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.

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.

RESULTS OF OPERATIONS

Our first fiscal quarter results were driven by sales growth in both of our operating segments as sales in the Inform segment increased 24% and sales in the Protect and Direct segment increased 2% over the first quarter last year. We saw growth in both the domestic and international markets. Domestic sales increased 9%, which we believe was driven in part by Federal stimulus funding. International sales increased 2% over the record first quarter sales levels achieved a year ago. Our results also benefitted from the cost reductions we made in the second half of fiscal 2009 and into the first quarter of fiscal 2010, allowing for enhanced gross margin and profitability in the quarter. Operating profit for the first quarter of fiscal 2010 increased 40% over the first quarter last year. See FUTURE OUTLOOK for further information.

                                                             Three Months Ended
                                                                September 30,

                                                            2009             2008


Revenues by Segment:
Protect and Direct                                      $ 20,472,000     $ 19,982,000
Inform                                                     6,390,000        5,157,000

                                                        $ 26,862,000     $ 25,139,000

Geographic Revenues:
Domestic                                                $ 18,719,000     $ 17,181,000
International                                              8,143,000        7,958,000

                                                        $ 26,862,000     $ 25,139,000


Operating Income (Loss) by Segment:
Protect and Direct                                      $  2,836,000     $  2,372,000
Inform                                                       521,000          420,000
Unallocated Corporate                                     (1,473,000 )     (1,450,000 )

                                                        $  1,884,000     $  1,342,000


Gross profit percentage                                         34.3 %           32.8 %


Selling and administrative expenses as a percentage
of sales                                                        23.3 %           23.8 %


Diluted earnings from continuing operations per
share                                                   $       0.07     $       0.03

Revenues

Our net sales for the first quarter of fiscal 2010 increased $1,723,000, or 7%, to $26,862,000 from $25,139,000 for the first quarter last year, with increases in both segments and in both domestic and international markets.

Geographic - Domestic sales for the first quarter of fiscal 2010 increased 9% to $18,719,000 from $17,181,000 due to increased domestic sales in both segments driven in part by activity related to the Stimulus funding. International sales for the first quarter of fiscal 2010 increased $185,000, or 2%, to $8,143,000, compared to $7,958,000 for the first quarter last year, with increased sales in Canada and Latin America offsetting decreased sales in the other regions. International sales for the Inform segment increased 69%, primarily due to increased sales of sensing products in all regions. International sales for the Protect and Direct segment decreased 4% primarily due to decreased sales of ABC Terminal crash cushion products in Europe and Latin America, decreased Triton Barrier sales in Australia and to one large glare screen order in the first quarter last year to the Mid-East region.

Inform - Net sales for the Inform segment for the first quarter of fiscal 2010 increased 24%, or $1,233,000, to $6,390,000 from $5,157,000 for the first quarter last year. The increase in sales in the current first quarter compared to the first quarter of fiscal 2009 was due to volume increases across most major product lines.

Gross Profit Margin

Our gross profit margin for the first quarter of fiscal 2010 was 34.3% compared to 32.8% for the first quarter last year. The gross margin for the Protect and Direct segment increased primarily due to favorable product sales mix with increased sales of permanent crash cushions, which have higher gross margins, and decreased sales of ABC terminals, which have lower gross margins than some other product lines. The gross margin for the Inform segment decreased slightly as volume efficiencies were offset by unfavorable product sales mix with increased sales of weather sensing products which have lower gross margins than some other product lines.

Selling and Administrative Expenses

Selling and administrative expenses for the first quarter of fiscal 2010 increased $289,000, or 5%, to $6,263,000 from $5,974,000 for the first quarter last year. Decreased selling and administrative expenses related to headcount reductions and other cost-savings initiatives were largely offset by $300,000 in expenses related to the shut-down of our China facility and increased costs associated with the increased sales level compared to last year. Selling and administrative expenses decreased as a percentage of sales to 23.3% for the first quarter of 2010 from 23.8% in the prior year period.

Research and Development

Research and development expenditures for the first quarter of fiscal 2010 decreased $159,000, or 17%, to $763,000 from $922,000 for the same period last year due to decreases in both segments. We continue to focus our investment in research and development primarily in critical projects to support long term growth.

Severance Costs

We recorded $296,000 in severance costs in the first quarter of fiscal 2010 related to headcount reductions in the Protect and Direct segment.

Operating Profit

Operating profit for the first quarter of fiscal 2010 was $1,884,000, compared to operating profit of $1,342,000 for the first quarter of fiscal 2009. For the first quarter of fiscal 2010, operating profit for the Protect and Direct segment was $2,836,000, compared to operating profit of $2,372,000 in the same period last year, primarily due to the higher sales volume and favorable product sales mix, offset somewhat by severance costs and higher bad debt expense. Operating profit for the Inform segment was $521,000 compared to operating profit of $420,000 for the first quarter of last year, primarily due to the higher sales volume.

Interest expense for the first quarter of fiscal 2010 decreased $44,000, or 5% to $873,000 from $917,000 for the first quarter last year, primarily due to the lower level of revolving debt outstanding. 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 6.7% as of September 30, 2009, primarily due to the 7% interest rate on our $40,000,000 in convertible debt.

Income Tax Provision

The income tax provision for the first quarter of fiscal 2010 was $384,000 representing a 38% effective income tax rate. The income tax provision for the first quarter of fiscal 2009 was $162,000, representing a 38% effective income tax rate.

Earnings from Continuing Operations

Earnings from continuing operations for the first quarter of fiscal 2010 were $627,000, or $0.07 per diluted share, compared to earnings from continuing operations of $263,000, or $0.03 per diluted share, for the first quarter last year.

Loss from Discontinued Operations, Net of Income Taxes

The loss from discontinued operations, net of income taxes, for the first quarter of fiscal 2009 was $758,000, or $0.08 per diluted share. Included in the loss was a $712,000 loss on the sale of the Intersection Control segment.

Net Earnings (Loss)

Net earnings for the first quarter of fiscal 2010 were $627,000, or $0.07 per diluted share, compared to a net loss of $495,000, or $0.05 per diluted share, for the first quarter last year.

FINANCIAL CONDITION

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 $7,526,000 as of September 30, 2009. As of September 30, 2009, we had $5,000,000 outstanding against our bank credit facility and $40,000,000 outstanding 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") provides for a $5 million revolving credit facility and includes both fixed and floating interest rate options, at LIBOR or the 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. The covenants also limit the incurrence of additional indebtedness, acquisitions, liens and encumbrances and other matters customarily restricted in such agreements.

We expect to be in compliance with the covenants of our Credit Agreement, as amended, through the term of the Agreement. However, our ability to remain in compliance with the covenants 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, may make it more difficult to comply with our bank covenants and to obtain an extension of our Credit Agreement. 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. However, we are currently generating positive cash flow in fiscal 2010 and we expect we may continue to do so throughout the fiscal year.

The holders of our $40,000,000 of 7% Senior Subordinated Convertible Notes may require us to repurchase the Notes in February 2010, which we expect they will do. Beginning in the third quarter of fiscal 2009, we implemented a series of cost control measures to improve our financial performance by eliminating approximately $4 million from our annualized cost structure. These costs include approximately $2,000,000 in salaries and related benefits through the reduction of 42 domestic employees in our Protect and Direct segment; $900,000 in salaries and related benefits through the reduction of 11 domestic employees in our Inform segment; $400,000 in costs including salaries and related benefits through the reduction of 15 employees in connection with closing our Protect and Direct facility in China; and $700,000 by renegotiating service agreements and reducing discretionary spending. We have also suspended our semi-annual dividend to conserve cash which will save approximately an additional $4 million in cash annually. We are restricting capital expenditures to those items critical to the effectiveness of our operations and plan to reduce capital expenditures from $3.4 million in fiscal 2009 to $2 million in fiscal 2010. We are currently generating positive operating cash flow in fiscal 2010 and we expect to continue to do so throughout the fiscal year, but our existing cash balances and the cash we expect to generate from operations in fiscal 2010 will not be sufficient to pay the principal amount of those Notes in fiscal 2010. We believe that the credit markets are improving and we are working with advisors to explore financing alternatives, including issuing other debt or equity and the sale of certain product lines which may include the sale of a segment of our business. We, along with our advisors, believe we have the alternatives available to us to achieve a satisfactory result for the Company.

There is no assurance that we will be able to refinance this debt on a timely basis and on satisfactory terms, if at all. Refinancing the Notes through the issuance of new debt or equity may significantly dilute our shareholders. If we are unable to refinance the debt and the holders of the Notes demand payment in February 2010, it would have a material adverse effect on the Company's business, liquidity and financial position. We may elect to seek protection from our creditors by filing a voluntary petition in bankruptcy or may be subject to an involuntary petition in bankruptcy.

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 $5,000,000 as of September 30, 2009. 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 $45.0 million in outstanding debt as of September 30, 2009.

Our outstanding borrowings were $45,000,000, or 56.4% of total capitalization, as of September 30, 2009, of which $5,000,000 was outstanding against our bank credit facility. This compares to outstanding borrowings of $41,000,000, or 54.5% of total capitalization, as of June 30, 2009. Included in current debt as of September 30, 2009 and June 30, 2009 was the $40 million of Convertible Notes. The amount of standby letters of credit outstanding was $920,250 as of September 30, 2009 and $1,120,000 as of June 30, 2009.

Cash Flows

Cash flows provided by continuing operations were $3,866,000 during the first three months of fiscal 2010 compared with $332,000 provided by continuing operations in the first three months of fiscal 2009. For the first three months of fiscal 2010, earnings from continuing operations were $627,000, net of income taxes compared to $263,000, net of income taxes for the first three months of fiscal 2009. Non-cash depreciation and amortization were $860,000 for the current period compared to $969,000 for the year ago period. The increase in cash provided by operations was primarily due to increased cash provided by decreased working capital in the first quarter of fiscal 2010. Decreased working capital provided $1,903,000 in cash, primarily representing decreased inventories and increased accounts payables due to our focus on increasing cash flow. This compares to a decrease in cash due to increased working capital of $1,139,000 for the first quarter of fiscal 2009.

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

Investing activities of continuing operations used cash of $438,000 during the first three months of fiscal 2010, compared to $19,566,000 provided in the first three 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 three months of fiscal 2010 included $418,000 for capital expenditures compared with $411,000 for the first three months last year as we continue to manage our capital spending in this difficult environment.

Financing activities provided cash of $4,000,000 during the first three months of fiscal 2010, compared with $18,529,000 of cash used during the first three months of fiscal 2009. 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 fiscal 2009. During the first three months of fiscal 2010, we borrowed $4,000,000 against our outstanding revolving credit facility. The payment of our semi-annual cash dividend used cash of $1,829,000 in the first quarter of fiscal 2009. Our decision made in fiscal 2009 to suspend payment of the semi-annual dividend will save nearly $4 million in annual cash expenditures.

OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS

We are subject to certain debt obligations, guarantees, commitments and
contingent liabilities further described in our Annual Report on Form 10-K for
the year ended June 30, 2009. The following table presents our contractual
obligations to make future payments under contracts, such as debt and lease
agreements, as of September 30, 2009:


                                           Less than                                     More than
                             Total           1 Year        1-3 Years      3-5 Years       5 Years


Long-term debt (1)        $ 45,000,000    $ 45,000,000
Estimated interest
payments (2)                 1,777,000       1,777,000
Operating leases             4,991,000         915,000    $ 1,713,000    $ 2,215,000    $   148,000
Minimum royalty
payments                     1,110,000         510,000        600,000
Uncertain tax benefits         183,000          72,000        111,000
Purchase obligations
(3)                          1,156,000       1,156,000

Total                     $ 54,217,000    $ 49,430,000    $ 2,424,000    $ 2,215,000    $   148,000

(1) Amount includes expected cash payments on long-term debt based upon current and effective maturities. Amount does not include renewals relating to refinancing of long-term debt currently outstanding as future terms are unknown at this time and difficult to estimate.

(2) Amount includes estimated interest payments based on interest rates as of the current period. Interest rates on variable-rate debt are subject to change in the future. Interest is estimated based upon current and effective maturities of long-term debt currently outstanding and does not include an estimate of future interest payments relating to refinancing of long-term debt per (1) above. Cash paid for interest was $3,519,000 in fiscal 2009 and we currently expect cash for interest to be approximately that amount or higher in fiscal 2010.

(3) Purchase obligations include non-cancellable orders with suppliers in the normal course of business on a short-term basis.

As disclosed in the footnotes to the consolidated financial statements, we have entered into bid and performance related bonds associated with various contracts. Potential payments due under these bonds are related to our performance under certain contracts. The total amount of bid and performance related bonds that were available and undrawn as of September 30, 2009 was $737,000. We also have standby letters of credit covering potential workers' compensation liabilities and other liabilities. The total standby exposure relating to letters of credit as of September 30, 2009 was $920,000. Subsequent to September 30, 2009 we obtained an additional letter of credit in the amount of $150,000.

Looking forward, we remain cautious given the continued weak global economic conditions and the difficult financial markets. This unfavorable market environment may negatively affect demand for our products indefinitely.

The United States domestic market for highway and transportation safety products is directly affected by federal, state, and local governmental policies. Historically, federal funds have been allocated and highway policy has been developed through six-year federal highway authorization bills. The federal highway authorization law, the Safe, Accountable, Flexible and Efficient Transportation Equity Act-A Legacy for Users, or SAFETEA-LU, expired September 30, 2009, but was extended through December 18, 2009. We anticipate further delays in the enactment of a new highway authorization bill with additional extensions for limited times (perhaps 1, 3, 6 or 12 months) at current funding levels.

While uncertainty in funding for our markets continues, we are encouraged by a turnaround to profitability in our fourth quarter of fiscal 2009 as well as our continued performance in the first quarter of fiscal 2010. We continue to believe that our business will gain strength if the federal funding issue is resolved. We anticipate that our fiscal 2010 results will continue to benefit from the federal funding for transportation projects, enacted as part of the American Recovery and Reinvestment Act, which includes approximately $27 billion in stimulus funding for highways and bridges. However, we believe that this one-time spending package cannot substitute for enactment of the multi-year highway authorization legislation and the long term funding of the highway trust fund. Until a new multi-year highway authorization bill becomes law, the transportation safety allotment in federal and state budgets may be uncertain and we believe that prolonged uncertainty may adversely impact sales of our products and our financial performance in fiscal 2010. In addition, state budgetary constraints and deficit issues are expected to continue into fiscal 2010, which will negatively impact our performance in fiscal 2010.

Although we expect business to slow down in the fiscal 2010 second quarter, due to seasonality, we anticipate that our second quarter will be improved over last year's second quarter. We believe that domestic demand for our products is uncertain due to the domestic funding issues and economic environment. We believe we will continue to see growth in international sales. We believe that we have strong market share positions, brand name recognition and a talented employee base and that we are well positioned with our leaner cost structure. However it is difficult to predict to what extent we will see increased spending for our products and there can be no assurance that either domestic or international sales will increase.

Our fiscal 2010 operating outlook will be affected by our ability to refinance . . .