the following has beenadded or deducted: unallocated corporate expenses, interest income or expense,other income or loss or income tax provisions or benefits. Corporate assetsconsist primarily of cash and cash equivalents, depreciable assets and incometax assets. Accounting policies for the segments are the same as those for theCompany.

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The following tablepresents financial information about reported segments as of and for the yearsended June 30, 2007, 2006 and 2005 comprising the totals reported in theconsolidated financial statements.

| ** **                                  | ** ** | **2007**                                         | ** ** | **2006** | ** ** | **2005** | ** ** |
|---------------------------------------------|------------|--------------------------------------------------|------------|----------|------------|----------|------------|
| ** **                                  | ** ** | **(Dollar amounts in thousands)** | ** ** |
| Revenues:                                   |       |                                             |       |     |       |     |       |
| Protect and Direct                          |       | $                                                | 83,593     |     | $          | 80,806   |       | $ | 73,575 |   |
| Inform                                      |       | 24,181                                           |       | 24,134   |       | 21,163   |       |
| Intersection Control                        |       | 29,704                                           |       | 56,194   |       | 51,615   |       |
| Total                                       |       | $                                                | 137,478    |     | $          | 161,134  |       | $ | 146,353 |   |
| Depreciation and  amortization:             |       |                                             |       |     |       |     |       |
| Protect and Direct                          |       | $                                                | 2,592      |     | $          | 2,601    |       | $ | 2,737 |   |
| Inform                                      |       | 680                                              |       | 746      |       | 792      |       |
| Intersection Control                        |       | 1,366                                            |       | 2,552    |       | 2,107    |       |
| Total segment depreciation and amortization |       | 4,638                                            |       | 5,899    |       | 5,636    |       |
| Unallocated corporate                       |       | 540                                              |       | 538      |       | 175      |       |
| Total                                       |       | $                                                | 5,178      |     | $          | 6,437    |       | $ | 5,811 |   |
| Income (loss) before  income taxes:         |       |                                             |       |     |       |     |       |
| Protect and Direct                          |       | $                                                | 16,965     | (1)      | $          | 15,539   |       | $ | 14,859 | (2) |
| Inform                                      |       | 3,445                                            | (3)        | 3,403    | (4)        | 1,151    |       |
| Intersection Control                        |       | (13,561                                          | )(5)       | (22,360  | )(6)       | (5,723   | )          |
| Total segment operating profit (loss)       |       | 6,849                                            |       | (3,418   | )          | 10,287   |       |
| Unallocated corporate                       |       | (8,172                                           | )          | (7,510   | )          | (8,120   | )          |
| Total operating profit (loss)               |       | (1,323                                           | )          | (10,928  | )          | 2,167    |       |
| Unallocated interest and other              |       | (4,459                                           | )          | (4,646   | )          | (3,264   | )          |
| Total                                       |       | $                                                | (5,782     | )        | $          | (15,574  | )          | $ | (1,097 | ) |
| Identifiable  assets:                       |       |                                             |       |     |       |     |       |
| Protect and Direct                          |       | $                                                | 57,228     |     | $          | 55,415   |       | $ | 52,204 |   |
| Inform                                      |       | 23,121                                           |       | 22,301   |       | 21,975   |       |
| Intersection Control                        |       | 18,598                                           |       | 28,359   |       | 48,864   |       |
| Total segment identifiable assets           |       | 98,947                                           |       | 106,075  |       | 123,043  |       |
| Unallocated corporate                       |       | 20,427                                           |       | 19,128   |       | 13,747   |       |
| Total                                       |       | $                                                | 119,374    |     | $          | 125,203  |       | $ | 136,790 |   |
| Capital  expenditures:                      |       |                                             |       |     |       |     |       |
| Protect and Direct                          |       | $                                                | 1,642      |     | $          | 1,538    |       | $ | 1,593 |   |
| Inform                                      |       | 501                                              |       | 801      |       | 490      |       |
| Intersection Control                        |       | 310                                              |       | 709      |       | 1,722    |       |
| Total segment capital expenditures          |       | 2,453                                            |       | 3,048    |       | 3,805    |       |
| Unallocated corporate                       |       |                                             |       |     |       |     |       |
| Total                                       |       | $                                                | 2,453      |     | $          | 3,048    |       | $ | 3,805 |   |

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(1)          Includesa $236 gain on sale of assets.

(2)          Includesa $1,126 gain on sale of assets.

(3)          Includesa $282 gain on sale of assets.

(4)          Includesa $846 gain on sale of assets.

(5)          Includes$7,655 in restructuring charges, $3,620 in related inventory write-offs, and again on sale of assets of $673.

(6)          Includes$13,374 in non-cash asset impairment charges, $5,775 in restructuring chargesand $2,975 in legal settlement gains.

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**17.**          RESTRUCTURINGCOSTS

During the fourth quarter of fiscal 2006 our Board ofDirectors approved a restructuring plan for our Intersection Control segment inorder to reduce costs through the reduction of overhead by closing twofacilities and through the reduction of headcount. Under the restructuringplan, we divested and discontinued certain low-margin and non-core productlines primarily manufactured in our leased facilities in Tecate, Mexico andSanta Fe Springs, California. These product lines included portable andpermanent variable message signs, tunnel lighting and illuminated street signs.We moved the remaining intersection control family of products, includingtraffic controllers, traffic signals and pedestrian signals to our Palmetto,Florida and Bedford, Pennsylvania facilities. We adopted an outsourcingstrategy for non-core manufacturing processes but continue to assemble and testproducts. The manufacturing operations in the Santa Fe Springs, California andTecate, Mexico facilities ceased in the first quarter of fiscal 2007.

The implementation of the restructuring plan wascompleted during the second quarter of fiscal 2007 and we incurred noadditional restructuring charges during the third or fourth quarters of fiscal2007. During the first half of fiscal 2007, we incurred charges of $11,275,000related to the restructuring plan, including $1,792,000 of employee severancecosts, $1,903,000 of lease expense, $3,960,000 of shut-down and other relatedcosts and $3,620,000 in asset write-offs. During the fourth quarter of fiscal2006, we recorded $5,775,000 in restructuring charges.

The remaining portion of the restructuring planrecorded in accrued expenses is $912,000 as of June 30, 2007, whichconsists of $104,000 in employee severance and related benefit costs, $690,000in lease obligations over the next year, and $118,000 in facility exit costs,consulting expense and other related costs.

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. The $4,571,000 in asset sales and write-offsrecorded in restructuring costs for fiscal 2006 includes the related saleof  inventory, equipment, intellectualproperty, allocated goodwill, contracts and orders.

Activityrelated to the restructuring plan was as follows:

| ** **                          | ** ** | **Employee  Severance  and Related Costs** | ** ** | **Lease  Obligations** | ** ** | **Asset  Sales and  Write-offs** | ** ** | **Facility Exit  Costs, Legal  and Other** | ** ** | **Total** | ** ** |
|-------------------------------------|------------|------------------------------------------------------|------------|------------------------|------------|---------------------------------------|------------|-----------------------------------------------------------|------------|-----------|------------|
| ** **                          | ** ** | **(Dollar amounts in thousands)**     | ** ** |
| Accrual balance  July 1, 2005  |       |                                                 | $          | —                 |       |                                  |       | $                                                         | —     |      |       |   | $ | — |   |   |   | $ | — |   |   | $ | — |   |
| Costs incurred                      |       |                                                 | 179        |                   |       |                                  | 90         |                                                      |       |      | 4,571      |   |   |   | 935 |   |   | 5,775 |   |
| Cash proceeds  (payments)           |       |                                                 | (179       | )                      |       |                                  | (90        | )                                                         |       |      | 1,500      |   |   |   | (601 | ) |   | 630 |   |
| Non-cash charges                    |       |                                                 |       |                   |       |                                  |       |                                                      |       |      | (5,908     | ) |   |   |   |   |   | (5,908 | ) |
| Accrual balance  June 30, 2006 |       |                                                 | —     |                   |       |                                  | —     |                                                      |       |      | 163        |   |   |   | 334 |   |   | 497 |   |
| Costs incurred                      |       |                                                 | 1,792      |                   |       |                                  | 1,903      |                                                      |       |      | 3,620      |   |   |   | 3,960 |   |   | 11,275 |   |
| Cash proceeds  (payments)           |       |                                                 | (1,688     | )                      |       |                                  | (1,213     | )                                                         |       |      | (163       | ) |   |   | (4,176 | ) |   | (7,240 | ) |
| Non-cash charges                    |       |                                                 |       |                   |       |                                  |       |                                                      |       |      | (3,620     | ) |   |   |   |   |   | (3,620 | ) |
| Accrual balance  June 30, 2007 |       |                                                 | $          | 104                    |       |                                  |       | $                                                         | 690        |      |       |   | $ | — |   |   |   | $ | 118 |   |   | $ | 912 |   |
| Remaining expected plan costs       |       |                                                 | $          | —                 |       |                                  |       | $                                                         | —     |      |       |   | $ | — |   |   |   | $ | — |   |   | $ | — |   |
| Total expected  plan costs          |       |                                                 | $          | 1,971                  |       |                                  |       | $                                                         | 1,993      |      |       |   | $ | 8,142 |   |   |   | $ | 4,944 |   |   | $ | 17,050 |   |

 

Employee severance andrelated benefits include severance pay, related benefits and retention bonuses.The total workforce reduction associated with restructuring activitiesinitiated during fiscal 2006 and 2007 was approximately 400 employees.

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**18.**       LEGALSETTLEMENTS

During the fourth quarter of fiscal 2006, we settledall outstanding litigation with the sellers of U.S. Traffic Corporation. Thesellers paid us $3 million in cash, and the parties agreed to waive all claimsarising from the original purchase and related agreements dated in May 2003.We also terminated some of these agreements and modified the terms of thenon-competition covenant with the sellers. Specifically, the sellers agreed torefrain from selling uninterruptible power supply products for use inintersection control to the cities of New York and Chicago until May 2008.We reaffirmed the $5 million subordinated note to the sellers. We guaranteedpayments pursuant to the lease of the Tecate, Mexico facility, although we werereleased from that obligation during fiscal 2007 when the facility was leasedto a third party. During the fourth quarter, we recorded a gain of $2,348,000,net of legal and other directly related expenses of which $336,000 wererecorded in fiscal 2006 prior to the fourth quarter.

During the first quarterof fiscal 2006, we settled all claims arising from our 2003 acquisition of PeekTraffic Corporation (Peek Traffic), by releasing all claims arising under thepurchase agreement. As part of the settlement, the sellers of that businesspaid us $627,000 in cash, net of legal expenses, and sold to us 150,603 sharesof our common stock that they initially acquired as part of the purchase pricefor $3,105,000, or $20.62 per share. We had claimed damages from the sellers ofPeek Traffic arising from the sellers’ breaches of representations andwarranties in the asset purchase agreement and from certain liabilities of PeekTraffic that we did not specifically assume or were misrepresented to us.

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**19.**          QUARTERLYFINANCIAL DATA (UNAUDITED)

Summarizedunaudited quarterly financial data for fiscal years 2007 and 2006 follows:

| ** **                         | ** ** | **Three months ended**                                                            | ** ** |
|------------------------------------|------------|---------------------------------------------------------------------------------------------|------------|
| ** **                         | ** ** | **9/30**                                                                                    | ** ** | **12/31** | ** ** | **3/31** | ** ** | **6/30** | ** ** |
| ** **                         | ** ** | **(Dollar amounts in thousands, except per share data)** | ** ** |
| FISCAL 2007                        |       |                                                                                        |       |   |   |   |   |   |   |
| Net sales                          |       | $                                                                                           | 34,161     |   | $ | 30,655 |   | $ | 30,975 |   | $ | 41,687 |   |
| Gross profit                       |       | 8,029                                                                                       |       | 10,984 |   | 10,673 |   | 15,746 |   |
| Operating profit (loss)            |       | (8,425                                                                                      | )(1)       | 367 | (2) | 1,578 | (3) | 5,157 |   |
| Net earnings (loss)                |       | (5,895                                                                                      | )(1)       | (511 | )(2) | 298 | (3) | 2,529 |   |
| Basic earnings (loss)  per share   |       | (.66                                                                                        | )(1)       | (.06 | )(2) | .03 | (3) | .28 |   |
| Diluted earnings (loss)  per share |       | (.66                                                                                        | )(1)       | (.06 | )(2) | .03 | (3) | .28 |   |
| ** **                         | ** ** | **9/30**                                                                                    | ** ** | **12/31** | ** ** | **3/31** | ** ** | **6/30** | *** *** |
| 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                                                                                       | (4)        | 488 |   | (178 | ) | (12,865 | )(5) |
| Net earnings (loss)                |       | 276                                                                                         | (4)        | (383 | ) | (878 | ) | (9,117 | )(5) |
| Basic earnings (loss)  per share   |       | .03                                                                                         | (4)        | (.04 | ) | (.10 | ) | (1.03 | )(5) |
| Diluted earnings (loss)  per share |       | .03                                                                                         | (4)        | (.04 | ) | (.10 | ) | (1.03 | )(5) |

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(1)          Theoperating loss included restructuring charges of $5,595, related inventorydisposal charges of $3,620 and gains on sale of assets of $497. The amountincluded in the net loss for these charges was $5,405, net of income taxbenefits. The amount included in the diluted loss per share for these items was$0.61.

(2)          Operatingprofit included restructuring charges of $2,060, and a gain on sale of assetsof $96. The amount included in the net loss for these charges was $1,218, netof income tax benefits. The amount included in the diluted loss per share forthese items was $0.14.

(3)          Operating profitincluded a gain on sale of assets of $598. The amount included in net earningsfor this gain was $371, net of income tax provisions. The amount included indiluted earnings per share for this item was $0.04.

(4)          Operating profitincluded a gain on legal settlement of $633. The amount included in netearnings for this gain was $392, net of income tax provisions. The amountincluded in the diluted loss per share for this item was $0.04.

(5)          The operating lossincluded non-cash asset impairment charges of $13,374, restructuring charges of$5,775, gains on legal settlements of $2,685 and again on sale of assets of$846. The amount included in the net loss for these charges was $10,129, net ofincome tax benefits. The amount included in diluted loss per share for theseitems was $1.14.

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**Item 9.**                     Changesin and Disagreements with Accountants on Accounting and Financial Disclosure

None.

**Item 9A.**             Controlsand Procedures

(a)      **EVALUATION OF DISCLOSURECONTROLS AND PROCEDURES**

Our management, under the supervision of and with theparticipation of our Chief Executive Officer and Chief Financial Officer, hasevaluated the effectiveness of the design and operation of the Company’sdisclosure controls and procedures pursuant to Exchange Act Rules 13a-15(e).Based upon that evaluation, our Chief Executive Officer and Chief FinancialOfficer concluded that our disclosure controls and procedures were effective asof the end of the period covered by this Annual Report 10-K, June 30,2007.

(b)     **MANAGEMENT’S REPORT ONINTERNAL CONTROL OVER FINANCIAL REPORTING**

Our management isresponsible for establishing and maintaining adequate internal control overfinancial reporting, as that term is defined in Exchange Act Rules 13a-15(f).Our internal control system is designed to provide reasonable assurance to ourmanagement and Board of Directors regarding the reliability of financialreporting and the preparation of financial statements for external purposes inaccordance with generally accepted accounting principles in the United Statesof America. Our management, including the Chief Executive Officer and ChiefFinancial Officer, assessed the effectiveness of our internal control overfinancial reporting as of June 30, 2007, based on criteria established in *Internal Control—Integrated Framework,* issued by the Committeeof Sponsoring Organizations of the Treadway Commission (“COSO”). Based on thisassessment, management has concluded that the Company maintained effectiveinternal controls over financial reporting as of June 30, 2007.

*Limitation on the Effectiveness 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 

58

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canprovide absolute assurance that all control issues and instances of fraud, ifany, within the Company have been detected.

*Remediation of the2006 Material Weakness*

As of June 30, 2006, we concluded that we had amaterial weakness in internal controls over certain financial reporting controls,resulting from a number of control breakdowns in the operations at twofacilities within our Intersection Control Segment. These control breakdownsresulted in a few misstatements, which were identified by our externalauditors, Grant Thornton LLP.

A comprehensiveremediation plan was not identified, because operations at these two facilitiesceased as part of a restructuring plan, approved in the fourth quarter offiscal 2006. Manufacturing ceased at these two locations and primaryresponsibility for financial reporting was transferred to another facilitywithin our Intersection Control Segment in the second quarter of fiscal 2007.

*Attestation of RegisteredPublic Accounting Firm*

**REPORT OF INDEPENDENTREGISTERED PUBLIC ACCOUNTING FIRM**

**Board of Directors and ShareholdersQuixote Corporation**

We have audited Quixote Corporation’s (a DelawareCorporation) internal control over financial reporting as of June 30,2007, based on criteria established in*Internal Control—IntegratedFramework*issued by the Committee of Sponsoring Organizations of theTreadway Commission (COSO). Quixote Corporation’s management is responsible formaintaining effective internal control over financial reporting and for itsassessment of the effectiveness of internal control over financial reporting. Ourresponsibility is to express an opinion on Quixote Corporation’s internalcontrol over financial reporting based on our audit.

We conducted our audit in accordance with the standardsof the Public Company Accounting Oversight Board (United States). Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether effective internal control over financial reporting wasmaintained in all material respects. Our audit included obtaining anunderstanding of internal control over financial reporting, assessing the riskthat a material weakness exists, testing and evaluating the design andoperating effectiveness of internal control based on the assessed risk, andperforming such other procedures as we considered necessary in thecircumstances. We believe that our audit provides a reasonable basis for ouropinion.

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.

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In our opinion, Quixote Corporation maintained, in allmaterial respects, effective internal control over financial reporting as of June 30,2007, based on criteria established in*Internal Control—Integrated Framework*issuedby COSO.

We have also audited, in accordance with the standardsof the Public Company Accounting Oversight Board (United States), theconsolidated balance sheet of Quixote Corporation and subsidiaries as of June 30,2007 and 2006, and the related consolidated statements of operations,shareholders’ equity, and cash flows for the years ended June 30, 2007,2006 and 2005, and the accompanying Schedule II—Valuation and QualifyingAccounts and Reserves as of June 30, 2007, 2006 and 2005, and our reportdated September 10, 2007 expressed an unqualified opinion on thosefinancial statements and schedule.

We do not express an opinion or any other form ofassurance on Management’s Report on Internal Control Over Financial Reportingwith respect to the disclosures regarding the Remediation of the 2006 MaterialWeakness.

| /s/ GRANT THORNTON LLP |   |
|-----------------------------|--------|
| Chicago, Illinois           |   |
| September 10,  2007    |   |

 

**Item 9B.**               Other Information

None.

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**PART III**

**Item10.**              Directors, ExecutiveOfficers and Corporate Governance

Some of the information required in response to thisitem regarding our Directors is set forth in the section “Corporate Governance”,“Information Concerning Nominees for Director and Directors Continuing inOffice” and “Compliance with Section 16 of the Securities Exchange Act of1934” of our Definitive Proxy Statement for the Annual Meeting of Stockholdersto be held on November 15, 2007 and is incorporated herein by reference.

We maintain a Code of Conduct, which is applicable toall employees and directors, and is available on our website atwww.quixotecorp.com by clicking “Investor Info” and then “Corporate Governance”.Any amendment or waiver to the Code of Conduct that applies to our directors orexecutive officers will be posted on our website or in a report filed with theSEC on Form 8-K. The Code of Conduct is available free of charge inprint to any stockholder who requests a copy by writing to Joan R. Riley, VicePresident and General Counsel, at 35 East Wacker Drive, Suite 1100,Chicago Illinois 60601.

Theexecutive officers of the Company, their ages and offices held by each duringfiscal 2007 are as follows:

| Leslie J. Jezuit |   | 61 |   | Chairman &  Chief Executive Officer—Quixote Corporation                  |
|------------------|--------|----|--------|----------------------------------------------------------------------------------------|
| Daniel P. Gorey  |   | 56 |   | Chief Financial  Officer, Vice President & Treasurer—Quixote Corporation |
| Joan R. Riley    |   | 54 |   | Vice President, General Counsel &  Secretary—Quixote Corporation         |

 

Mr. Jezuit joined the Company as President and ChiefOperating 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 ExecutiveOfficer and in July 2001 was elected Chairman of the Board of Directors.

Mr. Gorey joined the Company as Manager of CorporateAccounting in July 1985. He was made Controller of the Company in 1987,elected Vice President in 1994, and was elected Chief Financial Officer andTreasurer in November 1996. In August 2001, Mr. Gorey waselected to the Board of Directors.

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

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

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

**Item 11.**                 ExecutiveCompensation

The information requiredin response to this item is set forth under the caption “Executive Compensation”of our Definitive Proxy Statement for the Annual Meeting of Stockholders to beheld on November 15, 2007 and is incorporated herein by reference.

**Item 12.**                 SecurityOwnership of Certain Beneficial Owners and Management and Related StockholderMatters

Some of the informationrequired in response to this item is set forth under the caption “StockOwnership of Certain Beneficial Owners” of our Definitive Proxy Statement for theAnnual Meeting of Stockholders to be held on November 15, 2007 and isincorporated herein by reference.

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**Equity CompensationPlan Information**

As of June 30, 2007, 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, 2007:

| ** **                                                  | ** ** | **(a)**                                            | ** ** | **(b)**                           | ** ** | **(c)**                                                  | ** ** |
|-------------------------------------------------------------|------------|----------------------------------------------------|------------|-----------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                                  | ** ** | **Number of securities**                 | ** ** | **Weighted-average**              | ** ** | **Number of securities remaining**        | ** ** |
| ** **                                                  | ** ** | **to be issued upon exercise** | ** ** | **exercise price of**   | ** ** | **for future issuance under equity** | ** ** |
| ** **                                                  | ** ** | **of outstanding options,**              | ** ** | **outstanding options,**     | ** ** | **plans (excluding securities**                | ** ** |
| **Plan Category**                                           | ** ** | ** **                                         | ** ** | **warrants and rights** | ** ** | **warrants and rights**                        | ** ** | **reflected in column (a))** | ** ** |
| Equity  compensation plans approved by security holders     |       |                                               | 859,203    |                              |       |                                                     | $          | 18.54 |   |   |   | 543,359 |   |   |
| Equity  compensation plans not approved by security holders |       |                                               | 0          |                              |       |                                                     | 0          |   |   |   | 0 |   |   |
|                                                        |       |                                               | 859,203    |                              |       |                                                     | $          | 18.54 |   |   |   | 543,359 |   |   |
|                                                             |            |                                                    |            |                                   |            |                                                          |            |  |  |  |  |  |  |  |  |  |

 

**Item13.**              CertainRelationships, Related Transactions and Director Independence

The information requiredin response to this item is set forth under the caption “Certain Transactionsand Business Relationships” and the subsections entitled “Director Independence”and “Related Person Transactions” under the caption “Corporate Governance” ofour Definitive Proxy Statement for the Annual Meeting of Stockholders to beheld on November 15, 2007 and is incorporated herein by reference.

**Item14.**                 PrincipalAccountant Fees and Services

The information required in response to this item isset forth under the caption “Audit and Other Fees Paid to Grant Thornton LLP”of our Definitive Proxy Statement for the Annual Meeting of Stockholders to beheld on November 15, 2007 and is incorporated herein by reference.

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**PART IV**

**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         |   |   |
|       |       | Consolidated Statements of Operations for the years  ended June 30, 2007, 2006 and 2005                |       |                         | 33         |   |   |
|       |       | Consolidated Balance Sheets as of June 30, 2007  and 2006                                              |       |                         | 34         |   |   |
|       |       | Consolidated Statements of Shareholders’ Equity for  the years ended June 30, 2007, 2006 and 2005 |       |                         | 35         |   |   |
|       |       | Consolidated Statements of Cash Flows for the years  ended June 30, 2007, 2006 and 2005                |       |                         | 36         |   |   |
|       |       | Notes to  Consolidated Financial Statements                                                                 |       |                         | 37-57      |   |   |
| (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 or agreement

| 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.                                                                                                                                                                                              |
|--------|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 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.                                   |

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| 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; First Amendment to Amended and Restated  Credit Agreement and Reaffirmation of Guaranties dated as of December 1,  2006 filed as Exhibit 10(a) to the Company’s Form 10-Q Report  for the quarter ended December 31, 2006, File No. 001-08123,  and incorporated herein by reference; Second Amendment to Amended and  Restated Credit Agreement and Reaffirmation of Guaranties dated as of  March 15, 2007 and Revolving Loan Note dated as of March 15, 2007  filed as Exhibit 10(a) to the Company’s Form 10-Q Report for  the quarter ended March 31, 2007, 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|   | (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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |

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|        | (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 as Exhibit 10(f) to the Company’s  Form 10-K Report for the fiscal year ended June 30, 2004,  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 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 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)  | 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, filed as Exhibit 2.2 to the  Company’s Form 8-K Report dated October 10, 1997, File  No. 001-08123, and incorporated herein by reference.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |

65

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|        | (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. and Cambridge Leasing Corporation 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. |
|   | (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 as Exhibit 10(p) to the Company’s Form 10-K  Report for the fiscal year ended June 30, 2006, File No. 001-08123,  and incorporated herein by reference.                                                                                                                                                                 |
| 21.    |   | Subsidiaries of the  Company                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 23.    |   | Consent of Grant  Thornton LLP as an Independent Registered Public Accounting Firm                                                                                                                                                                                                                                                                                                                                                                                                 |
| 31.    |   | Certifications of the  Chief Executive Officer and Chief Financial Officer under Section 302 of  the Sarbanes-Oxley Act of 2002, filed herewith.                                                                                                                                                                                                                                                                                                                              |
| 32.    |   | Certifications of the  Chief Executive Officer and Chief Financial Officer under Section 906 of  the Sarbanes-Oxley Act of 2002, filed herewith.                                                                                                                                                                                                                                                                                                                              |

 

Schedule:

II—Valuation and Qualifying Accounts and Reserves

66

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**SIGNATURES**

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

**QUIXOTECORPORATION(Registrant)**

| Dated:    September 10,  2007 | By:    | /s/ Leslie J. Jezuit                 |
|--------------------------------------------------------|--------|-------------------------------------------|
|                                                   |   | Leslie J. Jezuit, Chief Executive Officer |

 

Pursuantto the requirements of the Securities Exchange Act of 1934, this report hasbeen signed below by the following persons on behalf of the registrant and inthe capacities and on the dates indicated.

| SIGNATURE                                | ** ** | **TITLE**                                 | ** ** | **DATE**                |
|------------------------------------------|------------|-------------------------------------------|------------|-------------------------|
| /s/ Leslie J.  Jezuit               |       | Chairman and Director                     |       | September 10, 2007 |
| Leslie J. Jezuit                         |       | (President, Chief Executive Officer)      |       |                    |
| /s/ Daniel P.  Gorey                |       | Vice President, Chief  Financial Officer, |       | September 10, 2007 |
| Daniel P. Gorey                          |       | Treasurer and Director                    |       |                    |
| /s/ Joan R. Riley                   |       | Vice President, General  Counsel          |       | September 10, 2007 |
| Joan R. Riley                            |       | and Secretary                             |       |                    |
| /s/ James H.  DeVries               |       | Director                                  |       | September 10, 2007 |
| James H. DeVries                         |       |                                      |       |                    |
| /s/ Lawrence C.  McQuade            |       | Director                                  |       | September 10, 2007 |
| Lawrence C. McQuade                      |       |                                      |       |                    |
| /s/ Duane M. Tyler                  |       | Director                                  |       | September 10, 2007 |
| Duane M. Tyler                           |       |                                      |       |                    |
| /s/ Robert D. van  Roijen, Jr. |       | Director                                  |       | September 10, 2007 |
| Robert D. van Roijen, Jr.           |       |                                      |       |                    |

 

67

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**QUIXOTECORPORATION AND SUBSIDIARIESSCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS AND RESERVESFor the years ended June 30, 2007, 2006 and 2005**

| **ColumnA**                                     | ** ** | ** **            | ** ** | **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, 2007                  |       | $                     | 1,816,000  |                |       | $                 | 359,000    |                 |       |              | $          | (488,000 | ) |   | $ | 1,687,000 |   |
| 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 |   |
|                                                 |            |                       |            |                     |            |                   |            |                      |            |                   |            |  |  |  |  |  |  |  |  |  |  |

 

NOTE:

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

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**EXHIBITINDEX**

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

 

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