**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM10-K**

 

**ANNUALREPORT**

 

**Pursuantto Section 13 or 15(d) of the Securities Exchange Act of 1934**

 

**For the Fiscal Year Ended September30, 2005**

 

**1-8931**

**Commission File Number**

 

**CUBIC CORPORATION**

Exact Name of Registrantas Specified in its Charter

 
| **Delaware**           | ** ** | **95-1678055**                   |
|------------------------|------------|----------------------------------|
| State of Incorporation |       | IRS Employer  Identification No. |

 

**9333 Balboa Avenue**

**San Diego, California 92123**

**Telephone (858) 277-6780**

 
| **Common  Stock**   | ** ** | **American  Stock Exchange, Inc.**    |
|---------------------|------------|---------------------------------------|
| Title of each class |       | Name of exchange on  which registered |

 

Indicate by check mark if the registrant is a well-known seasonedissuer, as defined in Rule 405 of the Securities Act.

o Yes   ý No

 

Indicate by check mark if the registrant is not required to filereports pursuant to Section 13 or Section 15(d) of the Act.

o Yes   ý No

 

Indicate by check mark whether the Registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months, and (2) has been subject to such filingrequirements for the past 90 days.

 

Yes ý   No o

 

Indicate by check mark if disclosure of delinquent filers pursuant toItem 405 of Regulation S-K is not contained herein, and will not be contained,to the best of the registrant’s knowledge, in definitive proxy or informationstatements incorporated by reference in Part III of this Form 10-K.

 

Yes ý   No o

 

Indicate by check mark whether the registrant is an accelerated filer.

 

Yes ý   No o

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theAct) o Yes   ý No

 

The aggregate market value of 16,029,954 shares of voting stock held bynon-affiliates of the registrant is: $303,607,000 as of March 31, 2005, based onthe closing stock price on that date.

 

Number of shares of common stock outstanding as of November 18, 2005including shares held by affiliates is: 26,719,845 (after deducting 8,944,884shares held as treasury stock).

 

Parts I and III incorporate information by reference from theRegistrant’s definitive proxy statement which will be filed no later than 120days after the close of the Registrant’s year-end, and no later than 30 daysprior to the Annual Shareholders’ Meeting.

 

 

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**PART I**

 

**Item 1.    BUSINESS.**

 

**GENERAL**

 

CUBIC CORPORATION (“Cubic” or “the Company”), was incorporated in theState of California in 1949 and began operations in 1951.  In 1984, the Company moved its corporatedomicile to the State of Delaware.

 

We design, develop, manufacture and install products which are mainlyelectronic in nature, such as:

 

Equipment for use in customized military rangeinstrumentation, training and applications systems, simulators, communicationsand surveillance systems, surveillance receivers, power amplifiers, andavionics systems.

 

Automated revenue collection systems, includingcontactless smart cards, passenger gates, central computer systems and ticketvending machines for mass transit networks, including rail systems, buses, andparking applications.

 

We also perform a variety of services, such as computer simulationtraining, distributed interactive simulation and development of militarytraining doctrine, as well as field operations and maintenance. We manufacturereplacement parts for the products we produce. In addition, we operate a corrugated paper converting facility throughour subsidiary, Consolidated Converting Company.

 

In 2005, our defense segment continued the growth pattern of recentyears through “organic” sales growth of 20%. While we made no defense relatedacquisitions in 2005, the strategic acquisition made in September 2003 and keycontract wins continued to fuel growth in our defense training business. Inaddition, our government services business continued its expansion, growing by27%. Our defense communications and electronics business unit is in atransition period from production of older systems to next-generation products andexperienced a loss in 2005 on lower sales with higher research and developmentcontent. Transportation systems sales have leveled off in recent years primarilybecause of the completion of the initial phase of the fare collection system inLondon in 2003. Although the business has expanded in other regions, weexperienced significant cost growth in the completion of several farecollection contracts this year, resulting in an operating loss intransportation systems for the year.

 

During fiscal year 2005, approximately 53% of our total business wasconducted, either directly or indirectly, with various agencies of the UnitedStates government.  Most of the remainderof our revenue was from local, regional and foreign governments or agencies.

 

Cubic’s internet address is www.Cubic.com. The content on our websiteis available for information purposes only. It should not be relied upon forinvestment purposes, nor is it incorporated by reference into this Form 10-K.We make available free of charge on or through our Internet website under theheading “Investor Information,” our reports on Form 10-K, quarterly reports onForm 10-Q, current reports on Form 8-K and amendments to those reports as soonas reasonably practicable after we electronically file such material with theSecurities and Exchange Commission.

 

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**BUSINESS SEGMENTS**

 

Information regarding the amounts of revenue, operating profit and lossand identifiable assets attributable to each of our business segments, is setforth in Note 10 to the Consolidated Financial Statements for the year ended September30, 2005. Additional information regarding the amounts of revenue and operatingprofit and loss attributable to major classes of products and services is setforth in Management’s Discussion and Analysis which follows at Item 7.

 

**DEFENSE**

 

Cubic’s defense business segment operates as the Cubic DefenseApplications (CDA) group consisting of three market-focused business units:Training Systems, Mission Support, and Communications & Electronics.  Our products include customized militaryrange instrumentation systems, tactical engagement simulation systems, firearmsimulation systems, communications and surveillance systems, surveillancereceivers, power amplifiers, and avionics systems.  Our services include training mission support,computer simulation training, distributed interactive simulation, developmentof military training doctrine, and field operations and maintenance.  We market our capabilities directly tovarious U.S. government departments and agencies and foreign governments.  In addition, we frequently contract or teamwith other leading defense suppliers. In addition to the three business units,we have a new company formed in a joint venture with Rafael ArmamentDevelopment Authority Ltd., an Israeli company, to produce certain Rafaeldefense systems in the United States for Israel and for U.S. customers.

 

**Training Systems**

 

Our Training Systems Business Unit (TSBU) is a pioneer and marketleader in the design and production of instrumented training systems formilitary customers.  These systems generallypermit live training in air and land combat environments, with weapons andother effects simulated by electronic and/or laser technology.  The systems also enable the collection (basedon Global Positioning System technology) and analysis of behavior and eventdata for determination of combat effectiveness and lessons learned.  As such, the systems generally have a highdegree of communications and software sophistication.

 

TSBU’s business is organized into Air Combat Training, Land CombatTraining, Tactical Engagement Simulation, and Simulation Systems.  In Air Combat Training, Cubic was the initialdeveloper and supplier of Air Combat Maneuvering Instrumentation (ACMI)capability during the Vietnam War and continues to lead that market with thecompetitive award in 2003 of a 10-year, $525 million indefinite delivery,indefinite quantity (IDIQ) contract to provide upgraded air combat trainingcapability to the U.S. Air Force, Navy and Marine Corps.  The latest ACMI systems permit forces totrain on either a fixed geographic range or in a “rangeless” environment.  Many other nations employ Cubic’s ACMIsystems.

 

TSBU’s Land Combat Training involves systems analogous to air rangesfor ground force training.  TSBU providedturnkey systems to instrument two U.S. Army training centers in past years atFort Polk, LA (Joint Readiness Training Center – JRTC) and Hohenfels, Germany(Combat Maneuver Training Center – CMTC) and is engaged in a multi-year effortto expand capability of the Alaska Training Range.  The unit also built ranges in recent yearsfor the British Army in the U.K. and Canada. TSBU is currently working on similar land combat training centers forCanada, Australia and for customers in the Middle East and Far East. To meetnew customer demand for mobile instrumented training, TSBU has also developed atransportable, deployable system, known as I-HITS, now being fielded by the U.S.Army. In 2005, TSBU was awarded a five-year contract to produce I-HITS for theU.S. Army.

 

Laser-based Tactical Engagement Simulation systems, generally known asMILES (Multiple Integrated Laser Engagement Simulators), are used at combattraining centers (CTC) and in other training environments to permit weapons tobe used realistically, registering hits or kills, without live ammunition.  TSBU supplies MILES equipment as part of CTCcontracts and as an independent product line. Cubic MILES systems are being heavily utilized by U.S. Army and MarineCorps forces, as well as Air Force security forces, other U.S. agencies andmany international customers.  We produceMILES equipment in 

 

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the U.S. and at our New Zealand-based subsidiary, OscmarInternational.  In 2005, Cubic wasawarded a 5-year $113 million IDIQ contract to produce MILES Individual WeaponSystem (IWS) kits for the U. S. Army.

 

TSBU’s Simulation Systems Division (SSD) produces virtual trainingsystems, employing actual or realistic weapons and systems together with visualimagery to simulate actual battlefield or other environments.  SSD also produces combat system andmaintenance trainers.

 

**Mission Support (Government Services)**

 

CDA’s Mission Support Business Unit (MSBU), along with the separateForce Modernization Division (FMD), is a leading provider of tacticalknowledge-based services to the U.S. Government and allied nations, with anemphasis on military training.  Ourmission support business consists of approximately 3,300 people at more than 90locations throughout the world.  Ourpersonnel serve with clients in their actual environments and prepare forcesthrough comprehensive training, exercises, education, and operational supportto meet the full scope of their missions, from large scale combat operations,to special operations, peacekeeping, consequence management, and humanitarianassistance operations worldwide.  We alsoplan, prepare, execute and document realistic and focused mission rehearsalexercises (including live and computer-based) as final preparation of forcesprior to their deployment to mission areas. In addition, we provide high level consultation and advisory services tothe governments and militaries of allied nations.  U.S. government service contracts aretypically awarded on a competitive basis with options for multiple years.  In this competitive market, MSBU and FMD areviewed as premier service providers and formidable competitors.  We typically compete as prime contractors tothe government, but also team with other companies depending on the skillsrequired.  Much of our early workcentered on battle command training and simulation, in which militarycommanders are taught to make correct decisions in battle situations.  More recently, the business base hasbroadened to include integrated live, virtual, and constructive training support,distance learning, knowledge management, weapons effects modeling, intelligenceanalysis, homeland security training and exercises, and military forcemodernization.

 

Our programs include providing mission support services to three of theArmy’s major CTCs, to the JRTC as prime contractor, and to the NationalTraining Center (NTC) and Battle Command Training Program (BCTP) as a principalsubcontractor.  These services includeplanning, executing and documenting large scale exercises aimed at stressing U.S.forces in situations as close to actual combat as possible. Cubic is assistingthe Army National Guard in developing and implementing a similar exportablecombat training capability at selected Guard locations in the U.S.

 

At U.S. Joint Forces Command, Cubic supports and helps manage allaspects of the operations of the Joint Warfighting Center (JWFC), includingsupport to worldwide exercises and the development and fielding of the JointNational Training Capability (JNTC).  Weprovide similar technical and management support services to the U.S. Army’sNational Simulation Center (NSC) at Fort Leavenworth, Kansas. On the Marine AirGround Task Force Training Systems Support (MTSS) contract, Cubic providescomprehensive training and exercise support to U.S. Marine forces worldwide,including real-world mission rehearsals. We have planned and executed virtually all Marine Corps simulation-basedexercises worldwide since 1998, directly preparing Marines for combatoperations. Cubic provides contractor logistics and training support necessaryto operate and maintain a wide variety of flight simulation, Unmanned AerialVehicles (UAV), and other facilities worldwide for U.S. and allied forces undermultiple long-term contracts. In addition, we provide a broad range ofoperational support to the U.S. Navy’s newly-formed Anti-Submarine Warfare(ASW) Command.

 

Cubic initiated and has continued to operate the Korea BattleSimulation Centers (KBSC) since their inception in 1991.  KBSC prepare U.S. and allied forces in Koreato deal with situations which may develop in their areas of responsibility andinclude the world’s largest and most complex training event, the annual ULCHIFOCUS LENS exercise.

 

At the U.S. Army I Corps Battle Simulation Center, Cubic provides thetechnical and operational expertise necessary to support worldwide training,exercises, evaluations, and mission rehearsals for I Corps active 

 

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and reserve component units, the new Stryker brigades, other services,and joint commands.

 

Cubic supports the Defense Threat Reduction Agency (DTRA) withtechnology-based engineering and other services necessary to accomplish DTRA’smission of predicting and defeating the effects of chemical, biological, radiological,nuclear and high explosive (CBRNE) weapons. Cubic supports DTRA with modeling and simulations to assess and predictthe effects of such weapons in combat and other environments. Additionally,Cubic provides comprehensive support to help plan, manage, and execute DTRA’sworldwide CBRNE exercise program, which trains senior U.S. and allied civilianand military personnel, first responders, and other users of DTRA products.

 

Cubic has multiple contracts with the U.S. Army and other governmentagencies to improve the quality and reach of training and education initiativesfor individuals up through large organizations. Cubic’s products andcapabilities include development and deployment of curriculum and relatedcourseware, computer-based training, knowledge management and distribution,advanced distance learning tools, and other advanced education programs for U.S.and allied forces.

 

FMD’s principal business is providing specialized teams of militaryexperts to advise the governments and militaries of the nations of the formerWarsaw Pact and Soviet Union in the transformation of their militaries to aNATO environment.  These very broad forcemodernization contracts entail both sweeping vision and minute detail,involving both the nations’ strategic foundation and the detailed planning ofall aspects of reform. FMD also operates battle simulation centers for selectcountries.

 

We believe the combination and scope of CDA’s mission support andtraining systems business is unique in the industry, permitting us to offercustomers a complete training and readiness capability from one source.

 

**Communications & Electronics**

 

Our Communications and Electronics Business Unit (CEBU) is a supplierof secure data links, intelligence receivers, high power RF amplifiers andsearch and rescue avionics systems to the U.S. military, other agencies andallied nations.  CEBU’s products supportthe strong military trend toward network-centric warfare and modernizationinitiatives.  The unit has long suppliedthe air/ground secure data link for the U.S. Army/Air Force Joint STARS systemand supplies the principal datalink for the United Kingdom’s ASTORprogram.  Capitalizing on a multiyearinternal R&D program, CEBU won a competitive contract in fiscal 2003 todevelop and produce the next-generation Common Data Link Subsystem (CDLS) forthe U.S. Navy.  CDLS is now beinginstalled on major surface ships of the U.S. fleet.  Smaller, tactical versions of our Common DataLink have been selected for both legacy and new military platforms, such as UAV,which require high performance in a small package.

 

CEBU’s Personnel Locator System (PLS) is standard equipment on U.S.aircraft with a search-rescue mission.  We have continued toreceive orders for an upgraded PLS which has been redesigned to interface withall modern search and rescue system standards, thus positioning us for majorplatform upgrades expected over the next few years.

 

CEBU has also begun to successfully leverageits communications products portfolio to move into larger subsystem and systemlevel programs in the areas of communications interception and jamming(Electronic Warfare) and communications intelligence.  We have been awarded contracts by the U.S.Navy and intelligence services for the initial development of these systemswhich could evolve to production contracts and potentially lead to newopportunities within these services.

 

**Raw Materials**:

 

The principal raw materials used by the defense segment are sheetaluminum and steel, copper electrical wire, and composite products.  A significant portion of the segment’s endproducts are composed of purchased electronic components and subcontractedparts and supplies. These items are primarily procured from commercialsources.  In general, supplies of rawmaterials and purchased parts are adequate to meet the requirements of thesegment.

 

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**Backlog**:

 

Funded sales backlog of the defense segment at September 30, 2005 was $476million compared to $452 million at September 30, 2004.  Total backlog, including unfunded customerorders, was $728 million at September 30, 2005 compared to $756 million atSeptember 30, 2004. Approximately $312 million of the September 30, 2005 totalbacklog is not expected to be completed by September 30, 2006.

 

**Competition**:

 

CDA’s broad defense business portfolio means we compete with numerouscompanies, large and small, domestic and international.  In many cases, we have also teamed with thesesame companies on specific bid opportunities. Well known CDA competitors include Lockheed Martin, Northrop Grumman,General Dynamics, Boeing, L3 Communications and SAIC.  While CDA is generally smaller than itscompetition, we believe our competitive advantages include past performance,incumbent relationships and the ability to rapidly focus technology andinnovation to solve customer problems.

 

Competition also exists among projects for funding in the defensebudget.  While the U.S. defense budgethas seen above average increases in recent years, long-term growth will onlyoccur in those segments which offer very high payoff and are consistent withwarfighting priorities and growing fiscal restraints.  The U.S. defense market today can becharacterized as highly dynamic, with priorities and funding shifting inreaction to, or anticipation of, world events much more rapidly than during theCold War or since.  Overarching militarypriorities include lighter, faster, more lethal forces with the ability andtraining to rapidly adapt to new situations based on superior knowledge of thebattle environment.  Superior knowledgeis enabled by systems which rapidly collect, process and disseminate the rightinformation to the right place at the right time, resulting in what DoD callsnetwork-centric warfare.  We believe Cubic’straining systems, training support and intelligence, surveillance andreconnaissance capabilities are well matched to these sustainable defensepriorities.

 

**TRANSPORTATION SYSTEMS**

 

Cubic Transportation Systems (“CTS”) is the leading turnkey solutionprovider of automated fare collection systems for public transport authoritiesworldwide.  We provide a range ofservices and systems solutions for the bus, bus rapid transit, light rail,commuter rail, heavy rail, ferry and parking markets.  These solutions and services include systemdesign, central computer systems, equipment design and manufacturing,device-level software, integration, test, installation, warranty, maintenance,computer hosting services, call center services, card management and distributionservices, financial clearing and settlement, multi-application support andoutsourcing services.  In addition, CTS designs,develops and manufactures its own technology components, such as smart cardreaders, magnetic ticket transports, and controller boards, for use within itssuite of fare collection equipment consisting of on-bus solutions, accesscontrol solutions, vending solutions, retail and card issuing solutions, andmobile inspection and sales solutions.

 

Over the years, the transportation segmenthas been awarded over 400 projects in 40 major markets on 5 continents.  Active projects include London, the New York/ New Jersey region, the Washington, D.C. / Baltimore / Virginia region, the LosAngeles region, the San Diego region, San Francisco, Minneapolis/St. Paul,Chicago, Atlanta, and Edmonton, Canada, Brisbane, Australia, and Scandinavia.

 

These programs provide a solid base ofcurrent business and the potential for additional future business as thesystems are expanded.  In 1998, TransactionSystems Limited (TranSys), a joint venture company in which Cubic has a 37.5%ownership, was awarded a contract called “PRESTIGE” to outsource the LondonTransport fare collection services.  This17-year contract, now in its eighth year, is the largest automated farecollection contract ever awarded.  Our shareof the work, including all contract change orders to date, exceeds $900 millionover the 17-year life of the contract.

 

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**Industry Overview**

 

Transport agencies, particularly those basedin the U.S., rely heavily on federal, state and local government for subsidiesin capital investments, including new procurements and/or upgrades of automatedfare collection systems.  The averagelifecycle for fare collection systems is 12 to 15 years.  Procurements tend to follow a long and strictcompetitive bid process where the lowest price bid typically wins.

 

The automated fare collection business is aniche market able to sustain only a relatively few number of suppliers.  Because of the long life expectancy of thesesystems and only a few companies able to supply them, there is fiercecompetition to win these jobs, often resulting in low initial contractprofitability.

 

Advances in communications, networking andsecurity technologies are enabling interoperability of multiple modes oftransportation within a single networked system as well as interoperability ofmultiple operators within a single networked system.  As such, there is a growing trend forregional ticketing systems, usually built around a large transit agency andincluding neighboring operators, all sharing a common regional smart card.  There is an emerging trend for otherapplications to be added to these regional systems to expand the utility of thesmart card, offering higher value and incentives to the end users and loweringcosts and creating new revenue streams for the regional system operators.  As a result, these regional systems havecreated opportunities for new levels of systems support and services includingcall center support, smart card production and distribution, financial clearingand settlement and multi-application support. In some cases, operators are choosing to outsource the capitaldevelopment, ongoing operations and commercialization of these regionalticketing systems. This growing new market provides the opportunity toestablish lasting relationships and grow revenues and profits over thelong-term.

 

**Raw Materials**:

 

Raw materials used in this segment include sheet steel, compositeproducts, copper electrical wire and castings. A significant portion of thesegment’s end product is composed of purchased electronic components andsubcontracted parts and supplies. All of these items are procured fromcommercial sources.  In general, suppliesof raw materials and purchased parts are adequate to meet the requirements ofthe segment.

 

**Backlog**:

 

Total sales backlog of the transportation systems segment was funded atSeptember 30, 2005 and 2004, and amounted to $733 million and $734 million,respectively. Approximately $534 million of the September 30, 2005 totalbacklog is not expected to be completed by September 30, 2006.

 

**Competition**:

 

We are one of several companies involved inproviding automated fare collection systems solutions and services for publictransport operators worldwide including such foreign competitors as Thales,Ascom, Scheidt & Bachmann and ERG. In addition, there are many smaller local companies, particularly inEuropean and Asian markets.  For largenational tenders, it is common practice to form consortiums that include, inaddition to the fare collection companies noted above, telecommunications,consulting and computer services companies including Keane, Siemens, Accenture,Metropolitan Transit Railway Corporation, Unisys, Computer Sciences Corporationand EDS.  These procurement activitiesare very competitive and require that we have highly skilled and experiencedtechnical personnel to compete. We believe that our competitive advantagesinclude intermodal and interagency regional integration expertise, technicalskills, past contract performance, systems quality and reliability, experiencein the industry and long-term customer relationships.

 

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**OTHER OPERATIONS**

 

Consolidated Converting Company converts corrugated paper stock intopizza boxes and other food related corrugated products.

 

**Raw Materials**:

 

Raw materials used by Consolidated Converting Company consist of paperproducts which are procured from commercial sources.  In general, supplies of raw materials arepresently adequate to meet the requirements of this business.  Paper shortages could delay completion, orresult in the cancellation, of customer orders.

 

**Backlog**:

 

Consolidated Converting Company had little sales backlog at September30, 2005 and 2004. The business does not track sales backlog due to theshort-term conversion of customer orders into sales and the absence oflong-term contracts.

 

**Competition**:

 

This business competes with concerns of varying size, including somevery large companies. It is not possible to predict the extent of thecompetition which present or future activities will encounter, particularlysince the market for this subsidiary’s products is subject to rapidly changingcompetitive conditions.

 

**BUSINESSSTRATEGY**

 

Our objective is to consistently grow sales,improve profitability and deliver attractive returns on capital.  We intend to build on our position with U.S.and foreign governments as the leading full spectrum supplier of trainingsystems and mission support services, grow our niche position as a supplier ofnetwork-centric technologies for communications systems and products, andmaintain our position as the leading provider of integrated intermodal regionaltransit fare collection systems to transit authorities worldwide. Ourstrategies to achieve these objectives include:

 

**Leverage Long-Term Relationships**

 

We seek to maintain long-term relationshipswith our customers through repeat business by continuing to achieve high levelsof performance on our existing contracts. By achieving this goal we can leverage our returns through repeatbusiness with existing customers and expand our presence in the market throughsales of similar systems at “good value” to additional customers.

 

An example of this in our defense segment isthe recent competitive award of a contract to provide the next generation U.S.mobile ground training system.  Starting inthe early 1980’s we built sophisticated ground training instrumented facilitiesfor the U.S. and foreign militaries.  Ourexperience and innovation in this area of training technology was a key factorin the recent award by the U.S. Army of a five year $71 million contract forthe first mobile training facilities known as Initial-HomestationInstrumentation Training System or “I-HITS”. These new mobile training facilities will be deployed into combat areasand will utilize the latest in training technologies.

 

In our transportation segment we have had arelationship with the Washington Metropolitan Area Transportation Authority(WMATA) for 30 years, since we first implemented their magnetic ticketingsystem, and have over the years installed a complete back office system andover 4,000 pieces of equipment.  In 1999,we upgraded their system with SmarTripÒ, the first contactless smart cardimplementation in the U.S. and have since added other applications such asparking, security access and 

 

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prepaid transit benefits to the system.  We are currently rolling out the SmarTripsystem to 1,600 WMATA buses, to over 2,000 buses throughout the Baltimore andNorthern Virginia region and to the regional rail system.  We are also supplying a point-of-saledistribution network and upgrading the central computer system to offerregion-wide services and to interface to a third party operated customerservice center. Similarly, we are regionalizing integrated fare collectionsystems in London, New York and Southern California.

 

**Maintain a Diversified BusinessMix**

 

We have a diverse mix of business in ourdefense and transportation systems segments. Approximately 53% of our sales aremade directly or indirectly to the U.S. government, however, this represents awide variety of product and service sales to many different U.S. governmentagencies. While as much as 15% of our sales in recent years came from thePRESTIGE contract in London, its share of total sales decreased to less than 7%in both 2004 and 2005. The London area is still one of our strongest marketsfor transportation systems but we believe the decreased reliance on a singlecustomer is a positive trend for the transportation systems segment.

 

We also seek a reasonable balance between systems and service work inboth the defense and transportation segments. In aggregate, approximately 44%of our sales revenue in 2005 was from service type work. We believe that astrong base of service work helps to smooth the revenue fluctuations inherentin systems type work.

 

**Pursue Strategic Acquisitions**

 

Through selective strategic acquisitions weseek to expand our customer base, broaden our technical solutions, gainstaffing resources and leverage our entry into related new markets. In ourdefense segment we recently acquired a virtual training technology company thatbroadened our presence in the training market and expanded our relationshipwith one of our key U.S. Army customers. In our transportation segment, we recently acquired two small parkingproduct companies.  The strategic benefitof these acquisitions was to secure a presence in the Canadian marketplacewhere we see future fare collection system opportunities, such as Toronto, andto expand fare collection solutions for our core customers who want to offersmart card enabled on-street and off-street parking solutions.

 

**OTHER MATTERS**

 

We pursue a policy of seeking patent protection for our products wheredeemed advisable, but do not regard ourselves as materially dependent onpatents for the maintenance of our competitive position.

 

We do not engage in any significant business that is seasonal innature. Because our revenues are generated primarily from work on contractsperformed by our employees and subcontractors, first quarter revenues tend tobe lower than the other three quarters due to our policy of providing many of ouremployees seven holidays in the first quarter, compared to one or two in eachof the other quarters of the year. This is not necessarily a consistent patternas it depends upon actual activities in any given year.

 

The cost of Company sponsored research and development (R&D)activities was $8.1 million, $5.5 million, $4.8 million in 2005, 2004, 2003,respectively. We do not rely heavily on independent R&D, as most of our newproduct development occurs in conjunction with the performance of work on ourcontracts. The amount of contract required product development activityincreased in 2005 to $65 million, compared to $51 million and $46 million in2004 and 2003, respectively; however, these costs are included in cost of salesas they are directly related to contract performance.

 

We comply with federal, state and local laws and regulations regardingdischarge of materials into the environment and the handling and disposal ofmaterials classed as hazardous and/or toxic. Such compliance has no materialeffect upon the capital expenditures, earnings or competitive position of theCompany.

 

We employed approximately 6,000 persons at September 30, 2005.

 

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Our domestic products and services are sold almost entirely by ouremployees.  Overseas sales are madeeither directly or through representatives or agents.

 

Typically our long-term contracts provide for progress or advancepayments by our customers, which provide assistance in financing the workingcapital requirements on those contracts.

 

**RISK FACTORS**

 

The followingare some of the factors we believe could cause our actual results to differmaterially from expected and historical results.  Additional risks and uncertainties notpresently known to us, or that we currently see as immaterial, may also harmour business.  If any of the risks oruncertainties described below or any such additional risks and uncertaintiesactually occur, our business, results of operations or financial conditioncould be materially and adversely affected.

 

***We depend ongovernment contracts for substantially all of our revenues and the loss ofgovernment contracts or a delay or decline in funding of existing or futuregovernment contracts could adversely affect our sales and cash flows and ourability to fund our growth.***

*** ***

Our revenues fromcontracts, directly or indirectly, with foreign and United States, state,regional and local governmental agencies represented more than 95% of our totalrevenues in fiscal year 2005.  Although thesevarious government agencies are subject to common budgetary pressures and otherfactors, many of our various government customers exercise independentpurchasing decisions.  Because of theconcentration of business with governmental agencies, we are vulnerable toadverse changes in our revenues, income and cash flows if a significant numberof our government contracts or subcontracts or prospects are delayed orcanceled for budgetary or other reasons.

 

The factors thatcould cause us to lose these contracts or could otherwise materially harm ourbusiness, prospects, financial condition or results of operations include:

 

•                  re-allocation ofgovernment resources as the result of actual or threatened terrorism or hostileactivities;

 

•                  budgetconstraints affecting government spending generally, or specific departments oragencies such as U.S. or foreign defense and transit agencies and regionaltransit agencies, and changes in fiscal policies or a reduction of availablefunding;

 

•                  changes ingovernment programs or requirements or their timing;

 

•                  curtailment ofgovernment’s use of technology products and service providers;

 

•                  the adoption ofnew laws or regulations pertaining to government procurement;

 

•                  governmentappropriations delays or shutdowns;

 

•                  suspension orprohibition from contracting with the government or any significant agency withwhich we conduct business;

 

•                  impairment ofour reputation or relationships with any significant government agency withwhich we conduct business;

 

•                  impairment ofour ability to provide third-party guarantees and letters of credit; and

 

•                  delays in thepayment of our invoices by government payment offices.

 

***Governmentspending priorities may change in a manner adverse to our businesses.***

*** ***

In the past, ourbusinesses have been adversely affected by significant changes in governmentspending during periods of declining budgets. A significant decline in overall spending, or the decision not toexercise options to renew contracts, or the loss of or substantial decline inspending on a large program in 

 

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which weparticipate could materially adversely affect our business, prospects,financial condition or results of operations. As an example, the U.S. defense and intelligence budgets generally, andspending in specific agencies with which we work, such as the Department ofDefense, have declined from time to time for extended periods since themid-1980s, resulting in program delays, program cancellations and a slowing ofnew program starts.  Although spending ondefense-related programs by the U.S. government has recently increased, futurelevels of expenditures and authorizations for those programs may decrease,remain constant or shift to programs in areas where we do not currently provideproducts or services.

 

Even though ourcontract periods of performance for a program may exceed one year, Congressmust usually approve funds for a given program each fiscal year and maysignificantly reduce funding of a program in a particular year.  Significant reductions in theseappropriations or the amount of new defense contracts awarded may affect ourability to complete contracts, obtain new work and grow our business.  Congress does not always enact spending billsby the beginning of the new fiscal year. Such delays leave the affected agencies under-funded which delays theirability to contract.  Future delays anduncertainties in funding could impose additional business risks on us.

 

***Our contracts withgovernment agencies may be terminated or modified prior to completion, whichcould adversely affect our business.***

*** ***

Governmentcontracts typically contain provisions and are subject to laws and regulationsthat give the government agencies rights and remedies not typically found incommercial contracts, including providing the government agency with theability to unilaterally:

 

•                  terminate ourexisting contracts;

 

•                  reduce the valueof our existing contracts;

 

•                  modify some ofthe terms and conditions in our existing contracts;

 

•                  suspend orpermanently prohibit us from doing business with the government or with anyspecific government agency;

 

•                  control andpotentially prohibit the export of our products;

 

•                  cancel or delayexisting multiyear contracts and related orders if the necessary funds forcontract performance for any subsequent year are not appropriated;

 

•                  decline toexercise an option to extend an existing multiyear contract; and

 

•                  claim rights intechnologies and systems invented, developed or produced by us.

 

Most U.S. governmentagencies can terminate their contracts with us for convenience, and in thatevent we generally may recover only our incurred or committed costs, settlementexpenses and profit on the work completed prior to termination.  If an agency terminates a contract with usfor default, we are denied any recovery and may be liable for excess costsincurred by the agency in procuring undelivered items from an alternativesource.  We may receive show-cause orcure notices under contracts that, if not addressed to the agency’ssatisfaction, could give the agency the right to terminate those contracts fordefault or to cease procuring our services under those contracts.

 

In the event thatany of our contracts were to be terminated or adversely modified, there may besignificant adverse effects on our revenues, operating costs and income thatwould not be recoverable.

 

***Failure to retainexisting contracts or win new contracts under competitive bidding processes mayadversely affect our revenue.***

*** ***

We obtain most ofour contracts through a competitive bidding process, and substantially all ofthe business that we expect to seek in the foreseeable future likely will besubject to a competitive bidding process. Competitive bidding presents a number of risks, including:

 

•                  the need tocompete against companies or teams of companies with more financial andmarketing resources and more experience in bidding on and performing majorcontracts than we have;

 

11

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•                  the need tocompete against companies or teams of companies that may be long-term,entrenched incumbents for a particular contract for which we are competing andthat have, as a result, greater domain expertise and better customer relations;

 

•                  the need tocompete to retain existing contracts that have in the past been awarded to uson a sole-source basis;

 

•                  the expense anddelay that may arise if our competitors protest or challenge new contractawards;

 

•                  the need to bidon programs in advance of the completion of their design, which may result inunforeseen technological difficulties, cost overruns or both;

 

•                  the substantialcost and managerial time and effort, including design, development andmarketing activities, necessary to prepare bids and proposals for contractsthat may not be awarded to us;

 

•                  the need todevelop, introduce, and implement new and enhanced solutions to our customers’needs;

 

•                  the need tolocate and contract with teaming partners and subcontractors; and

 

•                  the need toaccurately estimate the resources and cost structure that will be required to performany fixed-price contract that we are awarded.

 

We may not beafforded the opportunity in the future to bid on contracts that are held byother companies and are scheduled to expire if the agency decides to extend theexisting contract.  If we are unable towin particular contracts that are awarded through the competitive biddingprocess, we may not be able to operate in the market for services that areprovided under those contracts for a number of years.  If we win a contract, and upon expiration, ifthe customer requires further services of the type provided by the contract,there is frequently a competitive rebidding process and there can be noassurance that we will win any particular bid, or that we will be able toreplace business lost upon expiration or completion of a contract.

 

Because of thecomplexity and scheduling of contracting with government agencies, we occasionallyincur costs before receiving contractual funding by the government agency.  In some circumstances, we may not be able torecover these costs in whole or in part under subsequent contractual actions.

 

If we are unableto consistently retain existing contracts or win new contract awards, our businessprospects, financial condition and results of operations will be adverselyaffected.

 

***Government audits of our contracts could result ina material charge to our earnings and have a negative effect on our cashposition following an audit adjustment.***

** **

Many of ourgovernment contracts are subject to cost audits which may occur several yearsafter the period to which the audit relates. If an audit identifies significant unallowable costs, we could incur amaterial charge to our earnings or reduction in our cash position.

 

***Ourinternational business exposes us to additional risks, including exchange ratefluctuations, foreign tax and legal regulations and political or economicinstability that could harm our operating results.***

 

Our internationaloperations, including our contract for the London Transport fare collectionsystem, subject us to risks associated with operating in and selling productsor services in foreign countries, including:

 

•                  devaluations andfluctuations in currency exchange rates;

 

•                  changes inforeign laws that adversely affect our ability to sell our products or servicesor our ability to repatriate profits to the United States;

 

•                  increases orimpositions of withholding and other taxes on remittances and other payments byforeign subsidiaries or joint ventures to us;

 

•                  increases ininvestment and other restrictions or requirements by foreign governments inorder to operate in the territory or own the subsidiary;

 

•                  costs ofcompliance with local laws, including labor laws;

 

12

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•                  export controlregulations and policies which govern our ability to supply foreign customers;

 

•                  unfamiliar andunknown business practices and customs;

 

•                  domestic andforeign government policies, including requirements to expend a portion ofprogram funds locally and governmental industrial cooperation requirements;

 

•                  the complexityand necessity of using foreign representatives and consultants;

 

•                  the uncertaintyof the ability of foreign customers to finance purchases;

 

•                  imposition oftariffs or embargoes, export controls and other trade restrictions;

 

•                  the difficultyof management and operation of an enterprise in various countries; and

 

•                  economic andgeopolitical developments and conditions, including international hostilities,acts of terrorism and governmental reactions, inflation, trade relationshipsand military and political alliances.

 

Our foreignsubsidiaries and joint ventures generally conduct business in foreigncurrencies and enter into contracts and make purchase commitments that aredenominated in foreign currencies.   Accordingly,we are exposed to fluctuations in exchange rates, which could have asignificant impact on our results of operations.  We have no control over the factors thatgenerally affect this risk, such as economic, financial and political eventsand the supply of and demand for applicable currencies.  While we use foreign exchange forward andoption contracts to hedge significant contract sales and purchase commitmentsthat are denominated in foreign currencies, our hedging strategy may notprevent us from incurring losses due to exchange fluctuations.

 

***Our operating margins may decline under our fixed-pricecontracts if we fail to estimate accurately the time and resources necessary tosatisfy our obligations.***

** **

Approximately 73%of our revenues in 2005 were from fixed-price contracts under which we bear therisk of cost overruns.  Our profits areadversely affected if our costs under these contracts exceed the assumptions weused in bidding for the contract.  Often,we are required to fix the price for a contract before the projectspecifications are finalized, which increases the risk that we will incorrectlyprice these contracts. The complexity of many of our engagements makes accuratelyestimating the time and resources required more difficult.

 

***We may be liablefor civil or criminal penalties under a variety of complex laws andregulations, and changes in governmental regulations could adversely affect ourbusiness and financial position.***

*** ***

Our businessesmust comply with and are affected by various government regulations that impactour operating costs, profit margins and our internal organization and operationof our businesses. These regulations affect how we do business and, in someinstances, impose added costs.  Anychanges in applicable laws could adversely affect our financialperformance.  Any material failure tocomply with applicable laws could result in contract termination, price or feereductions or suspension or debarment from contracting.  The more significant regulations include:

 

•                  the FederalAcquisition Regulations and all department and agency supplements, whichcomprehensively regulate the formation, administration and performance of U.S.government contracts;

 

•                  the Truth inNegotiations Act and implementing regulations, which require certification anddisclosure of all cost and pricing data in connection with contractnegotiations;

 

•                  laws,regulations and executive orders restricting the use and dissemination ofinformation classified for national security purposes and the exportation ofcertain products and technical data;

 

•                  regulations of moststate and regional agencies and foreign governments similar to those describedabove;

 

•                  the Sarbanes-OxleyAct of 2002; and

 

13

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•                  tax laws andregulations in the U.S. and in other countries in which we operate.

 

***Our failure toidentify, attract and retain qualified technical and management personnel couldadversely affect our existing businesses.***

*** ***

We may not be ableto attract and retain the highly qualified technical personnel, includingengineers, computer programmers, and personnel with security clearancesrequired for classified work, or management personnel to supervise suchactivities that are necessary for maintaining and growing our existingbusinesses.

 

***We may incursignificant costs in protecting our intellectual property which could adverselyaffect our profit margins. Our inability to protect our patents and proprietaryrights could adversely affect our businesses’ prospects and competitivepositions.***

*** ***

We seek to protectproprietary technology and inventions through patents and other proprietary-rightprotection.  The laws of some foreigncountries do not protect proprietary rights to the same extent as the laws ofthe United States.  If we are unable toobtain or maintain these protections, we may not be able to prevent thirdparties from using our proprietary rights. In addition, we may incursignificant expense both in protecting our intellectual property and indefending or assessing claims with respect to intellectual property owned byothers.

 

We also rely ontrade secrets, proprietary know-how and continuing technological innovation toremain competitive.  We have takenmeasures to protect our trade secrets and know-how, including the use ofconfidentiality agreements with our employees, consultants and advisors.  These agreements may be breached and remediesfor a breach may not be sufficient to compensate us for damages incurred.  We generally control and limit access to ourproduct documentation and other proprietary information.  Other parties may independently develop ourknow-how or otherwise obtain access to our technology.

 

***We compete primarily for government contractsagainst many companies that are larger, better financed and better known thanus.  If we are unable to competeeffectively, our business and prospects will be adversely affected.***

** **

Our businessesoperate in highly competitive markets.  Manyof our competitors are larger, better financed and better known companies whomay compete more effectively than we can. In order to remain competitive, we must keep our capabilitiestechnically advanced and compete on price and on value added to our customers.  Our ability to compete may be adverselyaffected by limits on our capital resources and our ability to invest inmaintaining and expanding our market share.

 

***The terms of ourfinancing arrangements may restrict our financial and operational flexibility,including our ability to invest in new business opportunities.***

*** ***

We currently haveunsecured borrowing arrangements.  Theterms of these borrowing arrangements include provisions that require and/orlimit our levels of working capital, debt and net worth and coverage of fixedcharges.  We also have providedperformance guarantees to various customers that include financial covenantsincluding limits on working capital, debt, tangible net worth and cash flowcoverage.

 

We may incurfuture obligations that would subject us to additional covenants that affectour financial and operational flexibility or subject us to different events ofdefault.

 

***Our revenues couldbe less than expected if we are not able to deliver services or products asscheduled due to disruptions in supply.***

*** ***

Because ourinternal manufacturing capacity is limited, we use contract manufacturers.While we use care in selecting our manufacturers, we have less control over thereliability of supply, quality and price of products or components than if wemanufactured them.  In some cases, weobtain products from a sole supplier or a limited group of suppliers.  Consequently, we risk disruptions in oursupply of key products and components if our suppliers fail or are unable toperform because of strikes, natural disasters, financial condition or otherfactors.  Any material supply disruptionscould adversely affect our ability to perform our obligations under ourcontracts and could result in cancellation of contracts or purchase orders, penalties,delays in realizing revenues, payment delays, as well as adversely affect ourongoing 

 

14

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product coststructure.

 

***Failureto perform by one of our subcontractors could materially and adversely affectour prime contract performance and our ability to obtain future business.***

 

Our performance ofcontracts may involve subcontracts, upon which we rely to deliver the productsto our customers.  We may have disputeswith subcontractors.  A failure by a subcontractorto satisfactorily deliver products or services may adversely affect our abilityto perform our obligations as a prime contractor.  Any subcontractor performance deficienciescould result in the customer terminating our contract for default, which couldexpose us to liability for excess costs of reprocurement by the customer andhave a material adverse effect on our ability to compete for other contracts.

 

***Wemay acquire other companies, which could increase our costs or liabilities orbe disruptive.***

 

Part of ourstrategy involves the acquisition of other companies.  We may not be able to integrate acquiredentities successfully without substantial expense, delay or operational orfinancial problems.  The acquisition andintegration of new businesses involves risk. The integration of acquired businesses may be costly and may adverselyimpact our results of operations or financial condition:

 

•                  we may need todivert management resources to integration, which may adversely affect ourability to pursue other more profitable activities;

 

•                  integration maybe difficult as a result of the necessity of coordinating geographicallyseparated organizations, integrating personnel with disparate businessbackgrounds and combining different corporate cultures;

 

•                  we may noteliminate redundant costs in selecting acquisition candidates; and

 

•                  one or more ofour acquisition candidates may also have unexpected liabilities or adverseoperating issues that we fail to discover through our due diligence proceduresprior to the acquisition.

 

***Our results ofoperations have historically fluctuated and may continue to fluctuatesignificantly in the future, which could adversely affect the market price ofour common stock.***

*** ***

Our revenues areaffected by factors such as the unpredictability of contract awards due to thelong procurement process for most of our products and services, the potentialfluctuation of governmental agency budgets, the time it takes for the newmarkets we target to develop and for us to develop and provide products andservices for those markets, competition and general economic conditions.  Our contract type/product mix and unitvolume, our ability to keep expenses within budget, and our pricing affect our operatingmargins. Significant growth in costs to complete our contracts, such as weexperienced in our transportation systems business in 2005, may adverselyaffect our results of operations in future periods. These factors and otherrisk factors described herein may adversely affect our results of operationsand cause our financial results to fluctuate significantly on a quarterly orannual basis.  Consequently, we do notbelieve that comparison of our results of operations from period to period isnecessarily meaningful or predictive of our likely future results ofoperations. In some future financial period our operating results may be belowthe expectations of public market analysts or investors.  If so, the market price of our securities maydecline significantly.

 

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**CAUTIONARY STATEMENT ABOUT FORWARD-LOOKINGINFORMATION**

 

This report,including the documents that we incorporate by reference, containsforward-looking statements within the meaning of Section 21E of the SecuritiesExchange Act of 1934, as amended, that are subject to the “safe harbor” createdby those sections. Any statements about our expectations, beliefs, plans,objectives, assumptions or future events or our future financial and/oroperating performance are not historical and may be forward-looking. Thesestatements are often, but not always, made through the use of words or phrasessuch as “may,” “will,” “anticipate,” “estimate,” “plan,” “project,” “continuing,”“ongoing,” “expect,” “believe,” “intend,” “predict,” “potential,” “opportunity”and similar words or phrases or the negatives of these words or phrases.  These statements involve estimates,assumptions and uncertainties, including those discussed in “Risk Factors” andelsewhere throughout this filing and in the documents incorporated by referenceinto this filing that could cause actual results to differ materially fromthose expressed in these statements.

 

Because the riskfactors referred to above could cause actual results or outcomes to differmaterially from those expressed in any forward-looking statements made by us oron our behalf, you should not place undue reliance on any forward-lookingstatements.  In addition, past financialand/or operating performance is not necessarily a reliable indicator of futureperformance and you should not use our historical performance to anticipateresults or future period trends. Further, any forward-looking statement speaks only as of the date onwhich it is made, and we undertake no obligation to update any forward-lookingstatement to reflect events or circumstances after the date on which thestatement is made or to reflect the occurrence of unanticipated events. Newfactors emerge from time to time, and it is not possible for us to predictwhich factors will arise. In addition, we cannot assess the impact of eachfactor on our business or the extent to which any factor, or combination offactors, may cause actual results to differ materially from those contained inany forward-looking statements.

 

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**Item 2.    PROPERTIES.**

 

We conduct our operations in approximately 1.6 million square feet ofboth owned and leased properties located in the United States and foreigncountries.  We own approximately 75% ofthe square footage, including 540,000 square feet located in San Diego,California and 468,000 square feet located in Orlando, Florida.  All owned and leased properties areconsidered in good condition and, with the exception of the Orlando facility,adequately utilized.  We are currently usingor leasing approximately 270,000 square feet of the Orlando facility and havehired a property management firm to assist us in leasing the excess space tothird parties. The following table identifies significant properties bybusiness segment:

** **
| **Location of Property**    | ** ** | **Owned or Leased** |
|-----------------------------|------------|---------------------|
|                        |       |                |
| **Corporate Headquarters:** |       |                |
| San Diego, CA               |       | Owned               |
|                        |       |                |
| **Defense:**                |       |                |
| Arlington, VA               |       | Leased              |
| Auckland, New Zealand       |       | Leased              |
| Hampton, VA                 |       | Leased              |
| Honolulu, HI                |       | Leased              |
| Kingstowne, VA              |       | Leased              |
| Lacey, WA                   |       | Leased              |
| Leavenworth, KS             |       | Leased              |
| Orlando, FL                 |       | Leased and owned    |
| San Diego, CA               |       | Leased and owned    |
| Santa Clara, CA             |       | Leased              |
| Shalimar, FL                |       | Leased              |
| Singapore                   |       | Leased              |
| Tijuana, Mexico             |       | Leased              |
|                        |       |                |
| **Transportation Systems:** | ** ** | ** **          |
| Auburn, NSW Australia       |       | Leased              |
| Glostrup, Denmark           |       | Leased              |
| Chantilly, VA               |       | Leased              |
| Chicago, IL                 |       | Leased              |
| Frankfurt, Germany          |       | Leased              |
| London, England             |       | Leased              |
| Los Angeles, CA             |       | Leased              |
| Montreal, Canada            |       | Leased              |
| New York, NY                |       | Leased and owned    |
| Merthsham, Surrey, England  |       | Leased              |
| Salfords, Surrey, England   |       | Owned               |
| San Diego, CA               |       | Leased and owned    |
| Tullahoma, TN               |       | Owned               |
| Vancouver, Canada           |       | Leased              |
|                        |       |                |
| **Other:**                  |       |                |
| Whittier, CA                |       | Leased              |
|                        |       |                |
| **Investment properties:**  |       |                |
| San Diego, CA               |       | Owned               |
| Teterboro, NJ               |       | Leased              |

 

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**Item 3.    LEGALPROCEEDINGS.**

 

In 1991, the government of Iran commenced an arbitrationproceeding against the Company seeking $12.9 million for reimbursement ofpayments made for equipment that was to comprise an Air Combat ManeuveringRange pursuant to a sales contract and an installation contract executed in1977, and an additional $15 million for unspecified damages. The Companycontested the action and brought a counterclaim for compensatory damages of$10.4 million.  In May 1997, the arbitraltribunal awarded the government of Iran $2.8 million, plus simple interest atthe rate of 12% per annum from September 21, 1991 through May 5, 1997. InDecember 1998, the United States District Court granted a motion by thegovernment of Iran confirming the arbitral award but denied Iran’s request foradditional interest and costs. Both parties have appealed. In October 2004, the9th Circuit Court of Appeals issued a decision in the case of twointerveners who are attempting to claim an attachment on the amount that wasawarded to Iran in the original arbitration. The Court denied one of theintervener’s liens but confirmed the second one’s lien. Iran has asked the U.S.Supreme Court to review the 9th Circuit decision. Pending any suchreview, the matter is on hold in the 9th Circuit and the obligationupon Cubic to pay is stayed. Under current United States law and policy, anypayment to the Revolutionary Government of Iran must first be licensed by theU.S. government. The Company is unaware of the likelihood of the U.S. governmentgranting such a license. The Company is continuing to pursue its appeal in the9th Circuit case against Iran, and management believes that alicense from the U.S. government would be required in any case to make paymentto or on behalf of Iran. However, in light of the 9th Circuit Court’sdecision in the related intervener’s case, in 2004 the Company established areserve of $6 million for the estimated potential liability and will continueto accrue interest on this amount until the ultimate outcome of the case isdetermined.

 

In January 2005, a bus fare collection systemcustomer in North America issued a “cure notice” to the Company, alleging thatits performance was not in accord with the contract. After unsuccessfulnegotiations with the customer, in March 2005, the Company filed for atemporary restraining order requesting that the customer be restrained fromfurther interfering with the Company’s performance and from issuing atermination notice. The next business day, the customer issued a letter terminatingthe contract for default. In April 2005, the customer filed a claim for breachof contract, seeking damages for “all actual, consequential and liquidateddamages sustained” as well as attorney’s fees. The contract limits liability tothe contract value of $8.2 million, but the customer appears to be attemptingto avoid that limitation. In May 2005, the Company filed an answer and generaldenial and subsequently filed a verified petition alleging breach of contractand other substantive claims, claiming the amount owed under the contract of$4.2 million, plus interest and attorney’s fees. Management believes that boththe customer’s default notice and claim for damages are unsupported and theCompany is vigorously defending against the allegations. Based on the advice ofcounsel, management believes the Company had substantially completed thecontract prior to termination and that the remaining contract value is due andthat the Company will prevail at trial; however, due to the uncertainty of collectingthe outstanding receivable balance an allowance for doubtful accounts of $4.2million was established and all costs incurred in the performance of thecontract and costs incurred outside the scope of the contract were expensed inthe year ended September 30, 2005.

 

In June 2005, a company that Cubic had an alleged agreementwith to potentially bid on a portion of automated fare collection contractsfiled a court claim for breach of contract, fraud, negligent misrepresentation,theft of trade secrets, and other related allegations. The claim seeks $15.0million in compensatory damages, punitive damages, disgorgement of profits anda permanent injunction. In accordance with the underlying contract arbitrationclause, in July 2005 the Company filed a claim with the American ArbitrationAssociation and requested the court case be stayed or dismissed. The Courtdenied the Company’s motion to transfer the case to arbitration. The Companyhas appealed that decision to the California Court of Appeals. Based on informationcurrently available, management believes there is no merit to the claim andthat it will prevail in this matter. Therefore, no liability has been recordedas of September 30, 2005.

 

TheCompany is not a party to any other pending proceedings, other than ordinarylitigation incidental to the business. Management believes the outcome of theseproceedings and the proceedings described above will not have a materiallyadverse effect on the Company’s financial position.

 

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**Item 4.    SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS.**

 

Information regarding submission of matters to a vote of securityholders is incorporated herein by reference from our definitive ProxyStatement, which will be filed no later than 30 days prior to the date of theAnnual Meeting of Shareholders.

 

**PART II**

 

**Item 5.    MARKETFOR THE REGISTRANT’S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS**.

 

The principal market on which our common stock is being traded is theAmerican Stock Exchange under the symbol CUB. The closing high and low sales prices for the stock, as reported in theconsolidated transaction reporting system on the American Stock Exchange forthe quarterly periods during the past two fiscal years, and dividend informationfor those periods, are as follows:

 

MARKET AND DIVIDEND INFORMATION

 
| ** **     | ** ** | **Sales Price of Common Shares** | ** ** | **Dividends per Share** | ** ** |
|----------------|------------|----------------------------------|------------|-------------------------|------------|
| ** **     | ** ** | **Fiscal 2005**                  | ** ** | **Fiscal 2004**         | ** ** | **Fiscal 2005** | ** ** | **Fiscal 2004** | ** ** |
| ** **     | ** ** | **High**                         | ** ** | **Low**                 | ** ** | **High** | ** ** | **Low** | ** ** | ** ** | ** ** | ** ** | ** ** |
| First quarter  |       | $                                | 25.92      |                    | $          | 21.36 |   | $ | 30.10 |   | $ | 22.17 |   | — |   | — |   |
| Second quarter |       | 24.15                            |       | 18.35                   |       | 27.01 |   | 21.13 |   | $ | .09 |   | $ | .07 |   |
| Third quarter  |       | 19.80                            |       | 16.53                   |       | 28.39 |   | 20.52 |   | — |   | — |   |
| Fourth quarter |       | 19.47                            |       | 16.61                   |       | 25.31 |   | 19.26 |   | $ | .09 |   | $ | .09 |   |
|                |            |                                  |            |                         |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

On November 18, 2005, the closing price of our common stock on theAmerican Stock Exchange was $17.80.

 

There were approximately 1,200 shareholders of record of our commonstock as of November 18, 2005.

 

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**Item 6. SELECTED FINANCIAL DATA.**

 

FINANCIAL HIGHLIGHTS ANDSUMMARY OF CONSOLIDATED OPERATIONS

 

(amounts in thousands,except per share data)

 
| ** **                                   | ** ** | **Years Ended September 30,** |
|----------------------------------------------|------------|-------------------------------|
| ** **                                   | ** ** | **2005**                      | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
|                                         |       |                          |   |   |   |   |   |   |   |   |   |
| **Results of Operations:**                   |       |                          |   |   |   |   |   |   |   |   |   |
| Sales                                        |       | $                             | 804,372 |   | $ | 722,012 |   | $ | 634,061 |   | $ | 559,604 |   | $ | 501,679 |   |
| Cost of sales                                |       | 672,541                       |   | 549,170 |   | 493,377 |   | 426,012 |   | 385,569 |   |
| Selling, general and administrative expenses |       | 110,644                       |   | 107,139 |   | 87,888 |   | 85,459 |   | 76,052 |   |
| Interest expense                             |       | 5,386                         |   | 4,658 |   | 3,659 |   | 3,538 |   | 3,601 |   |
| Income taxes                                 |       | 453                           |   | 19,394 |   | 18,514 |   | 11,484 |   | 10,266 |   |
| Net income                                   |       | 11,628                        |   | 36,911 |   | 36,519 |   | 29,437 |   | 20,842 |   |
|                                         |       |                          |   |   |   |   |   |   |   |   |   |
| Average number of shares outstanding         |       | 26,720                        |   | 26,720 |   | 26,720 |   | 26,720 |   | 26,720 |   |
|                                         |       |                          |   |   |   |   |   |   |   |   |   |
| **Per Share Data:**                          |       |                          |   |   |   |   |   |   |   |   |   |
| Net income                                   |       | $                             | 0.44 |   | $ | 1.38 |   | $ | 1.37 |   | $ | 1.10 |   | $ | 0.78 |   |
| Cash dividends                               |       | 0.18                          |   | 0.16 |   | 0.14 |   | 0.13 |   | 0.13 |   |
|                                         |       |                          |   |   |   |   |   |   |   |   |   |
| **Year-End Data:**                           |       |                          |   |   |   |   |   |   |   |   |   |
| Shareholders’ equity                    |       | $                             | 297,158 |   | $ | 298,767 |   | $ | 255,292 |   | $ | 213,163 |   | $ | 190,895 |   |
| Equity per share                             |       | 11.12                         |   | 11.18 |   | 9.55 |   | 7.98 |   | 7.14 |   |
| Total assets                                 |       | 547,280                       |   | 542,924 |   | 460,226 |   | 374,459 |   | 341,347 |   |
| Long-term debt                               |       | 43,776                        |   | 50,037 |   | 47,142 |   | 48,571 |   | 50,000 |   |

 

This summary should be read in conjunction with the relatedconsolidated financial statements and accompanying notes.

 

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| **Item 7.** | ** ** | **MANAGEMENT’S DISCUSSION AND ANALYSIS OF  FINANCIAL CONDITION AND RESULTS OF OPERATIONS.** |
|-------------|------------|--------------------------------------------------------------------------------------------------|

 

Our two primary businesses are in the defense and transportation industries. For the year ended September 30, 2005, 68% of sales were derived from defense, while 32% were derived from transportation fare collection systems and other commercial operations. These are high technology businesses that design, manufacture and integrate complex systems to meet the needs of various federal and regional government agencies in the U.S. and other nations around the world. The U.S. Government remains our largest customer, accounting for approximately 53% of sales in 2005 compared to 50% in 2004 and 44% in 2003.

 

Cubic DefenseApplications is a diversified supplier of constructive, live and virtualmilitary training systems, services and communication systems and products tothe U.S. Department of Defense, other government agencies and allied nations.We design instrumented range systems for fighter aircraft, armored vehicles andinfantry force-on-force live training; weapons effects simulations; laser-basedtactical and communication systems; and precision gunnery solutions.  Our services are focused on training missionsupport, computer simulation training, distributed interactive simulation,development of military training doctrine, force modernization services forNATO entrants and field operations and maintenance. Our communications productsare aimed at intelligence, surveillance, and search and rescue markets.

 

CubicTransportation Systems develops and delivers innovative fare collection systemsfor public transit authorities worldwide. We provide hardware, software and multiagency, multimodal transportationintegration technologies and services that allow the agencies to efficientlycollect fares, manage their operations, reduce shrinkage and make using publictransit a more convenient and attractive option for commuters.

 

**Consolidated Overview**

 

Sales in fiscal 2005 were $804 million compared to $722 million in 2004,an increase of 11%, and the fourth consecutive year of double-digit salesgrowth. Sales of $722 million in 2004 represented a 14% increase over 2003sales of $634 million. All of the sales growth in both 2004 and 2005 came from thedefense segment, while transportation systems sales were virtually flat for thethree year period from 2003 to 2005. The growth in 2005 defense sales all camefrom existing businesses, while nearly $40 million of the growth in fiscal 2004defense sales came from the training systems business we acquired at the end of2003. Transportation systems made two small acquisitions, one at the end of 2004and one early in 2005, which added about $9 million to fiscal 2005transportation systems sales. See the segment discussions following for further analysis of segment sales.

 

Operating income fell to $13.1 million in2005 compared to $54.2 million in 2004, representing a 76% decrease. Operatingincome in 2004 increased by 13% over 2003 operating income of $48.0 million. Theprimary cause of the decrease in operating income in 2005 was an operating lossof $13.8 million incurred in the transportation systems segment, compared tooperating income for the segment of $28.2 million in 2004. Defense operating incomedecreased from $34.5 million in 2004 to $30.1 million in 2005 primarily due toa change in sales from mature to newer systems with significant research anddevelopment content. Operating income was also impacted in 2005 by the costs ofinitial year compliance with Section 404 of the Sarbanes-Oxley Act of 2002.These costs, which are included in corporate and other costs in our segmentreporting, amounted to $1.4 million and included consultants, software andadditional audit fees. In 2004, both segments posted operating incomeimprovements over 2003, with the bigger increase coming from the defensesegment. Operating income in 2004 was impacted by a $6 million provision for alegal matter that arose from a contract with the government of Iran in 1977. Althoughthis was a defense related contract, we did not include this provision in thedefense segment due to the remote connection of this matter to our currentdefense operations, since the events in question occurred more than 25 yearsago. See the segment discussions following for further details of segmentoperating results.

 

Net income in 2005 was $11.6 million ($0.44 per share), down 69% from$36.9 million ($1.38 per share) 

 

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in 2004. Net income in 2004 was nearly the same as 2003 net income of$36.5 million ($1.37 per share). The drop in net income in 2005 was primarilybecause of the operating loss in the transportation systems segment, and wasfurther impacted by the decrease in defense segment operating income. Approximately$2.8 million of the 2005 net income was from a reduction in tax contingencyreserves in the fourth quarter, while $2.3 million, after taxes, of the 2004net income was from a gain on the sale of a life insurance policy in the thirdquarter. The loss provision for the Iran legal matter described above reduced2004 net income in the fourth quarter by approximately $3.8 million after taxes.Approximately $5.3 million, after taxes, of the 2003 net income was from gainson the sale of two parcels of real, which were no longer used in the business. Thefollowing table provides insight into our results of operations by summarizingthe effects of these items on our net income:

 
| ** **                               | ** ** | **2005**          | ** ** | **2004** | ** ** | **2003** | ** ** |
|------------------------------------------|------------|-------------------|------------|----------|------------|----------|------------|
| ** **                               | ** ** | **(in millions)** | ** ** |
| Earnings before certain identified items |       | $                 | 8.8        |     | $          | 38.4     |       | $ | 31.2 |   |
| Gains on sale of assets                  |       | —            |       | 2.3      |       | 5.3      |       |
| Provision for litigation (Iran)          |       | —            |       | (3.8     | )          | —   |       |
| Reversal of tax contingency reserves     |       | 2.8               |       | —   |       | —   |       |
| Net income as reported                   |       | $                 | 11.6       |     | $          | 36.9     |       | $ | 36.5 |   |

 

The gross margin fell to 16.4% in 2005 compared to 23.9% in 2004 and 22.2%in 2003. This decrease in 2005 reflects the losses incurred on contracts in thetransportation systems segment and lower margins from the defense segment dueto a loss in the Communications and Electronics Business Unit.

 

Selling, general and administrative(SG&A) expenses decreased to 13.8% of sales compared to 14.8% in 2004 and 13.9%in 2003. SG&A expenses in the defense segment increased in both 2004 and2005 in support of the higher sales volume, but decreased as a percentage ofsales in 2005. Transportation systems SG&A expenses decreased in 2005,after having increased in 2004 due to legal, consulting and engineering supportcosts incurred that year related to a contractual dispute with a formersubcontractor.

 

Company sponsored research and development (R&D) spending increasedin 2005 over the 2004 level, however, R&D costs continued to be incurredprimarily in connection with customer funded activities. We do not rely heavilyon company sponsored R&D, as most of our new product development occurs inconjunction with the performance of work on our contracts. The amount of contractrequired development activity increased in 2005 to $65 million, compared to $51million in 2004 and $46 million in 2003; however, these costs are included incost of sales as they are directly related to contract performance.

 

Interest and dividend income increased in 2005 over both 2004 and 2003 dueto somewhat higher cash balances available for investment and higher interestrates. Other income increased in 2005 compared to 2004, primarily because of increasedforeign currency exchange gains on intercompany advances to our U.K.subsidiary, primarily in the first quarter. Interest expense increased in both2004 and 2005 due to higher amounts of short-term borrowings during each yearthan in the previous year.

 

Our effective tax rate for 2005 was 3.7% of pretax income compared to 34.4%in 2004 and 33.6% in 2003. The decrease in our effective rate in 2005 was due primarilyto the reversal of tax contingency provisions related to a foreign and a domesticstate tax matter, each of which was resolved in our favor during, or subsequentto, the fourth quarter. Our effective tax rate could be affected in futureyears by, among other factors, the mix of business between U.S. and foreignjurisdictions, our ability to take advantage of available tax credits, andaudits of our records by taxing authorities.

 

Tax legislation enacted in 2004 repealed theExtraterritorial Income (ETI) exclusion relating to export sales. Over atransition period which began in 2005, the new tax rules phase-out the ETIexclusion benefit and provide for a new tax deduction in computing profits fromthe sale of products manufactured in the United States. The tax benefit werealize from the new legislation is expected to be substantially equivalent tothe benefit we realized under the repealed ETI exclusion.

 

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We are continuing to evaluate the impact of tax legislation enacted in2004 that provides incentives for repatriation of capital to the U.S. We mustdetermine if it will be beneficial to take advantage of the provisions of thelegislation by reinvesting some amount of capital in the United States infiscal 2006. We believe that if the decision is made to reinvest a portion ofthis capital in the U.S., the related tax liability will not have a materialimpact on Cubic’s results of operations or financial position.

 

**Defense Segment**

 
| **Years ended September 30,**        | ** ** | **2005**          | ** ** | **2004** | ** ** | **2003** | ** ** |
|--------------------------------------|------------|-------------------|------------|----------|------------|----------|------------|
| ** **                           | ** ** | **(in millions)** | ** ** |
|                                 |       |              |       |     |       |     |       |
| **Defense Segment Sales**            |       |              |       |     |       |     |       |
| Communications and electronics       |       | $                 | 52.5       |     | $          | 65.5     |       | $ | 55.0 |   |
| Training systems                     |       | 227.9             |       | 181.6    |       | 160.1    |       |
| Government services                  |       | 257.0             |       | 202.4    |       | 148.8    |       |
| Other                                |       | 6.0               |       | 3.4      |       | 1.2      |       |
|                                 |       | $                 | 543.4      |     | $          | 452.9    |       | $ | 365.1 |   |
|                                 |       |              |       |     |       |     |       |
| **Defense Segment Operating Income** |       |              |       |     |       |     |       |
| Communications and electronics       |       | $                 | (4.9       | )        | $          | 6.6      |       | $ | 4.2 |   |
| Training systems                     |       | 17.0              |       | 14.5     |       | 12.3     |       |
| Government services                  |       | 19.2              |       | 13.2     |       | 8.2      |       |
| Tactical systems and other           |       | (1.2              | )          | 0.2      |       | (0.1     | )          |
|                                 |       | $                 | 30.1       |     | $          | 34.5     |       | $ | 24.6 |   |

 

Defense sales grew to $543 million in 2005 from$453 million in 2004, a 20% increase. All of the increase in 2005 sales was “organic,”coming from businesses we owned in 2004. The biggest sales increase came fromthe government services business unit, which increased 27% from $202 million in2004 to $257 million in 2005. The increase in government services sales came bothfrom new contracts and the expansion of existing programs. The most significantgrowth came from a contract at the Joint Readiness Training Center (JRTC) inFort Polk, LA, in support of combat training exercises and from contracts formodeling the effects of weapons of mass destruction. Training systems salesincreased by 25%, from $182 million to $228 million, as a result of growth insales of air and ground combat training systems and laser engagement systems tothe U.S. and allied governments. Air combat training sales increased in 2005 asactivity on the major IDIQ contract we won in 2003 expanded. Ground combat trainingsales also increased due to training ranges we are building in Canada,Australia and the Middle East. We received new orders during the year formultiple integrated laser engagement systems (MILES), resulting in higher salesfrom this product line as well. Communications and electronics sales decreased20% from $66 million in 2004 to $53 million in 2005, as sales of legacy datalink and avionics products declined. We are encouraged by orders we receivedrecently for our new communications and electronics products, which we expectwill generate higher sales for this product line in the future.

 

Defense sales of $453 million in 2004 representedan increase of 24% over 2003 sales of $365 million. Of the increase in 2004sales, nearly $40 million came from the Simulation Systems Division (SSD)acquired in September 2003, which is included with training systems in the foregoingtable. Not including SSD, defense sales would have increased 13% from 2003 to2004. This growth came despite a decrease of nearly $20 million in trainingsystems sales, other than from SSD, due primarily to a decline in air combattraining sales from the 2003 level. MILES sales also decreased in 2004, butthis decrease was more than offset by higher sales from ground combat trainingsystems. Communications and Electronics Business Unit sales were also higher in2004 because of a contract we won in 2003 to develop a common data linksubsystem (CDLS) for the U.S. Navy. Government services sales increased by $54million in 2004, a 36% increase. As in 2005, the most significant salesincrease in government services came from the JRTC contract. Other than fromJRTC, government services sales grew by 20% in 2004.

 

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Operating income in the defense segment fell to $30.1million in 2005 from $34.5 million in 2004, a 13% decrease, after havingincreased 40% in 2004.  Higher operatingincome from training systems and government services was more than offset by anoperating loss in communications and electronics and start up expenses for thejoint venture we entered into early in the year. This 50/50 joint venture arrangement with theU.S. subsidiary of Rafael Armament Development Authority Ltd. (Rafael), anIsraeli company, will manufacture certain Rafael products for sale to the U.S.and Israeli defense forces. This new company began operations during the secondquarter this year, but did not receive its first contract award until shortly beforethe close of the fiscal year and, therefore, had no sales in fiscal 2005. Thebusiness incurred approximately $1.3 million in expenses in 2005, which areincluded in the table above under the caption “Tactical Systems and Other.”Cubic is the primary beneficiary of theventure, as defined in FIN 46 “*Consolidationof Variable Interest Entities,*” therefore, we consolidated thisjoint venture in our financial statements. As a result, all of the income andexpenses of this business are included in the calculation of operating incomeeven though it is only 50% owned by Cubic. Minority interest in the net lossfrom this business is reflected on the income statement and minority interestin the net assets is included on the balance sheet.

 

The operating loss incommunications and electronics in 2005 was primarily due to cost growthtotaling nearly $5 million on two contracts, one a program involving a newintelligence application of our data link and receiver technology and the otherthe CDLS contract mentioned above. In addition, approximately $2 million inoverstocked or obsolete communications products inventory was written down invalue to zero. This inventory valuation adjustment was due primarily to thetransition of this product line from building predominately surveillancereceivers to building power amplifiers. In addition, the decrease in sales oflegacy data link and avionics products reduced operating income by more than $6million. With the transition to the new communications and electronics productsnow complete, we are optimistic that this business unit can return toprofitability in fiscal 2006.

 

Operating income incommunications and electronics improved in 2004 over 2003 primarily because2003 was impacted by a loss provision of $3 million related to our investmentin new communications technology for the CDLS contract. In addition,communications and electronics operating income was bolstered in 2004 byperformance on another data link contract with a foreign customer. Avionicsproducts, such as personnel locator systems, generated higher operating incomein 2004; however, this was offset by operating losses from the surveillancereceiver product line.

 

Training systems operating incomeincreased in 2005, compared to 2004, because of higher sales from ground combattraining and MILES contracts. However, operating income as a percentage ofsales decreased slightly because a portion of the sales growth came from groundcombat training ranges in Canada, Australia and the Middle East that have lowprofit margins. In addition, two new contracts for laser engagement and combattraining systems were in the early stages of completion in 2005, with little orno profit recognized until they are further along toward completion. Operatingincome in training systems increased in 2004 over 2003 because of theacquisition of SSD late in 2003. SSD added $2.3 million to training systemsoperating income in 2004. Higher operating income from ground combat trainingsystems in 2004 offset the profit impact of lower sales volume from air combattraining systems and MILES products.

 

Government services operating income in 2005 increasedover 2004 due to higher sales volume and improved operating performance.Operating income as a percentage of sales increased from 6.5% in 2004 to nearly7.5% in 2005, as SG&A expenses did not increase in proportion to the salesincrease, thereby improving the profit margin. Government services operatingincome improved in 2004 compared to 2003 primarily because of higher salesvolume, but also because of improved performance from operations andmaintenance (O&M) contracts. The O&M business recorded a loss in 2003 onone particular contract which had experienced cost growth that year.

 

**Transportation Systems Segment**

 

Transportation systems sales were nearly flat for the 2003 to 2005period, with 2003 and 2004 virtually equal, at $253 million, while 2005 decreasedabout 3% to $246 million. North American sales in 2005 decreased from the 2004level by 15%, while sales in Australia and Europe increased about 14%. Thedecrease in North America was in contrast to 2004, when North American salesincreased by 8% over 2003. Sales from 

 

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European service contracts also increased in 2004, as well as sales inAustralia. These increases in 2004 were offset by an expected $47 million decrease in sales from the PRESTIGEcontract in London between 2003 and 2004 due to completion of the initialsystem installation. Sales from the PRESTIGE contract increased about $9million in 2005 over the 2004 level due to increased service activities andwork on contract change orders. Transportation systems made acquisitionsof two small parking system companies, one at the end of 2004 and one early in2005, which added about $9 million to fiscal 2005 transportation product sales.

 

Transportation systems incurred an operating loss in 2005 of $13.8million, compared to operating income in 2004 of $28.2 million. Projected costs to complete fare collectionsystems in five cities increased by $27.9 million more than we had estimatedlast year; therefore, a loss of that amount was recorded on these contractsduring the year. The primary cause of the cost growth was an increase inengineering hours incurred to complete the projects. We made progress towardcompletion of these projects during the year, and a significant amount of theequipment has been installed; however, the costs of accomplishing this werehigher than we were previously able to anticipate. The new cost estimates areour best estimates of the most likely costs to complete these contracts, threeof which are substantially complete and two of which should be substantiallycomplete by mid-2006. Remaining tasks on the contracts are now on schedule forcompletion in 2006 and we expect the transportation systems segment to returnto profitability in fiscal 2006.

 

Unrelated to these contracts, in the secondquarter we provided an allowance of $4.2 million for doubtful collection of an accountsreceivable balance with a customer that terminated its contract with us. Thisprovision is included in SG&A expenses in the consolidated statement ofincome. We believe that we have substantially performed the requirements of thecontract such that this payment is due to us and we believe the termination attemptby this customer is unwarranted. We also incurred an operating loss of $4.5million from the parking company we acquired last year. This was the result ofcost growth on two contracts as well a lack of sufficient sales volume toabsorb the overhead costs of the business. A restructuring plan has beendeveloped and will be implemented by the end of the first quarter of fiscalyear 2006. Costs of the restructuring and additional unabsorbed overheadexpenses will result in a loss from the parking company in the first quarter of2006.

 

Transportation Systems operating income of $28.2 million in 2004 increased16% from the 2003 level of $24.4 million. The increased operating income in2004 compared to 2003 resulted from higher sales and improved operatingperformance on service contracts in Europe and from a contract in the Far East.Higher profits from the PRESTIGE contract in 2004 were offset by costs associatedwith claim settlement proceedings.

 

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**Backlog**

 
| **September 30,**               | ** ** | **2005**          | ** ** | **2004** | ** ** |
|---------------------------------|------------|-------------------|------------|----------|------------|
| ** **                      | ** ** | **(in millions)** | ** ** |
| **Total backlog**               |       |              |       |     |       |
| Transportation  systems         |       | $                 | 733.3      |     | $          | 733.9 |   |
| Defense                         |       |              |       |     |       |
| Communications  and electronics |       | 57.3              |       | 61.5     |       |
| Training systems                |       | 318.9             |       | 317.6    |       |
| Government  services            |       | 344.1             |       | 377.0    |       |
| Tactical systems                |       | 7.4               |       | —   |       |
| Total defense                   |       | 727.7             |       | 756.1    |       |
| Total                           |       | $                 | 1,461.0    |     | $          | 1,490.0 |   |
|                            |       |              |       |     |       |
| **Funded backlog**              |       |              |       |     |       |
| Transportation  systems         |       | $                 | 733.3      |     | $          | 733.9 |   |
| Defense                         |       |              |       |     |       |
| Communications  and electronics |       | 57.3              |       | 61.5     |       |
| Training systems                |       | 318.9             |       | 317.6    |       |
| Government  services            |       | 92.0              |       | 72.7     |       |
| Tactical systems                |       | 7.4               |       | —   |       |
| Total defense                   |       | 475.6             |       | 451.8    |       |
| Total                           |       | $                 | 1,208.9    |     | $          | 1,185.7 |   |

 

In addition to the amounts identified above, the company has beenselected as a participant in or, in some cases, the sole contractor for severalsubstantial Indefinite Delivery, Indefinite Quantity (IDIQ) contracts.  IDIQ contracts are not included in backloguntil an order is received.

 

The difference between total backlog and funded backlog representsoptions under multiyear service contracts. Funding for these contracts comesfrom annual operating budgets of the U.S. government and the options arenormally exercised annually. Options for the purchase of additional systems orequipment are not included in backlog until exercised.

 

**New Accounting Standards**

 

In November 2004, the FASB issued Statementof Financial Accounting Standards No. 151, an amendment of ARB No. 43, Chapter4, Inventory Costs (SFAS No. 151). This accounting standard, which is effectivefor annual periods beginning after June 15, 2005, requires that abnormalamounts of idle facility expense, freight, handling costs, and wasted materials(spoilage) should be recognized as current-period charges. The adoption of SFASNo. 151 is not expected to have a material effect on the Company’s financialposition or results or operations.

 

**Liquidity and Capital Resources**

 

Cash flows from operations totaled $55 million in 2005, offsettingnegative cash flows from operations in the previous two years of $28 million in2004 and $26 million in 2003. The greatest contributor to positive cash flowsin 2005 was a $38 million decrease in accounts receivable. Both the defense andtransportation systems segments generated positive cash flows in 2005, with thetotal split nearly equally between them. Operating cash flows from the defensesegment were positive in all three years, while transportation systemsoperating cash flows were negative in 2003 and 2004, before turning positive in2005.

 

A portion of the transportation systems positive cash flows in 2005came from an $18 million claim settlement received in October 2004 related tothe PRESTIGE project, with the remainder coming from normal contractualpayments. Weexpect transportation systems cash flows to continue to be positive in fiscal2006, as contract milestones are reached, triggering customer payments thathave been deferred due to the contract performance issues described in thetransportations systems discussion above. Growth in accounts receivable due tothese deferred milestone payments accounted for the majority of the increase

 

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in accounts receivable and the negative cash flows in 2004. In fiscal2003, $55 million in negative cash flows came from the PRESTIGE project;however, this contract generated positive cash flows in both 2004 and 2005, inaddition to the claim settlement mentioned above.

 

We have classified certain unbilled accounts receivable balances asnoncurrent because we do not expect to receive payment within one year from thebalance sheet date. At September 30, 2005, $19 million of the $23 millionrelated to the PRESTIGE project, while at September 30, 2004, $30 million ofthe $33 million balance related to PRESTIGE.

 

Cash flows used in investing activities in 2005 included $8 million incapital expenditures, partially offset by the liquidation of $6 million inmarketable securities that had been held for sale. Investing activities in 2004included a $14 million cash receipt from the sale of a life insurance policy,$7 million in capital expenditures, $7 million used for acquisitions and thenet purchase of marketable securities held for sale of $3 million. In 2003,investing activities included $12 million in proceeds from the sale of two piecesof real estate which were no longer used in the business. In addition, a net amountof $3 million was used to purchase marketable securities, $34 million was usedfor an acquisition and $8 million was used for capital expenditures.

 

Financing activities in 2005 included scheduled debt payments of $6million, dividends paid to shareholders of $5 million (18 cents per share) andnet borrowings of $1 million on a short-term basis. Short-term borrowings inNew Zealand of $9 million were repaid in 2005, while $4 million was borrowed ona short-term basis in Canada to fund transportation systems operations thereand a net of $6 million was added to short-term borrowings in the U.S.

 

In 2004 we obtained a mortgage on our facility in the U.K. and used theproceeds to repay $6 million of short-term borrowings made in fiscal 2003 inthe U.K.  We borrowed $9 million in NewZealand in 2004 on a short-term basis to fund working capital growth in ourdefense subsidiary in that country and borrowed $16 million in the U.S. on ashort-term basis to fund domestic working capital requirements. Other financingactivities included scheduled debt payments of $2 million in 2004 and $1 millionin 2003, and the payment of $4 million in dividends to shareholders in both2004 and 2003.

 

Accumulatedother comprehensive income decreased by $8 million in 2005 because of foreigncurrency translation adjustments of $4 million and an increase in the minimumliability for our pension plan of $4 million. This leaves a positive balance of$2 million in accumulated other comprehensive income as of September 30, 2005compared to $10 million at September 30, 2004.

 

Thepension plan under-funded balance increased from the September 30, 2004 balanceof $34 million to a September 30, 2005 balance of $41 million. The plan assetsgenerated a healthy return again this year; however, growth in the net benefitobligation, caused primarily by lower long-term interest rates, caused theunder funded balance to increase. Pension expense decreased from $9.7 millionin 2004 to $8.7 million in 2005 due to an increase in plan assets available forinvestment and a lower actuarial loss than in 2004. We expect our pension expenseto increase in fiscal 2006 by about $1 million, back to the 2004 level, due primarilyto the increased actuarial loss experienced in fiscal 2005. We contributed $8.2million to the plans in 2005 and expect to make contributions of at least $8million during fiscal 2006.

 

Thenet deferred tax asset was $28 million at September 30, 2005 compared to $18million at September 30, 2004. Of these amounts, $6 million and $4 million at September30, 2005 and 2004, respectively, resulted from the tax effect of recording anadditional minimum pension liability. We expect to generate sufficient taxableincome in the future such that the net deferred tax asset will be realized.

 

Our financial condition remains strong with working capital of $242 millionand a current ratio of 2.3 at September 30, 2005. We expect that cash on handand our ability to access the debt markets will be adequate to meet our workingcapital requirements for the foreseeable future. In addition to the short-termborrowing arrangements we have in the U.K., New Zealand and Canada, we have a committed five year creditfacility from a group of financial institutions in the U.S., aggregating $150million.  As of September 30, 2005, $22million of this amount was used, with approximately another $29 millionavailable under a technical 

 

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financial ratio calculation.  Our total debt to capital ratio at September30, 2005 was 20%, which is at a conservative level and well below industry averages.

 

The following is a schedule of ourcontractual obligations outstanding as of September 30, 2005:

 
| ** **            | ** ** | **Total**         | ** ** | **Less than 1  Year** | ** ** | **1 - 3 years** | ** ** | **4 - 5 years** | ** ** | **After 5 years** | ** ** |
|-----------------------|------------|-------------------|------------|-----------------------|------------|-----------------|------------|-----------------|------------|-------------------|------------|
| ** **            | ** ** | **(in millions)** | ** ** |
| Long-term debt        |       | $                 | 49.8       |                  | $          | 6.0             |       | $               | 12.1       |              | $          | 10.7 |   | $ | 21.0 |   |
| Interest payments     |       | 13.4              |       | 2.8                   |       | 4.6             |       | 3.1             |       | 2.9               |       |
| Operating leases      |       | 22.9              |       | 6.1                   |       | 8.1             |       | 4.8             |       | 3.9               |       |
| Deferred compensation |       | 8.7               |       | 1.1                   |       | 1.3             |       | 0.6             |       | 5.7               |       |
|                       |            |                   |            |                       |            |                 |            |                 |            |                   |            |  |  |  |  |  |

 

**Critical Accounting Policies, Estimates and Judgments**

 

Our financial statements are prepared in accordance with accounting principles that are generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. We continually evaluate our estimates and judgments, the most critical of which are those related to revenue recognition, income taxes, valuation of goodwill and pension costs. We base our estimates and judgments on historical experience and other factors that we believe to be reasonable under the circumstances. Materially different results can occur as circumstances change and additional information becomes known.

 

Besides the estimates identified above that are considered critical, we make many other accounting estimates in preparing our financial statements and related disclosures. All estimates, whether or not deemed critical, affect reported amounts of assets, liabilities, revenues and expenses, as well as disclosures of contingent assets and liabilities. These estimates and judgments are also based on historical experience and other factors that are believed to be reasonable under the circumstances. Materially different results can occur as circumstances change and additional information becomes known, even for estimates and judgments that are not deemed critical.

 

This discussion of critical accounting policies, estimates and judgments should be read in conjunction with other disclosures included in this discussion, and the Notes to the Consolidated Financial Statements related to estimates, contingencies and new accounting standards. Significant accounting policies are identified in Note 1 to the Consolidated Financial Statements. We have discussed each of the “critical” accounting policies and the related estimates with the audit committee of the Board of Directors.

 

*Revenue Recognition*

 

Most of our business is derived fromlong-term development, production and system integration contracts which weaccount for consistent with the American Institute of Certified PublicAccountants’ (AICPA) audit and accounting guide, *Audits ofFederal Government Contractors*, and the AICPA’s Statement ofPosition No. 81-1, *Accounting for Performanceof Construction-Type and Certain Production-Type Contracts*. Weconsider the nature of these contracts, and the types of products and servicesprovided, when we determine the proper accounting for a particular contract.Generally, we record revenue for long-term fixed price contracts on a percentageof completion basis using the cost-to-cost method to measure progress towardcompletion. Most of our long-term fixed-price contracts require us to deliverminimal quantities over a long period of time or to perform a substantial levelof development effort in relation to the total value of the contract. Under thecost-to-cost method of accounting, we recognize revenue based on a ratio of thecosts incurred to the estimated total costs at completion. Amounts representingcontract change orders, claims or other items are included in the contractvalue only when they can be reliably estimated and realization is considered probable.Provisions are made on a current basis to fully recognize any anticipatedlosses on contracts.

 

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We record sales under cost-reimbursement-typecontracts as we incur the costs. Incentives or penalties and awards applicableto performance on contracts are considered in estimating sales and profits, andare recorded when there is sufficient information to assess anticipatedcontract performance. Incentive provisions that increase or decrease earningsbased solely on a single significant event are not recognized until the eventoccurs. We have accounting policies in place to address these and other complexissues in accounting for long-term contracts.

 

Sales of products are recorded when a firmsales agreement is in place, delivery has occurred and collectibility of thefixed or determinable sales price is reasonably assured. Sales of services arerecorded when performed in accordance with contracts or service agreements.  Sales and profits on contracts thatspecify multiple deliverables are allocated to separate units of accountingwhen there is objective evidence that each accounting unit has value to thecustomer on a stand-alone basis. Separate units of accounting are based upon values assigned under theterms of such contracts.

 

*Income Taxes*

 

Significant judgment is required in determining our income tax provisions and in evaluating our tax return positions. We establish reserves when, despite our belief that our tax return positions are fully supportable, we believe that certain positions are likely to be challenged and that we may not prevail. We adjust these reserves in light of changing facts and circumstances, such as the progress of a tax audit.

 

Tax regulations require items to be included in the tax return at different times than the items are reflected in the financial statements and are referred to as timing differences. In addition, some expenses are not deductible on our tax return and are referred to as permanent differences. Timing differences create deferred tax assets and liabilities. Deferred tax assets generally represent items that can be used as a tax deduction or credit in future years for which we have already recorded the benefit in our income statement. We establish valuation allowances for our deferred tax assets when the amount of expected future taxable income is not likely to support the use of the deduction or credit. Deferred tax liabilities generally represent deductions we have taken on our tax return but have not yet recognized as expense in our financial statements. We have not recognized any United States tax expense on undistributed earnings of our foreign subsidiaries since we intend to reinvest the earnings outside the United States for the foreseeable future. These undistributed earnings totaled approximately $70 million at September 30, 2005.

 

*Valuation of Goodwill*

 

We evaluate our recorded goodwill balances for potential impairmentannually by comparing the fair value of each reporting unit to its carryingvalue, including recorded goodwill. We have not yet had a case where thecarrying value exceeded the fair value; however, if it did, impairment would bemeasured by comparing the derived fair value of goodwill to its carrying value,and any impairment determined would be recorded in the current period. To datethere has been no impairment of our recorded goodwill. Goodwill balances byreporting unit are as follows:

 
| **September 30,**             | ** ** | **2005**          | ** ** | **2004** | ** ** |
|-------------------------------|------------|-------------------|------------|----------|------------|
| ** **                    | ** ** | **(in millions)** | ** ** |
|                          |       |              |       |     |       |
| Defense systems  and products |       | $                 | 16.6       |     | $          | 17.5 |   |
| Defense services              |       | 9.7               |       | 9.7      |       |
| Transportation  systems       |       | 8.2               |       | 8.0      |       |
| Total goodwill                |       | $                 |  34.5 |     | $          |  35.2 |   |

 

Determining the fair value of a reporting unit for purposes of thegoodwill impairment test is judgmental in nature and often involves the use ofsignificant estimates and assumptions. These estimates and assumptions couldhave a significant impact on whether or not an impairment charge is recognizedand also the magnitude of any such charge. We currently perform internalvaluation analysis and consider other market information that is publiclyavailable. Estimates of fair value are primarily determined using discountedcash flows and comparisons with recent transactions. These approaches usesignificant estimates and 

 

29

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assumptions including projected future cash flows, discount ratereflecting the inherent risk in future cash flows, perpetual growth rate anddetermination of appropriate market comparables.

 

*Pension Costs*

 

The measurement of our pension obligations and costs is dependent on a variety of assumptions used by our actuaries. These assumptions include estimates of the present value of projected future pension payments to plan participants, taking into consideration the likelihood of potential future events such as salary increases and demographic experience. These assumptions may have an effect on the amount and timing of future contributions.

 

The assumptions used in developing the required estimates include the following key factors:

 

•                  Discount rates

•                  Inflation

•                  Salary growth

•                  Expected return on plan assets

•                  Retirement rates

•                  Mortality rates

 

We base the discount rate assumption on investment yields available at year-end on high quality corporate long-term bonds. Our inflation assumption is based on an evaluation of external market indicators. The salary growth assumptions reflect our long-term actual experience in relation to the inflation assumption. The expected return on plan assets reflects asset allocations, our historical experience, our investment strategy and the views of investment managers and large pension sponsors. Retirement and mortality rates are based primarily on actual plan experience. The effects of actual results differing from our assumptions are accumulated and amortized over future periods, and therefore, generally affect our recognized expense in such future periods.

 

**Item 7a. QUANTITATIVE AND QUALITATIVEDISCLOSURE ABOUT MARKET RISK**

 

**Interest Rate Risk**

 

We invest in money market instruments and short-term marketable debtand equity securities that are tied to floating interest rates being offered atthe time the investment is made. We maintain short-term borrowing arrangementsin the U.S., U.K., New Zealand and Canada, which are also tied to floatinginterest rates (LIBOR and the U.S. prime rate and the U.K. and New Zealand baserates). We also have senior unsecured notes payable to insurance companies thatare due in annual installments. These notes have fixed coupon interest rates.See Note 5 to the Consolidated Financial Statements for more information.

 

Interest income earned on our short-term investments is affected bychanges in the general level of U.S. and U.K. interest rates. These incomestreams are generally not hedged. Interest expense incurred under the short-term borrowing arrangements isaffected by changes in the general level of interest rates in the U.S., U.K.,New Zealand and Canada.  The expenserelated to these cost streams is usually not hedged since it is eitherrevolving, payable within three months and/or immediately callable by thelender at any time. Interest expense incurred under the long-term notes payableis not affected by changes in any interest rate because it is fixed.  However, we have in the past, and may in thefuture, use an interest rate swap to essentially convert this fixed rate into afloating rate for some or all of the long-term debt outstanding.  The purpose of a swap would be to tie theinterest expense risk related to these borrowings to the interest income riskon our short-term investments, thereby mitigating our net interest rate risk.We believe that we are not significantly exposed to interest rate risk at thispoint in time.  There was no interestrate swap outstanding at September 30, 2005.

 

**Foreign Currency Exchange Risk**

 

In the ordinary course of business, we enter into firm sale andpurchase commitments denominated in 

 

30

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many foreign currencies.  We havea policy to hedge those commitments greater than $20,000 by using foreigncurrency exchange forward and option contracts that are denominated incurrencies other than the functional currency of the subsidiary responsible forthe commitment, typically the British pound, Canadian dollar, euro, New Zealanddollar and Australian dollar.  Thesecontracts are designed to be effective hedges regardless of the direction ormagnitude of any foreign currency exchange rate change, because they result inan equal and opposite income or cost stream that offsets the change in thevalue of the underlying commitment.  SeeNote 1 to the Consolidated Financial Statements for more information on ourforeign currency translation and transaction accounting policies.  We also use balance sheet hedges to mitigateforeign exchange risk.  This strategyinvolves incurring British pound denominated debt (See Interest Rate Riskabove) and having the option of paying off the debt using U.S. dollar orBritish pound funds. We do not believe that we are significantly exposed toforeign currency exchange rate risk at this point in time.

 

Investments in our foreign subsidiaries in the U.K., Australia, NewZealand, and Canada are not hedged because we consider them to be investedindefinitely.  In addition, we generallyhave control over the timing and amount of earnings repatriation and expect touse this control to mitigate foreign currency exchange risk.

 

31

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**Item 8.    FINANCIALSTATEMENTS AND SUPPLEMENTAL DATA.**

 

CUBIC CORPORATION

 

CONSOLIDATED BALANCE SHEETS

 
| ** **                                 | ** ** | **September 30,**  | ** ** |
|--------------------------------------------|------------|--------------------|------------|
| ** **                                 | ** ** | **2005**           | ** ** | **2004** | ** ** |
| ** **                                 | ** ** | **(in thousands)** | ** ** |
| ASSETS                                     |       |               |       |   |   |
|                                       |       |               |       |   |   |
| CURRENT ASSETS                             |       |               |       |   |   |
| Cash and cash  equivalents                 |       | $                  | 48,860     |   | $ | 10,622 |   |
| Marketable  securities, available-for-sale |       | —             |       | 6,200 |   |
| Accounts  receivable:                      |       |               |       |   |   |
| Trade and other  receivables               |       | 11,085             |       | 29,771 |   |
| Long-term  contracts                       |       | 304,688            |       | 314,286 |   |
| Allowance for  doubtful accounts           |       | (5,002             | )          | (860 | ) |
|                                       |       | 310,771            |       | 343,197 |   |
|                                       |       |               |       |   |   |
| Inventories                                |       | 21,530             |       | 23,967 |   |
| Deferred income  taxes                     |       | 24,798             |       | 15,816 |   |
| Prepaid expenses  and other current assets |       | 17,871             |       | 13,494 |   |
| TOTAL CURRENT ASSETS                       |       | 423,830            |       | 413,296 |   |
|                                       |       |               |       |   |   |
| LONG-TERM CONTRACT RECEIVABLES             |       | 22,900             |       | 33,000 |   |
|                                       |       |               |       |   |   |
| PROPERTY, PLANT AND EQUIPMENT              |       |               |       |   |   |
| Land and land  improvements                |       | 14,990             |       | 15,039 |   |
| Buildings and  improvements                |       | 41,154             |       | 39,660 |   |
| Machinery and  other equipment             |       | 79,713             |       | 81,029 |   |
| Leasehold  improvements                    |       | 3,665              |       | 3,155 |   |
| Accumulated  depreciation and amortization |       | (87,345            | )          | (86,524 | ) |
|                                       |       | 52,177             |       | 52,359 |   |
|                                       |       |               |       |   |   |
| OTHER ASSETS                               |       |               |       |   |   |
| Deferred income  taxes                     |       | 3,293              |       | 2,108 |   |
| Goodwill                                   |       | 34,473             |       | 35,173 |   |
| Miscellaneous  other assets                |       | 10,607             |       | 6,988 |   |
|                                       |       | 48,373             |       | 44,269 |   |
|                                       |       |               |       |   |   |
| TOTAL ASSETS                               |       | $                  | 547,280    |   | $ | 542,924 |   |

 

See accompanying notes.

 

32

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| ** **                                                                                             | ** ** | **September 30,**  | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|--------------------|------------|
| ** **                                                                                             | ** ** | **2005**           | ** ** | **2004** | ** ** |
| ** **                                                                                             | ** ** | **(in thousands)** | ** ** |
| LIABILITIES AND SHAREHOLDERS’ EQUITY                                                              |       |               |       |   |   |
|                                                                                                   |       |               |       |   |   |
| CURRENT LIABILITIES                                                                                    |       |               |       |   |   |
| Short-term  borrowings                                                                                 |       | $                  | 26,302     |   | $ | 25,048 |   |
| Trade accounts  payable                                                                                |       | 30,256             |       | 28,317 |   |
| Customer  advances                                                                                     |       | 41,239             |       | 51,182 |   |
| Accrued  compensation                                                                                  |       | 36,601             |       | 28,651 |   |
| Accrued pension  liability                                                                             |       | 7,953              |       | 8,618 |   |
| Other current  liabilities                                                                             |       | 27,270             |       | 25,007 |   |
| Income taxes  payable                                                                                  |       | 6,571              |       | 5,908 |   |
| Current  maturities of long-term debt                                                                  |       | 6,040              |       | 6,057 |   |
| TOTAL CURRENT LIABILITIES                                                                              |       | 182,232            |       | 178,788 |   |
|                                                                                                   |       |               |       |   |   |
| LONG-TERM DEBT                                                                                         |       | 43,776             |       | 50,037 |   |
|                                                                                                   |       |               |       |   |   |
| OTHER LIABILITIES                                                                                      |       |               |       |   |   |
| Accrued pension  liability                                                                             |       | 16,179             |       | 9,009 |   |
| Deferred  compensation                                                                                 |       | 7,584              |       | 6,323 |   |
|                                                                                                   |       |               |       |   |   |
| MINORITY INTEREST                                                                                      |       | 351                |       | — |   |
|                                                                                                   |       |               |       |   |   |
| COMMITMENTS AND CONTINGENCIES                                                                          |       | —             |       | — |   |
|                                                                                                   |       |               |       |   |   |
| SHAREHOLDERS’ EQUITY                                                                              |       |               |       |   |   |
| Common stock, no  par value:                                                                           |       |               |       |   |   |
| Authorized—50,000,000  shares   Issued—35,664,729 shares, outstanding—26,719,845 shares |       | 234                |       | 234 |   |
| Additional  paid-in capital                                                                            |       | 12,123             |       | 12,123 |   |
| Retained  earnings                                                                                     |       | 319,200            |       | 312,381 |   |
| Accumulated  other comprehensive income                                                                |       | 1,667              |       | 10,095 |   |
| Treasury stock  at cost—8,944,884 shares                                                          |       | (36,066            | )          | (36,066 | ) |
|                                                                                                   |       | 297,158            |       | 298,767 |   |
|                                                                                                   |       |               |       |   |   |
| TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY                                                        |       | $                  | 547,280    |   | $ | 542,924 |   |

 

See accompanyingnotes.

 

33

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CUBIC CORPORATION

 

CONSOLIDATED STATEMENTS OFINCOME

 
| ** **                                    | ** ** | **Years Ended September 30,**                     | ** ** |
|-----------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                    | ** ** | **2005**                                          | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                    | ** ** | **(amounts in thousands, except per share data)** | ** ** |
|                                          |       |                                              |       |   |   |   |   |
| Net sales                                     |       | $                                                 | 804,372    |   | $ | 722,012 |   | $ | 634,061 |   |
|                                          |       |                                              |       |   |   |   |   |
| Costs and expenses:                           |       |                                              |       |   |   |   |   |
| Cost of sales                                 |       | 672,541                                           |       | 549,170 |   | 493,377 |   |
| Selling, general  and administrative expenses |       | 110,644                                           |       | 107,139 |   | 87,888 |   |
| Research and  development                     |       | 8,083                                             |       | 5,494 |   | 4,819 |   |
| Provision for  litigation                     |       | —                                            |       | 6,000 |   | — |   |
|                                          |       | 791,268                                           |       | 667,803 |   | 586,084 |   |
|                                          |       |                                              |       |   |   |   |   |
| Operating income                              |       | 13,104                                            |       | 54,209 |   | 47,977 |   |
|                                          |       |                                              |       |   |   |   |   |
| Other income (expenses):                      |       |                                              |       |   |   |   |   |
| Gain on sale of  assets                       |       | —                                            |       | 4,510 |   | 8,448 |   |
| Interest and  dividends                       |       | 1,046                                             |       | 431 |   | 1,161 |   |
| Interest expense                              |       | (5,386                                            | )          | (4,658 | ) | (3,659 | ) |
| Other income                                  |       | 2,668                                             |       | 1,813 |   | 1,106 |   |
| Minority  interest in loss of subsidiary      |       | 649                                               |       | — |   | — |   |
|                                          |       |                                              |       |   |   |   |   |
| Income before income taxes                    |       | 12,081                                            |       | 56,305 |   | 55,033 |   |
|                                          |       |                                              |       |   |   |   |   |
| Income taxes                                  |       | 453                                               |       | 19,394 |   | 18,514 |   |
|                                          |       |                                              |       |   |   |   |   |
| Net income                                    |       | $                                                 | 11,628     |   | $ | 36,911 |   | $ | 36,519 |   |
|                                          |       |                                              |       |   |   |   |   |
| Basic and diluted net income per common share |       | $                                                 | 0.44       |   | $ | 1.38 |   | $ | 1.37 |   |
|                                          |       |                                              |       |   |   |   |   |
| Average number of common shares outstanding   |       | 26,720                                            |       | 26,720 |   | 26,720 |   |

 

See accompanyingnotes.

 

34

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CUBIC CORPORATION

 

CONSOLIDATED STATEMENTS OFCHANGES IN SHAREHOLDERS’ EQUITY

 
| ** **                                                 | ** ** | ** **        | ** ** | ** **   | ** ** | **Accumulated**    | ** ** | ** **   | ** ** | ** **     | ** ** | ** ** | ** ** |
|------------------------------------------------------------|------------|-------------------|------------|--------------|------------|--------------------|------------|--------------|------------|----------------|------------|------------|------------|
| ** **                                                 | ** ** | ** **        | ** ** | ** **   | ** ** | **Other**          | ** ** | ** **   | ** ** | **Additional** | ** ** | ** ** | ** ** |
| **(in  thousands except**                                  | ** ** | **Comprehensive** | ** ** | **Treasury** | ** ** | **Comprehensive**  | ** ** | **Retained** | ** ** | **Paid-in**    | ** ** | **Common** | ** ** |
| **per  share amounts)**                                    | ** ** | **Income**        | ** ** | **Stock**    | ** ** | **Income  (Loss)** | ** ** | **Earnings** | ** ** | **Capital**    | ** ** | **Stock**  | ** ** |
| October 1, 2002                                            |       |              |       | (36,066      | )          | (10,096            | )          | 246,968      |       | 12,123         |       | 234        |       |
|                                                       |       |              |       |         |       |               |       |         |       |           |       |       |       |
| Comprehensive  income:                                     |       |              |       |         |       |               |       |         |       |           |       |       |       |
| Net income                                                 |       | $                 | 36,519     |         | —     |               | —     |         | 36,519     |           | —     |       | —     |   |
| Unrealized  holding gains on marketable securities         |       | 57                |       | —       |       | 57                 |       | —       |       | —         |       | —     |       |
| Reduction of  minimum pension liability                    |       | 1,581             |       | —       |       | 1,581              |       | —       |       | —         |       | —     |       |
| Foreign currency  translation adjustment                   |       | 6,918             |       | —       |       | 6,918              |       | —       |       | —         |       | —     |       |
| Net unrealized  gains from cash flow hedges                |       | 795               |       | —       |       | 795                |       | —       |       | —         |       | —     |       |
| Comprehensive  income                                      |       | $                 | 45,870     |         |       |               |       |         |       |           |       |       |       |   |
|                                                       |       |              |       |         |       |               |       |         |       |           |       |       |       |
| Cash dividends  paid — $.14 per share of common stock |       |              |       | —       |       | —             |       | (3,741       | )          | —         |       | —     |       |
| September 30,  2003                                        |       |              |       | (36,066      | )          | (745               | )          | 279,746      |       | 12,123         |       | 234        |       |
|                                                       |       |              |       |         |       |               |       |         |       |           |       |       |       |
| Comprehensive  income:                                     |       |              |       |         |       |               |       |         |       |           |       |       |       |
| Net income                                                 |       | $                 | 36,911     |         | —     |               | —     |         | 36,911     |           | —     |       | —     |   |
| Realized gains  on marketable securities                   |       | (160              | )          | —       |       | (160               | )          | —       |       | —         |       | —     |       |
| Reduction of  minimum pension liability                    |       | 2,568             |       | —       |       | 2,568              |       | —       |       | —         |       | —     |       |
| Foreign currency  translation adjustment                   |       | 8,788             |       | —       |       | 8,788              |       | —       |       | —         |       | —     |       |
| Net unrealized  losses from cash flow hedges               |       | (356              | )          | —       |       | (356               | )          | —       |       | —         |       | —     |       |
| Comprehensive  income                                      |       | $                 | 47,751     |         |       |               |       |         |       |           |       |       |       |   |
|                                                       |       |              |       |         |       |               |       |         |       |           |       |       |       |
| Cash dividends  paid — $.16 per share of common stock |       |              |       | —       |       | —             |       | (4,276       | )          | —         |       | —     |       |
| September 30,  2004                                        |       |              |       | $            | (36,066    | )                  | $          | 10,095       |       | $              | 312,381    |       | $          | 12,123 |   | $ | 234 |   |
|                                                       |       |              |       |         |       |               |       |         |       |           |       |       |       |
| Comprehensive  income:                                     |       |              |       |         |       |               |       |         |       |           |       |       |       |
| Net income                                                 |       | $                 | 11,628     |         | —     |               | —     |         | 11,628     |           | —     |       | —     |   |
| Increase in  minimum pension liability                     |       | (4,027            | )          | —       |       | (4,027             | )          | —       |       | —         |       | —     |       |
| Foreign currency  translation adjustment                   |       | (3,970            | )          | —       |       | (3,970             | )          | —       |       | —         |       | —     |       |
| Net unrealized  losses from cash flow hedges               |       | (431              | )          | —       |       | (431               | )          | —       |       | —         |       | —     |       |
| Comprehensive  income                                      |       | $                 | 3,200      |         |       |               |       |         |       |           |       |       |       |   |
|                                                       |       |              |       |         |       |               |       |         |       |           |       |       |       |
| Cash dividends  paid — $.18 per share of common stock |       |              |       | —       |       | —             |       | (4,809       | )          | —         |       | —     |       |
|                                                       |       |              |       |         |       |               |       |         |       |           |       |       |       |
| September 30,  2005                                        |       |              |       | $            | (36,066    | )                  | $          | 1,667        |       | $              | 319,200    |       | $          | 12,123 |   | $ | 234 |   |

 

Seeaccompanying notes.

 

35

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CUBIC CORPORATION

 

CONSOLIDATED STATEMENTSOF CASH FLOWS

 
| ** **                                                                                   | ** ** | **Years Ended September 30,** | ** ** |
|----------------------------------------------------------------------------------------------|------------|-------------------------------|------------|
| ** **                                                                                   | ** ** | **2005**                      | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                                                   | ** ** | **(in thousands)**            | ** ** |
| Operating  Activities:                                                                       |       |                          |       |   |   |   |   |
| Net income                                                                                   |       | $                             | 11,628     |   | $ | 36,911 |   | $ | 36,519 |   |
| Adjustments to  reconcile net income to net cash provided by (used in) operating activities: |       |                          |       |   |   |   |   |
| Depreciation and  amortization                                                               |       | 8,631                         |       | 7,466 |   | 6,483 |   |
| Deferred income  taxes                                                                       |       | (7,967                        | )          | 52 |   | 5,405 |   |
| Provision for  doubful accounts                                                              |       | 4,136                         |       | (193 | ) | 738 |   |
| Gain on sale of  assets                                                                      |       | —                        |       | (4,510 | ) | (8,448 | ) |
| Changes in operating  assets and liabilities, net of effects from acquisitions:              |       |                          |       |   |   |   |   |
| Accounts  receivable                                                                         |       | 38,480                        |       | (84,534 | ) | (94,425 | ) |
| Inventories                                                                                  |       | 3,048                         |       | 2,638 |   | 6,256 |   |
| Prepaid expenses                                                                             |       | (4,865                        | )          | (3,327 | ) | (4,934 | ) |
| Accounts payable  and other current liabilities                                              |       | 12,122                        |       | 8,948 |   | 14,730 |   |
| Customer  advances                                                                           |       | (9,893                        | )          | 9,047 |   | 9,236 |   |
| Income taxes                                                                                 |       | 885                           |       | (129 | ) | 3,438 |   |
| Other items -  net                                                                           |       | (1,492                        | )          | (556 | ) | (1,115 | ) |
| NET CASH  PROVIDED BY (USED IN) OPERATING ACTIVITIES                                         |       | 54,713                        |       | (28,187 | ) | (26,117 | ) |
|                                                                                         |       |                          |       |   |   |   |   |
| Investing  Activities:                                                                       |       |                          |       |   |   |   |   |
| Acquisition of  businesses, net of cash acquired                                             |       | (358                          | )          | (7,141 | ) | (33,949 | ) |
| Proceeds from  sale of assets                                                                |       | —                        |       | 13,610 |   | 12,038 |   |
| Decrease  (increase) in marketable securities                                                |       | 6,200                         |       | (3,206 | ) | (2,588 | ) |
| Purchases of  property, plant and equipment                                                  |       | (8,311                        | )          | (6,949 | ) | (8,184 | ) |
| Other items -  net                                                                           |       | (3,256                        | )          | (784 | ) | — |   |
| NET CASH USED IN  INVESTING ACTIVITIES                                                       |       | (5,725                        | )          | (4,470 | ) | (32,683 | ) |
|                                                                                         |       |                          |       |   |   |   |   |
| Financing  Activities:                                                                       |       |                          |       |   |   |   |   |
| Change in  short-term borrowings                                                             |       | 683                           |       | 17,876 |   | 6,254 |   |
| Proceeds from  issuance of long-term debt                                                    |       | —                        |       | 9,026 |   | — |   |
| Principal  payments on long-term debt                                                        |       | (6,069                        | )          | (1,902 | ) | (1,429 | ) |
| Dividends paid  to shareholders                                                              |       | (4,809                        | )          | (4,276 | ) | (3,741 | ) |
| NET CASH  PROVIDED BY (USED IN) FINANCING ACTIVITIES                                         |       | (10,195                       | )          | 20,724 |   | 1,084 |   |
|                                                                                         |       |                          |       |   |   |   |   |
| Effect of  exchange rates on cash                                                            |       | (555                          | )          | 185 |   | 1,430 |   |
|                                                                                         |       |                          |       |   |   |   |   |
| NET INCREASE  (DECREASE) IN CASH AND CASH EQUIVALENTS                                        |       | 38,238                        |       | (11,748 | ) | (56,286 | ) |
|                                                                                         |       |                          |       |   |   |   |   |
| Cash and cash  equivalents at the beginning of the year                                      |       | 10,622                        |       | 22,370 |   | 78,656 |   |
|                                                                                         |       |                          |       |   |   |   |   |
| CASH AND CASH  EQUIVALENTS AT THE END OF THE YEAR                                            |       | $                             | 48,860     |   | $ | 10,622 |   | $ | 22,370 |   |

 

See accompanying notes.

 

36

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CUBIC CORPORATION

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

September 30, 2005

 

NOTE 1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Organization and Nature of the Business:  Cubic Corporation (“Cubic” or “the Company”)designs, develops and manufactures products which are mainly electronic innature, provides government services and services related to productspreviously produced by Cubic and others. The Company’s principal lines ofbusiness are defense electronics and transportation fare collection systems.Principal customers for defense products and services are the United States andforeign governments. Transportation fare collection systems are sold primarilyto large local government agencies in the United States and worldwide.

 

Principles of Consolidation:  The consolidated financial statements includethe accounts of Cubic Corporation, its majority-owned subsidiaries and a 50%owned joint venture of which the Company is the primary beneficiary. Allsignificant intercompany balances and transactions have been eliminated inconsolidation. The consolidation of foreign subsidiaries requires translationof their assets and liabilities into U.S. dollars at year-end exchange rates.Statements of income and cash flows are translated at the average exchangerates for each year.

 

Cash Equivalents:  The Company considers highly liquidinvestments with maturity of three months or less when purchased to be cashequivalents.

 

Concentration of Credit Risk:  The Company has established guidelinespursuant to which its cash and cash equivalents are diversified among variousmoney market instruments and investment funds. These guidelines emphasize thepreservation of capital by requiring minimum credit ratings assigned byestablished credit organizations. Diversification is achieved by specifying maximum investments in each instrumenttype and issuer. The majority of these investments are not on deposit infederally insured accounts.

 

Fair Value of Financial Instruments:  Financial instruments, includingcash equivalents, accounts receivable, accounts payable and accrued liabilities,are carried at cost, which management believes approximates the fair valuebecause of the short-term maturity of these instruments.  The fair value of long-term debt is basedupon quoted market prices for the same or similar debt instruments and approximatesthe carrying value of the debt.  Receivablesconsist primarily of amounts due from U.S. and foreign governments for defenseproducts and local government agencies for transportation systems.  Due to the nature of its customers, theCompany generally does not require collateral. The Company has limited exposure to credit risk as the Company hashistorically collected substantially all of its receivables from governmentagencies.  The Company generally requiresno allowance for doubtful accounts for these customers unless specificcontractual circumstances warrant it.

 

Marketable Securities, Available-for-Sale:  Marketable securities include highly liquid, investment grade,institutional money market debt and preferred stock instruments and arestated at fair market value. The net excess of fair market value over cost isincluded in Accumulated Other Comprehensive Income (Loss) on the ConsolidatedBalance Sheets.

 

Inventories:  Inventories are stated at the lower of costor market. Cost is determined using primarily the first-in, first-out (FIFO)method, which approximates current replacement cost. Work in process is statedat the actual production and engineering costs incurred to date, includingapplicable overhead, and is reduced by charging any amounts in excess ofestimated realizable value to cost of sales. Although costs incurred forcertain government contracts include general and administrative costs asallowed by government cost accounting standards, the amounts remaining ininventory at September 30, 2005 and 2004 were immaterial.

 

37

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Property, Plant and Equipment:  Property, plant and equipment are carried atcost. Depreciation is provided in amounts sufficient to amortize the cost ofthe depreciable assets over their estimated useful lives. Generally,straight-line methods are used for real property over estimated useful livesranging from 15 to 39 years or the term of the underlying lease for leaseholdimprovements.  Accelerated methods areused for machinery and equipment over estimated useful lives ranging from fiveto seven years.  Provisions fordepreciation of plant and equipment amounted to $8,096,000, $6,979,000, and $6,483,000in 2005, 2004 and 2003, respectively.

 

Goodwill:   Goodwill is evaluated for potentialimpairment annually by comparing the fair value of a reporting unit to itscarrying value, including recorded goodwill. If the carrying value exceeds thefair value, impairment is measured by comparing the derived fair value of goodwillto its carrying value, and any impairment determined would be recorded in thecurrent period. To date there has been no impairment of the Company’s recordedgoodwill.  The changes in the carryingamount of goodwill for the two years ended September 30, 2005 are as follows:

 
| ** **                                                | ** ** | **Transportation  Segment** | ** ** | **Defense  Segment** | ** ** | **Total** | ** ** |
|-----------------------------------------------------------|------------|-----------------------------|------------|----------------------|------------|-----------|------------|
| ** **                                                | ** ** | **(in thousands)**          | ** ** |
| Balances October 1, 2003                                  |       | 7,144                       |       | 26,167               |       | 33,311    |       |
| Goodwill  acquired during the year                        |       | 176                         |       | —               |       | 176       |       |
| Adjustments to  purchase price                            |       | —                      |       | 657                  |       | 657       |       |
| Foreign currency  exchange rate changes                   |       | 631                         |       | 398                  |       | 1,029     |       |
| Balances September 30, 2004                               |       | 7,951                       |       | 27,222               |       | 35,173    |       |
| Goodwill  acquired during the year                        |       | 358                         |       | —               |       | 358       |       |
| Utilization of  net operating loss carryforwards acquired |       | —                      |       | (968                 | )          | (968      | )          |
| Foreign currency  exchange rate changes                   |       | (159                        | )          | 69                   |       | (90       | )          |
| Balances September 30, 2005                               |       | $                           | 8,150      |                 | $          | 26,323    |       | $ | 34,473 |   |
|                                                           |            |                             |            |                      |            |           |            |  |  |  |

 

Impairment of Long-Lived Assets:  The carrying values of long-lived assetsother than goodwill are generally evaluated for impairment only if events or changesin facts and circumstances indicate that carrying values may not berecoverable. Any impairment determined would be recorded in the current periodand would be measured by comparing the fair value of the related asset to itscarrying value. Fair value is generally determined by identifying estimatedundiscounted cash flows to be generated by those assets.  No impairments have been recorded for theyears ended September 30, 2005, 2004, and 2003.

 

Comprehensive Income:  Comprehensive income and its components arepresented in the statement of changes in shareholders’ equity.  Accumulated comprehensive income (loss) consistedof the following:

 
| **September 30,**                          | ** ** | **2005**           | ** ** | **2004** | ** ** |
|--------------------------------------------|------------|--------------------|------------|----------|------------|
| ** **                                 | ** ** | **(in thousands)** | ** ** |
| Minimum pension liability                  |       | $                  | (11,069    | )        | $          | (7,042 | ) |
| Foreign currency translation               |       | 12,728             |       | 16,698   |       |
| Net unrealized gains from cash flow hedges |       | 8                  |       | 439      |       |
|                                       |       | $                  | 1,667      |     | $          | 10,095 |   |

 

38

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The minimum pension liability is shown net of tax benefits of $5,960,000and $3,792,000 at September 30, 2005 and 2004, respectively.  Deferred income taxes are not recognized fortranslation-related temporary differences of foreign subsidiaries whoseundistributed earnings are considered to be permanently invested.  The net unrealized gain from cash flow hedgesis shown net of tax liabilities of $4,000 and $236,000 in 2005 and 2004,respectively.

 

Revenue Recognition:  Sales and profits under the Company’slong-term fixed-price contracts, which generally require a significant amountof development effort in relation to total contract value, are recognized usingthe cost-to-cost percentage of completion method of accounting. Sales andprofits are recorded based on the ratio of costs incurred to estimated totalcosts at completion. In the early stages of contract performance, profit is notrecognized until progress is demonstrated or contract milestones are reached.

 

Sales under cost-reimbursement type contracts are recorded as costs areincurred. Applicable estimated profits are included in earnings based on theratio of costs incurred to the estimated total costs at completion. Sales ofproducts are recorded when a firm sales agreement is in place, delivery hasoccurred and collectibility of the fixed or determinable sales price isreasonably assured. Sales of services are recorded when performed in accordancewith contracts or service agreements.

 

Amounts representing contract change orders, claims or other items areincluded in the contract value only when they can be reliably estimated andrealization is considered probable. Incentives or penalties and awardsapplicable to performance on contracts are considered in estimating sales andprofits, and are recorded when there is sufficient information to assessanticipated contract performance. Incentive provisions that increase ordecrease earnings based solely on a single significant event are not recognizeduntil the event occurs.

 

Sales and profits on contracts that specify multiple deliverables areallocated to separate units of accounting when there is objective evidence thateach accounting unit has value to the customer on a stand-alone basis.  Separate units of accounting are based uponvalues assigned under the terms of such contracts.

 

Provisions are made on a current basis to fully recognize anyanticipated losses on contracts.  Cashreceived prior to revenue recognition is classified as customer advances on thebalance sheet.

 

Income taxes:  The provision for income taxes includes federal, state, local, and foreign taxes.  Tax credits, primarily for research and development and export programs are recognized as a reduction of the provision for income taxes in the year in which they are available for tax purposes.  Deferred income taxes are provided on temporary differences between assets and liabilities for financial reporting and tax purposes as measured by enacted tax rates expected to apply when the temporary differences are settled or realized.  Valuation allowances are established for deferred tax assets when the amount of expected future taxable income is not likely to support the use of the deduction or credit. Deferred tax liabilities generally represent deductions that have been taken on tax returns but have not yet been recognized as expense in the financial statements. The Company has not recognized any United States tax expense on undistributed earnings of its foreign subsidiaries since it intends to reinvest the earnings outside the United States for the foreseeable future. Such undistributed earnings totaled approximately $70 million at September 30, 2005.

 

EarningsPer Share:  Per shareamounts are based upon the weighted average number of shares of common stockoutstanding.

 

Derivative Financial Instruments:   The Company’s use of derivativefinancial instruments is limited to foreign exchange forward and optioncontracts used to hedge significant contract sales and purchase

 

39

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commitments that are denominated in currencies other thanthe functional currency of the subsidiary responsible for the commitment and tohedge net advances to foreign subsidiaries. The purpose of the Company’s foreign currency hedging activities is to fixthe dollar value of specific commitments and payments to foreign vendors, andthe value of foreign currency denominated receipts from customers. At September30, 2005, the Company had foreign exchange contracts with a notional value of $147.3million outstanding.

 

The Company accounts for derivatives pursuant to SFAS No. 133, *Accounting for Derivative Instruments and HedgingActivities*, as amended. This standard requires that all derivativeinstruments be recognized in the financial statements and measured at fairvalue regardless of the purpose or intent for holding them. The classificationof gains and losses resulting from changes in the fair values of derivatives isdependent on the intended use of the derivative and its resulting designation.The change in fair value of the ineffective portion of a hedge, and changes infair values of derivatives that are not considered highly effective hedges are immediatelyrecognized in earnings. If the derivative is designated as a fair value hedge,the changes in the estimated fair value of the derivative and the underlyinghedged item are recognized in earnings. If the derivative is designated as acash flow hedge, the effective portions of changes in the fair value of thederivative are recorded in other comprehensive income and are subsequentlyrecognized in earnings when the hedged item affects earnings. Ineffectivenessbetween the change in fair value of the derivatives and the change in fairvalue of hedged items was immaterial for the years ended September 30, 2005,2004 and 2003. At September 30, 2005 net gains of $12,000 ($8,000 net of taxes)were recorded in accumulated other comprehensive income associated with cashflow hedging transactions.

 

Accounting Standards:  In November 2004, the FASBissued Statement of Financial Accounting Standards No. 151, an amendment of ARBNo. 43, Chapter 4, Inventory Costs (SFAS No. 151). This accounting standard,which is effective for annual periods beginning after June 15, 2005, requiresthat abnormal amounts of idle facility expense, freight, handling costs, andwasted materials (spoilage) should be recognized as current-period charges. Theadoption of SFAS No. 151 is not expected to have a material effect on theCompany’s financial position or results or operations.

 

Use of Estimates:  The preparation of financial statements inconformity with U.S. generally accepted accounting principles requiresmanagement to make estimates and assumptions that affect the amounts reportedin the financial statements and accompanying notes. Significant estimatesinclude the estimated total costs at completion of the Company’s long-term contracts,and the estimated rates of return and discount rates related to the Company’sdefined benefit pension plans. Actual results could differ from thoseestimates.

 

Risks and Uncertainties:  The Company is subject to the normal risksand uncertainties of performing large, multiyear, often fixed-price contracts.In addition, the Company is subject to audit of incurred costs related to manyof its U.S. Government contracts. These audits could produce different resultsthan the Company has estimated; however, the Company’s experience has been thatits costs are acceptable to the government.

 

Reclassifications:  Certain prior year amounts have beenreclassified to conform to the current year classifications.

 

40

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NOTE 2—INVESTMENTS IN JOINT VENTURES

 

In December 2004, the Company entered into a50/50 joint venture arrangement with the U.S. subsidiary of Rafael ArmamentDevelopment Authority Ltd. (Rafael), an Israeli company, to manufacture certainof their products for sale to the U.S. and Israeli defense forces. Theagreement requires the Company to invest up to $15 million in the joint ventureover the first three years of operation, while Rafael will provide certain ofits intellectual property to the joint venture in a royalty-free arrangement.The joint venture commenced operations and the Company invested $2 million inthe year ended September 30, 2005. In fiscal 2005, the joint ventureincurred approximately $1.3 million in expenses and did not generate any sales.

 

The Company analyzed this joint venture under theprovisions of FIN 46 “*Consolidation ofVariable Interest Entities,*” and concluded that it is the primarybeneficiary of the arrangement. Therefore, the joint venture was consolidatedin the Company’s financial statements beginning in the quarter endedMarch 31, 2005. Minority interest in the net loss from this business isreflected in the consolidated income statements and minority interest in thenet assets of the joint venture is included in the consolidated balance sheets.

 

The Company owns 37.5% of the common stock of Transaction SystemsLimited (TranSys), an unconsolidated joint venture company in the UnitedKingdom. This joint venture company was formed to bid on a contract called“PRESTIGE” (Procurement of Revenue Services, Ticketing, Information, Gates andElectronics), the purpose of which is to outsource most of the functions of theLondon Transport (LT) fare collection system for a period of seventeen years.In August 1998, TranSys was awarded the contract and began operations.Cubic and the other parties to the joint venture participate in the PRESTIGEcontract solely through subcontracts from TranSys. All of the work to beperformed by TranSys is subcontracted to the joint venture partners and thejoint venture provides for the pass-through of virtually all revenues fromLondon Transport to the joint venture partners. As a result, TranSys hasoperated on a break-even basis and is expected to continue to do so. If TranSyswere to eventually generate a net income or loss, the joint venture partnerswould share in this income or loss in accordance with their percentageownership in the joint venture. The Company’s investment in the joint ventureis immaterial.

 

LT elected to finance the project through private financing rather thanincurring public debt. Financing for the project was provided by a syndicate ofbanks which participated in creating the project’s financial structure. Duringthe first four years of the project, through August 2002, the banksprovided financing to TranSys totaling 200 million British Pounds(approximately $353 million). Debt servicing began in 2003 and will continueuntil the debt is fully paid in 2013. This debt is guaranteed by LT and isnonrecourse to the joint venture partners.

 

The Company has also provided certain performance guarantees to variousparties related to the PRESTIGE contract and the TranSys joint venture,including LT, the banks and the joint venture partners. The joint venturepartners have also provided similar performance guarantees to the same partiesand to Cubic.

 

41

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Summarized unaudited financial information for this unconsolidatedjoint venture is as follows:

 
| **September 30,**                            | ** ** | **2005**          | ** ** | **2004** | ** ** |
|---------------------------------------------------|------------|-------------------|------------|----------|------------|
| ** **                                        | ** ** | **(in millions)** | ** ** |
| **Balance  Sheets:**                              |       |              |       |     |       |
| Cash                                              |       | $                 | 49.7       |     | $          | 37.5 |   |
| Other current  assets                             |       | 54.8              |       | 63.6     |       |
| Noncurrent  unbilled contract accounts receivable |       | 240.2             |       | 274.6    |       |
| Total Assets                                      |       | $                 | 344.7      |     | $          | 375.7 |   |
|                                              |       |              |       |     |       |
| Current  liabilities                              |       | $                 | 36.7       |     | $          | 31.3 |   |
| Long-term debt                                    |       | 308.0             |       | 344.4    |       |
| Equity                                            |       | —            |       | —   |       |
| Total  Liabilities and Equity                     |       | $                 | 344.7      |     | $          | 375.7 |   |

 
| **Years  ended September 30,** | ** ** | **2005**          | ** ** | **2004** | ** ** | **2003** | ** ** |
|-------------------------------------|------------|-------------------|------------|----------|------------|----------|------------|
| ** **                          | ** ** | **(in millions)** | ** ** |
| **Statement  of Operations:**       |       |              |       |     |       |     |       |
| Sales                               |       | $                 | 132.0      |     | $          | 136.0    |       | $ | 109.6 |   |
| Operating profit                    |       | $                 | —     |     | $          | —   |       | $ | — |   |
| Net income                          |       | $                 | —     |     | $          | —   |       | $ | — |   |

 

NOTE 3—ACCOUNTS RECEIVABLE

 

The components of accounts receivable under long-term contracts are asfollows:

 
| **September 30,**                                                       | ** ** | **2005**           | ** ** | **2004** | ** ** |
|------------------------------------------------------------------------------|------------|--------------------|------------|----------|------------|
| ** **                                                                   | ** ** | **(in thousands)** | ** ** |
| US Government  Contracts:                                                    |       |               |       |     |       |
| Amounts billed                                                               |       | $                  | 43,381     |     | $          | 50,497 |   |
| Recoverable  costs and accrued profits on progress completed–not billed |       | 88,490             |       | 56,104   |       |
|                                                                         |       | 131,871            |       | 106,601  |       |
| Commercial  Customers:                                                       |       |               |       |     |       |
| Amounts billed                                                               |       | 26,237             |       | 34,559   |       |
| Recoverable  costs and accrued profits on progress completed–not billed |       | 169,480            |       | 206,126  |       |
|                                                                         |       | 195,717            |       | 240,685  |       |
|                                                                         |       | 327,588            |       | 347,286  |       |
| Less estimated  amounts not currently due–commercial customers          |       | (22,900            | )          | (33,000  | )          |
|                                                                         |       | $                  | 304,688    |     | $          | 314,286 |   |

 

A portion of recoverable costs and accrued profits on progress completedis billable under progress payment provisions of the related contracts. Theremainder of these amounts is billable upon delivery of

 

42

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products or furnishing ofservices, with an immaterial amount subject to retainage provisions of thecontracts. As identified above, a portion of the amount not billed undercommercial contracts is not expected to be collected within one year fromSeptember 30, 2005, and therefore, has been classified as a noncurrentasset.  This amount relates primarily tothe contract with TranSys for the PRESTIGE system in London.  The customer has been paying the Company inaccordance with the terms of the contract and it is expected that all amountsdue under the contract will ultimately be collected.  It is anticipated that substantially all ofthe unbilled portion of receivables identified as current assets will be billedand collected under progress billing provisions of the contracts or uponcompletion of performance tests and/or acceptance by the customers duringfiscal 2006.

 

NOTE 4—INVENTORIES

 

Inventories are classified as follows:

 
| **September 30,**                                           | ** ** | **2005**           | ** ** | **2004** | ** ** |
|------------------------------------------------------------------|------------|--------------------|------------|----------|------------|
| ** **                                                       | ** ** | **(in thousands)** | ** ** |
|                                                             |       |               |       |     |       |
| Finished products                                                |       | $                  | 471        |     | $          | 510 |   |
| Work in process and inventoried costs under long-term  contracts |       | 17,113             |       | 16,491   |       |
| Materials and purchased parts                                    |       | 3,946              |       | 6,966    |       |
|                                                             |       | $                  | 21,530     |     | $          | 23,967 |   |

 

At September 30, 2005, work in process and inventoried costs underlong-term contracts included approximately $5.8 million in costs incurredoutside the scope of work on several contracts in the defense segment. Suchcosts were not significant as of September 30, 2004.  Management believes it is probable thesecosts, plus appropriate profit margin, will be recovered under contract changeorders within the next year.

 

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NOTE 5—FINANCING ARRANGEMENTS

 

Long-term debt consists of the following:

 
| **September 30,**                                                                                                                                                                          | ** ** | **2005**           | ** ** | **2004** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|----------|------------|
| ** **                                                                                                                                                                                      | ** ** | **(in thousands)** | ** ** |
| Unsecured notes  payable to a group of insurance companies, with annual principal payments of $4,000,000  due in November. Interest at 6.31% is payable semiannually in  November and May. |       | $                  | 36,000     |     | $          | 40,000 |   |
| Unsecured note  payable to an insurance company, with annual principal payments of $1,429,000  due in November. Interest at 6.11% is payable semiannually in  November and May.            |       | 5,714              |       | 7,143    |       |
| Mortgage note  from a UK financial institution, with quarterly installments of principal and  interest at 6.5%                                                                                  |       | 8,102              |       | 8,951    |       |
|                                                                                                                                                                                            |       |               |       |     |       |
|                                                                                                                                                                                            |       | 49,816             |       | 56,094   |       |
| Less current  portion                                                                                                                                                                           |       | (6,040             | )          | (6,057   | )          |
|                                                                                                                                                                                            |       |               |       |     |       |
|                                                                                                                                                                                            |       | $                  | 43,776     |     | $          | 50,037 |   |

 

The terms of the notes payable and other financial instruments includeprovisions that require and/or limit, among other financial ratios andmeasurements, the permitted levels of working capital, debt and tangible networth and coverage of fixed charges. The Company has also provided certainperformance guarantees to various parties related to the PRESTIGE contract andthe TranSys joint venture. As consideration for the performance guarantee, theCompany has agreed to certain financial covenants including limits on workingcapital, debt, tangible net worth and cash flow coverage. At September 30,2005, the most restrictive covenant under these agreements leaves consolidatedretained earnings of $104.0 million available for the payment of dividends toshareholders, purchases of the Company’s common stock and other charges toshareholders’ equity. To date, there have been no covenant violations and theCompany believes it will be able to meet the covenant financial performanceobligations described above.

 

The Company maintains a short-term borrowing arrangement totaling 10million British pounds (equivalent to approximately $17.6 million) with a U.K.financial institution to help meet the short-term working capital requirementsof its subsidiary, Cubic Transportation Systems Ltd. Any outstanding balancesare guaranteed by Cubic Corporation, are repayable on demand, and bear interestat the bank’s base rate, as defined, plus one percent.  Such interest rate was 5.5% atSeptember 30, 2005. At September 30, 2005, no amounts wereoutstanding under this borrowing arrangement.

 

The Company maintains short-term borrowing arrangements in New Zealandand Canada to help meet the short-term working capital requirements of itssubsidiaries in those countries. Borrowings under such lines of credit totaled $4.3 million atSeptember 30, 2005 with interest at 4.0%

 

44

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The Company has a $150 million revolving line of credit arrangementwith a group of U.S. banks which expires in March 2010. As ofSeptember 30, 2005, the Company had $22 million outstanding under thisline of credit at an interest rate of 4.6%. Technical financial ratio covenantsunder this agreement restrict the total available amount to approximately $51million as of September 30, 2005.

 

Maturities of long-term debt for each of the five years in the periodending September 30, 2010, are as follows: 2006 – $6.0 million;  2007 – $6.0 million; 2008 – $6.0 million; 2009– $6.0 million; 2010 – $4.6 million.

 

Interest paid amounted to $5.5 million, $4.6 million, and $3.7 millionin 2005, 2004, and 2003, respectively.

 

As of September 30, 2005 the Company had letters of credit andbank guarantees outstanding totaling $45.1 million, which guarantee either theCompany’s performance or customer advances under certain contracts. Inaddition, the Company had financial letters of credit outstanding totaling $5.4million as of September 30, 2005, which guarantee the Company’s payment ofcertain self-insured liabilities. The Company has never had a drawing on aletter of credit instrument, nor are any anticipated; therefore, the fair valueof these instruments is estimated to be zero.

 

The Company’s self-insurance arrangements are limited to certainworkers’ compensation plans, automobile liability, and product liability claimsprimarily related to a business the Company sold in 1993. Under thesearrangements, the Company self-insures only up to the amount of a specifieddeductible for each claim. Self-insurance liabilities included in other current liabilities on thebalance sheet amounted to $3.1 million and $2.9 million as ofSeptember 30, 2005 and 2004, respectively.

 

NOTE 6—COMMITMENTS

 

The Company leases certain office, manufacturing and warehouse space,and miscellaneous computer and other office equipment under noncancelableoperating leases expiring in various years through 2013.  These leases, some of which may be renewedfor periods up to 10 years, generally require the lessee to pay allmaintenance, insurance and property taxes. Several leases are subject toperiodic adjustment based on price indices or cost increases. Rental expense,net of sublease income, for all operating leases amounted to $6.8 million, $5.4million, and $3.5 million in 2005, 2004, and 2003, respectively.

 

Future minimum payments, net of minimum sublease income, undernoncancelable operating leases with initial terms of one year or more consistof the following at September 30, 2005 (in thousands):

 

| 2006       |   | $     |  6,066 |   |
|------------|--------|-------|-------------|--------|
| 2007       |   | 4,311 |        |
| 2008       |   | 3,769 |        |
| 2009       |   | 2,927 |        |
| 2010       |   | 1,906 |        |
| Thereafter |   | 3,925 |        |
|       |   | $     | 22,904      |   |

 

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NOTE 7—INCOME TAXES

 

Significant components of the provision for income taxes are asfollows:

 
| **Years  ended September 30,** | ** ** | **2005**           | ** ** | **2004** | ** ** | **2003** | ** ** |
|-------------------------------------|------------|--------------------|------------|----------|------------|----------|------------|
| ** **                          | ** ** | **(in thousands)** | ** ** |
|                                |       |               |       |     |       |     |       |
| Current:                            |       |               |       |     |       |     |       |
| Federal                             |       | $                  | 725        |     | $          | 11,069   |       | $ | 4,805 |   |
| State                               |       | 1,224              |       | 2,516    |       | 2,587    |       |
| Foreign                             |       | 6,471              |       | 5,757    |       | 5,717    |       |
| Total current                       |       | 8,420              |       | 19,342   |       | 13,109   |       |
|                                |       |               |       |     |       |     |       |
| Deferred  (credit):                 |       |               |       |     |       |     |       |
| Federal                             |       | (5,534             | )          | (298     | )          | 5,323    |       |
| State                               |       | (1,274             | )          | 152      |       | 820      |       |
| Foreign                             |       | (1,159             | )          | 198      |       | (738     | )          |
| Total deferred                      |       | (7,967             | )          | 52       |       | 5,405    |       |
| Total income tax  expense           |       | $                  | 453        |     | $          | 19,394   |       | $ | 18,514 |   |

 

46

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Deferred tax assets and liabilities are determined based on differencesbetween financial reporting and tax bases of assets and liabilities, and aremeasured using the enacted tax rates and laws that will be in effect when thedifferences are expected to reverse. Significant components of the Company’sdeferred tax assets and liabilities are as follows:

 
| **September 30,**                                  | ** ** | **2005**           | ** ** | **2004** | ** ** |
|---------------------------------------------------------|------------|--------------------|------------|----------|------------|
| ** **                                              | ** ** | **(in thousands)** | ** ** |
| Deferred tax  assets:                                   |       |               |       |     |       |
| Accrued employee  benefits                              |       | $                  | 5,236      |     | $          | 3,895 |   |
| Additional minimum  pension liability                   |       | 5,960              |       | 3,792    |       |
| Allowance for  doubtful accounts                        |       | 1,962              |       | 232      |       |
| Long-term  contracts and inventory valuation reductions |       | 10,281             |       | 4,331    |       |
| Allowances for  loss contingencies                      |       | 4,119              |       | 4,933    |       |
| Deferred  compensation                                  |       | 3,103              |       | 2,612    |       |
| Book over tax  depreciation                             |       | 1,919              |       | —   |       |
| Other                                                   |       | 1,042              |       | 3,720    |       |
| Deferred tax  assets                                    |       | 33,622             |       | 23,515   |       |
|                                                    |       |               |       |     |       |
| Deferred tax  liabilities:                              |       |               |       |     |       |
| Tax over book  depreciation                             |       | —             |       | 1,304    |       |
| Amortization of  goodwill and intangibles               |       | 2,370              |       | 2,107    |       |
| Prepaid expenses                                        |       | 1,268              |       | 1,224    |       |
| State taxes                                             |       | 1,079              |       | 266      |       |
| Other                                                   |       | 814                |       | 690      |       |
| Deferred tax  liabilities                               |       | 5,531              |       | 5,591    |       |
| Net deferred tax  asset                                 |       | $                  | 28,091     |     | $          | 17,924 |   |

 

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The reconciliation of income tax computed at the U.S. federal statutorytax rate to income tax expense is as follows:

 
| **Years  ended September 30,**                      | ** ** | **2005**           | ** ** | **2004** | ** ** | **2003** | ** ** |
|----------------------------------------------------------|------------|--------------------|------------|----------|------------|----------|------------|
| ** **                                               | ** ** | **(in thousands)** | ** ** |
|                                                     |       |               |       |     |       |     |       |
| Tax at federal  statutory rate                           |       | $                  | 4,228      |     | $          | 19,707   |       | $ | 19,262 |   |
| State income  taxes (benefit), net of federal tax effect |       | (32                | )          | 1,734    |       | 2,215    |       |
| Income exclusion  on export sales                        |       | (437               | )          | (946     | )          | (945     | )          |
| Nondeductible  expenses                                  |       | 291                |       | 288      |       | 359      |       |
| Reversal of  reserve accrued for tax contingencies       |       | (2,788             | )          | —   |       | —   |       |
| Tax effect from  foreign subsidiaries                    |       | (647               | )          | (668     | )          | (349     | )          |
| Tax credits and  other                                   |       | (162               | )          | (721     | )          | (2,028   | )          |
|                                                     |       | $                  | 453        |     | $          | 19,394   |       | $ | 18,514 |   |

 

The Company is subject to ongoing audits from various taxingauthorities in the jurisdictions in which it does business.  The Company believes it has adequatelyprovided for uncertain tax issues not yet resolved with federal, state andforeign tax authorities. Although not probable, the most adverse resolution ofthese issues could result in additional charges to earnings in future periods.Based upon a consideration of all relevant facts and circumstances, the companydoes not believe the ultimate resolution of uncertain tax issues for all opentax periods will have a materially adverse effect upon its results ofoperations or financial condition.

 

As indicated in the table above, in 2005 the Company was able toreverse $2.8 million of tax reserves established in previous years. This wasdue to the resolution of an uncertain foreign tax issue and an uncertaindomestic state issue during, or subsequent to, the quarter endedSeptember 30, 2005.

 

TheCompany made income tax payments, net of refunds, totaling $6.9 million, $18.7million, and $9.9 million in 2005, 2004, and 2003, respectively.

 

Income before income taxes includes the following components:

 
| **Years  ended September 30,** | ** ** | **2005**           | ** ** | **2004** | ** ** | **2003** | ** ** |
|-------------------------------------|------------|--------------------|------------|----------|------------|----------|------------|
| ** **                          | ** ** | **(in thousands)** | ** ** |
|                                |       |               |       |     |       |     |       |
| United States                       |       | $                  | (1,151     | )        | $          | 37,383   |       | $ | 40,318 |   |
| Foreign                             |       | 13,232             |       | 18,922   |       | 14,715   |       |
| Total                               |       | $                  | 12,081     |     | $          | 56,305   |       | $ | 55,033 |   |

 

48

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Undistributed earnings of the Company’s foreign subsidiaries amountedto approximately $70.0 million at September 30, 2005. Those earnings areconsidered to be indefinitely reinvested, and accordingly, no provision forU.S. federal and state income taxes has been provided thereon. Upondistribution of those earnings in the form of dividends or otherwise, theCompany would be subject to both U.S. income taxes and withholding taxespayable to the foreign countries, but would also be able to offset unrecognizedforeign tax credit carryforwards. Determination of the amount of unrecognizeddeferred U.S. income tax liability is not practicable because of thecomplexities associated with its hypothetical calculation; however, the Companydoes not believe the amount would be material.

 

The Company is continuing to evaluate the impact of tax legislationenacted in 2004 that provides incentives for repatriation of capital to theU.S. The Company must determine if it will be beneficial to take advantage ofthe provisions of the legislation in fiscal 2006 by reinvesting some amount ofcapital in the United States. Management believes that if the decision is madeto reinvest a portion of this capital in the U.S., the related tax liabilitywill not have a material impact on the Company’s results of operations orfinancial position.

 

NOTE 8—PENSION, PROFIT SHARING AND OTHER RETIREMENT PLANS

 

The Company has profit sharing and other defined contributionretirement plans that provide benefits for most employees in the U.S. Anemployee is eligible to participate in these plans after six months to one yearof service, and may make additional contributions to the plans from their dateof hire. These plans provide for full vesting of benefits over five years. Asubstantial portion of Company contributions to these plans is discretionarywith the Board of Directors. Company contributions to the plans aggregated$11.5 million, $9.9 million and $9.4 million in 2005, 2004 and 2003,respectively.

 

Approximately one-half of the Company’s nonunion employees in the U.S.are covered by a noncontributory defined benefit pension plan. Approximatelyone-half of the Company’s European employees are covered by a contributorydefined benefit pension plan. The Company’s funding policy provides thatcontributions will be at least equal to the minimum amounts mandated bystatutory requirements. The following table sets forth changes in the benefitobligation and plan assets for these plans and the net amount recognized in theConsolidated Balance Sheets:

 
| **September 30,**                               | ** ** | **2005**           | ** ** | **2004** | ** ** |
|------------------------------------------------------|------------|--------------------|------------|----------|------------|
| ** **                                           | ** ** | **(in thousands)** | ** ** |
| **Change  in benefit obligations:**                  |       |               |       |     |       |
| Net benefit  obligation at the beginning of the year |       | $                  | 130,728    |     | $          | 112,140 |   |
| Service cost                                         |       | 7,347              |       | 6,610    |       |
| Interest cost                                        |       | 7,902              |       | 6,940    |       |
| Plan amendments                                      |       | —             |       | 165      |       |
| Actuarial loss                                       |       | 16,288             |       | 3,892    |       |
| Participant  contributions                           |       | 1,079              |       | 927      |       |
| Gross benefits  paid                                 |       | (3,649             | )          | (2,797   | )          |
| Foreign currency  exchange rate changes              |       | (1,687             | )          | 2,851    |       |
| Net benefit  obligation at the end of the year       |       | 158,008            |       | 130,728  |       |
|                                                      |            |                    |            |          |            |  |  |

 

49

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| **September 30,**                                                                               | ** ** | **2005**           | ** ** | **2004** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|--------------------|------------|----------|------------|
| ** **                                                                                           | ** ** | **(in thousands)** | ** ** |
| **Change  in plan assets:**                                                                          |       |               |       |     |       |
| Fair value of  plan assets at the beginning of the year                                              |       | 96,473             |       | 76,141   |       |
| Actual return on  plan assets                                                                        |       | 16,566             |       | 10,332   |       |
| Employer  contributions                                                                              |       | 8,170              |       | 10,494   |       |
| Participant  contributions                                                                           |       | 1,079              |       | 927      |       |
| Gross benefits  paid                                                                                 |       | (3,649             | )          | (2,797   | )          |
| Administrative  expenses                                                                             |       | (545               | )          | (495     | )          |
| Foreign currency  exchange rate changes                                                              |       | (1,188             | )          | 1,871    |       |
| Fair value of  plan assets at the end of the year                                                    |       | 116,906            |       | 96,473   |       |
|                                                                                                 |       |               |       |     |       |
| **Net  amount recognized:**                                                                          |       |               |       |     |       |
| Funded status                                                                                        |       | (41,102            | )          | (34,255  | )          |
| Unrecognized net  actuarial loss                                                                     |       | 33,999             |       | 27,463   |       |
| Unrecognized  prior service cost                                                                     |       | 164                |       | 190      |       |
| Net amount  recognized                                                                               |       | $                  | (6,939     | )        | $          | (6,602 | ) |
|                                                                                                 |       |               |       |     |       |
| **Amounts  recognized in the Consolidated Balance Sheets:**                                          |       |               |       |     |       |
| Accrued benefit  cost                                                                                |       | $                  | (6,939     | )        | $          | (6,602 | ) |
| Additional  minimum liability                                                                        |       | (17,193            | )          | (11,025  | )          |
| Deferred tax  asset                                                                                  |       | 5,960              |       | 3,792    |       |
| Intangible asset                                                                                     |       | 164                |       | 191      |       |
| Accumulated  other comprehensive loss                                                                |       | 11,069             |       | 7,042    |       |
| Net amount  recognized                                                                               |       | $                  | (6,939     | )        | $          | (6,602 | ) |
|                                                                                                 |       |               |       |     |       |
| **Information  for pension plans with an accumulated benefit obligation in excess of plan  assets:** |       |               |       |     |       |
| Projected  benefit obligation                                                                        |       | $                  | 158,008    |     | $          | 130,728 |   |
| Accumulated  benefit obligation                                                                      |       | 137,763            |       | 113,883  |       |
| Fair value of  plan assets                                                                           |       | 116,906            |       | 96,473   |       |

 

**Componentsof net periodic benefit cost:**

 
| **Years  ended September 30,** | ** ** | **2005**                 | ** ** | **2004** | ** ** | **2003** | ** ** |
|-------------------------------------|------------|--------------------------|------------|----------|------------|----------|------------|
| ** **                          | ** ** | **(in thousands) ** | ** ** |
|                                |       |                     |       |     |       |     |       |
| Service cost                        |       | $                        | 7,347      |     | $          | 7,129    |       | $ | 5,741 |   |
| Interest cost                       |       | 7,902                    |       | 7,512    |       | 6,073    |       |
| Expected return  on plan assets     |       | (8,216                   | )          | (7,110   | )          | (4,989   | )          |
| Amortization of:                    |       |                     |       |     |       |     |       |
| Prior service  cost                 |       | 26                       |       | 23       |       | 4        |       |
| Actuarial (gain)  loss              |       | 1,565                    |       | 2,098    |       | 2,238    |       |
| Administrative  expenses            |       | 99                       |       | 94       |       | 82       |       |
| Net pension cost                    |       | $                        | 8,723      |     | $          | 9,746    |       | $ | 9,149 |   |

 

50

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**Assumptions:**

 
| **Years  ended September 30,**                                                                                   | ** ** | **2005**                 | ** ** | **2004** | ** ** | **2003** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|----------|------------|----------|------------|
| ** **                                                                                                            | ** ** | **(in thousands) ** | ** ** |
| **Weighted-average  assumptions used to determine benefit obligation at September 30:**                          |       |                     |       |     |       |     |       |
| Discount rate                                                                                                         |       | 5.5                      | %          | 6.0      | %          | 6.0      | %          |
| Rate of  compensation increase                                                                                        |       | 4.5                      | %          | 4.1      | %          | 4.0      | %          |
| **Weighted-average  assumptions used to determine net periodic benefit cost for the years ended  September 30:** |       |                     |       |     |       |     |       |
| Discount rate                                                                                                         |       | 6.0                      | %          | 6.0      | %          | 6.4      | %          |
| Expected return  on plan assets                                                                                       |       | 8.2                      | %          | 8.2      | %          | 8.3      | %          |
| Rate of  compensation increase                                                                                        |       | 4.1                      | %          | 4.0      | %          | 4.6      | %          |

 

The Company’s pension plans weighted average asset allocations by assetcategory as of September 30 were as follows:

 
| ** **         | ** ** | **2005** | ** ** | **2004** | ** ** |
|--------------------|------------|----------|------------|----------|------------|
| Equity  securities |       | 75       | %          | 77       | %          |
| Debt securities    |       | 18       | %          | 17       | %          |
| Real estate        |       | 4        | %          | 4        | %          |
| Other              |       | 3        | %          | 2        | %          |
| Total              |       | 100      | %          | 100      | %          |

 

TheCompany has the responsibility to formulate the investment policies andstrategies for the plans’ assets. The overall policies and strategies include:maintain the highest possible return commensurate with the level of assumedrisk, preserve the benefit security for the plans’ participants, and minimizethe necessity of Company contributions by maintaining a ratio of plan assets toliabilities in excess of 1.0.

 

The Company does not involve itself with the day-to-day operations andselection process of individual securities and investments, and, accordingly,has retained the professional services of investment management organizationsto fulfill those tasks. The investment management organizations have investmentdiscretion over the assets placed under their management. The Company provideseach investment manager with specific investment guidelines relevant to itsasset class. The table below presents the ranges for each major category of theplans’ assets at September 30, 2005:

 
| **Asset  Category**                         | ** ** | **Allocation  Range** | ** ** |
|---------------------------------------------|------------|-----------------------|------------|
|                                        |       |                  |       |
| Equity  securities                          |       | 50% to 85%       |       |
| Debt securities                             |       | 10% to 60%       |       |
| Other, primarily  cash and cash equivalents |       |  0% to 15%  |       |

 

The pension plans held no positions in Cubic Corporation common stockas of September 30, 2005 and 2004.

 

The Company expects to contribute a minimum of $8 million to itspension plans in 2006.

 

51

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**Estimated future benefit payments**

 

The following pension benefit payments, which reflect expected futureservice, as appropriate, are expected to be paid:

 

| Expected future benefit  payments: |   |
|------------------------------------|--------|
|                               |   |   |   |
| 2006                               |   | $ | 4,876 |   |
| 2007                               |   | 5,389 |   |
| 2008                               |   | 5,880 |   |
| 2009                               |   | 6,471 |   |
| 2010                               |   | 7,440 |   |
| 2011-2015                          |   | 46,420 |   |
|                                    |        |  |  |  |

 

NOTE 9—LEGAL MATTERS

 

In1991, the government of Iran commenced an arbitration proceeding against theCompany seeking $12.9 million for reimbursement of payments made for equipmentthat was to comprise an Air Combat Maneuvering Range pursuant to a salescontract and an installation contract executed in 1977, and an additional $15million for unspecified damages. The Company contested the action and brought acounterclaim for compensatory damages of $10.4 million.  In May 1997, the arbitral tribunalawarded the government of Iran $2.8 million, plus simple interest at the rateof 12% per annum from September 21, 1991 through May 5, 1997. InDecember 1998, the United States District Court granted a motion by thegovernment of Iran confirming the arbitral award but denied Iran’s request foradditional interest and costs. Both parties have appealed. InOctober 2004, the 9th Circuit Court of Appeals issued adecision in the case of two interveners who are attempting to claim anattachment on the amount that was awarded to Iran in the original arbitration.The Court denied one of the intervener’s liens but confirmed the second one’slien. Iran has asked the U.S. Supreme Court to review the 9thCircuit decision. Pending any such review, the matter is on hold in the 9thCircuit and the obligation upon Cubic to pay is stayed. Under current UnitedStates law and policy, any payment to the Revolutionary Government of Iran mustfirst be licensed by the U.S. government. The Company is unaware of thelikelihood of the U.S. government granting such a license. The Company iscontinuing to pursue its appeal in the 9th Circuit case againstIran, and management believes that a license from the U.S. government would berequired in any case to make payment to or on behalf of Iran. However, in lightof the 9th Circuit Court’s decision in the intervener’s case, in2004 the Company established a reserve of $6 million for the estimatedpotential liability and will continue to accrue interest on this amount untilthe ultimate outcome of the case is determined.

 

In January 2005, a bus fare collection system customer in NorthAmerica issued a “cure notice” to the Company, alleging that its performancewas not in accord with the contract. After unsuccessful negotiations with thecustomer, in March 2005, the Company filed for a temporary restrainingorder requesting that the customer be restrained from further interfering withthe Company’s performance and from issuing a termination notice. The nextbusiness day, the customer issued a letter terminating the contract fordefault. In April 2005, the customer filed a claim for breach of contract,seeking damages for “all actual, consequential and liquidated damagessustained” as well as attorney’s fees. The contract limits liability to thecontract value of $8.2 million, but the customer appears to be attempting toavoid that limitation. In May 2005, the Company filed an answer andgeneral denial and subsequently filed a verified petition alleging breach ofcontract and other substantive claims, claiming the amount owed under thecontract of $4.2 million, plus interest and attorney’s fees. Managementbelieves that both the customer’s default notice and claim for damages areunsupported and the Company is vigorously defending against the allegations.Based on the advice of counsel, management believes the Company had

 

52

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substantially completed the contract prior to termination and that theremaining contract value is due and that the Company will prevail at trial; however,due to the uncertainty of collecting the outstanding receivable balance anallowance for doubtful accounts of $4.2 million was established and all costsincurred in the performance of the contract and costs incurred outside thescope of the contract were expensed in the year ended September 30, 2005.

 

InJune 2005, a company that Cubic had an alleged agreement with topotentially bid on a portion of automated fare collection contracts filed acourt claim for breach of contract, fraud, negligent misrepresentation, theftof trade secrets, and other related allegations. The claim seeks $15.0 millionin compensatory damages, punitive damages, disgorgement of profits and apermanent injunction. In accordance with the underlying contract arbitrationclause, in July 2005 the Company filed a claim with the AmericanArbitration Association and requested the court case be stayed or dismissed.The Court denied the Company’s motion to transfer the case to arbitration. TheCompany has appealed that decision to the California Court of Appeals. Based oninformation currently available, management believes there is no merit to theclaim and that it will prevail in this matter. Therefore, no liability has beenrecorded as of September 30, 2005.

 

TheCompany is not a party to any other pending proceedings, other than ordinarylitigation incidental to the business. Management believes the outcome of theseproceedings and the proceedings described above will not have a materiallyadverse effect on the Company’s financial position.

 

NOTE 10—BUSINESS SEGMENT INFORMATION

 

###### Descriptionof the types of products and services from which each reportable segmentderives its revenues:

 

TheCompany has two primary business segments: transportation systems and defense.The transportation systems segment designs, produces, installs and serviceselectronic revenue collection systems for mass transit projects, includingrailways and buses. The defense segment performs work under U.S. and foreigngovernment contracts relating to electronic defense systems and equipment,computer simulation training, development of training doctrine, and fieldoperations and maintenance. Products include customized range instrumentationand training systems, simulators, communications and surveillance systems, avionicssystems, power amplifiers and receivers.

 

###### Measurementof segment profit or loss and segment assets:

 

The Company evaluates performance and allocates resources based ontotal segment operating profit or loss. The accounting policies of the reportablesegments are the same as those described in the summary of significantaccounting policies. Intersegment sales and transfers are immaterial.

 

###### Factorsmanagement used to identify the Company’s reportable segments:

 

TheCompany’s reportable segments are business units that offer different productsand services. The reportable segments are each managed separately because theydevelop and manufacture distinct products with different customer bases.

 

53

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Business segment financial data is as follows:

 
| **Years ended September 30,**        | ** ** | **2005**          | ** ** | **2004** | ** ** | **2003** | ** ** |
|-------------------------------------------|------------|-------------------|------------|----------|------------|----------|------------|
| ** **                                | ** ** | **(in millions)** | ** ** |
| **Sales:**                                |       |              |       |     |       |     |       |
| Transportation  systems                   |       | $                 | 245.8      |     | $          | 253.5    |       | $ | 253.4 |   |
| Defense                                   |       | 543.4             |       | 452.9    |       | 365.1    |       |
| Other                                     |       | 15.2              |       | 15.6     |       | 15.6     |       |
| Total sales                               |       | 804.4             |       | 722.0    |       | 634.1    |       |
|                                      |       |              |       |     |       |     |       |
| **Operating  income:**                    |       |              |       |     |       |     |       |
| Transportation  systems                   |       | $                 | (13.8      | )        | $          | 28.2     |       | $ | 24.4 |   |
| Defense                                   |       | 30.1              |       | 34.5     |       | 24.6     |       |
| Provision for  litigation                 |       | —            |       | (6.0     | )          | —   |       |
| Unallocated  corporate expenses and other |       | (3.2              | )          | (2.5     | )          | (1.0     | )          |
| Total operating  income                   |       | $                 | 13.1       |     | $          | 54.2     |       | $ | 48.0 |   |
|                                      |       |              |       |     |       |     |       |
| **Assets:**                               |       |              |       |     |       |     |       |
| Transportation  systems                   |       | $                 | 211.8      |     | $          | 241.1    |       | $ | 186.7 |   |
| Defense                                   |       | 255.2             |       | 245.0    |       | 220.5    |       |
| Corporate and  other                      |       | 80.3              |       | 56.9     |       | 53.0     |       |
| Total assets                              |       | $                 | 547.3      |     | $          | 543.0    |       | $ | 460.2 |   |
|                                      |       |              |       |     |       |     |       |
| **Depreciation  and amortization:**       |       |              |       |     |       |     |       |
| Transportation  systems                   |       | $                 | 3.2        |     | $          | 2.5      |       | $ | 2.3 |   |
| Defense                                   |       | 4.9               |       | 4.6      |       | 3.6      |       |
| Corporate and  other                      |       | 0.5               |       | 0.4      |       | 0.6      |       |
| Total  depreciation and amortization      |       | $                 | 8.6        |     | $          | 7.5      |       | $ | 6.5 |   |
|                                      |       |              |       |     |       |     |       |
| **Expenditures  for long-lived assets:**  |       |              |       |     |       |     |       |
| Transportation  systems                   |       | $                 | 3.2        |     | $          | 2.6      |       | $ | 5.3 |   |
| Defense                                   |       | 4.5               |       | 4.1      |       | 1.9      |       |
| Corporate and  other                      |       | 0.6               |       | 0.2      |       | 1.0      |       |
| Total  expenditures for long-lived assets |       | $                 | 8.3        |     | $          | 6.9      |       | $ | 8.2 |   |
|                                      |       |              |       |     |       |     |       |
| **Geographic  Information:**              |       |              |       |     |       |     |       |
| Sales (a):                                |       |              |       |     |       |     |       |
| United States                             |       | $                 | 531.5      |     | $          | 494.5    |       | $ | 414.6 |   |
| United Kingdom                            |       | 119.9             |       | 120.3    |       | 147.4    |       |
| Canada                                    |       | 44.4              |       | 30.7     |       | 18.2     |       |
| Far East                                  |       | 23.6              |       | 29.3     |       | 13.4     |       |
| Other                                     |       | 85.0              |       | 47.2     |       | 40.5     |       |
| Total sales                               |       | $                 | 804.4      |     | $          | 722.0    |       | $ | 634.1 |   |

 

----

(a) Sales areattributed to countries or regions based on the location of customers.

 

54

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| **September 30,**        | ** ** | **2005**          | ** ** | **2004** | ** ** | **2003** | ** ** |
|-------------------------------|------------|-------------------|------------|----------|------------|----------|------------|
| ** **                    | ** ** | **(in millions)** | ** ** |
| Long-lived  assets, net:      |       |              |       |     |       |     |       |
| United States                 |       | $                 | 45.2       |     | $          | 41.4     |       | $ | 50.2 |   |
| United Kingdom                |       | 12.9              |       | 13.9     |       | 13.3     |       |
| Other foreign  countries      |       | 2.7               |       | 2.6      |       | 1.3      |       |
| Total long-lived  assets, net |       | $                 | 60.8       |     | $          | 57.9     |       | $ | 64.8 |   |

 

Defense segment sales include $426.9 million, $360.3 million and $281.9million in 2005, 2004, and 2003, respectively, of sales to U.S. Governmentagencies.  No other single customeraccounts for 10% or more of the Company’s revenue.

 

NOTE 11—SUMMARY OF QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

 

The following is a summary of the quarterly results of operations forthe years ended September 30, 2005 and 2004:

 
| ** **            | ** ** | **Quarter Ended**                         | ** ** |
|-----------------------|------------|-------------------------------------------|------------|
| ** **            | ** ** | **December 31**                      | ** ** | **March 31** | ** ** | **June 30** | ** ** | **September 30** | ** ** |
| ** **            | ** ** | **(in thousands, except per share data)** | ** ** |
| Fiscal 2005           |       |                                      |       |   |   |   |   |   |   |
| Net sales             |       | $                                         | 189,940    |   | $ | 182,053 |   | $ | 213,790 |   | $ | 218,589 |   |
| Gross profit          |       | 37,435                                    |       | 33,547 |   | 27,809 |   | 33,040 |   |
| Net income            |       | 5,253                                     |       | 544 |   | 822 |   | 5,009 |   |
| Net income per  share |       | 0.20                                      |       | 0.02 |   | 0.03 |   | 0.19 |   |
|                  |       |                                      |       |   |   |   |   |   |   |
| Fiscal 2004           |       |                                      |       |   |   |   |   |   |   |
| Net sales             |       | $                                         | 171,032    |   | $ | 175,184 |   | $ | 190,829 |   | $ | 184,967 |   |
| Gross profit          |       | 35,985                                    |       | 40,319 |   | 43,126 |   | 53,412 |   |
| Net income            |       | 7,466                                     |       | 8,320 |   | 11,718 |   | 9,407 |   |
| Net income per  share |       | 0.28                                      |       | 0.31 |   | 0.44 |   | 0.35 |   |

 

55

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**REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

 

TheBoard of Directors and Stockholders of Cubic Corporation

 

Wehave audited the accompanying consolidated balance sheets of Cubic Corporationas of September 30, 2005 and 2004, and the related consolidated statementsof income, changes in shareholders’ equity and cash flows for each of the threeyears in the period ended September 30, 2005. These financial statementsare the responsibility of the Company’s management. Our responsibility is toexpress an opinion on these financial statements based on our audits.

 

Weconducted our audits in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that weplan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement. An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements. An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well asevaluating the overall financial statement presentation. We believe that ouraudits provide a reasonable basis for our opinion.

 

Inour opinion, the financial statements referred to above present fairly, in allmaterial respects, the consolidated financial position of Cubic Corporation atSeptember 30, 2005 and 2004, and the consolidated results of itsoperations and its cash flows for each of the three years in the period endedSeptember 30, 2005, in conformity with U.S. generally accepted accountingprinciples.

 

Wealso have audited, in accordance with the standards of the Public CompanyAccounting Oversight Board (United States), the effectiveness of CubicCorporation’s internal control over financial reporting as ofSeptember 30, 2005, based on criteria established in InternalControl-Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission and our report dated December 5,2005 expressed an unqualified opinion thereon.

 
|                   | /s/    ERNST &  YOUNG LLP |   |
|------------------------|--------------------------------------------------------|--------|
|                   |                                                   |
| San  Diego, CA         |                                                   |
| December 5,  2005 |                                                   |

 

56

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**Item 9.    DISAGREEMENTSON ACCOUNTING AND FINANCIAL DISCLOSURE**.

 

None.

 

**Item 9a. CONTROLS AND PROCEDURES**.

 

***Evaluation ofDisclosure Controls and Procedures*** – The Company’smanagement conducted an evaluation, under the supervision and with theparticipation of the Company’s Chief Executive Officer and Chief FinancialOfficer, of the effectiveness of the design and operation of the Company’sdisclosure controls and procedures as of September 30, 2005. Basedon this evaluation, the Company’s management, including the Chief Executive Officer andChief Financial Officer, concluded that the Company’s disclosurecontrols and procedures are effective in providing reasonable assurance thatinformation required to be disclosed in the reports the Company files andsubmits under the Securities Exchange Act of 1934 is recorded, processed,summarized and reported as and when required.

 

In designing andevaluating the Company’s disclosure controls and procedures, the Company’smanagement recognizes that any controls, no matter how well designed andoperated, can provide only reasonable assurance of achieving the desiredcontrol objectives.

 

***Management’s Report on InternalControl over Financial Reporting***

 

Management is responsible for establishing and maintaining adequateinternal control over financial reporting for the Company. In order to evaluatethe effectiveness of internal control over financial reporting, as required bySection 404 of the Sarbanes-Oxley Act, management has conducted anassessment, including testing, using the criteria in Internal Control –Integrated Framework, issued by the Committee of Sponsoring Organizations ofthe Treadway Commission (COSO). The Company’s system of internal control overfinancial reporting is designed to provide reasonable assurance regarding thereliability of financial reporting and the preparation of financial statementsfor external purposes in accordance with generally accepted accountingprinciples. Because of its inherent limitations, internal control overfinancial reporting may not prevent or detect misstatements. Also, projectionsof any evaluation of effectiveness to future periods are subject to the riskthat controls may become inadequate because of changes in conditions, or thatthe degree of compliance with the policies or procedures may deteriorate.

 

Based on its assessment, management has concluded that the Companymaintained effective internal control over financial reporting as ofSeptember 30, 2005, based on criteria in Internal Control – IntegratedFramework, issued by the COSO. Management’s assessment of the effectiveness ofthe Company’s internal control over financial reporting as ofSeptember 30, 2005, has been audited by Ernst & Young LLP, anindependent registered public accounting firm, as stated in their report whichfollows.

 

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**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM**

 

TheBoard of Directors and Stockholders of Cubic Corporation

 

Wehave audited management’s assessment, included in the accompanying Management’sReport on Internal Controls Over Financial Reporting, that Cubic Corporationmaintained effective internal control over financial reporting as ofSeptember 30, 2005, based on criteria established in InternalControl—Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission (the COSO criteria). CubicCorporation’s management is responsible for maintaining effective internalcontrol over financial reporting and for its assessment of the effectiveness ofinternal control over financial reporting. Our responsibility is to express anopinion on management’s assessment and an opinion on the effectiveness of the Company’sinternal control over financial reporting based on our audit.

 

Weconducted our audit in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that weplan and perform the audit to obtain reasonable assurance about whethereffective internal control over financial reporting was maintained in allmaterial respects. Our audit included obtaining an understanding of internalcontrol over financial reporting, evaluating management’s assessment, testingand evaluating the design and operating effectiveness of internal control, andperforming such other procedures as we considered necessary in thecircumstances. We believe that our audit provides a reasonable basis for ouropinion.

 

Acompany’s internal control over financial reporting is a process designed toprovide reasonable assurance regarding the reliability of financial reportingand the preparation of financial statements for external purposes in accordancewith generally accepted accounting principles. A company’s internal controlover financial reporting includes those policies and procedures that(1) pertain to the maintenance of records that, in reasonable detail,accurately and fairly reflect the transactions and dispositions of the assetsof the company; (2) provide reasonable assurance that transactions arerecorded as necessary to permit preparation of financial statements inaccordance with generally accepted accounting principles, and that receipts andexpenditures of the company are being made only in accordance withauthorizations of management and directors of the company; and (3) providereasonable assurance regarding prevention or timely detection of unauthorizedacquisition, use, or disposition of the company’s assets that could have amaterial effect on the financial statements.

 

Becauseof its inherent limitations, internal control over financial reporting may notprevent or detect misstatements. Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls maybecome inadequate because of changes in conditions, or that the degree ofcompliance with the policies or procedures may deteriorate.

 

Inour opinion, management’s assessment that Cubic Corporation maintainedeffective internal control over financial reporting as of September 30,2005, is fairly stated, in all material respects, based on the COSO criteria.Also, in our opinion, Cubic Corporation maintained, in all material respects,effective internal control over financial reporting as of September 30,2005, based on the COSO criteria.

 

Wealso have audited, in accordance with the standards of the Public CompanyAccounting Oversight Board (United States), the consolidated balance sheets ofCubic Corporation as of September 30, 2005 and 2004, and the relatedstatements of income, stockholders’ equity, and cash flows for each of thethree years in the period ended September 30, 2005 of Cubic Corporationand our report dated December 5, 2005 expressed an unqualified opinion thereon.

 
|                   | /s/    ERNST &  YOUNG LLP |   |
|------------------------|--------------------------------------------------------|--------|
|                   |                                                   |
| San  Diego, California |                                                   |
| December 5,  2005 |                                                   |

 

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***Changes in InternalControls Over Financial Reporting*** – There were no changesin the Company’s internal control over financial reporting that occurred duringthe fourth fiscal quarter of 2005 that have materially affected, or arereasonably likely to materially affect the Company’s internal control overfinancial reporting.

 

**PART III**

 

**Item 10. DIRECTORS AND EXECUTIVE OFFICERS OFTHE REGISTRANT**.

 

Certain information regarding directors and executive officers isincorporated herein by reference from our definitive Proxy Statement, whichwill be filed no later than 30 days prior to the date of the Annual Meeting ofShareholders.

 

The Company has adopted a code of ethics that applies to its principleexecutive officer, principle financial officer, and its principle accountingofficer.  Such code of ethics appears onour web site at: http://www.cubic.com/corp1/invest/governance.html.

 

**Item 11. EXECUTIVE COMPENSATION**.

 

Information regarding executive compensation is incorporated herein byreference from our definitive Proxy Statement, which will be filed no laterthan 30 days prior to the date of the Annual Meeting of Shareholders.

 

**Item 12. SECURITY OWNERSHIP OF CERTAINBENEFICIAL OWNERS AND****MANAGEMENT**.

 

Information regarding security ownership of certain beneficial ownersand management is incorporated herein by reference from our definitive ProxyStatement, which will be filed no later than 30 days prior to the date of theAnnual Meeting of Shareholders.

 

**Item 13. CERTAIN RELATIONSHIPS AND RELATEDTRANSACTIONS**.

 

Information regarding certain relationships and related transactions isincorporated herein by reference from our definitive Proxy Statement, whichwill be filed no later than 30 days prior to the date of the Annual Meeting ofShareholders.

 

**Item 14. PRINCIPAL ACCOUNTANT FEES ANDSERVICES.**

 

Information regarding principal accountant fees and services isincorporated herein by reference from our definitive Proxy Statement, whichwill be filed no later than 30 days prior to the date of the Annual Meeting ofShareholders.

 

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**PART IV**

 

**Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULESAND REPORTS ON FORM 8-K.**

 
| (a)    |   | Documents filed as part of this Report:                    |
|--------|--------|------------------------------------------------------------|
|   |   |                                                       |   |   |   |   |
|   |   | (1)                                                        |   | The following consolidated financial statements of  Cubic Corporation, as referenced in Item 8: |
|   |   |                                                       |   |   |
|   |   |                                                       |   |   |   | Consolidated Balance Sheets |
|   |   |                                                       |   |   |   | September 30, 2005 and 2004 |
|   |   |                                                       |   |   |   |   |
|   |   |                                                       |   |   |   | Consolidated Statements of Income |
|   |   |                                                       |   |   |   | Years ended September 30, 2005, 2004 and 2003 |
|   |   |                                                       |   |   |   |   |
|   |   |                                                       |   |   |   | Consolidated Statements of Changes in Shareholders’  Equity |
|   |   |                                                       |   |   |   | Years ended September 30, 2005, 2004 and 2003 |
|   |   |                                                       |   |   |   |   |
|   |   |                                                       |   |   |   | Consolidated Statements of Cash Flows |
|   |   |                                                       |   |   |   | Years ended September 30, 2005, 2004 and 2003 |
|   |   |                                                       |   |   |   |   |
|   |   |                                                       |   |   |   | Notes to Consolidated Financial Statements |
|   |   |                                                       |   |   |   | September 30, 2005 |
|   |   |                                                       |   |   |
|   |   | (2)                                                        |   | The following consolidated financial statement  schedules of Cubic Corporation and subsidiaries, as referenced in Item 15(d): |
|   |   |                                                       |   |   |   |   |
|   |   |                                                       |   |   |   | None are required under the applicable accounting  rules and regulations of the Securities and Exchange Commission. |
|   |   |                                                       |   |   |   |   |
| (b)    |   | Reports on Form 8-K during the last quarter of  2005: |
|   |   |                                                       |   |   |
|   |   |                                                       |   | None |
| (c)    |   | Exhibits:                                                  |
|   |   |                                                       |
|   |   |                                                       |   | List of Subsidiaries |
|   |   |                                                       |   |   |
|   |   |                                                       |   | 3.1 |   | Certificate of Incorporation. Incorporated by  reference from Form 10-Q for the quarter ended December 31, 2003,  file No.1-8931, Exhibit 3. |
|   |   |                                                       |   | 3.2 |   | Bylaws. Incorporated by reference to Form 10-K  filed for the fiscal year ended September 30, 2004, file No.1-8931,  Exhibit 3. |
|   |   |                                                       |   | 10.1 |   | 2005 Equity Incentive Plan. |
|   |   |                                                       |   | 10.2 |   | Transition Protection Plan. |
|   |   |                                                       |   | 10.3 |   | Credit Agreement dated March 10, 2005.  Incorporated by reference from Form 10-Q for the quarter ended  March 31, 2005, file No. 1-8931, Exhibit 10. |
|   |   |                                                       |   | 10.4 |   | Deferred Compensation Plan Summary. Incorporated by  reference from Form 8-K filed April 6, 2005, file No. 1-8931,  Exhibit 10. |
|   |   |                                                       |   | 21.1 |   | List of Subsidiaries |
|   |   |                                                       |   | 23.1 |   | Consent of Independent Registered Accounting Firm. |
|   |   |                                                       |   | 31.1 |   | Section 302 Certifications. |
|   |   |                                                       |   | 32.1 |   | Section 906 Certifications. |
|   |   |                                                       |   |   |   |   |
| (d)    |   | Financial Statement Schedules                              |
|   |   |                                                       |
|   |   |                                                       |   | None |
|        |        |                                                            |  |  |  |  |  |  |  |  |

 

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**SIGNATURES**

 

Pursuant to the requirements of Sections 13 or 15(d) of theSecurities Exchange Act of 1934, the Registrant has duly caused this report tobe signed on its behalf by the undersigned, thereunto duly authorized:

 
| (Registrant) | CUBIC CORPORATION |                       |
|--------------|-------------------|----------------------------|
|         |              |                       |
| *12/12/05*   | * *          | /s/ Walter J. Zable        |   |
| Date         |              | WALTER J. ZABLE, President |   |

 

Pursuant to the requirements of the Securities Exchange Act of 1934,this report has been signed below by the following persons on behalf of theRegistrant and in the capacities and on the dates indicated:

 
| *12/12/05* | * * | /s/ Walter J. Zable                      | * * | *12/8/05* | * * | /s/ Raymond E. Peet                 | * * |
|------------|----------|------------------------------------------|----------|-----------|----------|-------------------------------------|----------|
| Date       |     | WALTER J. ZABLE,                         |     | Date      |     | RAYMOND E. PEET,                    |     |
|       |     | President, Chief Executive Officer  |     |      |     | Director                            |     |
|       |     | and Chairman of the Board of             |     |      |     |                                |     |
|       |     | Directors                                |     | *12/8/05* | * * | /s/ Robert S. Sullivan              | * * |
| * *   | * * | * *                                 | * * | Date      |     | ROBERT S. SULLIVAN,                 |     |
| *12/12/05* |     | /s/ Walter C. Zable                      |     |      |     | Director                            |     |
| Date       |     | WALTER C. ZABLE,                         |     |      |     |                                |     |
|       |     | Vice President and Vice Chairman         |     | *12/8/05* | * * | /s/ Robert D. Weaver                | * * |
|       |     | of the Board of Directors                |     | Date      |     | ROBERT D. WEAVER,                   |     |
|       |     |                                     |     |      |     | Director                            |     |
| *12/8/05*  | * * | /s/ Richard C. Atkinson                  |     |      |     |                                |     |
| Date       |     | RICHARD C. ATKINSON,                     |     | *12/8/05* | * * | /s/ William W. Boyle                | * * |
|       |     | Director                                 | * * | Date      |     | WILLIAM W. BOYLE,                   |     |
|       |     |                                     | * * |      |     | Director, Senior Vice President and |     |
| *12/8/05*  |     | /s/ Raymond L. deKozan                   |     |      |     | Chief Financial Officer             |     |
| Date       |     | RAYMOND L. deKOZAN,                      |     |      |     |                                |     |
|       |     | Director, Senior Group Vice              |     | *12/8/05* | * * | /s/ Mark A. Harrison                |     |
|       |     | President                                |     | Date      |     | MARK A. HARRISON,                   | * * |
|       |     |                                     |     |      |     | Vice President and Corporate        |     |
|       |     |                                     |     |      |     | Controller (Principal Accounting    |     |
|       |     |                                     |     |      |     | Officer)                            |     |

 

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