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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

For the transition period            to            

Commission file number 0-7903

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

Registrant's telephone number including area code: (312) 467-6755

Securities Registered Pursuant to Section 12(g) of the Act:

Common Stock ($.01²/3 Par Value)
(Title of Class)

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

        Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K (    ).

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

        State the aggregate market value 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 the average bid and asked prices of such common equity, as of the last business day of the registrant's most recently completed second fiscal quarter.

$209,371,234 as of December 31, 2003

        Indicate the number of share outstanding of each of the issuer's classes of common stock, as of the latest practicable date:

8,760,200 shares of the Company's Common Stock ($.01²/3 par value) were outstanding as of September 10, 2004.

DOCUMENTS INCORPORATED BY REFERENCE

        The Registrant's Definitive Proxy Statement for the Annual Meeting of Stockholders to be held on November 18, 2004 which will be filed with the Commission on or about October 7, 2004 is incorporated by reference at Part III.

TABLE OF CONTENTS

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PART I
THE COMPANY

Overview of the Company and Its Financial Condition

        Quixote Corporation was originally incorporated under the laws of the State of Delaware in 1969 as Energy Absorption Systems, Inc. In June 1980, Energy Absorption Systems, Inc. changed its name to Quixote Corporation. Unless otherwise indicated herein, the terms "Quixote" and the "Company" refer to Quixote Corporation and its subsidiaries.

        Quixote Corporation develops, manufactures and sells highway and transportation safety products to domestic and international markets. Quixote's operations are divided into two reportable segments: highway and transportation safety products that "Protect and Direct," which improve safety on the roads by minimizing the severity of crashes or by directing or guiding traffic to avoid crashes; and highway and transportation safety products that "Inform" motorists, pedestrians, state and local highway and bridge personnel about dangerous or congested conditions. The Company's products are sold by both a direct sales force and a distribution network to customers in the highway construction and safety business, state and municipal departments of transportation and other governmental transportation agencies.

        Quixote's business is directly affected by federal, state and municipal government funding for transportation safety, highway construction and maintenance, and other infrastructure projects. A significant part of Quixote's sales are ultimately financed by funds provided to the states by the federal government through the federal highway funding bill. The last six-year federal highway bill expired on September 30, 2003, and pending enactment of a new bill, has been extended several times. It currently is scheduled to expire September 24, 2004. The delayed passage of the new highway bill adversely affected Quixote's financial performance in fiscal year 2004. Quixote can not predict when a new highway bill will be enacted, but believes that the old highway funding bill will continue to be extended until a new law is enacted. Even if the new highway funding bill is enacted in late 2004, Quixote does not expect to realize the benefit of the bill until late fiscal 2005.

        In addition, most states have been suffering, and the Company anticipates will continue to suffer, from budget constraints given the national and local economies. Such budget constraints adversely affect the ability of the states to fund highway and infrastructure projects, and therefore reduce the demand for the Company's products. Municipalities also suffer from budget restraints that reduce transportation safety spending.

        In calendar year 2003, Quixote made two acquisitions in the intersection signal business, U.S. Traffic Corporation and Peek Traffic Corporation. The Company has been rationalizing the operations of those two businesses as well as several of its other Inform businesses since May 2003. Integration of the new businesses combined with the reduced demand for the Company's products given the government budgetary situation adversely affected Quixote's financial performance in the year ended June 30, 2004. In addition, the Company recorded impairment charges of $32.6 million for the year ended June 30, 2004 related to goodwill, intangible assets and other long-lived assets in the Inform Group.

        The Company historically meets its financial needs through a combination of cash flows generated from operations and borrowing from a group of banks pursuant to a multi-year credit agreement. Given the weakened financial performance of Quixote's operations during fiscal year 2004 and the need to borrow funds to acquire and rationalize the intersection businesses, the Company anticipated possible breaches of several of the covenants in its credit agreement as of June 30, 2004 and negotiated an amendment to its loan arrangements with its banks. The amended credit agreement modified several covenants and the Company collateralized the loans with interests in its assets including receivables, inventories, furniture and fixtures, intangibles and certain real estate.

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        Given the continuing delay in both passage of the highway funding bill and the economic turnaround, the Company predicted that it could be unable to satisfy certain covenants in its amended credit agreement as of September 30, 2004 and has therefore negotiated an additional amendment to the credit agreement. The amendment reduced the revolving loan commitment to $38 million, reset limits of EBITDA, net worth, and capital expenditures, and increased reporting requirements. The Company also has new requirements regarding EBIT of the Protect and Direct segment, cash dividends and required prepayments. Quixote also granted additional collateral in the form of two mortgages, stock pledges of all subsidiary guarantors, and a pledge of all intangible assets.

Item 1.    Business

        Quixote Corporation, through its subsidiaries, develops, manufactures and markets highway and transportation safety products to protect, direct and inform motorists and highway workers in both domestic and international markets. These products include energy-absorbing highway crash cushions, flexible post delineators, electronic wireless measuring and sensing devices, weather information systems and forecasting services, variable message signs, highway advisory radios, intelligent intersection control devices, automated enforcement systems, video detection equipment and other highway and transportation safety devices.

        As of June 30, 2004, Quixote Corporation and its subsidiaries employed approximately 1,300 people.

Description of Business

        The Company's operations are comprised of two reportable segments within the highway and transportation safety industry, concentrating on safety problems and designing products to provide solutions for the highways. The Company's two reportable segments are—the manufacture and sale of highway and transportation safety products which "Protect and Direct", and the manufacture and sale of products and services which "Inform" that are often referred to as Intelligent Transportation Systems (ITS) products. The Company's Protect and Direct segment provides solutions for improving safety on the roads either by minimizing the severity of crashes that occur or by preventing crashes from occurring by directing or guiding traffic. The Company's Inform segment provides solutions for improving traffic flow and safety on roads and runways by providing information. The Company's products are sold by both a direct sales force and a distribution network to customers in the highway construction and safety business, state and municipal departments of transportation and other governmental transportation agencies.

Protect and Direct Segment

        In the category of products which reduce the severity of crashes within the Protect and Direct segment, the Company's patented highway crash cushions were first conceived and developed in 1969 in response to the high number of fatalities and serious injuries suffered by occupants of errant vehicles in collisions with roadside hazards, such as bridge abutments, overpass piers, overhead sign supports, lane dividers, traffic islands and toll booths. Since that time, various types of highway crash cushions have been installed in front of thousands of life-threatening roadside hazards. The Federal Highway Administration (FHWA) endorses the installation of highway crash cushions as an effective safety program.

        The Company develops, manufactures and markets lines of patented highway crash cushion systems and other barriers which absorb and dissipate the force of impact in collisions between vehicles and fixed roadside objects or slow moving highway construction vehicles. The product lines utilize the principles of momentum transfer and kinetic energy to safely decelerate errant vehicles. Energy absorption or energy dissipation is accomplished by using different combinations of water, aluminum,

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steel, urethane foam systems, cardboard, plastic structures, elastometric cylinders and sand. The Company also manufactures and sells products that prevent crashes and help control the flow of traffic by directing or guiding. These products consist of a line of flexible sign and guide post systems (delineators) and a glare screen system. The guide posts are extruded from polyethylene and are used to delineate a travel way, channel vehicles or mark the location of an object. The post features a patented, in-ground anchor system that permits inexpensive repair and replacement techniques. The glare screen system, also made from polyethylene, is installed on top of median barriers to eliminate the distraction of lights from oncoming vehicles. The Company's products within the Protect and Direct segment also include a crashworthy barrier arm for use at areas such as railroad crossings and tollroads and as security for access ways, driveways and parking lots. In addition, the Company markets a FreezeFree™ anti-icing system which automatically or manually dispenses deicing liquids in advance of ice formation on bridges, roads and overpasses.

Inform Segment

        To expand the Company's business within the highway and transportation safety industry, in 1998 the Company began acquiring companies that manufacture ITS products which provide information to improve traffic flow and safety. These companies now comprise the Inform segment. Highway Information Systems, Inc. (HIS), acquired in April 1998, manufactures highway advisory radio systems that help control the flow of traffic by informing motorists of accidents and traffic delays. In December 1998, the Company acquired Nu-Metrics, Inc., which provides electronic wireless measuring and sensing devices that gather and use information to relieve traffic congestion. In January 2001, the Company acquired National Signal, Inc. With this acquisition, the Company acquired mobile variable message signs, directional displays and warning lights for the transportation industry. In August 2001, the Company acquired Surface Systems, Inc. This acquisition expands the Company's offering of pavement sensing equipment and specialized road and runway weather stations. The Company also gained both road condition and weather forecasting services. In May 2003, the Company acquired U.S. Traffic Corporation (UST). The UST business provided an extensive array of intelligent intersection control systems and other traffic control products. The Company acquired Peek Traffic Corporation (Peek Traffic) in December 2003. With this acquisition, the Company expanded its product line of intelligent intersection control systems and provided products for new markets within the transportation safety industry. Principal products of Peek Traffic include traffic signal systems, data collection systems, video detection systems, automated enforcement and parking detection devices.

        Specific products within the Company's Inform segment include devices which can be used to measure distance and perform repetitive spacing to within one inch per mile as well as portable or permanent sensors that record volume, speed, and length classification of vehicles. These sensors also collect, analyze and store traffic and road surface condition and freezing point data which can be relayed on a real-time basis to a transportation department's base computer or control center via telephone, cellular link, fiber optic connection or a wireless link. The Company also manufactures and markets road/runway traffic and weather information systems. Using a tower equipped with weather instruments and special detectors, these systems can detect freezing conditions and provide valuable weather and traffic data to transportation departments or airports in order to dispatch salt trucks or automatically activate anti-icing systems. The Company's products within the Inform segment also include traffic controllers, in-ground vehicle detectors, permanently-mounted and mobile variable message signs, directional displays, traffic and pedestrian signals, traffic uninterruptible power supply (UPS) systems, data collection devices, video detection equipment, automated enforcement systems, parking detection devices, illuminated transportation signage and tunnel lighting. Traffic controllers and detectors are devices that control traffic signal operations at intersections either with preset timers or with detectors that enable the signals to change in response to variations in traffic. Permanently-mounted and mobile variable message signs provide advance warning and directional information to oncoming drivers to assist in diverting and controlling traffic around areas of potential hazard. These

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LED signs and displays can be electronic, solar or diesel powered. UPS is a power supply system with battery backup that keeps a lighted intersection operating either normally or in flash-mode during a power interruption. Traffic and pedestrian signals are LED or incandescent signals for intersection operations and pedestrian crossings which may include countdown warnings before a signal changes. The Company also provides specialty lighting solutions for roadway and pedestrian tunnels, subways and other areas. Automated enforcement systems, such as red light enforcement and speed enforcement, involve cameras and detectors to detect possible traffic violations at intersections or the side of a road. A toll road monitoring system is a data collection system able to count axles of vehicles in order for the proper authorities to ensure the proper toll amount is collected. The Company is a leading manufacturer of highway advisory radio (HAR) systems that broadcast traffic information using an AM radio frequency. HAR systems, in conjunction with flashing lights and message signs, advise drivers to tune into a particular AM station to communicate messages about traffic, road conditions and weather with reception up to six miles from the unit.

        The Company also provides product education, selection and application assistance. The Company, in limited cases, performs site preparation and installation services for its products, but these services are typically performed by the Company's distributor/contractor network.

        Financial information relating to industry segments appears in Note 17 of the notes to Company's consolidated financial statements included herein.

Competition and Marketing

        The Company's products are sold in all 50 U.S. states and internationally. Domestically, the Company sells either through a distribution network or through a direct sales force. The distribution network consists of regional managers who supervise domestic distributors and make direct sales in areas not covered by distributors. The Company sells its products principally to distributors, contractors (on behalf of state and local governments), state departments of transportation, state agencies, local governments, municipalities, and airports. Although the federal government provides matching funds for the purchase of certain highway safety products made by state and local governmental agencies, the federal government is not a direct purchaser of the Company's domestic products. For certain products, the Company sells through catalogs and inside sales personnel.

        Many foreign governments are now beginning to recognize the need for crash cushions and the Company's other highway safety products as a method of reducing traffic congestion and fatalities. The Company's products are sold outside of the U.S through a network of distributors who make sales to municipal and national governments and contractors who are responding to bids from their respective governments.

        The Company experiences competition in many of its product lines. The Company believes it is a leading U.S. manufacturer of transportation safety products. Within the Protect and Direct segment, no other company presently markets as broad a line of highway crash cushion systems designed to shield as large a variety of fixed roadside hazards as the Company. However, many of the Company's competitors offer similar products to those supplied by the Company, and a few are better capitalized than the Company. The Company experiences competition particularly in the sand barrel, QuadGuard®, REACT 350® and TMA product lines. The Company competes in the U.S. market for crash cushions with Syro, Inc., a subsidiary of Trinity Industries, Inc., (NYSE TRN), with TrafFix Devices, Inc. and with other smaller regional companies. A number of other companies manufacture flexible sign and guide post systems. Within the Inform segment, the Company experiences rigorous competition in selling certain product lines because they are generally sold through a bidding process. These product lines may include the Company's road/runway traffic and weather information systems, permanently-mounted and mobile variable message signs, traffic and detection controllers, traffic and pedestrian signals and lighting products. There are several companies that manufacture and sell

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highway advisory radio systems. With respect to traffic counters and sensors, the Company competes with many different companies that sell sensors using different technologies, including microwave and infra-red sensors and machine-vision (video), and each technology offers certain advantages.

        Competition may have an adverse effect on the selling prices and profit margins of certain Company product lines, and depending on the product mix sold, can adversely affect the Company's financial results. The award of large contract orders by state departments of transportation and the timing of those awards also has an effect on the Company's sales and may affect the Company's results in any one particular fiscal period. The Company believes that it competes effectively through its own advanced product development, patent protection, quality and price, and the effectiveness of its strong distribution network.

Government Policies and Funding

        The domestic market for highway and transportation safety products is directly affected by federal, state and local governmental policies. A portion of the Company's sales is ultimately financed by funds provided to the states by the federal government. Historically, these funds have covered 75% to 90% of the cost of highway safety projects on roads constructed or maintained with federal assistance. The current six-year federal highway bill (TEA-21) expired on September 30, 2003, but has been extended. However, the timing of the passage of the new bill is uncertain. Until the new bill is approved, the transportation safety allotment in federal and state budgets will continue to be uncertain, and the Company believes this uncertainty will continue to negatively impact spending on the products and services offered by the Company. The Company believes that the passage of the new six-year reauthorization bill may occur by the end of calendar 2004. However, the Company does not anticipate realizing the benefit of the bill's passage until the later half of fiscal 2005. Any change or further delay in the availability of federal funds and the timing of the release of those funds to the state and local governments can have an adverse impact on the Company's financial results.

        The current and proposed federal legislation currently includes a guaranteed amount of funding for highway safety programs. These federal funds are currently based on gasoline tax revenues. Under TEA-21, the states must set aside 10% of the federal funds received each year for safety construction activities such as hazard elimination. Many of the Company's products are approved as acceptable highway hardware according to procedures in the National Cooperative Highway Research Program number 230 or 350 that provide various test levels depending on the application. This approval is gained after a formal submission to the FHWA that makes the products eligible for federal funds for certain highway projects. The Company is obligated to seek such approval for improvements or upgrades to such devices and for any new devices.

        In addition, the majority of states are currently operating under budget constraints, which adversely affects their ability to fund highway and infra-structure projects, and reduces the demand for the Company's products.

        Foreign government policies and funding vary by country for highway and transportation safety. In many cases, additional testing of the Company's products may be required in order to obtain certification.

Backlog

        As of June 30, 2004, 2003 and 2002, the Company had a backlog of unfilled orders for highway safety devices of $26,921,000, $28,364,000 and $12,667,000, respectively. The backlog as of June 30, 2004 included $6,841,000 related to the Peek Traffic acquisition. The Company can usually fill an order within two days to 8 weeks of receipt depending on the type of product.

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Research and Development; Patents

        Many of the Company's products have patented features and the Company conducts its own research, development and testing of new products before introducing them to the marketplace. The expenditures for research and development activities were $3,605,000, $2,356,000 and $2,468,000 for the fiscal years 2004, 2003 and 2002, respectively. The Company maintains its own crash test facility in California.

        The Company develops new products by working with federal, state and local highway officials to determine highway traffic safety needs, and then designs products to satisfy those needs. The Company is also active in promoting cooperation among state highway agencies, contractors and engineers to encourage comprehensive repair and maintenance of roadside crash attenuating systems. In addition to developing new products within the impact technology area, the Company is seeking to develop or to acquire new products which can be sold through its existing distribution networks to its existing customers.

        The Company owns a number of U.S. and foreign patents covering its major products. It actively seeks patent and trademark protection for new developments.

Raw Materials

        The principal raw materials used in the production of highway safety devices are plastic and plastic resins, steel, aluminum and electronic components. These raw materials are purchased from various suppliers and have been readily available throughout the last year. The Company believes that adequate supplies of these materials will continue to be available.

        The Company has been affected by increased prices for certain commodities, particularly steel and resin, which can be a significant component of the cost of certain of the Company's products. The Company attempts to reduce the negative impact of increasing prices by entering into certain fixed price arrangements. However, increased commodity prices negatively impact the Company's gross margin for certain products.

Major Customers

        No single customer of the Company represents a significant portion of total revenues. However, approximately 10% and 14% of the Company's consolidated revenues resulted from sales to customers in the states of Texas and California, respectively, in fiscal 2004. Customers are typically distributors, contractors, departments of transportation, state agencies, local governments or municipalities, so a change in policy in state spending could materially affect the Company's sales in that state.

Seasonality

        The Company's sales are seasonal. The domestic highway maintenance and construction season tends to reach its peak in the Company's fourth fiscal quarter.

Foreign and Domestic Operations and Revenues

        The Company's business is conducted principally in the United States, with sales outside of the United States as follows: $14,249,000, $13,545,000 and $8,596,000 in 2004, 2003 and 2002 respectively.

        Excluding its manufacturing facility in Tecate, Mexico (See Properties at page 9),the Company's assets outside of the United States are not material. The Company's long-lived assets used in the leased Tecate facility are recorded on the Company's books and records at approximately $100,000.

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Discontinued Operations

        In fiscal years 1996 and 1997, the Company sold substantially all of the assets and transferred significant operating liabilities of Disc Manufacturing, Inc. and its legal technologies businesses. During the year ended June 30, 2002, the Company recorded a gain of $927,000, or $0.11 per diluted share, which was net of income tax provisions of $521,000, due to the adjustment of certain accruals related to contingencies which the Company no longer believed were probable and from the favorable outcome of a legal settlement.

Available Information

        The Company files 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 those reports, with the Securities and Exchange Commission (SEC). The public may read and copy any materials filed by the Company with the SEC at the SEC's Public Reference Room at 450 Fifth Street N. W., Washington D. C. Information about the operation of the SEC Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. The SEC maintains an internet website at http://www.sec.gov that contains access to filings of issuers that file electronically with the SEC. The Company also maintains an internet website at http://www.quixotecorp.com that contains access to its public filings and other information regarding the Company. The Company makes its public filings available as soon as reasonably practicable after such material is filed, or furnished, to the SEC. A copy of the Company's filings will also be furnished free of charge upon request of the Company.

Item 2.    Properties

        Information relating to the Company's principal facilities is as follows:

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The Company believes that its principal plants are suitable and adequate for the manufacturing and other activities performed at those plants. In addition to the principal facilities listed above, the Company has other small facilities, including international locations, used primarily for sales activities.

Item 3.    Legal Proceedings

1.

BEDLINGER V. THE MILLS CORPORATION, GAYLORD ENTERTAINMENT AND SAFE-HIT CORPORATION, State of Tennessee Circuit Court of Davidson County, No. 02C2832. In October 2002, Energy Absorption Systems, Inc. was served in this matter. The Complaint alleges that plaintiff was injured when she tripped over a surface mount twist-lock and post in a parking lot and seeks judgment for $1,000,000 in damages. The case has been tendered to the Company's insurance carrier and discovery is proceeding.

2.

GEORGIA ELECTRIC COMPANY V. U.S. TRAFFIC CORPORATION N/K/A MYERS AMERICA, INC., DISPLAY SOLUTIONS, INC. QUIXOTE CORPORATION, AND U.S. TRAFFIC CORPORATION F/K/A GREEN LIGHT ACQUISITION CORPORATION, U.S. District Court, Northern District of Georgia, Case No. 1:03-CV-2816-RWS. This matter was settled in August 2004 on terms mutually satisfactory to the parties. Terms of the settlement were not disclosed.

        The Company is involved in other legal proceedings and claims arising out of the conduct of its business. The Company believes, after consultation with counsel, that the outcome of such proceedings and claims will not have a material adverse effect on the Company's consolidated financial condition or results of operations.

Item 4.    Submission of Matters to a Vote of Security Holders

        There were no matters submitted to a vote of security holders during the fourth quarter of fiscal 2004.

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PART II

Item 5.    Market for the Registrant's Common Equity and Related Stockholder Matters

        The Company's common stock is quoted on The Nasdaq Stock Market®, under the symbol QUIX. Set forth are the daily high and low sales prices for the Company's common stock for the periods indicated, as reported by the Nasdaq.

        The current quoted price of the stock is listed daily in The Wall Street Journal in the Nasdaq National Market System section. As of August 23, 2004, there were 1,129 shareholders of record.

Dividend Policy

        During 2004, the Company declared two semi-annual cash dividends of seventeen cents per share. During 2003, the Company declared semi-annual cash dividends of sixteen cents per share and seventeen cents per share.

Equity Compensation Plan Information

        As of June 30, 2004, the Company has two outstanding stock option plans which were approved by the shareholders of the Company in November 2001. Additional information relating to the Company's stock option plans appears in Note 9 to the Company's consolidated financial statements included herein.

        The following table details information regarding the Company's equity compensation plans as of June 30, 2004:

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Item 6.    Selected Financial Data

(1)

Includes non-cash asset impairment charges of $32,600.

(2)

Includes non-cash asset impairment charges of $21,266, net of income tax benefits, and an income tax benefit of $1,249 related to the favorable settlement of a tax audit.

(3)

Includes non-cash asset impairment charges of $2.48 per diluted share and $0.14 per diluted share related to the favorable settlement of a tax audit.

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Item 7.    Management's Discussion and Analysis of Financial Condition and Results of Operations

OVERVIEW

        Quixote Corporation (the Company) and its subsidiaries develop, manufacture and market highway and transportation safety products to protect, direct and inform motorists, pedestrians and road workers in both domestic and international markets. The Company's operations are comprised of two reportable segments within the highway and transportation safety industry, concentrating on safety problems and designing products to provide transportation safety solutions. The Company's two reportable segments are—the manufacture and sale of highway and transportation safety products which "Protect and Direct", and the manufacture and sale of products and services which "Inform" that are often referred to as Intelligent Transportation Systems (ITS) products. The Company's Protect and Direct segment provides solutions for improving safety on the roads either by minimizing the severity of crashes that occur or by preventing crashes from occurring by directing or guiding traffic. The primary product lines within the Protect and Direct segment include energy-absorbing products such as crash cushions, truck-mounted attenuators, sand-filled barrels and water-filled barriers, and directing and guiding products such as flexible post delineators and glare screen systems. The Company's Inform segment provides solutions for improving traffic flow and safety on roads and runways by providing information. The primary product lines within the Inform segment include intelligent intersection control systems, automated enforcement systems, video detection systems, mobile and permanent variable message signs, advanced sensing products which measure distance, count and classify vehicles, and sense weather conditions, computerized highway advisory radio transmitting systems, automated red light enforcement systems, and other transportation equipment.

        The Company's products are sold by both a direct sales force and a distribution network to customers in the highway construction and safety business, state departments of transportation, county and local governments and other governmental transportation agencies. The domestic market for highway and transportation safety products is directly affected by federal, state and local governmental policies. A portion of the Company's sales is ultimately financed by funds provided to the states by the federal government. Historically, these funds have covered 75% to 90% of the cost of highway safety projects on roads constructed or maintained with federal assistance. The Company's business is seasonal with a higher level of sales and earnings in the Company's fourth fiscal quarter.

RESULTS OF OPERATIONS

        The results for 2004 were below the Company's expectations, largely as a result of the prolonged delay in the passage of new federal highway funding legislation and state budgetary constraints. Please refer to FUTURE OUTLOOK for further information. In addition, sales volumes at U.S. Traffic Corporation (UST), acquired in May 2003, were significantly lower than expected, which resulted in operating losses, during the second half of 2004. The Company believes this is due in part to the absence of new large contracts related to ongoing state and municipal budgetary issues. The Company is continuing to identify and implement solutions that may improve the performance of UST. This includes integrating the acquisitions of UST and Peek Traffic, acquired in December 2003. During fiscal 2004, the Company integrated the sales, marketing and distribution operations of Peek Traffic and UST under one name, Quixote Traffic Corporation, with both companies operating under a combined management team. See FUTURE OUTLOOK for further information.

        As a result of a review in the fourth quarter of fiscal 2004, the Company determined that the carrying amounts of certain long-lived assets were no longer recoverable based on estimated future operating cash flows to be generated by those assets. The Company recorded non-cash asset impairment charges in the Inform segment of $32,600,000, which was $21,266,000, net of income tax benefits, or $2.48 per diluted share.

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        The following table sets forth selected key operating statistics relating to the Company's financial results:

(1)

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

Revenues

        The Company's net sales for fiscal 2004 increased $35,980,000, or 31%, to $150,290,000 from $114,310,000 for fiscal 2003. This was primarily due to the acquisitions of UST in May 2003 and Peek Traffic in December 2003, which contributed $50,753,000 of net sales in fiscal 2004. Excluding these acquisitions, net sales decreased by $8,795,000, or 8%, due to decreases in sales across both its Protect and Direct and Inform segments in fiscal 2004.

        The Company's net sales for fiscal 2003 increased 27% to $114,310,000 from $89,694,000 for 2002 due to organic sales growth for both segments as well as sales growth from the acquisition of UST. Excluding acquisitions, sales for 2003 increased 20% as sales for 2002 were unusually low as the Company believes it was affected by both generally weak economic conditions and state budgetary positions.

        Protect and Direct—Net sales for the Company's Protect and Direct segment for fiscal 2004 decreased 5% to $73,282,000 from $77,243,000 for fiscal 2003. The Company believes the decrease in sales is due to state budgetary constraints and transportation funding uncertainties caused by the delay in the passage of the new federal highway funding bill. Decreased sales of permanent crash cushions, truck-mounted attenuator (TMA) products, and barrels were partially offset by increased sales of parts. Sales of permanent crash cushions decreased 9%, sales of TMA products decreased 17%, and sales of parts increased 17%.

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        Sales for the Protect and Direct segment for fiscal 2003 increased 15% to $77,243,000 from $67,225,000 for fiscal 2002. Sales increased across the Company's Protect and Direct product lines with the exception of sales of parts, sand-filled barrels and the FreezeFree™ anti-icing system. Sales of TMA products increased 66% and sales of permanent crash cushions increased 19%.

        Inform—Net sales for the Company's Inform segment for fiscal 2004 increased $39,941,000 to $77,008,000 from $37,067,000 for fiscal 2003. This was primarily due to the acquisitions of UST and Peek Traffic, which added $50,753,000 in net sales for 2004. Excluding the two recent acquisitions, net sales for the Inform segment decreased $4,834,000, or 16%, due to lower sales of advanced sensing equipment and weather systems. Sales for fiscal 2003 included two particularly large contracts totaling $4,048,000 for weather and traffic sensing stations to Ohio and variable message signs to California. UST has been affected by ongoing state and municipal budgetary issues, which has resulted in depressed order flows and sales levels significantly lower than planned.

        Sales for the Inform segment for fiscal 2003 increased 65% to $37,067,000 from $22,469,000 for fiscal 2002 primarily due to the acquisition of UST in May 2003 and Surface Systems, Inc. (SSI) in August 2001. These two acquisitions added $6,891,000 in sales for fiscal 2003 not comparable to the prior year. Excluding these acquisitions, sales for this segment increased 34% due to higher sales across the Company's Inform product lines. The growth in sales of advanced sensing systems and variable message signs was due to shipments of two large contracts, including $2,800,000 in Ohio to supply weather and traffic sensing systems and $1,248,000 in variable message signs and arrowboards in California.

        Geographic—International sales for fiscal 2004 increased by $704,000, or 5%, to $14,249,000 compared to $13,545,000 for last year. The acquisitions of UST and Peek Traffic contributed $1,194,000 in international net sales for fiscal 2004. Domestic sales for fiscal 2004 increased 35% to $136,041,000 from $100,765,000. The acquisitions of UST and Peek Traffic contributed $49,558,000 in domestic net sales in fiscal 2004 offset by decreased domestic sales, excluding acquisitions, for both segments.

        For fiscal 2003, the Company's increase in sales was helped by strong international sales which increased $4,949,000 or 58% to $13,545,000 in 2003 compared to $8,596,000 for 2002. Of the increase, $1,193,000 was due to an increase in sales of the Triton Barrier® product in Australia related to new legislation passed in Australia requiring positive protection for all highway work zones. Domestic sales increased 24% in fiscal 2003 due principally to the acquisition of UST. Excluding acquisitions, domestic sales for 2003 increased 16% over the prior year due to the sales increases across both segments mentioned earlier.

Gross Profit Margin

        The Company's gross profit margin for fiscal 2004 was 31.5% compared to 40.5% for fiscal 2003 due principally to lower gross profit margins at UST and Peek Traffic. The gross profit margin for the Protect and Direct segment decreased somewhat due to volume inefficiencies associated with the lower level of sales offset by a positive change in product sales mix with decreased sales of the lower margin TMA product line. The gross profit margin for the Inform segment decreased primarily due to low gross profit margins at UST and Peek Traffic as those gross profit margins are less than the segment's historical gross profit margin. In addition, the gross profit margin at UST was lower than planned due to decreased sales volumes. Excluding UST and Peek Traffic results, the gross profit margin for the Inform segment was slightly lower than fiscal 2003 primarily due to volume inefficiencies associated with the lower level of sales.

        The gross profit margin for fiscal 2003 was 40.5% compared to 40.1% for 2002. The modest increase in gross profit margin was due to an increase in gross profit margin for the Protect and Direct segment partially offset by a decrease in the gross profit margin for the Inform segment. The increase in the gross profit margin for the Protect and Direct segment was due to volume efficiencies associated with the higher level of sales offset by an adverse change in product sales mix with higher sales of the

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lower margin TMA product line. The decrease in the gross profit margin for the Inform segment was primarily due to an adverse change in product sales mix with increased sales of lower margin large contract shipments. Also contributing to the decline in gross profit margin for the Inform segment was the impact of the acquisitions of UST and SSI as those gross profit margins are lower than the segment's historical gross profit margin.

Selling and Administrative Expenses

        Selling and Administrative expenses increased $7,970,000, or 28%, to $36,700,000 from $28,730,000 for fiscal 2003 due to the inclusion of UST and Peek Traffic which added $8,689,000 for fiscal 2004, not comparable to fiscal 2003. Excluding UST and Peek Traffic results, selling and administrative expenses decreased 3% in fiscal 2004 primarily related to decreased selling expenses due to lower sales volume in the Protect and Direct and Inform segments. Selling and administrative expenses decreased as a percentage of sales to 24.4% for fiscal 2004 compared to 25.1% for 2003 as UST and Peek Traffic have lower selling and administrative expenses as a percentage of sales than the Company's historical percentage.

        Selling and administrative expenses for 2003 increased 20%, or $4,755,000, to $28,730,000 from $23,975,000 for 2002. The increase was due to the increase in sales and to the inclusion of selling and administrative expenses from UST and SSI which added approximately $1,452,000 in expenses for 2003. Selling and administrative expenses decreased as a percentage of sales to 25.1% of sales for 2003 from 26.7% of sales for 2002. This decrease in the percentage of sales was due to the fixed component of many of the Company's expenses. Also contributing to the decrease in percentage was the acquisition of UST with lower selling and administrative expenses as a percentage of sales than the Company's historical percentage.

Asset Impairment Charges

        The prolonged delay in the passage of new federal highway funding legislation as well as ongoing state and municipal budget issues have had a significant negative impact on the Company as a whole. In addition, UST operating results have been much lower than expected, although the Company is currently pursuing the integration of UST and Peek Traffic in order to improve profitability. As a result of these factors and the Company's impairment review in the fourth quarter of fiscal 2004, the Company determined that the carrying amounts of certain long-lived assets were no longer recoverable based on estimated future operating cash flows to be generated by those assets, which were lower than previously projected. The Company recorded asset impairment charges in the Inform segment of $32,600,000, or $21,266,000, net of income tax benefits, or $2.48 per diluted share. The charges included $26,009,000 for goodwill relating to UST, SSI and Nu-Metrics, $4,182,000 for intangible assets and $2,409,000 for fixed assets.

Research and Development

        Research and development expenditures were $3,605,000 for fiscal 2004 compared to $2,356,000 for fiscal 2003. The increase of $1,249,000 was due primarily to the inclusion of research and development expenditures for UST and Peek Traffic. The Company continued to invest in development projects for new applications as well as upgrades and modifications to existing products.

        Research and development expenditures were $2,356,000 for 2003 compared to $2,468,000 for 2002. The expenditures in 2003 included enhancements to the Company's existing line of FreezeFree® anti-icing systems, TMA products and the Triton Barrier® product. The Company also successfully tested its QuadGuard® CEN family of crash cushions under European standards at speeds of 80, 100 and 110 km/h and at all hazard widths.

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Operating Profit

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

        Operating profit increased 60% to $15,154,000 in 2003 from $9,489,000 for 2002. Operating profit for the Protect and Direct segment increased $4,091,000 to $18,846,000 for fiscal 2003 from $14,755,000 for fiscal 2002. Operating profit for the Inform segment increased $2,784,000 to $3,151,000 for fiscal 2003 from $367,000 for fiscal 2002.

Interest Expense

        Interest expense for fiscal 2004 increased to $2,144,000 from $906,000 last year. The increase was due to the higher level of average long-term debt since the acquisitions of UST in May 2003 and Peek Traffic in December 2003. The interest rate on the Company's collateralized credit agreement is based on prime or LIBOR and a fixed rate, plus a margin. The weighted average rate was 3.7% as of June 30, 2004 compared to a weighted average rate of 2.8% as of June 30, 2003. The Company expects interest rates to increase during fiscal 2005 to an estimated average rate of 6%.

        Interest expense was $906,000 for 2003 compared to $1,184,000 for 2002. Interest expense decreased due to the lower average level of long-term debt outstanding and to lower interest rates for 2003.

Other Expense

        The Company recorded a loss on disposal of fixed assets of $212,000 in fiscal 2004 in connection with the relocation of the Company's Chicago office.

Provision for Income Taxes

        The income tax benefit for fiscal 2004 was $10,901,000. This includes $11,334,000 relating to the asset impairment charges recorded in the fourth quarter and a $1,249,000 income tax tax benefit related to the favorable settlement of a tax audit recorded during the third quarter. Excluding the impact of these benefits, income taxes reflect a 36% effective tax rate. The Company expects to provide for income taxes at a rate of 38% for fiscal 2005, primarily due to higher state taxes.

        The Company's effective income tax rate for 2003 was 34% compared to an effective income tax rate of 36% for 2002. The decrease in the effective rate was due in part to the continued expected utilization of certain tax planning strategies.

Net Earnings (Loss)

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

        Earnings from continuing operations for 2003 were $9,472,000, or $1.17 per diluted share, compared to $5,897,000, or $0.73 per diluted share, for 2002. Net earnings were $9,472,000, or $1.17 per diluted share, for the year compared to $6,824,000, or $0.84 per diluted share, for 2002. Net earnings for 2002 included a gain from discontinued operations of $927,000, or $0.11 per diluted share, which was net of income tax provisions of $521,000.

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FINANCIAL CONDITION

Liquidity and Capital Resources

        The Company's principal sources of funds historically have been cash flows from operations and borrowings from banks. The Company had cash and cash equivalents of $2,389,000 as of June 30, 2004 and access to additional funds under a bank credit agreement which currently expires as of May 16, 2006. The Company believes that this credit agreement is an important source of liquidity. The credit agreement provides for a $38 million revolving credit facility and a term loan agreement with $17 million outstanding at June 30, 2004. Principal on the term loan is payable quarterly in installments of $750,000, plus interest. The agreement contains both fixed and floating interest rate options, at the prime rate or LIBOR rate, plus a margin. The credit agreement also contains affirmative and negative covenants including requirements that the Company meet certain consolidated financial criteria, including minimum levels of consolidated net worth, EBITDA (as defined in the agreement) and capital expenditures. Dividend payments are limited by a maximum amount outstanding against the revolving credit facility of $33 million, minus the amount of such dividend payment. The covenants also limit the incurrence of additional indebtedness, acquisitions, liens and encumbrances and other matters customarily restricted in such agreements. The agreement may be renewed one additional year on each anniversary date upon mutual consent of the Company and the banks.

        Effective June 30, 2004 and during September 2004, the Company entered into two amendments to the credit agreement, modifying certain covenants, pledging the Company's assets as collateral and reducing the maximum amount of availability under the revolving credit facility to $38 million to avoid the occurrence of events of default relating to certain covenants and financial ratios. The Company is currently in compliance with its debt covenants as of June 30, 2004. However, the Company's ability to remain in compliance in the future is dependent upon the Company's future performance and may be affected in part by events beyond its control, including the prolonged delay in the passage of new federal highway legislation. While the Company currently expects to be in compliance with the current agreement as amended, there can be no assurance that the Company will generate sufficient earnings and cash flow to remain in compliance or that it will be able to obtain future amendments to the agreement, if necessary, to avoid a default. In the event of a default, the lenders could elect to declare all amounts borrowed under the agreement, $44 million as of June 30, 2004, to be due and currently payable and the Company would negotiate a new credit agreement. However, there can be no assurance that the Company would be able to obtain a new credit agreement with satisfactory terms and conditions within an acceptable time period.

        The Company's outstanding borrowings were $50,407,000, or 44% of total capitalization, as of June 30, 2004, of which $44,000,000 was outstanding related to the bank credit facility. This compares to $43,817,000, or 37% of total capitalization, as of June 30, 2003. The increase primarily relates to the acquisition of Peek Traffic in December 2003 for which the Company borrowed $11,000,000 against the revolving credit facility.

Cash Flows

        Cash flows provided by operations were $8,676,000 during fiscal 2004. This compares with $16,156,000 in fiscal 2003 and $12,670,000 in fiscal 2002. In each of the past three years, cash flow from operations was primarily derived from earnings before non-cash expenses such as depreciation, amortization and asset impairment charges. The decrease in cash generated from operating activities in fiscal 2004 reflects increased working capital, in particular, an investment in working capital at UST through the payment of accounts payable and accrued expenses in the first few months after the acquisition in May 2003. However, working capital decreased through reductions in accounts receivable and inventory in fiscal 2004 due to the decreased level of sales.

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        Investing activities used cash of $15,943,000 during fiscal 2004, compared to $22,660,000 in fiscal 2003 and $18,230,000 in fiscal 2002. Expenditures during fiscal 2004 included $11,263,000 for the purchase of Peek Traffic in December 2003 and $4,638,000 for capital expenditures.

        Financing activities provided cash of $5,910,000 during fiscal 2004, compared to $8,422,000 in fiscal 2003 and $3,196,000 in fiscal 2002. The majority of the cash provided through financing activities in all three years was used to acquire businesses. During fiscal 2004, the Company borrowed a net $10,500,000 against its outstanding revolving credit facility primarily for the acquisition of Peek Traffic. The Company also paid $3,000,000 in quarterly payments on the term loan due in connection with the acquisition of UST and $910,000 on other notes payable. The Company received cash of $2,147,000 from the exercise of common stock options. The payment of the Company's semi-annual cash dividend used cash of $2,827,000. The Company has paid a semi-annual dividend since 1993 and plans to continue to do so. However, payment of the semi-annual dividend is subject to limitations in the Company's credit agreement.

        For 2005, the Company anticipates needing $3,500,000 in cash for capital expenditures. The Company may also need additional cash as it considers acquiring businesses that complement its existing operations. Also, the Company may require additional investments in working capital to maintain growth. The Company may also need additional funds to repurchase its own common stock from time to time. These expenditures will be financed either through the Company's cash on-hand, cash generated from its operations or from borrowings available under the Company's bank credit facility. The Company believes its existing cash, cash generated from operations and funds available under its existing credit facility are sufficient for all planned operating and capital requirements in the near term. If needed and available on favorable terms, the Company may also enter into other debt or equity financing arrangements.

OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS

        The Company is subject to certain debt obligations, guarantees, commitments and contingent liabilities further described in the notes to the consolidated financial statements. The following table presents the Company's contractual obligations to make future payments under contracts, such as debt and lease agreements, as of June 30, 2004:

FUTURE OUTLOOK

        The Company has been affected by the general slowdown in U.S. highway safety construction spending for the Company's products. The Company believes this is due principally to the prolonged delay in the passage of new federal highway legislation as well as revenue shortfalls and budget constraints at the state level. The previous highway funding bill, TEA-21, expired in September 2003, but has been extended several times. The timing of the passage of the new highway legislation is uncertain. Until new legislation is passed, the transportation safety allotment in federal and state budgets will continue to be uncertain, and the Company believes this uncertainty will continue to negatively impact spending on the products and services offered by the Company. The Company believes that the passage of the new six-year reauthorization bill may occur by the end of calendar 2004, however, the Company does not anticipate realizing the benefit of the bill's passage until the later half of fiscal 2005.

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        The substandard sales volumes and operating losses at UST are expected to continue into the first half of fiscal 2005. The Company is developing a plan to rationalize portions of the UST and Peek Traffic operations which will include integrating product offerings, outsourcing non-critical component parts and focusing manufacturing facilities to obtain greater synergies. Although the Company is currently refining estimates related to the plan, the total projected annual savings could be several million dollars with costs estimated at approximately one million dollars. The full benefit of projected annual cost savings is not expected to be realized until fiscal 2006.

        The Company experiences fluctuation in its gross profit margin from quarter to quarter primarily due to sales volume related to seasonality, variability in product mix and changes in the competitive environment. In addition, the Company has acquired complementary businesses over the past several years and, as part of its strategy, may continue to acquire complementary businesses. The gross profit margins of certain acquired product lines are lower than the Company's historical gross profit margin, which is adversely affecting the Company's gross profit margin. The Company is also experiencing rigorous competition in its variable message sign and weather sensing system product lines. The Company does not believe these trends will improve in the near future.

SIGNIFICANT ACCOUNTING POLICIES AND CRITICAL ESTIMATES

        The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements. Management's estimates also affect the reported amounts of revenues and expenses during the reporting period. In addition, certain normal and recurring estimates are made including estimates in determining the allowance for doubtful accounts receivable, inventory valuation reserves, valuation allowance on deferred tax assets and health care liabilities. These estimates are made using management's best judgment given relevant factors and available data. Actual results could differ materially from those estimates. Note 2 to the Company's June 30, 2004 consolidated financial statements includes a summary of the significant accounting policies, methods and estimates used in the preparation of the Company's consolidated financial statements. There have been no material changes in accounting policies, methods and estimates used by management. In the opinion of management, the Company does not have any individual accounting policy or use any individual estimate that is critical to the preparation of its consolidated financial statements. In most instances, the Company must use an accounting policy or method because it is the only policy or method permitted under U.S. GAAP. The Company believes the following significant accounting policies and methods used by the Company are the most important to the presentation of the Company's financial statements:

        Revenue Recognition:    Revenues, net of sales incentives, are recognized when either services have been rendered or both title and risk of loss of products have been transferred to unaffiliated customers. Additionally, the Company ensures that collection of the resulting receivable is probable, persuasive evidence that an arrangement exists, and the revenue is fixed or determinable. Provision for estimated uncollectible amounts is made based upon management's analysis of sales returns and bad debts.

        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. Standard costs, which approximate actual costs, are used to value finished goods and work-in-process. Standard costs include raw materials, direct labor and manufacturing overhead. Provision for potentially obsolete or slow-moving inventory is made based on management's analysis of inventory levels, ages and salability.

        Long-Lived Assets:    Long-lived assets include such items as goodwill, patents, product rights, other intangible assets and property, plant and equipment. For purposes of evaluating the recoverability of long-lived assets, the Company assesses the possibility of obsolescence, demand, new technology,

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competition, and other pertinent economic factors and trends that may have an impact on the value or remaining lives of these assets.

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

        Goodwill and other indefinite-lived intangible assets are tested for impairment at least annually. The indefinite-lived intangible asset impairment test is performed by comparing the fair value of the intangible asset to its carrying value in a one-step analysis. If the fair value of the intangible asset is less than 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 a two-step analysis. First, the fair value of the reporting unit is compared to its book value. If the fair value of the reporting unit is less than its book value, the Company performs a hypothetical purchase price allocation based on the reporting unit's fair value to determine the implied fair value of the reporting unit's goodwill. If the implied fair value of the goodwill is less than its carrying value, the goodwill is written-down to its implied fair value. Fair values are determined with the help of a third party appraisal firm using present value techniques.

        As discussed further in Note 7 to the Company's June 30, 2004 consolidated financial statements, the Company performed an impairment review during the fourth quarter of fiscal 2004. As a result, the Company recorded non-cash asset impairment charges of $32,600,000 relating to goodwill, other indefinite-lived intangible assets and amortized long-lived assets of the Inform segment. The impairment review is highly judgmental and involves the use of significant estimates and assumptions. These estimates and assumptions have a significant impact on the amount of any impairment charge recorded. Estimates of fair value are primarily determined using discounted cash flow methods and are dependent upon assumptions of future sales trends, market conditions and cash flows of each reporting unit over several years. Actual cash flows in the future may differ significantly from those previously forecasted. Other significant assumptions include growth rates and the discount rate applicable to future cash flows. The impact of these estimates and assumptions on impairment testing of goodwill is particularly critical for the Company's Inform segment with $21,364,000 of the Company's $29,503,000 of goodwill recorded in the Company's June 30, 2004 balance sheet.

        Income Taxes:    The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. In assessing the realizability of the deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. To the extent that any future tax benefits are not expected to be fully realized, such future tax benefits are reduced by a valuation allowance. Realization of deferred tax assets assumes that the Company will be able to generate sufficient taxable income so that the assets will be realized. The factors that the Company considers in assessing the likelihood of realization include the forecast of future taxable income and available tax planning strategies that could be implemented to realize the deferred tax assets. The Company expects the deferred tax assets currently recorded to be fully realizable, however there can be no assurance that an increased valuation allowance would not need to be recorded in the future.

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FORWARD LOOKING STATEMENTS

        Various statements made within the Management's Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in this report constitute "forward-looking statements" for purposes of the SEC's "safe harbor" provisions under the Private Securities Litigation Reform Act of 1995 and Rule 3b-6 under the Securities Exchange Act of 1934, as amended. Any statement that addresses expectations or projections about the future, including statements about the Company's strategy for growth, product development, market position, expenditures, financial results or changes in governmental legislation, policies and conditions, is a forward-looking statement.

        Investors are cautioned that all forward-looking statements involve risks and uncertainties, including those detailed in the Company's public filings with the SEC, news releases and other communications, which speak only as of the dates of those filings or communications. The Company does not undertake any obligation to release publicly any revisions to these forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. There can be no assurance that actual results will not differ materially from the Company's expectations. Factors which could cause materially different results include, among others, uncertainties related to continued federal, state and municipal funding for highways and risks related to reductions in government expenditures; the successful completion, integration and rationalization of acquisitions; the ability to generate sufficient future cash flows to be in compliance with financing agreements; the introduction and acceptance of the Company's products and services; an unfavorable change in product sales mix; seasonality along with the extent and timing of the award of large contracts; the cyclical nature of the Company's governmental markets; competitive and pricing pressures; increasing raw material costs; excess manufacturing capacity; weather conditions; acts of war and terrorist activities; the possible impairment of goodwill and other intangible assets; and general economic conditions.

Item 7A.    Quantitative and Qualitative Disclosures about Market Risk

        The Company is exposed to market risk from fluctuations in interest rates. The Company manages its exposure to interest rate fluctuations through the use of derivative instruments in the form of non-trading interest rate swaps. The objective of the swap is to fix the interest rate on certain variable rate debt to stabilize interest rates and to more effectively balance the Company's long-term borrowing costs and interest rate risk. During July 2003, the Company entered into an interest rate swap agreement to set a fixed interest rate relating to $20 million of its outstanding debt at variable interest rates. As described in Note 8 to the consolidated financial statements, the amount of long-term debt outstanding as of June 30, 2004 and 2003 was $47,014,000 and $39,789,000, respectively. A hypothetical 1% increase in interest rates would have adversely affected the Company's 2004 and 2003 net earnings and cash flows by approximately $249,000 and $147,000, respectively.

        The majority of the Company's business is transacted in U.S. dollars and the U.S. dollar is considered the primary currency for the majority of the Company's operations. Although the Company continues to evaluate derivative financial instruments to manage foreign currency exchange rate changes, the Company did not hold such derivatives during 2004 or 2003. Assets, liabilities and commitments that are to be settled in cash and are denominated in foreign currencies for transaction purposes are sensitive to changes in currency exchange rates. However, there were no significant transaction gains or losses during 2004, 2003 or 2002 and the Company does not believe it is currently exposed to any material risk of loss from currency exchange fluctuations.

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Item 8.    Financial Statements and Supplementary Data

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the board of directors and shareholders of Quixote Corporation:

        In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a)(1) present fairly, in all material respects, the financial position of Quixote Corporation and its subsidiaries at June 30, 2004 and 2003, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 2004 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15 (a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

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QUIXOTE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS

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

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QUIXOTE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

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

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QUIXOTE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

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

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QUIXOTE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS