OVERVIEW

We 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. Our continuing operations are comprised of two reportable segments within the highway and transportation safety industry. Our two reportable segments are: the manufacture and sale of highway and transportation safety products which Protect and Direct and the manufacture and sale of highway products and services which Inform motorists and highway personnel. The 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 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 advanced sensing products which measure distance, count and classify vehicles; weather sensing systems and computerized highway advisory radio transmitting systems.

Our products are sold worldwide primarily through a distribution network and supplemented by a direct sales force to customers in the highway construction and safety business, state and municipal departments of transportation, and other governmental transportation agencies. The domestic market for highway and transportation safety products is directly affected by federal, state and local governmental policies and budgets. A portion of our domestic 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. Seasonality affects our business with generally a higher level of sales in our fourth fiscal quarter.

Due to the effects of the global economic downturn on infrastructure spending worldwide and the recent events that have adversely affected the credit markets, management has placed increased emphasis on reducing costs and monitoring the risks associated with the current environment, particularly the collectibility of accounts receivable and our liquidity. If the future economic environment continues to deteriorate, we could experience difficulties due to the financial viability of certain of our customers and suppliers. Increased costs and imposition of more stringent terms and conditions by our suppliers as well as delays in payment and higher default rates by our customers could affect our financial performance. In addition, the volatility of our stock price and declines in our market capitalization could put pressure on the carrying value of goodwill and other long-lived assets if these conditions persist for an extended time. See Significant Accounting Policies and Critical Estimates for further information. The holders of our $40,000,000 of convertible notes may require us to repurchase the notes in cash at a price equal to 100% of the principal amount of the notes plus accrued and unpaid interest, if any, as early as February 15, 2010. If that occurs, there can be no assurance that we can refinance our debt on a timely basis on satisfactory terms. Management will continue to monitor the risks associated with the current economic environment and their impact on our results. See FINANCIAL CONDITION for further information.

DISCONTINUED OPERATIONS

On July 25, 2008, we sold our Intersection Control segment to Signal Group, Inc. for $20 million in cash. The Intersection Control segment sold products including traffic controllers, traffic and pedestrian signals, traffic uninterruptible power supply (UPS) systems, video detection equipment and

toll road monitoring systems. Accordingly, we reflect the results of those operations as discontinued operations for all periods presented. The assets and liabilities of the divested segment were classified as assets and liabilities held for sale within our consolidated balance sheets until the sale. In the first quarter of fiscal 2009, we recorded a loss on the sale of this business of $712,000, net of income taxes. The sale of this business allowed us to strengthen our balance sheet and improve our financial flexibility by reducing the amount outstanding against our revolving credit facility.

RESULTS OF OPERATIONS

Overall, we saw decreased sales and profitability for the first six months and the second quarter of fiscal 2009 compared with the same periods last year, primarily due to the effects of the global economic downturn on infrastructure spending that we experienced during the current second quarter. For the current second quarter, sales decreased 22% compared to the second quarter of last year due to decreased sales across both of our operating segments both domestically and internationally. These decreases in the second quarter offset the sales increases in the first quarter of fiscal 2009. International sales for the second quarter of fiscal 2009 decreased 22% compared to the second quarter last year primarily due to decreased sales in the Asia-Pacific region, particularly in China. However, for the first six months of fiscal 2009, international sales increased 12% compared to the first six months of fiscal 2008. Domestic sales decreased 23% compared to the second quarter of last year. Sales for the Protect and Direct segment decreased 22% and sales in our Inform segment decreased 23% compared to the second quarter of last year. The decreased sales volume resulted in an operating loss for both segments for the quarter. See FUTURE OUTLOOK for further information.

                                     Three Months Ended             Six Months Ended
                                        December 31,                  December 31,
                                     2008           2007           2008           2007
 Revenues by Segment:
      Protect and Direct         $ 15,021,000   $ 19,337,000   $ 35,003,000   $ 39,062,000
      Inform                        5,036,000      6,542,000     10,193,000     11,321,000

                                 $ 20,057,000   $ 25,879,000   $ 45,196,000   $ 50,383,000

 Geographic Revenues:
      Domestic                   $ 14,609,000   $ 18,923,000   $ 31,790,000   $ 38,379,000
      International                 5,448,000      6,956,000     13,406,000     12,004,000

                                 $ 20,057,000   $ 25,879,000   $ 45,196,000   $ 50,383,000

 Operating Income (Loss) by
 Segment:
      Protect and Direct         $   (414,000 ) $  3,771,000   $  1,958,000   $  7,000,000
      Inform                         (345,000 )      979,000         75,000      1,324,000
      Unallocated Corporate        (2,660,000 )   (2,057,000 )   (4,110,000 )   (3,614,000 )

                                 $ (3,419,000 ) $  2,693,000   $ (2,077,000 ) $ (4,710,000 )

 Gross profit percentage                 25.4 %         38.6 %         29.5 %         36.5 %

 Selling and administrative
 expenses as a percentage of
 sales                                   34.3 %         24.9 %         28.4 %         23.8 %

 Diluted earnings (loss) from
 continuing operations per
 share                           $      (0.29 ) $       0.10   $      (0.26 ) $       0.16

Revenues

Our net sales for the second quarter of fiscal 2009 decreased $5,822,000, or 22%, to $20,057,000 from $25,879,000 for the second quarter last year, with decreases in both domestic and international sales, which we believe is primarily due to the effects of the global economic downturn on infrastructure spending worldwide.

Our net sales for the first six months of fiscal 2009 decreased $5,187,000, or 10%, to $45,196,000 from $50,383,000 for the same period last year with sales decreases in both the Protect and Direct segment and the Inform segment. Sales increases during the first quarter of this year for both segments were offset by the sales decreases during the second quarter of this year.

Geographic-Domestic sales for the second quarter of fiscal 2009 decreased 23% to $14,609,000 from $18,923,000, with decreased sales across both segments, due to the effects of the domestic economic downturn and state and municipal budgetary constraints. International sales for the second quarter of fiscal 2009 decreased $1,507,000, or 22%, to $5,448,000, compared to $6,956,000 for the second quarter last year, primarily due to decreased sales in the Asia-Pacific region. In that region, approximately $1,000,000 in sales in China during the second quarter last year were not repeated in the second quarter of fiscal 2009. International sales for the Protect and Direct segment decreased 20% primarily due to decreased sales of permanent crash cushions in Asia-Pacific, particularly in China. However, we continue to see strong interest in our Protect and Direct products in other regions including Europe, Latin America and the Mideast/Africa region, where sales increased 29% over the second quarter of fiscal 2008. International sales for the Inform segment decreased 32%, primarily due to decreased sales of weather sensors in Europe and Canada.

Protect and Direct-Net sales for the Protect and Direct segment for the second quarter of fiscal 2009 decreased 22% to $15,021,000 from $19,337,000 for the second quarter last year with decreases in both domestic and international sales. The decrease in sales was due to decreased sales of permanent crash cushions, truck mounted attenuators, Triton® water-filled barriers, delineators and parts, which were partially offset by increased sales of ABC terminals and barrels.

Net sales for the Protect and Direct segment for the first six months of fiscal 2009 decreased 10% to $35,003,000 from $39,062,000 for the same period last year. Increased international sales in the first quarter of this year were offset by decreased domestic and international sales in the second quarter of this year. The decrease in sales for the first six months of this year was across most major product lines, particularly truck mounted attenuators and permanent crash cushions, which were offset somewhat by increased sales of ABC terminals and Triton® water-filled barriers.

Inform-Net sales for the Inform segment for the second quarter of fiscal 2009 decreased 23%, or $1,506,000, to $5,036,000 from $6,542,000 for the second quarter last year. The decrease in sales in the current second quarter compared to the second quarter of fiscal 2008 was primarily due to decreased sales of weather sensors and highway advisory radios, partially offset by increased sales of traffic sensors.

Net sales for the Inform segment for the first six months of fiscal 2009 decreased 10%, or $1,128,000, to $10,193,000 from $11,321,000 for the same period last year. Increased international sales in the first quarter of this year were offset by decreased domestic and international sales in the second quarter of this year. Increased sales of traffic sensors in the first six months of this year were more than offset by decreased sales of weather sensing products and highway advisory radio products.

Gross Profit Margin

Our gross profit margin for the second quarter of fiscal 2009 was 25.4% compared to 38.6% for the second quarter last year. The gross margin for the Protect and Direct segment declined due to manufacturing inefficiencies related to the lower sales volume and the fixed nature of many of our expenses and in part due to unfavorable product sales mix with higher sales of ABC terminals, which have lower gross margins than some other product lines. The gross margin for the Inform segment declined due to inefficiencies related to the lower sales volume and in part due to unfavorable product sales mix with lower sales of higher margin highway advisory radios.

Our gross profit margin for the first six months of fiscal 2009 was 29.5% compared to 36.5% primarily due to manufacturing inefficiencies related to the lower sales volume and the fixed nature of many of our expenses and in part due to unfavorable product sales mix.

Selling and Administrative Expenses

Selling and administrative expenses for the second quarter of fiscal 2009 increased $428,000, or 7%, to $6,881,000 from $6,453,000 for the second quarter last year. This was primarily due to increased bad debt expenses in both our Protect and Direct and Inform segments. Selling and administrative expenses increased as a percentage of sales to 34.3% for the second quarter of 2009 from 24.9%.

Severance Costs

We recorded $843,000 in severance costs in the second quarter of fiscal 2009 related to the retirement of our former chief executive officer and a senior executive within the Protect and Direct segment.

Research and Development

Research and development expenditures for the second quarter of fiscal 2009 decreased $41,000, or 5%, to $798,000 from $839,000 for the same period last year due to decreases in the Inform segment.

Research and development expenditures for the first six months of fiscal 2009 remained consistent with expenditures in the same period last year as we continue our development of new products.

Operating Profit (Loss)

The operating loss for the second quarter of fiscal 2009 was $3,419,000, compared to operating profit of $2,693,000 for the second quarter of fiscal 2008. For the second quarter of fiscal 2009, the operating loss for the Protect and Direct Group was $414,000, compared to operating profit of $3,771,000 in the same period last year, primarily due to the lower sales volume, unfavorable product sales mix and increased selling and administrative expenses. The operating loss for the Inform segment was $345,000, compared to operating profit of $979,000 for the second quarter of last year due primarily to decreased sales and unfavorable product sales mix. The operating loss for the second quarter of fiscal 2009 also included severance costs of $843,000.

The operating loss for the first six months of fiscal 2009 was $2,077,000, compared to operating profit of $4,710,000 for the first six months of fiscal 2008. For the first six months of fiscal 2009, operating profit for the Protect and Direct segment was $1,958,000 compared to $7,000,000 for the same period last year, due to the lower sales volume, unfavorable product sales mix and higher selling and administrative expenses. Operating profit for the Inform segment was $75,000 compared to operating profit of $1,324,000 for the first six months of last year, also due to the lower sales volume, unfavorable product sales mix and higher selling and administrative expenses.

Interest Expense

Interest expense for the second quarter of fiscal 2009 decreased $278,000, or 24% to $865,000 from $1,143,000 for the second quarter last year, primarily due to the lower level of revolving debt outstanding and to the lower interest rates on our revolving debt. The interest rate on our bank facility is based on LIBOR or the British Bankers Association LIBOR, plus a margin. Our overall weighted average interest rate was 6.8% as of December 31, 2008, primarily due to the 7% interest rate on our $40,000,000 in convertible debt.

Interest expense for the first six months of fiscal 2009 decreased to $1,782,000 from $2,238,000 for the same period last year. The decrease was primarily due to the lower level of revolving debt outstanding and to the lower interest rates on our revolving debt.

The income tax benefit for the second quarter of fiscal 2009 was $1,628,000 representing a 38% effective income tax rate. The income tax provision for the second quarter of fiscal 2008 was $589,000, also representing a 38% effective income tax rate.

The income tax benefit for the first six months of fiscal 2009 was $1,466,000, compared to a provision of $939,000 for the same period last year, both representing a 38% effective income tax rate.

Earnings (Loss) from Continuing Operations

The loss from continuing operations for the second quarter of fiscal 2009 was $2,656,000, or $0.29 per diluted share, compared to earnings from continuing operations of $961,000, or $0.10 per diluted share, for the second quarter last year. The current quarter loss includes severance costs of $843,000, or $0.06 per diluted share.

The loss from continuing operations for the first six months of fiscal 2009 was $2,393,000, or $0.26 per diluted share, compared to earnings of $1,535,000, or $0.16 per diluted share, for the same period last year.

Loss from Discontinued Operations, Net of Income Taxes

The loss from discontinued operations, net of income taxes, for the second quarter of fiscal 2008 was $202,000, or $0.02 per diluted share.

The loss from discontinued operations, net of income taxes, for the first six months of fiscal 2009 was $758,000, or $0.08 per diluted share, compared to a net loss of $306,000, or $0.03 per diluted share, for the same period last year.

Net Earnings (Loss)

The net loss for the second quarter of fiscal 2009 was $2,656,000, or $0.29 per diluted share, compared to net earnings of $759,000, or $0.08 per diluted share, for the second quarter last year.

The net loss for the first six months of fiscal 2009 was $3,151,000, or $0.34 per diluted share, compared to net earnings of $1,229,000, or $0.13 per diluted share, for the same period last year.

Liquidity and Capital Resources

Our principal sources of cash historically have been cash flows from operations and borrowings from banks and other sources. We had cash and cash equivalents of $985,000 as of December 31, 2008. As of December 31, 2008, we had $1,750,000 outstanding against our bank credit facility and $40,000,000 in 7% Convertible Senior Subordinated Notes due February 2025 (the "Convertible Notes").

Our current secured bank credit agreement with our senior bank (the "Credit Agreement") includes both fixed and floating interest rate options, at the LIBOR and British Bankers Association LIBOR rate, plus a margin. The Credit Agreement also contains affirmative and negative covenants including requirements that we meet certain consolidated financial criteria, such as a fixed charge coverage ratio, a maximum senior leverage ratio, and a maximum total leverage ratio. The covenants also limit the incurrence of additional indebtedness, acquisitions, liens and encumbrances and other matters customarily restricted in such agreements.

We were in violation of certain covenants as of the fourth quarter of fiscal 2008 and the first quarter of fiscal 2009 and we received waivers from our senior bank for those violations. Accordingly, we also amended the Credit Agreement with an amendment dated November 7, 2008. As of December 31, 2008, we were in violation of the maximum total leverage ratio and the fixed charge ratio, for which we received a waiver and an amendment dated February 9, 2009. This amendment to the Credit Agreement reduced the amount of the revolver commitment from $40 million to $15 million, changed the expiration date from February 2010 to November 1, 2009, prohibited payments for dividends and the purchase of our common stock for the treasury and increased the interest rate margin and certain fees. The Credit Agreement may be renewed one additional year on each anniversary date upon mutual consent of the Company and the bank. We are currently working with our senior bank on an additional amendment to the Credit Agreement. We expect that the amendment will modify several financial covenants which would include the addition of a monthly borrowing base formula to restrict borrowings based on eligible accounts receivable, inventory and fixed assets in order to reduce the possibility that we may violate financial covenants in the future. However, there is no assurance that we will be able to obtain an amendment on terms that are mutually satisfactory to avoid a default. In the event of a default, our senior bank could elect to declare all amounts borrowed under the Agreement, $1,750,000 as of December 31, 2008, to be due and currently payable and could cancel the outstanding letters of credit, $890,000 as of December 31, 2008. We would then attempt to negotiate a new credit agreement. However, there can be no assurance that we would be able to negotiate a new credit agreement with satisfactory terms and conditions within an acceptable time period.

The holders of our $40,000,000 of Convertible Notes may require us to repurchase the notes in cash at a price equal to 100% of the principal amount of the Notes plus accrued and unpaid interest, if any, as early as February 15, 2010. We are working with our senior bank and are in the process of evaluating a variety of refinancing alternatives. We are also pursuing other strategic and financial alternatives, including the sale and leaseback of certain assets. We have also taken several actions to reduce our cost structure and we continue to investigate other potential cost savings alternatives. To conserve cash, we have suspended our semiannual dividend and we have reduced capital expenditures. However, even with these actions, given the continued weakness in the economy and in the credit markets, there can be no assurance that we can obtain the necessary capital on satisfactory terms to pay the Convertible Note holders, should they require payment in February 2010.

Our ability to remain in compliance with the covenants of the Credit Agreement, as amended, and to modify our capital structure is dependent upon our future performance and may be affected in part by events beyond our control, including the current economic downturn. Reduced cash flows from

operations, regardless of cause, will make it more difficult to comply with our bank covenants. Continuing uncertainty in the credit markets may affect our ability to access those markets and may increase costs associated with borrowing and issuing debt instruments. In the event of a default of our Credit Agreement, there are currently no default interest provisions. The provisions of our Credit Agreement and Convertible Notes each include cross-default provisions such that a default on any individual payment obligation greater than $5 million is a default under both agreements.

Our outstanding borrowings were $41,750,000, or 50.1% of total capitalization, as of December 31, 2008, of which $1,750,000 was outstanding against our bank credit facility. This compares to outstanding borrowings of $57,600,000, or 56.8% of total capitalization, as of June 30, 2008, of which $17,600,000 was outstanding against our bank credit facility. We used $20 million in proceeds from the sale of the Intersection Control segment in the first quarter to pay down substantially all of our revolving bank debt. Included in long-term debt as of December 31, 2008 and June 30, 2008 was the $40 million of Convertible Notes. The amount of standby letters of credit outstanding was $890,000 as of December 31, 2008 and $1,012,000 as of June 30, 2008.

Although the variable interest rates under our revolving credit facility have been volatile due to the current credit environment, the financial effect on us has not been significant as the amount outstanding against the facility was only $1,750,000 as of December 31, 2008. Currently, we do not believe that our operating cash flow needs will require us to significantly increase our bank borrowings in the near term. Our $40 million of 7% Convertible Notes accounted for the majority of our $41.8 million in outstanding debt as of December 31, 2008.

Cash Flows

Cash flows provided by continuing operations were $753,000 during the first six months of fiscal 2009 compared with $1,021,000 provided by continuing operations in the first six months of fiscal 2008. For the first six months of fiscal 2009, cash used to fund the loss from continuing operations, net of tax, of $2,393,000 was offset by cash provided through a decrease in working capital. Decreased working capital provided $1,965,000 primarily representing decreased accounts receivable due to the lower level of our sales. Further offsetting the loss from continuing operations were non-cash expenses of $1,181,000, including depreciation and amortization expense. Although we are focused on reducing working capital, such as inventory levels, to provide cash, further losses from continuing operations would negatively impact cash flow provided by operations.

Cash used in discontinued operations was $1,545,000 during the first six months of fiscal 2009 and $3,734,000 in the first six months of fiscal 2008 primarily representing increased working capital including increased inventory and decreased accounts payable.

Investing activities of continuing operations provided cash of $19,073,000 during the first six months of fiscal 2009, compared to $1,928,000 used in the first six months of the prior year. Proceeds from the sale of the Intersection Control segment provided cash of $20 million in the first quarter of fiscal 2009. Expenditures during the first six months of fiscal 2009 included $876,000 for capital expenditures compared with $1,887,000 for the first six months last year as we manage our capital spending in this difficult environment.

Financing activities used cash of $17,679,000 during the first six months of fiscal 2009, compared with $5,663,000 of cash provided during the first six months of fiscal 2008. The $20 million in proceeds from the sale of the Intersection Control segment was used to pay down substantially all of our bank debt in the first quarter of this year. Also during the first six months of fiscal 2009, we borrowed a net $4,150,000, excluding the $20 million, against our outstanding revolving credit facility. The payment of our semi-annual cash dividend used cash of $1,829,000 during the first six months of fiscal 2009. Our recent decision to suspend payment of the semi-annual dividend will save nearly $4 million in annual cash expenditures.

. . .