** **

**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-K**

 

**ANNUAL REPORT PURSUANT TO SECTION 13OR 15(d) OF THE SECURITIES**

**EXCHANGE ACT OF 1934**

** **

**For the Fiscal Year Ended September 30, 2008**

 

**Commission File Number  1-8931**

 

**CUBIC CORPORATION**

Exact Name of Registrant as 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**

 

Securities registered pursuant to Section 12(b) ofthe Act:

 

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

 

Securities registered pursuant to Section 12(g) ofthe Act:

**None**

 
| Indicate by check mark  if the registrant is a well known seasoned issuer, as defined in Rule 405 of  the Securities Act. | Yes  o   No  x |
|---------------------------------------------------------------------------------------------------------------------------|---------------------------------------------------|

 
| Indicated by check mark  if the registrant is not required to file reports pursuant to Section 13 or  Section 15(d) of the Act. | Yes  o   No  x |
|---------------------------------------------------------------------------------------------------------------------------------|---------------------------------------------------|

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

 
| Indicate by check mark  if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is  not contained herein, and will not be contained, to the best of the  registrant’s knowledge, in definitive proxy or information statements  incorporated by reference in Part III of this Form 10-K. |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                                                                            | Yes  o   No  x |

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company. See definition of “largeaccelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2of the Exchange Act (check one).

Largeaccelerated filer o        Acceleratedfiler x          Non-acceleratedfiler o      Smallerreporting company o

 
| Indicate by check mark  whether the registrant is a shell company (as defined in Rule 12b-2 of the  Act) | Yes  o   No  x |
|----------------------------------------------------------------------------------------------------------|---------------------------------------------------|

 

Theaggregate market value of 15,549,143 shares of voting stock held bynon-affiliates of the registrant was: $442,062,135 as of March 31, 2008,based on the closing stock price on that date.

 

Numberof shares of common stock outstanding as of November 12, 2008 includingshares held by affiliates is: 26,727,487 (after deducting 8,945,120 shares heldas treasury stock).

 

**DOCUMENTS INCORPORATED BY REFERENCE:**

 

Portions of the Registrant’s Proxy Statementfor its 2009 Annual Meeting of Shareholders to be held on February 24,2009, are incorporated by reference into Part III of this Annual Report onForm 10-K.

 

 

 

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**PART I**

 

**Item 1. BUSINESS.**

 

**GENERAL**

 

CUBIC CORPORATION (“Cubic”or “the Company”), was incorporated in the State of California in 1949 andbegan operations in 1951.  In 1984, theCompany moved its corporate domicile to the State of Delaware.

 

We design, develop,manufacture and install products which are mainly electronic in nature, suchas:

 

Equipment for usein customized military range instrumentation, training and applicationssystems, simulators, communications and surveillance systems, surveillancereceivers, power amplifiers, and avionics systems.

 

Automated revenuecollection systems, including contactless smart cards, passenger gates, centralcomputer systems and ticket vending machines for mass transit networks,including rail systems, buses, and parking applications.

 

We also perform a varietyof services, such as computer simulation training, distributed interactivesimulation and development of military training doctrine, as well as fieldoperations and maintenance. We also manufacture replacement parts for theproducts we produce.

 

During fiscal year 2008,approximately 54% of our total business was conducted, either directly orindirectly, with various agencies of the United States government.  Most of the remainder of our revenue was fromlocal, regional and foreign governments or agencies.

 

Cubic’s internet addressis www.Cubic.com. The content on our website is available for informationpurposes only. It should not be relied upon for investment purposes, nor is itincorporated by reference into this Form 10-K. We make available free ofcharge on or through our Internet website under the heading “InvestorInformation,” our reports on Form 10-K, quarterly reports on Form 10-Q,current reports on Form 8-K and amendments to those reports as soon asreasonably practicable after we electronically file such material with theSecurities and Exchange Commission.

 

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**BUSINESS SEGMENTS**

 

Information regarding theamounts of revenue, operating profit and loss and identifiable assetsattributable to each of our business segments, is set forth in Note 11 to theConsolidated Financial Statements for the year ended September 30, 2008.Additional information regarding the amounts of revenue and operating profitand loss attributable to major classes of products and services is set forth inManagement’s Discussion and Analysis which follows at Item 7.

 

**DEFENSE**

 

Cubic’s defense businesssegment consists of three market-focused businesses: Mission Support Services, TrainingSystems and Communications.  Our productsinclude customized military range instrumentation systems, electro-opticalsystems, firearm simulation systems, communications and surveillance systems,surveillance receivers, power amplifiers, and avionics systems.  Our services include training missionsupport, computer simulation training, distributed interactive simulation,development of military training doctrine, and field operations andmaintenance.  We market our capabilitiesdirectly to various U.S. government departments and agencies and foreigngovernments.  In addition, we frequentlycontract or team with other leading defense suppliers.

 

**MissionSupport Services**

 

Cubic Mission SupportServices (MSS) is a leading provider of training, operations, maintenance,technical, and other support services to the U.S. Government and alliednations, with an emphasis on military training. MSS comprises approximately 5,000 Cubic employees working at more than130 locations throughout the world.  Ourpeople serve with clients in actual training and operational environments tohelp prepare and support forces through provision of comprehensive training,exercises, education, operational, and logistical assistance to meet the fullscope of their assigned missions.  Thescope of mission support that Cubic provides includes training and rehearsalfor both small and large scale combat operations; combat and materialdevelopment; logistics and maintenance support for fielded and deployedsystems; special operations; peacekeeping; consequence management; andhumanitarian assistance operations worldwide. We plan, prepare, execute and document realistic and focused missionrehearsal exercises (using both live and computer-based exercises) as finalpreparation of forces prior to deployment. In addition, we provide high level consultation and advisory services tothe governments and militaries of allied nations.

 

InJuly 2008, we acquired all outstanding capital stock of the privately-heldOmega Training Group, Inc. (Omega). Omega provides training, testing, analysis, logistics and staffingservices to U.S. Army locations at the U.S. Army Infantry School at FortBenning, Fort Bliss, Fort Jackson and Fort Hood. Founded in 1990, Omega now has790 employees. We believe this acquisition will enhance our position in thedefense services market place and add revenues of approximately $60 -70 millionin 2009.

 

U.S. government servicecontracts are typically awarded on a competitive basis with options formultiple years.  In this competitivemarket, Cubic is viewed as a premier service provider and formidablecompetitor.  We typically compete asprime contractors to the government, but also team with other companies,depending on the skills required.  Muchof our early work centered on battle command training and simulation, in whichmilitary commanders are taught to make correct decisions in battlesituations.  More recently, our businessbase has broadened to include integrated live, virtual, and constructivetraining support; advanced distance learning and other professional militaryeducation; comprehensive logistics and maintenance support; weapons effects andanalytical modeling; intelligence analysis; homeland security training andexercises; and military force modernization. Additionally, we support thedeployment and re-deployment of both active and reserve component forces atU.S. Army Mobilization Centers at Fort Bliss, TX and several other U.S.locations; and we provide in-country logistics, maintenance, operational, andtraining support to U.S. Forces deployed in Kuwait, Iraq, and Afghanistan.

 

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Cubic’s contracts includeproviding mission support services to three of the Army’s major Combat TrainingCenters (CTCs): the Joint Readiness Training Center (JRTC) as prime contractor;and to the National Training Center (NTC) and Battle Command Training Program(BCTP) as a principal subcontractor. These services include planning, executing, and documenting large scaleexercises aimed at stressing both active and reserve U.S. forces in situationsas close to actual combat as possible.

 

At U.S. Joint ForcesCommand (USJFCOM), Cubic is a principal member of the contractor team thatsupports and helps manage all aspects of the operations of the JointWarfighting Center (JWFC), including support to worldwide exercises and thedevelopment and fielding of the Joint National Training Capability (JNTC).  We provide similar technical and managementsupport services to the U.S. Army’s National Simulation Center (NSC) at FortLeavenworth, Kansas. Under the Marine Air Ground Task Force (MAGTF) TrainingSystems Support (MTSS) contract, Cubic provides comprehensive training andexercise support to U.S. Marine Corps forces worldwide, including real-worldmission rehearsals.  We have planned andexecuted virtually all Marine Corps simulation-based exercises worldwide since1998, directly preparing Marines for combat operations. Cubic provides trainingand professional military education support to the U.S. Army’s QuartermasterCenter and School and to the Transportation School. We also provide contractormaintenance and instructional support necessary to operate and maintain a widevariety of flight simulation systems, Unmanned Aerial Vehicles (UAV), and otherfacilities worldwide for U.S. and allied forces under multiple long-termcontracts. In addition, we provide a broad range of operational support to theU.S. Navy’s Anti-Submarine Warfare (ASW) Command.

 

Cubic initiated and hascontinued to operate the Korea Battle Simulation Center (KBSC) since itsinception in 1991.  KBSC prepares U.S.and allied forces in Korea to deal with mission situations that may develop intheir areas of responsibility.  Our KBSCcontract includes support to the world’s largest and most complexsimulation-based training events.

 

At the U.S. Army I CorpsBattle Simulation Center, Cubic provides the technical and operationalexpertise necessary to support worldwide training, exercises, evaluations, andmission rehearsals for I Corps active and reserve component units, the newStryker brigades, other services, and joint commands.

 

Cubic supports theDefense Threat Reduction Agency (DTRA) with technology-based engineering andother services necessary to accomplish DTRA’s mission of predicting anddefeating the effects of chemical, biological, radiological, nuclear and highexplosive (CBRNE) weapons.  Cubicsupports DTRA with modeling and simulations to analyze, assess and predict theeffects of such weapons in combat and other environments. Additionally, Cubicprovides 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 multiplecontracts with the U.S. Army and other government agencies to improve the qualityand reach of training and education initiatives for individuals up throughlarge organizations. Cubic’s products and capabilities include development anddeployment of curriculum and related courseware, computer-based training,knowledge management and distribution, advanced distance learning, seriousgames for training, and other advanced education programs for U.S. and alliedforces.

 

An important part ofCubic’s services business is to provide specialized teams of military expertsto advise the governments and militaries of the nations of the former WarsawPact and Soviet Union, and other former communist countries in thetransformation of their militaries to a NATO environment.  These very broad defense modernizationcontracts entail sweeping vision and minute detail, involving both the nations’strategic foundation and the detailed planning of all aspects of reform. Cubicalso operates battle simulation centers for select countries in Central andEastern Europe.

 

We believe thecombination and scope of Cubic’s growing mission support services and trainingsystems business is unique in the industry, permitting us to offer customers acomplete training and combat readiness capability from one source.

 

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**TrainingSystems**

 

Our Training Systemsbusiness is a pioneer and market leader in the design and production ofinstrumented training systems for military customers.  These systems generally permit live trainingin air and ground combat environments, with weapons and other effects simulatedby electronic and/or laser technology. The systems also enable the collection (based on Global PositioningSystem technology) and analysis of behavior and event data for determination ofcombat effectiveness and lessons learned. As such, the systems generally have a high degree of communications andsoftware sophistication.

 

Our training business isorganized into Air Combat Training, Ground Combat Training, Electro-optics, andSimulation Systems.  In Air CombatTraining, Cubic was the initial developer and supplier of Air CombatManeuvering Instrumentation (ACMI) capability during the Vietnam War andcontinues to lead that market with the competitive award in 2003 of a 10-year,$525 million indefinite delivery/ indefinite quantity (IDIQ) contract toprovide upgraded air combat training capability to the U.S. Air Force, Navy andMarine Corps.  The latest ACMI systemspermit forces to train on either a fixed geographic range or in a “rangeless”environment.  Many other nations employCubic’s ACMI systems.

 

Our Ground CombatTraining involves systems analogous to air ranges for ground forcetraining.  Cubic provided turnkey systemsto instrument two U.S. Army training centers in past years at Fort Polk, LA(Joint Readiness Training Center – JRTC) and Hohenfels, Germany (CombatManeuver Training Center – CMTC) and is engaged in a multiyear effort to expandcapability of the Alaska Training Range. The unit also built ranges in recent years for the British Army in theU.K. and Canada.  We are currentlyworking on similar ground combat training centers for Canada, Australia and forcustomers in the Middle East and Far East. To meet new customer demand formobile instrumented training, Cubic has also developed a transportable, deployablesystem, known as I-HITS. In 2005, Cubic was awarded a five-year $72 millionIDIQ contract to produce I-HITS for the U.S. Army.

 

Electro-optics includeslaser-based tactical engagement simulation systems, generally known as MILES(Multiple Integrated Laser Engagement Simulators), which are used at combattraining centers (CTC) and in other training environments to permit weapons tobe used realistically, registering hits or kills, without live ammunition.  We supply 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 the U.S. and at our New Zealand-based subsidiary, CubicDefence New Zealand.  In 2005, Cubic wasawarded a 5-year $113 million IDIQ contract to produce MILES Individual WeaponSystem (IWS) kits for the U.S. Army.

 

Our Simulation SystemsDivision (SSD) produces virtual training systems, employing actual or realisticweapons and systems together with visual imagery to simulate actual battlefieldor other environments.  SSD also producescombat system and maintenance trainers.

 

**Communications**

 

Our Communications businessis a supplier of secure data links, intelligence receivers, high power RFamplifiers, direction finding systems and search and rescue avionics to theU.S. military, other agencies and allied nations.  Our products support the strong militarytrend toward network-centric warfare, intelligence collection and overallmodernization initiatives.  The unit haslong supplied the air/ground secure data link for the U.S. Army/Air Force JointSTARS system and supplies the principal datalink for the United Kingdom’s ASTORprogram.  Capitalizing on a multiyearinternal R&D program, we won a competitive contract in fiscal 2003 todevelop and produce the next-generation Common Data Link Subsystem (CDLS) forthe U.S. Navy.  CDLS has been installedon major surface ships of the U.S. fleet. Smaller, tactical versions of our Common Data Link have been selectedfor both legacy and new military platforms, such as UAVs, which require highperformance in a small package.  Thesecontracts include the U.K. Watchkeeper and the U.S. Firescout.

 

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Our Personnel LocatorSystem (PLS) is standard equipment on U.S. aircraft with a search-rescue mission. We have continued to receive orders for an upgraded PLS which has beenredesigned to interface with all modern search and rescue system standards,thus positioning us for major platform upgrades expected over the next fewyears.

 

Wealso supply high power amplifiers, intelligence receivers and direction findingsystems to major primes and end users for both domestic and internationalapplications.  These include systems usedby the Canadian Coast Guard, the U.S. Navy and the U.S. Air Force.  System level applications of these productsto the worldwide Electronic Warfare marketplace is a major thrust for thisbusiness area.

 

**Raw Materials**:

 

Theprincipal raw materials used by the defense segment are sheet aluminum andsteel, 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.

 

**Backlog**:

 

Fundedsales backlog of the defense segment at September 30, 2008 was $593 millioncompared to $602 million at September 30, 2007. Total backlog, including unfunded customer orders, was $1,292million at September 30, 2008 compared to $1,247 million at September 30, 2007.Approximately $805 million ofthe September 30, 2008 total backlog is not expected to be completed bySeptember 30, 2009.

 

**Competition**:

 

Cubic’sbroad defense business portfolio means we compete with numerous companies,large and small, domestic and international. Well known Cubic competitors include Lockheed Martin, Northrop Grumman,General Dynamics, Boeing, L3 Communications, and SAIC.  In many cases, we have also teamed with thesesame companies on specific bid opportunities. While Cubic is generally smaller than its competitors, we believe ourcompetitive advantages include an outstanding record of past performance,strong incumbent relationships, our ability to control operating costs, and theability to rapidly focus technology and innovation to solve customer problems.

 

Projectsmust compete for funding in the defense budget. While the U.S. defense budget has seen above average increases in recentyears, long-term growth will only occur in those segments that offer very highpayoff and are consistent with warfighting priorities and growing fiscalrestraints.  The U.S. defense markettoday can be characterized as highly dynamic, with priorities and fundingshifting in reaction to, or anticipation of, world events much more rapidly thanduring the Cold War or since. Overarching military priorities include lighter, faster, more lethalforces with the ability and training to rapidly adapt to new situations basedon superior knowledge of the battle environment.  Superior knowledge is enabled by systems thatrapidly collect, process and disseminate the right information to the rightplace at the right time, resulting in what DoD calls network-centricwarfare.  We believe Cubic’s trainingsystems, training support and intelligence, surveillance and reconnaissancecapabilities are well matched to these sustainable defense priorities.

** **

**TRANSPORTATION SYSTEMS**

 

Cubic TransportationSystems (CTS) is the leading turnkey solution provider of automated farecollection systems for public transport authorities worldwide.  We provide a range of service and systemsolutions for the bus, bus rapid transit, light rail, commuter rail, heavyrail, ferry and parking markets.  These solutionsand services include system design, central computer systems, equipment designand manufacturing, device-level software, integration, test, installation,warranty, maintenance, computer hosting services, call center services, cardmanagement and distribution services, financial clearing and settlement,multi-application support and outsourcing services.  In addition, CTS designs, develops and 

 

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manufactures specialtechnology components, such as smart card readers and magnetic tickettransports for use within its suite of fare collection equipment consisting ofon-bus solutions, access control solutions, vending solutions, retail and cardissuing solutions, and mobile inspection and sales solutions.   

 

Over the years, the transportation segment has been awarded over 400projects in 40 major markets on 5 continents. Active projects include London, and various other cities around theU.K., Miami, Florida, Vancouver, B.C. Canada, the New York / New Jersey region, the Washington, D.C. / Baltimore /Virginia region, the Los Angeles region, the San Diego region, San Francisco,Minneapolis/St. Paul, Chicago, Atlanta, Brisbane, Australia, and Sweden.

 

These programs provide a base of current business and the potential foradditional future business as the systems are expanded.  In 1998, Transaction Systems Limited(TranSys), a company in which Cubic has a 37.5% ownership, was awarded acontract called “PRESTIGE” to outsource the London Transport fare collectionservices.  This contract, now in itstenth year, is the largest automated fare collection contract ever awarded. In August 2008, Transport for London (TfL) notified TranSys that they it wouldterminate the PRESTIGE fare collection system contract as of August 2010 inaccordance with an early termination option in the contract. To replacePRESTIGE, TfL, awarded a contract directly to Cubic for continuing the servicesuntil 2013.  The new contract, with aninitial value of £170 million ($255 million), will include all the existingoperational services as well as laying the groundwork for future ticketinginnovations such as mobile phone ticketing and bank card ticketing. 

 

**Industry Overview**

** **

Transport agencies, particularly those based in the U.S., rely heavilyon federal, state and local government for subsidies in capital investments,including new procurements and/or upgrades of automated fare collectionsystems.  The average lifecycle for railfare collection systems is 12 to 15 years, and for bus systems is 7 to 10years.  Procurements tend to follow along and strict competitive bid process where low price is a significantfactor.

 

The automated fare collection business is a niche market able tosustain 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 and security technologies areenabling interoperability of multiple modes of transportation within a singlenetworked system as well as interoperability of multiple operators within asingle networked system.  As such, thereis a growing trend for regional ticketing systems, usually built around a largetransit agency and including neighboring operators, all sharing a commonregional smart card.  There is anemerging trend for other applications to be added to these regional systems toexpand the utility of the smart card, offering higher value and incentives tothe end users and lowering costs and creating new revenue streams for theregional system operators.  As a result,these regional systems have created opportunities for new levels of systemssupport and services including call center support, smart card production anddistribution, financial clearing and settlement and multi-applicationsupport.  In some cases, operators arechoosing to outsource the ongoing operations and commercialization of theseregional ticketing systems. This growing new market provides the opportunity toestablish lasting relationships and grow revenues and profits over thelong-term.

 

**Raw Materials**:

 

Rawmaterials used in this segment include sheet steel, composite products, copperelectrical wire and castings. A significant portion of the segment's endproduct is composed of purchased electronic components and subcontracted partsand supplies. All of these items are procured from commercial sources.  In general, supplies of raw materials andpurchased parts are adequate to meet the requirements of the segment.

 

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**Backlog**:

 

Funded sales backlog ofthe transportation systems segment at September 30, 2008 and 2007 amountedto $481 million and $787 million, respectively. As mentioned above, TfLexercised an early termination option in the PRESTIGE contract and, as a result,the last five years of our contracts with TranSys and the other major TranSysshareholder were also terminated, effective August 2010.  Therefore, this portion of the contract valuewas removed from backlog as of September 30, 2008. Transportation systemsbacklog at September 30, 2007 included $290 million (£142 million)relating to these contracts covering the period from August 2010 through August 2015.In November 2008, TfL awarded Cubic directly a new three year contractthat includes virtually all of the services currently being performed byTranSys through the major shareholders. The term of this contract is for thetime period from August 2010 to August 2013, with a base value ofapproximately $255 million (£170 million), which will be added to backlog inthe quarter ending December 31, 2008. Approximately $221 million of the September 30,2008 backlog is not expected to be completed by September 30, 2009.

 

**Competition**:

 

Weare one of several companies involved in providing automated fare collectionsystems solutions and services for public transport operators worldwideincluding such foreign competitors as Thales, ACS and Scheidt &Bachmann.  In addition, there are manysmaller local companies, particularly in European and Asian markets.  For large national tenders, our competitorsmay form consortiums that could include, in addition to the fare collectioncompanies noted above, telecommunications, financial institutions, consultingand computer services companies.  Theseprocurement activities are very competitive and require that we have highlyskilled and experienced technical personnel to compete. We believe that ourcompetitive advantages include intermodal and interagency regional integrationexpertise, technical skills, past contract performance, systems quality andreliability, experience in the industry and long-term customer relationships.

 

**BUSINESS STRATEGY**

 

Ourobjective is to consistently grow sales, improve profitability and deliverattractive returns on capital.  We intendto build on our position with U.S. and foreign governments as the leading fullspectrum supplier of training systems and mission support services, grow ourniche position as a supplier of network-centric technologies for communicationssystems and products, and maintain our position as the leading provider ofintegrated intermodal regional transit fare collection systems to transitauthorities worldwide. Our strategies to achieve these objectives include:

 

**Leverage Long-Term Relationships**

 

Weseek to maintain long-term relationships with our customers through repeatbusiness by continuing to achieve high levels of performance on our existingcontracts.  By achieving this goal we canleverage our returns through repeat business with existing customers and expandour presence in the market through sales of similar systems at “good value” toadditional customers.

 

Anexample of this in our defense segment is the recent award of a contract toprovide the next generation U.S. air combat training system.  Starting in 1971 Cubic developed the firstgeneration of Air Combat Maneuvering Instrumentation system, or ACMI, for theU.S. Military for live combat training. In 2003 the company was awarded the P5 $525 million ID/IQ contract todeliver the latest technology for rangeless live training to the U.S. andforeign militaries.  In 2007 the companywas awarded a $50.3 million contract to develop the next generation of livetraining for the F-35 Joint Strike Fighter aircraft using embeddedtechnology.  Thus since the initial contractin 1971 the company has successfully and continuously supplied the U.S. andforeign militaries with the latest in air combat training technologies.

 

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Inour transportation segment we have had a continuous relationship with Transportfor London (TfL) since the 1970’s. Starting with a small trial of magnetic ticketing and gating in 1978,the company has continuously delivered fare collection equipment and systems toTfL as its exclusive fare collection system supplier.  Today under the PRESTIGE contract more than22 million Oyster smart cards have been sold, making this one of the largesttransportation smart card systems in the world. In August 2008 TfL notified our 37.5% owned company, TranSys, that itwas exercising its option to terminate the PRESTIGE contract for convenienceeffective in August 2010 and, subsequently, awarded Cubic the follow-oncontract to operate and maintain the Oyster system under a contract called theFuture Ticket Agreement, thus continuing Cubic’s relationship through2013.  Similarly, we are regionalizingintegrated fare collection systems in Washington D.C., New York and SouthernCalifornia.

 

**Maintain a Diversified Business Mix**

 

Wehave a diverse mix of business in our defense and transportation systemssegments. Approximately 54% of our sales are made directly or indirectly to theU.S. government; however, this represents a wide variety of product and servicesales to many different U.S. government agencies. The largest single contractin the transportation segment is the PRESTIGE contract in London whichrepresented about 13% of consolidated sales in 2008.

 

We also seek a reasonablebalance between systems and service work in both the defense and transportationsegments. In aggregate, approximately 46% of our sales revenue in 2008 was fromservice type work. We believe that a strong base of service work helps tosmooth the revenue fluctuations inherent in systems type work.

 

**Pursue Strategic Acquisitions**

 

Weare focused on finding attractive acquisitions to enhance our marketpositions.  We look for specific growthopportunities in the defense and transportation marketplaces, and adjacentmarkets in smart cards and security.  In2008 we acquired a company whose business included strong positions in trainingservices and logistical support.  Thisacquisition enhanced our position at key U.S. Army installations that willbecome more important as the Base Realignment and Closing efforts continue.  This acquisition should also enable us toexpand our service offerings to the U.S. Army

 

**OTHERMATTERS**

 

We pursue a policy ofseeking patent protection for our products where deemed advisable, but do notregard ourselves as materially dependent on patents for the maintenance of ourcompetitive position.

 

We do not engage in anybusiness that is seasonal in nature. Because our revenues are generatedprimarily from work on contracts performed by our employees and subcontractors,first quarter revenues tend to be lower than the other three quarters due toour policy of providing many of our employees seven holidays in the firstquarter, compared to one or two in each of the other quarters of the year. Thisis not necessarily a consistent pattern as it depends upon actual activities inany given year.

 

The cost of Companysponsored research and development (R&D) activities was $12.2 million, $5.2million and $6.1 million in 2008, 2007 and 2006, respectively. We do not relyheavily on internally funded R&D, as most of our new product developmentoccurs in conjunction with the performance of work on our contracts. The amountof contract-required product development activity was $55 million in 2008compared to $66 million and $64 million in 2007 and 2006, respectively;however, these costs are included in cost of sales as they are directly relatedto contract performance.

 

We comply with federal,state and local laws and regulations regarding discharge of materials into theenvironment and the handling and disposal of materials classed as hazardous and/ortoxic. Such compliance has no material effect upon the capital expenditures,earnings or competitive position of the Company.

 

We employed approximately7,000 persons at September 30, 2008.

 

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Our domestic products andservices are sold almost entirely by our employees.  Overseas sales are made either directly orthrough representatives or agents.

 

**Item 1A. RISK FACTORS.**

 

The following are some of the factors webelieve could cause our actual results to differ materially from expected andhistorical results.  Additionalrisks and uncertainties not presently known to us, or that we currently see asimmaterial, may also harm our business. If any of the risks or uncertainties described below or any such additionalrisks and uncertainties actually occur, our business, results of operations orfinancial condition could be materially and adversely affected.

 

***Wedepend on government contracts for substantially all of our revenues and theloss of government contracts or a delay or decline in funding of existing orfuture government contracts could adversely affect our sales and cash flows andour ability to fund our growth.***

*** ***

Ourrevenues from contracts, directly or indirectly, with foreign and UnitedStates, state, regional and local governmental agencies represented more than95% of our total revenues in fiscal year 2008. Although these various government agencies are subject to commonbudgetary pressures and other factors, many of our various government customersexercise independent purchasing decisions. Because of the concentration of business with governmental agencies, weare vulnerable to adverse changes in our revenues, income and cash flows if asignificant number of our government contracts or subcontracts or prospects aredelayed or canceled for budgetary or other reasons.

 

Thefactors that could cause us to lose these contracts or could otherwisematerially harm our business, prospects, financial condition or results ofoperations include:

 

·                  re-allocationof government resources as the result of actual or threatened terrorism orhostile activities;

 

·                  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;

 

·                  Disruptionsin our customers’ ability to access funding from capital markets;

 

·                  changesin government programs or requirements or their timing;

 

·                  curtailmentof government’s use of technology products and service providers;

 

·                  theadoption of new laws or regulations pertaining to government procurement;

 

·                  governmentappropriations delays or shutdowns;

 

·                  suspensionor prohibition from contracting with the government or any significant agencywith which we conduct business;

 

·                  impairmentof our reputation or relationships with any significant government agency withwhich we conduct business;

 

·                  impairmentof our ability to provide third-party guarantees and letters of credit; and

 

·                  delaysin the payment of our invoices by government payment offices.

 

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

*** ***

In thepast, our businesses have been adversely affected by significant changes ingovernment spending during periods of declining budgets.  A significant decline in overall spending, orthe decision not to exercise options to renew contracts, or the loss of orsubstantial decline in spending on a large program in which we participatecould materially adversely affect our business, prospects, financial conditionor results of operations.  As an example,the U.S. defense and intelligence budgets generally, and spending 

 

10

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inspecific agencies with which we work, such as the Department of Defense, havedeclined from time to time for extended periods since the 1980s, resulting inprogram delays, program cancellations and a slowing of new program starts.  Although spending on defense-related programsby the U.S. government has recently increased, future levels of expendituresand authorizations for those programs may decrease, remain constant or shift toprograms in areas where we do not currently provide products or services.

 

Eventhough our contract periods of performance for a program may exceed one year,Congress must usually approve funds for a given program each fiscal year andmay significantly reduce funding of a program in a particular year.  Significant reductions in these appropriationsor the amount of new defense contracts awarded may affect our ability tocomplete 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:

 

·                  terminateour existing contracts;

 

·                  reducethe value of our existing contracts;

 

·                  modifysome of the terms and conditions in our existing contracts;

 

·                  suspendor permanently prohibit us from doing business with the government or with anyspecific government agency;

 

·                  controland potentially prohibit the export of our products;

 

·                  cancelor delay existing multiyear contracts and related orders if the necessary fundsfor contract performance for any subsequent year are not appropriated;

 

·                  declineto exercise an option to extend an existing multiyear contract; and

 

·                  claimrights in technologies and systems invented, developed or produced by us.

 

MostU.S. government agencies and some other agencies with which we contract canterminate their contracts with us for convenience, and in that event wegenerally may recover only our incurred or committed costs, settlement expensesand 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 theevent that any of our contracts were to be terminated or adversely modified,there may be significant adverse effects on our revenues, operating costs andincome that would not be recoverable.

 

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

*** ***

Weobtain most of our contracts through a competitive bidding process, andsubstantially all of the business that we expect to seek in the foreseeablefuture likely will be subject to a competitive bidding process.  Competitive bidding presents a number ofrisks, including:

 

·      the need to compete againstcompanies or teams of companies with more financial and marketing resources andmore experience in bidding on and performing major contracts than we have;

 

·      the need to compete againstcompanies or teams of companies that may be long-term, entrenched incumbentsfor a particular contract for which we are competing and that have, as aresult, greater domain expertise and better customer relations;

 

11

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·      the need to compete toretain existing contracts that have in the past been awarded to us on asole-source basis;

 

·      the expense and delay thatmay arise if our competitors protest or challenge new contract awards;

 

·      the need to bid on someprograms in advance of the completion of their design, which may result inhigher research and development expenditures, unforeseen technologicaldifficulties, or increased costs which lower our profitability;

 

·      the substantial cost andmanagerial time and effort, including design, development and marketingactivities, necessary to prepare bids and proposals for contracts that may notbe awarded to us;

 

·      the need to develop,introduce, and implement new and enhanced solutions to our customers’ needs;

 

·      the need to locate andcontract with teaming partners and subcontractors; and

 

·      the need to accuratelyestimate the resources and cost structure that will be required to perform anyfixed-price contract that we are awarded.

 

We maynot be afforded the opportunity in the future to bid on contracts that are heldby other companies and are scheduled to expire if the agency decides to extendthe existing contract.  If we are unableto win 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.

 

Becauseof the complexity and scheduling of contracting with government agencies, weoccasionally incur costs before receiving contractual funding by the governmentagency.  In some circumstances, we maynot be able to recover these costs in whole or in part under subsequentcontractual actions.

 

If weare unable to consistently retain existing contracts or win new contractawards, our business prospects, financial condition and results of operationswill be adversely affected.

 

***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.***

** **

Manyof our government contracts are subject to cost audits which may occur severalyears after the period to which the audit relates.  If an audit identifies significantunallowable costs, we could incur a material charge to our earnings orreduction in our cash position.

 

***Our international business exposes us to additional risks, includingexchange rate fluctuations, foreign tax and legal regulations and political oreconomic instability that could harm our operating results.***

 

Ourinternational operations, including our contract for the London Transport farecollection system, subject us to risks associated with operating in and sellingproducts or services in foreign countries, including:

 

·      devaluations andfluctuations in currency exchange rates;

 

·      changes in foreign laws thatadversely affect our ability to sell our products or services or our ability torepatriate profits to the United States;

 

·      increases or impositions ofwithholding and other taxes on remittances and other payments by foreignsubsidiaries or joint ventures to us;

 

·      increases in investment andother restrictions or requirements by foreign governments in order to operatein the territory or own the subsidiary;

 

·      costs of compliance withlocal laws, including labor laws;

 

·      export control regulationsand policies which govern our ability to supply foreign customers;

 

·      unfamiliar and unknownbusiness practices and customs;

 

12

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·      domestic and foreigngovernment policies, including requirements to expend a portion of programfunds locally and governmental industrial cooperation requirements;

 

·      the complexity and necessityof using foreign representatives and consultants;

 

·      the uncertainty of theability of foreign customers to finance purchases;

 

·      imposition of tariffs orembargoes, export controls and other trade restrictions;

 

·      the difficulty of managementand operation of an enterprise in various countries; and

 

·      economic and geopoliticaldevelopments and conditions, including international hostilities, acts ofterrorism and governmental reactions, inflation, trade relationships andmilitary and political alliances.

 

Ourforeign subsidiaries generally conduct business in foreign currencies and enterinto contracts and make purchase commitments that are denominated in foreigncurrencies.  Accordingly, we are exposedto fluctuations in exchange rates, which could have a significant impact on ourresults of operations.  We have nocontrol over the factors that generally affect this risk, such as economic,financial and political events and the supply of and demand for applicablecurrencies.  While we use foreignexchange forward and option contracts to hedge significant contract sales andpurchase commitments that are denominated in foreign currencies, our hedgingstrategy may not prevent us from incurring losses due to exchange fluctuations.

 

***Our operating margins may decline under ourfixed-price contracts if we fail to estimate accurately the time and resourcesnecessary to satisfy our obligations.***

** **

Approximately73% of our revenues in 2008 were from fixed-price contracts under which we bearthe risk of cost overruns.  Our profitsare adversely affected if our costs under these contracts exceed theassumptions we used in bidding for the contract.  Sometimes we are required to fix the pricefor a contract before the project specifications are finalized, which increasesthe risk that we will incorrectly price these contracts. The complexity of manyof our engagements makes accurately estimating the time and resources requiredmore 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.***

*** ***

Ourbusinesses must comply with and are affected by various government regulationsthat impact our operating costs, profit margins and our internal organizationand operation of our businesses. These regulations affect how we do businessand, in some instances, impose added costs. Any changes 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 Federal AcquisitionRegulations and all department and agency supplements, which comprehensivelyregulate the formation, administration and performance of U.S. governmentcontracts;

 

·      the Truth in NegotiationsAct and implementing regulations, which require certification and disclosure ofall cost and pricing data in connection with contract negotiations;

 

·      laws, regulations andexecutive orders restricting the use and dissemination of informationclassified for national security purposes and the exportation of certainproducts and technical data;

 

·      regulations of most stateand regional agencies and foreign governments similar to those described above;

 

·      the Sarbanes-Oxley Act of2002; and

 

·      tax laws and regulations inthe U.S. and in other countries in which we operate.

 

13

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

*** ***

We maynot be able to attract and retain the highly qualified technical personnel,including engineers, computer programmers, and personnel with securityclearances required for classified work, or management personnel to supervisesuch activities 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.***

*** ***

Weseek to protect proprietary technology and inventions through patents and otherproprietary-right protection.  The lawsof some foreign countries do not protect proprietary rights to the same extentas the laws of the United States.  If weare unable to obtain or maintain these protections, we may not be able toprevent third parties from using our proprietary rights. In addition, we mayincur significant expense both in protecting our intellectual property and indefending or assessing claims with respect to intellectual property owned byothers.

 

Wealso rely on trade secrets, proprietary know-how and continuing technologicalinnovation to remain competitive.  Wehave taken measures to protect our trade secrets and know-how, including theuse of confidentiality agreements with our employees, consultants andadvisors.  These agreements may bebreached and remedies for a breach may not be sufficient to compensate us fordamages incurred.  We generally controland limit access to our product documentation and other proprietaryinformation.  Other parties mayindependently develop our know-how or otherwise obtain access to ourtechnology.

 

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

** **

Ourbusinesses operate in highly competitive markets.  Many of our competitors are larger, betterfinanced and better known companies who may compete more effectively than wecan.  In order to remain competitive, wemust keep our capabilities technically advanced and compete on price and onvalue added to our customers.  Ourability to compete may be adversely affected by limits on our capital resourcesand our ability to invest in maintaining 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.***

*** ***

Wecurrently have unsecured borrowing arrangements.  The terms of these borrowing arrangementsinclude provisions that require and/or limit our levels of working capital,debt and net worth and coverage of fixed charges.  We also have provided performance guaranteesto various customers that include financial covenants including limits onworking capital, debt, tangible net worth and cash flow coverage.

 

We mayincur future obligations that would subject us to additional covenants thataffect our financial and operational flexibility or subject us to differentevents of default.

 

Ourcurrent $150 million unsecured revolving credit facility expires in March 2010.  Based on current capital market conditions weanticipate paying higher interest rates, increased fees and having reducedleverage capacity when we negotiate a new facility.  At the present time there are no borrowingsunder our present revolving facility and $24.1 million of outstanding lettersof credit.

 

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

*** ***

Becauseour internal 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, 

 

14

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financialcondition or other factors.  Any materialsupply disruptions could adversely affect our ability to perform ourobligations under our contracts and could result in cancellation of contractsor purchase orders, penalties, delays in realizing revenues, payment delays, aswell as adversely affect our ongoing product cost structure.

 

***Failure to perform by one of our subcontractors could materially andadversely affect our contract performance and our ability to obtain futurebusiness.***

 

Ourperformance of contracts may involve subcontractors, upon which we rely todeliver the products to our customers. We may have disputes with subcontractors.  A failure by a subcontractor to satisfactorilydeliver products or services may adversely affect our ability to perform ourobligations as a prime contractor.  Anysubcontractor performance deficiencies could result in the customer terminatingour contract for default, which could expose us to liability for excess costsof reprocurement by the customer and have a material adverse effect on ourability to compete for other contracts.

 

***We may acquire other companies, which could increase our costs orliabilities or be disruptive.***

 

Part ofour strategy 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 to divertmanagement resources to integration, which may adversely affect our ability topursue other more profitable activities;

 

·      integration may be difficultas a result of the necessity of coordinating geographically separatedorganizations, integrating personnel with disparate business backgrounds andcombining different corporate cultures;

 

·      we may not eliminateredundant costs in selecting acquisition candidates; and

 

·      one or more of ouracquisition 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 are affectedby factors such as the unpredictability of contract awards due to the longprocurement 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 ouroperating margins. Significant growth in costs to complete our contracts mayadversely affect our results of operations in future periods. These factors andother risk factors described herein may adversely affect our results ofoperations and cause our financial results to fluctuate significantly on aquarterly or annual basis.  Consequently,we do not believe that comparison of our results of operations from period toperiod is necessarily 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**

 

Thisreport, including the documents that we incorporate by reference, containsforward-looking statements within the meaning of Section 21E of theSecurities Exchange Act of 1934, as amended, that are subject to the “safeharbor” created by those sections. Any statements about our expectations,beliefs, plans, objectives, assumptions or future events or our futurefinancial and/or operating performance are not historical and may beforward-looking. These statements are often, but not always, made through theuse of words or phrases such 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 orphrases.  These statements involveestimates, assumptions and uncertainties, including those discussed in “RiskFactors” and elsewhere throughout this filing and in the documents incorporatedby reference into this filing that could cause actual results to differmaterially from those expressed in these statements.

 

Becausethe risk factors referred to above could cause actual results or outcomes todiffer materially from those expressed in any forward-looking statements madeby us or on our behalf, you should not place undue reliance on anyforward-looking statements.  In addition,past financial and/or operating performance is not necessarily a reliableindicator of future performance and you should not use our historicalperformance to anticipate results or future period trends.  Further, any forward-looking statement speaksonly as of the date on which it is made, and we undertake no obligation toupdate any forward-looking statement to reflect events or circumstances afterthe date on which the statement is made or to reflect the occurrence ofunanticipated events. New factors emerge from time to time, and it is notpossible for us to predict which factors will arise. In addition, we cannotassess the impact of each factor on our business or the extent to which anyfactor, or combination of factors, may cause actual results to differmaterially from those contained in any forward-looking statements.

 

**Item 1B.UNRESOLVED STAFF COMMENTS.**

 

None

 

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**Item2. PROPERTIES.**

 

We conduct our operationsin approximately 1.5 million square feet of both owned and leased propertieslocated in the United States and foreign countries.  We own approximately 75% of the squarefootage, including 498,000 square feet located in San Diego, California and467,000 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.  The following tableidentifies significant properties by business segment:

** **
| **Location of Property**    | ** ** | **Owned or  Leased** |
|-----------------------------|------------|----------------------|
|                        |       |                 |
| **Corporate Headquarters:** | ** ** | ** **           |
| San Diego, CA               |       | Owned                |
|                        |       |                 |
| **Defense:**                | ** ** | ** **           |
| Aitkenvale, Australia       |       | Leased               |
| Arlington, VA               |       | Leased               |
| Auckland, New Zealand       |       | Leased               |
| Columbus, GA                |       | Leased and owned     |
| Cummings, GA                |       | Leased               |
| El Paso, TX                 |       | Leased               |
| Hampton, VA                 |       | Leased               |
| Honolulu, HI                |       | Leased               |
| Kingstowne, VA              |       | Leased               |
| Lacey, WA                   |       | Leased               |
| Leavenworth, KS             |       | Leased               |
| Orlando, FL                 |       | Leased and owned     |
| Prince George, VA           |       | Leased               |
| San Diego, CA               |       | Leased and owned     |
| San Jose, CA                |       | Leased               |
| Shalimar, FL                |       | Leased               |
| Singapore                   |       | Leased               |
| Tijuana, Mexico             |       | Leased               |
| ** **                  | ** ** | ** **           |
| **Transportation Systems:** | ** ** | ** **           |
| Atlanta, GA                 |       | Leased               |
| Brisbane, Australia         |       | Leased               |
| Glostrup, Denmark           |       | Leased               |
| Chantilly, VA               |       | Leased               |
| Frankfurt, Germany          |       | Leased               |
| London, England             |       | Leased               |
| Los Angeles, CA             |       | Leased               |
| Merthsham, Surrey,  England |       | Leased               |
| Montreal, Canada            |       | Leased               |
| New York, NY                |       | Leased and owned     |
| Ontario, Canada             |       | Leased               |
| Salfords, Surrey,  England  |       | Owned                |
| San Diego, CA               |       | Owned                |
| Tullahoma, TN               |       | Owned                |
|                        |       |                 |
| **Investment properties:**  |       |                 |
| Teterboro, NJ               |       | Leased               |
| Vancouver, Canada           |       | 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, thearbitral tribunal awarded the government of Iran $2.8 million, plus simpleinterest at the rate of 12% per annum from September 21, 1991 through May 5,1997. In December 1998, the United States District Court granted a motionby the government of Iran confirming the arbitral award but denied Iran’srequest for additional interest and costs. Both parties have appealed. In October 2004,the 9th Circuit Court of Appeals issued a decision in the case oftwo interveners who are attempting to claim an attachment on the amount thatwas awarded to Iran in the original arbitration. The Court denied one of theintervener’s liens but confirmed the second one’s lien. Iran asked the U.S.Supreme Court to review the 9th Circuit decision and to void theinitial judgment against it. In 2006, the Supreme Court returned the case tothe 9th Circuit for reconsideration, suggesting that the claimedlien cannot be enforced. The Court of Appeal then ruled that the lien was validunder the Terrorism Risk Insurance Act. Subsequently, Iran’s petition forreview by the Supreme Court was granted; therefore, while the dispute betweenIran and Cubic is on hold in the 9th Circuit the obligation uponCubic to pay is stayed. Under current United States law and policy, any paymentto the Revolutionary Government of Iran must first be licensed by the U.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 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 damages sustained”as well as attorney’s fees. The contract limits liability to the contract valueof $8.2 million, but the customer appears to be attempting to avoid thatlimitation. In May 2005, the Company filed an answer and general denialand subsequently filed a verified petition alleging breach of contract andother substantive claims, claiming the amount owed under the contract of $4.2million, plus interest and attorney’s fees. Management believes that both thecustomer’s default notice and claim for damages are unsupported and the Companyis 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; therefore, no liability has beenrecorded for the former customer’s claim as of September 30, 2008.However, due to the uncertainty of collecting the outstanding receivablebalance an allowance for doubtful accounts of $4.2 million was established andall costs incurred in the performance of the contract and costs incurredoutside the scope of the contract were expensed in the year ended September 30,2005.

 

In June 2005, a company that Cubic had an allegedagreement with to potentially bid on a portion of automated fare collectioncontracts, filed a court claim for breach of contract, fraud, negligentmisrepresentation, theft of trade secrets, and other related allegations. Theclaim seeks $15.0 million in compensatory damages, punitive damages,disgorgement of profits and a permanent injunction.  In November 2008 the Company agreed tosettle this claim for a nominal amount. Documents are expected to be finalized in December 2008.

 

18

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InMay 2007 the Company filed a claim with the U.S. Navy for $6.2 millionarising out of allegedly defective specifications, the late delivery ofgovernment-furnished equipment and the Navy’s attempt to unilaterally imposeadditional contract requirements in connection with a contract whose initialaward value was $31.8 million.  In February 2008, the Navy asserted acounter-claim seeking a $4.1 million reduction in the contract price because itallegedly relaxed certain specifications, provided more government-furnishedequipment than was required and had to revise certain equipment and manualsfurnished by the Company.  In November 2008 a negotiated settlementagreement was reached whereby the Company will receive payment of approximately$4.0 million for its additional costs incurred in performance of the contractand will furnish additional equipment in satisfaction of the customer’srequirements. The settlement also resolves the Navy’s $4.1 millioncounterclaim. In the year ended September 30, 2008, inventoried costsrelated to this claim were reduced to the settlement amount and a provision wasmade for the Company’s remaining obligations arising from the settlementagreement.

 

Fromtime-to-time, agencies of the U.S. and foreign governments may investigatewhether the Company’s operations are being conducted in accordance withapplicable regulatory requirements. Such investigations, whether relating togovernment contracts or conducted for other reasons, could result inadministrative, civil or criminal liabilities, including repayments, fines orpenalties being imposed upon the Company, or could lead to suspension ordebarment from future government contracting. Government investigations often take years to complete and most resultin no adverse action against the Company.

 

TheCompany is not a party to any other material pending proceedings and managementconsiders all other matters to be ordinary proceedings incidental to thebusiness. Management believes the outcome of these proceedings and theproceedings described above will not have a materially adverse effect on theCompany’s financial position.

 

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

 

Information regardingsubmission of matters to a vote of security holders is incorporated herein byreference from our definitive Proxy Statement, which will be filed no later than30 days prior to the date of the Annual Meeting of Shareholders.

 

**PART II**

 

**Item5. MARKET FOR THE REGISTRANT’S COMMON STOCK AND RELATED SECURITY HOLDERMATTERS**.

 

As of September 2008,the principal market on which our common stock is being traded is the New YorkStock Exchange under the symbol CUB.  Ourstock previously was traded on the American Stock Exchange under the samesymbol. The closing high and low sales prices for the stock, as reported in theconsolidated transaction reporting systems of the American and New York stockexchanges for the quarterly periods during the past two fiscal years, anddividend information for those periods, are as follows:

 

MARKET AND DIVIDENDINFORMATION

** **
| ** **  | ** ** | **Sales Price of Common Shares** | ** ** | ** **           | ** ** | ** **                        | ** ** |
|-------------|------------|------------------------------------------------------|------------|----------------------|------------|-----------------------------------|------------|
| ** **  | ** ** | **Fiscal 2008**                                 | ** ** | **Fiscal 2007** | ** ** | **Dividends per Share** | ** ** |
| **Quarter** | ** ** | **High**                                             | ** ** | **Low**              | ** ** | **High**                          | ** ** | **Low** | ** ** | **Fiscal 2008** | ** ** | **Fiscal 2007** | ** ** |
| First       |       | $                                                    | 47.80      |                 | $          | 34.90                             |       | $ | 22.82 |   | $ | 19.06 |   | — |   | — |   |
| Second      |       | 35.99                                                |       | 25.42                |       | 22.37                             |       | 19.99 |   | $ | 0.09 |   | $ | 0.09 |   |
| Third       |       | 28.72                                                |       | 20.12                |       | 30.14                             |       | 20.12 |   | — |   | — |   |
| Fourth      |       | 29.58                                                |       | 21.43                |       | 46.43                             |       | 27.23 |   | $ | 0.09 |   | $ | 0.09 |   |
|             |            |                                                      |            |                      |            |                                   |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

On November 12,2008, the closing price of our common stock on the New York Stock Exchange was$19.98. There were approximately 1,000 shareholders of record of our commonstock as of November 12, 2008.

 

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**Item 6. SELECTEDFINANCIAL DATA.**

 

FINANCIALHIGHLIGHTS AND SUMMARY OF CONSOLIDATED OPERATIONS

 

(amounts inthousands, except per share data)

 
| ** **                                    | ** ** | **Years Ended September 30,** | ** ** |
|-----------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                    | ** ** | **2008**                                     | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                          |       |                                         |       |   |   |   |   |   |   |   |   |
| **Results  of Operations:**                   |       |                                         |       |   |   |   |   |   |   |   |   |
| Sales                                         |       | $                                            | 881,135    |   | $ | 889,870 |   | $ | 821,386 |   | $ | 804,372 |   | $ | 722,012 |   |
| Cost of sales                                 |       | 709,481                                      |       | 727,540 |   | 687,213 |   | 672,541 |   | 549,170 |   |
| Selling, general  and administrative expenses |       | 99,956                                       |       | 95,054 |   | 97,166 |   | 110,644 |   | 107,139 |   |
| Interest expense                              |       | 2,745                                        |       | 3,403 |   | 5,112 |   | 5,386 |   | 4,658 |   |
| Income taxes                                  |       | 20,385                                       |       | 23,662 |   | 12,196 |   | 453 |   | 19,394 |   |
| Net income                                    |       | 36,854                                       |       | 41,586 |   | 24,133 |   | 11,628 |   | 36,911 |   |
|                                          |       |                                         |       |   |   |   |   |   |   |   |   |
| Average number  of shares outstanding         |       | 26,725                                       |       | 26,720 |   | 26,720 |   | 26,720 |   | 26,720 |   |
|                                          |       |                                         |       |   |   |   |   |   |   |   |   |
| **Per  Share Data:**                          |       |                                         |       |   |   |   |   |   |   |   |   |
| Net income                                    |       | $                                            | 1.38       |   | $ | 1.56 |   | $ | 0.90 |   | $ | 0.44 |   | $ | 1.38 |   |
| Cash dividends                                |       | 0.18                                         |       | 0.18 |   | 0.18 |   | 0.18 |   | 0.16 |   |
|                                          |       |                                         |       |   |   |   |   |   |   |   |   |
| **Year-End  Data:**                           |       |                                         |       |   |   |   |   |   |   |   |   |
| Shareholders’  equity                    |       | $                                            | 388,852    |   | $ | 382,771 |   | $ | 323,226 |   | $ | 297,158 |   | $ | 298,767 |   |
| Equity per share                              |       | 14.55                                        |       | 14.33 |   | 12.10 |   | 11.12 |   | 11.18 |   |
| Total assets                                  |       | 641,252                                      |       | 592,565 |   | 548,071 |   | 547,280 |   | 542,924 |   |
| Long-term debt                                |       | 25,700                                       |       | 32,699 |   | 38,159 |   | 43,776 |   | 50,037 |   |

 

This summaryshould be read in conjunction with the related consolidated financialstatements and accompanying notes.

 

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**Item 7.****          MANAGEMENT’SDISCUSSION 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, 2008, 69% of sales were derived from defense, while 31% 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 54% of sales in 2008 and 2007 compared to 52% in 2006.

 

Our defense segment isfocused on three primary lines of business: Training Systems (formerly known asReadiness Systems), Mission Support Services, and Communications.  The segment is a diversified supplier ofconstructive, live and virtual military training systems, services andcommunication systems and products to the U.S. Department of Defense, othergovernment agencies and allied nations. We design instrumented range systemsfor fighter aircraft, armored vehicles and infantry force-on-force livetraining; weapons effects simulations; laser-based tactical and communicationsystems; and precision gunnery solutions. Our services are focused on training mission support, computersimulation training, distributed interactive simulation, development ofmilitary training doctrine, force modernization services for NATO entrants andfield operations and maintenance. Our communications products are aimed atintelligence, surveillance, and search and rescue markets.

 

Cubic TransportationSystems develops and delivers innovative fare collection systems for publictransit authorities worldwide.  Weprovide 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 fiscal2008 were down slightly from 2007 because of the sale of our corrugated boxbusiness in the fourth quarter of 2007. Sales in 2008 were $881.1 millioncompared to $889.9 million in 2007, a 1% decrease. Sales in 2007 had increased8% over 2006 sales of $821.4 million. In 2008 transportation systems salesincreased 15% over 2007, while defense sales decreased 5%. In contrast, 2007sales from defense were up 14% and transportations systems sales were down 3%. See the segment discussions following forfurther analysis of segment sales.

 

Operating income decreased 14% in fiscal 2008 to $53.3 million from$62.1 million in 2007. Operating income in 2007 had doubled from $30.9 millionin 2006. Operating income in the transportation systems segment increasedsignificantly in 2008, more than doubling from the 2007 level. However,operating income from defense was down 59%, more than offsetting theimprovement from transportation systems. In addition, in the fourth quarter of2008 we recorded a restructuring charge of $6.2 million as the result of areduction in force in our defense systems subsidiary and corporate headquartersin San Diego, California. This cost-cutting measure is intended to streamlineoperations and enhance competitiveness in the defense-related marketplace. Theimprovement in 2007 had come from both segments with transportation systemsincreasing significantly from a low level in 2006 and defense improving by morethan 40%. See the segment discussions following for further details of segmentoperating results.

 

Netincome decreased 11% in fiscal 2008 to $36.9 million ($1.38 per share) from$41.6 million ($1.56 per share) in 2007. Net income had increased 72% in fiscal2007 from $24.1 million ($.90 per share) in 2006. Lower net income in 2008resulted primarily from the decrease in defense operating income and therestructuring costs mentioned above, which impacted net income by approximately$3.7 million after applicable income taxes, or $0.14 per share.  Also included in 2008 was a gain of $1.2million in the fourth quarter on the sale of our investment in adefense-related joint venture that added approximately $0.8 million to netincome, after applicable income taxes, or $.03 per share. In 2007 we sold ourcorrugated box business, also in the fourth quarter, for a gain ofapproximately $0.6 million, after applicable income taxes, or $.02 pershare. Approximately $4.3 million, after applicable income taxes, of

 

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the 2006 net income was froma gain on the sale ofreal estate that added $0.16 per share. Reductions in tax contingency reservesaccounted for approximately $1.2 million, $0.9 million and $1.1 million,respectively, of the 2008, 2007 and 2006 net income.

 

The gross marginfrom product sales improved in 2008 to 21.4% from 19.6% in 2007 and 16.0% in2006. Improved performance from our transportation systems segment in both 2007and 2008 and improvement in defense training systems in 2007 contributed to thehigher margin from product sales. The gross margin from service sales was 17.2%in 2008, compared to 16.3% in 2007 and 16.9% in 2006. Higher sales and marginsfrom transportation systems service contracts in Europe contributed to theimprovement in 2008, while the completion of a high margin transportationservice contract in Europe resulted in the decrease in 2007 compared to 2006.

 

Selling, general and administrative (SG&A) expenses increased to$100.0 million, or 11.3% of sales, in 2008, compared to $95.1 million, or 10.7%of sales, in 2007 and $97.2 million, or 11.8% of sales, in 2006. In 2008,SG&A increased in the defense segment due to increased bid and proposalefforts and the acquisition of a new subsidiary.

 

Company sponsoredresearch and development (R&D) spending increased to $12.2 million in 2008from $5.2 million in 2007 and $6.1 million in 2006. The increase came primarilyfrom projects to develop new data link technologies and transportationsecurity-related development initiatives. Our R&D spending continues to beincurred primarily in connection with customer funded activities. We do notrely heavily on company sponsored R&D, as most of our new productdevelopment occurs in conjunction with the performance of work on ourcontracts. The amount of contract required development activity in 2008 was $55million, compared to $66 million in 2007 and $64 million in 2006; however,these costs are included in cost of sales, rather than R&D, as they aredirectly related to contract performance.

 

Interest anddividend income increased to $6.4 million in 2008 from $3.4 million in 2007 and$1.9 million in 2006 due primarily to higher available cash balances forinvestment. Other Income (Expense) netted to an expense of $0.6 million in 2008compared to income of $1.3 million in 2007 and $0.4 million in 2006 primarilydue to foreign currency exchange losses on advances to our foreignsubsidiaries. Interest expense decreased to $2.7 million in 2008 compared to$3.4 million in 2007 and $5.1 million in 2006 because of a reduction in bothshort- and long-term borrowings.

 

Our effective taxrate for 2008 was 35.6% of pretax income compared to 36.3% in 2007 and 33.6% in2006. Our effective rate in 2008 decreased primarily because more of our incomecame from foreign tax jurisdictions where we do not incur state tax expensesand tax rates are generally lower. Partially offsetting this benefit was a $3.9million provision for U.S. taxes on $26.7 million in dividends from our U.K.and New Zealand subsidiaries that were paid in 2008 compared to a similarprovision of $2.6 million in 2007 and $1.6 million in 2006. Tax credits werelower in 2008 than in 2007 and 2006, primarily because the Research and Experimentation (R&E) credithad expired as of December 31, 2007. Subsequent to the end of the year, inOctober 2008, the U.S. Congress reinstated the R&E credit retroactiveto January 1, 2008, however, the benefit of this credit for the ninemonths ended September 30, 2008, estimated to be about $0.8 million, willnot be recorded until the first quarter of fiscal 2009. The effectiverate in 2008, 2007 and 2006 also benefited from the reversal of tax contingencyprovisions amounting to $1.2 million, $0.9 million and $1.1 million,respectively. Our effective tax rate could be affected in future years 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.

 

**Restructuring Activity**

 

Asmentioned earlier, in the fourth quarter of 2008 we reduced our defensesegment workforce in San Diego by 139 employees. In addition, 6corporate office positions were eliminated. This action was the result of acost cutting initiative designed to streamline operations, enhance ourcompetitiveness and better position us in the defense-related marketplace.Affected employees received severance pay and outplacement assistance, as wellas company paid medical coverage for a defined period based on years ofservice. The cost of this restructuring was $6.2 million ($3.7 million afterapplicable income taxes) and is reflected in our results for the fourthquarter. We estimate this cost-cutting action will yield an annual savings ofapproximately $15 million, before applicable income taxes.

 

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**Business Acquisition**

 

InJuly 2008, we acquired all outstanding capital stock of the privately-heldOmega Training Group, Inc. (Omega). The purchase was for $61.0 million in cash which was funded fromexisting cash reserves.  Omega providestraining, testing, analysis, logistics and staffing services to U.S. Armylocations at the U.S. Army Infantry School at Fort Benning, Fort Bliss, FortJackson and Fort Hood. Founded in 1990, Omega now has 790 employees. We believethis acquisition will enhance our position in the defense services market placeand add revenues of approximately $60 -70 million in 2009.

 

**Defense Segment**

** **
| **Years ended September 30,** | ** ** | **2008**   | ** ** | **2007**               | ** ** | **2006**   | ** ** |
|----------------------------------------------|------------|------------|------------|------------------------|------------|------------|------------|
| ** **                                   | ** ** | ** ** | ** ** | **(in millions)** | ** ** | ** ** | ** ** |
|                                         |       |       |       |                   |       |       |       |
| **Defense  Segment Sales**                   |       |       |       |                   |       |       |       |
| Mission support  services                    |       | $          | 332.5      |                   | $          | 308.0      |       | $ | 262.9 |   |
| Training systems                             |       | 227.7      |       | 263.4                  |       | 228.0      |       |
| Communications                               |       | 36.0       |       | 57.4                   |       | 64.6       |       |
| Tactical systems  and other                  |       | 11.6       |       | 12.3                   |       | 7.3        |       |
|                                         |       | $          | 607.8      |                   | $          | 641.1      |       | $ | 562.8 |   |
|                                         |       |       |       |                   |       |       |       |
| **Defense  Segment Operating Income**        |       |       |       |                   |       |       |       |
| Mission support  services                    |       | $          | 27.8       |                   | $          | 27.6       |       | $ | 20.6 |   |
| Training systems                             |       | 6.8        |       | 18.9                   |       | 9.7        |       |
| Communications                               |       | (15.6      | )          | (0.7                   | )          | 3.9        |       |
| Tactical systems  and other                  |       | (0.7       | )          | (1.6                   | )          | (2.8       | )          |
|                                         |       | $          | 18.3       |                   | $          | 44.2       |       | $ | 31.4 |   |

 

Asdepicted in the table above, sales from our defense segment decreased 5% to$607.8 million in 2008, compared to $641.1 million in 2007, after havingincreased 14% in 2007 from $562.8 million in 2006. Lower sales from TrainingSystems and Communications resulted in the decrease in 2008, while MissionSupport Services sales increased. Sales from Mission Support Services and TrainingSystems were both higher in 2007than in 2006, however, Communications sales decreased in 2007 from the 2006level. The caption “Tactical systems and other” in the table above includesadvanced programs for the development of new defense technologies and theoperating results of the joint venture company in which we previously owned a50% interest. We sold our interest in the JV to our former partner in August 2008,as we no longer believe the venture has the growth potential we had anticipatedat its inception.

 

Operating income in ourdefense segment decreased to $18.3 million in 2008 from $44.2 million in 2007,a 59% decrease. In 2007, operating income had increased 41% from 2006 operatingincome of $31.4 million. Operating income was sharply lower in 2008 fromTraining Systems, while the operating loss from Communications increased significantlyfrom the small operating loss posted in 2007. Mission Support Services operating income increased slightly in2008 over the 2007 level. Growth in 2007 operating income had come from bothTraining Systems and Mission SupportServices, while Communicationshad generated an operating loss in 2007 compared to operating income in 2006.The joint venture company made a small operating profit of $0.4 million in2008, prior to its sale, after having incurred operating losses of $1.4 millionand $1.9 million in 2007 and 2006, respectively.

 

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**MissionSupport Services**

 

MissionSupport Services sales increased 8% in 2008, after having increased 17% in 2007compared to 2006. About half of the sales increase in 2008 came from Omega, thecompany we acquired at the end of July 2008. We believe the addition ofOmega enhances our capability and strategic position in the defense servicesmarketplace and are pleased with the results from the business thus far. Wealso realized higher sales from our contract with the U.S. Marine Corps thatwas expanded as a result of the contract renewal in 2008 and from a newcontract at the U.S. Army Quartermaster School. These increases were partiallyoffset by a decrease in activity during 2008 at the Joint Readiness TrainingCenter (JRTC) in Fort Polk, LA. The increase in 2007 sales had come from theexpansion of existing programs and from new contracts won in 2007. Sales werehigher in 2007 compared to 2006 by nearly $14 million from the JRTC contract,due to an increase in training exercises conducted by the customer. Inaddition, increased activity from the U.S. Marine Corps contract and highersales from contracts for modeling the effects of weapons of mass destructionhad added to the 2007 sales.

 

Operatingincome from Mission Support Services increased only 1% in 2008, afterincreasing 34% in 2007. The new company, Omega, contributed over $2 million tooperating profits in the first two months we owned it. In addition, highersales from the U.S. Marine Corps contract also contributed to operating incomegrowth in 2008. However, these increases were nearly offset by lower sales andprofit margins from the JRTC contract and from other Mission Support Servicescontracts that had experienced particularly strong performance in 2007. Highersales volume and award fees helped to increase profitability in 2007 comparedto 2006 and improved operating income as a percentage of sales to 8.9%,compared to 7.8%. The most significant increases in 2007 operating income hadcome from the U.S. Marine Corp. and JRTC contracts mentioned above.

 

**TrainingSystems**

 

Training Systems sales decreased 14% in 2008, returning tothe level of 2006, after having increased 16% in 2007. The decrease in 2008sales came from each of the major product lines, including air combat training,ground combat training, electro-optics (laser-based tactical engagementsystems) and small arms virtual training systems. Sales were lower by $23.0million from the air combat training system contract known as P5 and from anair combat training system in Australia that was completed in the firstquarter. Partially offsetting these sales decreases was an increase in salesfrom the new Joint Strike Fighter (JSF) development contract and other aircombat training contracts. Sales were also lower from a ground combat trainingsystem contract in the Far East and from small arms training systems. Sales inthree of the Training Systemsproduct lines have been impacted by a transition from the development phase,where revenue is recognized on a cost-to-cost percentage completion basis, tothe production phase, where we recognize revenues from production orders on aunits-of-delivery percentage completion basis, resulting in the recording ofsales when the product is delivered and accepted by the customer. This includesthe P5 air combat training contract, electro-optics and small arms trainingsystems. This transition also resulted in an increase in inventories of $30.3million, offset by customer advances of $11.5 million from these product lines infiscal 2008. Most of the increase in 2007 sales compared to 2006 had come fromair combat training systems, while ground combat training and small armsvirtual training systems sales grew slightly.

 

Training Systems operating income decreased 64% in 2008compared to 2007 after having nearly doubled in 2007 from 2006. Lower salesfrom the P5 and Australian air combat training contracts and small arms virtualtraining systems contributed to the decrease in operating income. However, theprimary cause of the decrease was cost growth of $9.6 million on theelectro-optics contract to develop the next generation laser-based tacticalengagement system. This cost growth stemmed from problems encountered in thesecond quarter during system integration testing and resulted in greaterdifficulties than we had previously anticipated. In addition to increasedengineering development costs for design changes, these changes also resultedin higher manufacturing costs and rework costs. We also experienced furthercost growth of $4.2 million in 2008 on a contract for the development of aground combat training system in the Middle East. This compares to cost growthof $5.1 million in 2007 on the same contract. Improved profit margins from aground combat training system in Canada partially offset the impact from thiscontract. The increase in 2007 operating income compared to 2006 had come fromhigher profit margins on higher sales of air combat training systems andimprovements in profitability of ground combat training systems and small armstraining systems. Higher profit margins from a ground combat training system inthe Far East in 2007 were offset by cost growth on the ground combat trainingsystem in the Middle East mentioned above, while operating income from other groundcombat training systems improved slightly. Operating income from small armstraining systems had improved in 2007 due to somewhat higher sales andcompletion of the development of new weapons simulations systems in 2006,resulting in decreased costs in 2007.

 

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**Communications**

 

Salesfrom Communications decreased 37% in 2008, after having decreased 11% in 2007from the 2006 level. Sales decreased in 2008 from contracts for the developmentof data links for unmanned aerial vehicles in the U.S. and U. K. and from acontract for the development of a data link for the U.S. Navy. These decreaseswere partially offset by higher sales of personnel locator systems and poweramplifiers. In 2007 sales increased from the contract for the supply of datalinks for unmanned aerial vehicles in the U.K.; however, this increase was morethan offset by decreases in sales from other data link contracts that nearedcompletion in 2007. Sales of personnel locator systems and power amplifiersalso decreased in 2007.

 

Communications incurred an operating loss of $15.6 million in 2008compared to an operating loss of $0.7 million in 2007 and operating income of$3.9 million in 2006. The primary cause of the loss in 2008 was cost growth of$9.5 million from a contract to develop new data link technology for unmannedaerial vehicles for a U.K. customer. We have encountered significantdifficulties in performing this firm fixed-price contract due in part tocustomer-caused delay and disruption, directed changes and due to delays causedby two subcontractors. We have completed discussions with the customer tosubstantially restructure the contract and believe we have now established areasonable basis for completion of the contract and resolution of the issueswith the most problematic subcontractor. The contract modification, whensigned, will add additional contract value for a portion of the out-of-scopecosts we have incurred and anticipate incurring and remove our responsibilityfor the subcontractor’s performance. We continue to have performance risksgoing forward but we anticipate that the contract value added by themodification will be sufficient to cover those risks. Cost growth on two otherdata link development contracts impacted profitability by $6.2 million in 2008.One of these is a contract with the U.S. Navy for which we had inventoriedcosts of $5.2 million in 2005 that were the subject of a legal proceedingbefore the U.S. Armed Services Board of Contract Appeals. We reached asettlement agreement with this customer whereby we will be paid for $4.0million of the $5.2 million in costs and have expensed the remainder. As a partof the settlement we provided other concessions to the customer, which alsowere expensed, in exchange for them dropping all claims against us. In addition,we started work on several research and development projects for new data linktechnology during 2008, which added $2.7 million to the operating loss for theyear. Partially offsetting these increased costs was higher operating income onhigher sales of power amplifiers and personnel locator systems.

 

Communicationshad generated an operating loss of $0.7 million in 2007 due primarily to costgrowth of $4.3 million on a contract for the development of new data linktechnology. Profit margins on other data link contracts were also lower than in2006; however, this decrease was partially offset by improved profit marginsfrom sales of power amplifiers and personnel locator systems in 2007. Operatingincome in 2006 had come primarily from the sale of power amplifiers and datalinks, in addition to the favorable settlement of a long-standing dispute witha customer during the year, which added $1.2 million to operating income.

 

**TransportationSystems Segment**

** **
| **Years ended September 30,** | ** ** | **2008** | ** ** | **2007**           | ** ** | **2006** | ** ** |
|----------------------------------------------|------------|----------|------------|--------------------|------------|----------|------------|
|                                         |       |     |       | **(in  millions)** |       |     |       |
| Transportation  Segment Sales                |       | $        | 272.3      |               | $          | 236.6    |       | $ | 243.9 |   |
|                                         |       |     |       |               |       |     |       |
| Transportation  Segment Operating Income     |       | $        | 43.0       |               | $          | 20.1     |       | $ | 2.8 |   |

 

Transportation systemssales increased 15% in 2008 after having decreased 3% in 2007. Salesincreased in 2008 primarily due to additional work from change orders on thePRESTIGE contract and from other contracts in the U.K. Sales were also higherfrom system installation work on a contract in Australia and increased sales ofspare parts in North America. These increases were partially offset bydecreased sales from system installation contracts in North America andSweden. The exchange rate between the British Pound and the U.S. Dollar had noimpact on sales for 2008, when compared to 2007, as the average rate for theyear was virtually the same as in 2007.

 

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As a result of a decreasein the value of the British Pound compared to the U.S. Dollar in late fiscal2008 and subsequently, we expect that the dollar value of transportationsystems sales and operating income from our U.K. subsidiary will be lower infiscal 2009 than in 2008.

 

Sales in North Americaand Sweden had decreased in 2007 compared to 2006, while sales in Australia andthe U.K. had increased.Sales in Australia increased due in part to a settlement reached with thecustomer during 2007 that increased the value of the contract. In the U.K.sales had been lower in 2007 from a service contract that was phased-outbecause old ticket issuing equipment was replaced by modern equipment requiringless maintenance; however, this decrease was more than offset by higher salesfrom other U.K. contracts, including the PRESTIGE contract. A major contributorto the increase in U.K. sales in 2007 had been the strength of the BritishPound against the U.S. dollar, which resulted in the dollar value of sales inthe U.K. increasing $10.8 million for the year when compared to averageexchange rates experienced in 2006.

 

Operating income in the transportation systems segment more thandoubled in 2008 when compared to 2007, after having improved significantly in2007 from the low level of 2006. Higher sales and improved performance fromU.K. contracts, including bonuses earned on the PRESTIGE contract for systemusage, and profits from increased spares sales in the U.S. contributed to theincrease in 2008. Cost growth on North American contracts that had been aprofit drain in recent years was limited to $1.6 million in 2008, a significantimprovement over 2007 when cost growth on the same contracts had been $7.0million. Partially offsetting the profit improvements in 2008 was cost growthof $3.4 million on a contract in Sweden and an investment in new technology of$1.8 million we made related to a new contract in North America. Thesedevelopment costs are required for this contract; however, they will benefitfuture programs as well. A reduction in legal fees of $2.0 million in 2008 alsocontributed to the operating income improvement. As mentioned above relating tosales, currency exchange between the British Pound and U.S. Dollar had noimpact on 2008 operating income when compared to 2007.

 

In 2007, settlements reached with three customers added $8.6 million tooperating income; however, we also added $3.4 million to our estimate of coststo complete two of these contracts that year, yielding a net improvement tooperating income of $5.2 million from these contract settlements. Operatingincome from the PRESTIGE contract had increased when compared to 2006, includingbonuses earned for system usage and the effect of a higher currency exchangerate. Currency exchange differences had resulted in an improvement in operatingincome of about $1.8 million from all U.K. contracts, when comparing the 2007average exchange rate to the 2006 rate. As mentioned above, cost growth onNorth American system installation contracts in 2007 was $7.0 million comparedto $21.0 million in 2006, helping to improve operating income. Lower operatingincome from the U.K. service contract mentioned above and from spare partssales in the U.S. partially offset these improvements. In addition, cost growthfrom a contract in Sweden totaling $6.3 million in 2007 had also impactedoperating income. Higher legal fees in 2007 further reduced operating incomefor the year by $1.3 million when compared to 2006.

 

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**Backlog**

** **
| **September 30,**    | ** ** | **2008**           | ** ** | **2007** | ** ** |
|---------------------------|------------|--------------------|------------|----------|------------|
|                      |       | **(in  millions)** |       |
| **Total  backlog**        |       |               |       |     |       |
| Transportation  systems   |       | $                  | 480.6      |     | $          | 787.3 |   |
| Defense                   |       |               |       |     |       |
| Mission support  services |       | 880.0              |       | 776.6    |       |
| Training systems          |       | 363.6              |       | 383.4    |       |
| Communications            |       | 45.9               |       | 56.4     |       |
| Other                     |       | 2.4                |       | 30.6     |       |
| Total defense             |       | 1,291.9            |       | 1,247.0  |       |
| Total                     |       | $                  | 1,772.5    |     | $          | 2,034.3 |   |
|                      |       |               |       |     |       |
| **Funded  backlog**       |       |               |       |     |       |
| Transportation  systems   |       | $                  | 480.6      |     | $          | 787.3 |   |
| Defense                   |       |               |       |     |       |
| Mission support  services |       | 180.6              |       | 131.2    |       |
| Training systems          |       | 363.6              |       | 383.4    |       |
| Communications            |       | 45.9               |       | 56.4     |       |
| Other                     |       | 2.4                |       | 30.6     |       |
| Total defense             |       | 592.5              |       | 601.6    |       |
| Total                     |       | $                  | 1,073.1    |     | $          | 1,388.9 |   |

 

In addition to the amountsidentified above, the company has been selected as a participant in or, in somecases, the sole contractor for several substantial indefinite delivery/indefinite quantity (IDIQ) contracts. IDIQ contracts are not included in backlog until an order is received.

 

In August 2008,Transport for London (TfL) notified our 37.5% owned subsidiary, TranSys, thatthey will be terminating the PRESTIGE fare collection system contract as of August 2010in accordance with the early termination provision of the contract. As a resultof this early termination, the last five years of our contracts with TranSysand the other 37.5% shareholder were also terminated and, therefore, thisportion of the contract value was removed from backlog in the table above as ofSeptember 30, 2008. Our transportation systems backlog at September 30,2007 included $290 million (£142 million) relating to the terminated portion ofour contracts with TranSys and the other 37.5% shareholder covering the periodfrom August 2010 through August 2015.

 

In November 2008,TfL awarded Cubic directly a new three year contract that includes virtuallyall of the services currently being performed by TranSys through itsshareholders. The term of this contract is for the time period from August 2010to August 2013, with a base value of approximately $255 million (£170million), which will be added to our backlog in the quarter ending December 31,2008. The contract value will be indexed for inflation from August 2008through its completion and additionally includes variable payments that arecontingent upon system usage, similar to provisions that were contained in thePRESTIGE contract.

 

Aside from the impact of the PRESTIGE contract early terminationdescribed above, a decrease in the value of the British Pound vs. the U.S.Dollar between September 30, 2007 and September 30, 2008, resulted ina decrease in transportation systems backlog of approximately $45 million.

 

The differencebetween total backlog and funded backlog represents options under multiyearservice contracts. Funding for these contracts comes from annual operatingbudgets of the U.S. government and the options are normally exercised annually.Options for the purchase of additional systems or equipment are not included inbacklog until exercised.

 

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**NewAccounting Standards**

 

In July 2006, the Financial Accounting Standards Board (FASB)issued Interpretation No. 48, *Accountingfor Uncertainty in Income Taxes*(FIN 48), which we adopted on October 1,2007. The purpose of FIN 48 is to clarify and set forth consistent rules foraccounting for uncertain tax positions in accordance with SFAS 109, *Accounting for Income Taxes*. Thecumulative effect of applying the provisions of this interpretation are requiredto be reported separately as an adjustment to the opening balance of retainedearnings in the year of adoption. The effect of adopting FIN 48 on ourfinancial condition at September 30, 2008 has been included in theaccompanying consolidated financial statements. See Note 8 for furtherdiscussion of the effect of adopting FIN 48.

 

In September 2006,the FASB issued SFAS No. 157, *Fair Value Measurements,*whichwe will adopt in the quarter ending December 31, 2008. SFAS 157 definesfair value, establishes a framework and gives guidance regarding the methodsused for measuring fair value, and expands disclosures about fair valuemeasurements. We currently do not expect that the adoption of SFAS 157 willhave a material impact on our results of operations, financial position or cashflows.

 

In February 2007,the FASB issued SFAS No. 159, *The Fair Value Option forFinancial Assets and Financial Liabilities – Including an Amendment of FASBStatement No. 115*, which we will adopt in the quarter ending December 31,2008. This statement permits an entity to choose to measure many financialinstruments and certain other items at fair value at specified election dates.Subsequent unrealized gains and losses on items for which the fair value optionhas been elected will be reported in earnings. We currently do not expect thatthe adoption of SFAS 159 will have a material impact on our results ofoperations, financial position or cash flows.

 

InDecember 2007 the FASB issued SFAS No. 141(R),*Business Combinations,* which we willadopt in the fiscal year beginning October 1, 2009. This statement appliesto all transactions or other events in which an entity obtains control of oneor more businesses. This statement applies to all business entities, includingmutual entities that previously used the pooling-of-interests method ofaccounting for some business combinations. We currently do not expectthat the adoption of SFAS 141(R) will have a material impact on ourresults of operations, financial position or cash flows.

 

In March 2008 the FASB issued SFAS No. 161,***Disclosures aboutDerivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133*, which we willadopt in the quarter ending March 31, 2009. This statement requiresenhanced disclosures about an entity’s financial position, financialperformance, and cash flows. The statement requires that objectives for usingderivative instruments be disclosed in terms of underlying risks and accountingdesignation. We currently do not expect that the adoption of SFAS 161will have a material impact on our results of operations, financial position orcash flows.

 

**Liquidityand Capital Resources**

 

Cash flows fromoperations totaled $92.7 million in 2008, compared to $69.2 million in 2007 and$31.3 million in 2006. In addition to cash generated by earnings, a decrease inaccounts receivable in each of the three years amounting to $40.5 million,$18.1 million and $5.8 million in 2008, 2007 and 2006, respectively,contributed to the positive cash flows. In addition, net customer advances of$17.0 million, $12.2 million and $2.3 million in 2008, 2007 and 2006,respectively, added to the positive result. Inventories grew in 2008 and 2007,using cash of $18.7 million and $7.6 million, respectively, reflecting the transitionfrom development type contracts to production contracts described in thedefense segment section above. Positive operating cash flows in 2008 came fromboth segments, with the greater portion coming from transportation systems. Allof the operating cash flows in 2007 had come from the transportation systemssegment, while defense cash flows were slightly negative for the year. Both thedefense and transportation systems segments had generated positive cash flowsin 2006, with the larger amount contributed by transportation systems in thatyear as well.

 

28

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We have classifiedcertain unbilled accounts receivable balances as noncurrent because we do notexpect to receive payment within one year from the balance sheet date. At September 30,2008, this balance was $19.9 million compared to $16.7 million at September 30,2007.

 

Cash flows used ininvesting activities in 2008 included our acquisition of Omega Training Group, Inc.,which used cash of $53.8 million, net of cash acquired. The remaining balanceof the purchase price amounting to $6.1 million was paid subsequent to September 30,2008 and was included in other current liabilities at that date. We madecapital expenditures of $8.1 million in 2008, partially offset by proceeds of$1.8 million from the sale of our interest in the joint venture mentionedpreviously. We liquidated $27.2 million of short-term investments in the firstquarter of fiscal 2008, thereby avoiding much of the turmoil in the credit marketsthat occurred later in the year. During 2007 we had invested a net of $18.3million in these financial instruments, received $3.8 million from the sale ofour former corrugated box business and made $6.1 million in capitalexpenditures. Investing activities in 2006 had included capital expenditures of$9.8 million, proceeds from the sale of investment real estate of $8.0 millionand the addition of $8.9 million to short-term investments.

 

Financingactivities in 2008 included scheduled payments on long-term borrowings of $6.1million and the payment of a dividend to shareholders of $4.8 million (18 centsper share). Financing activities in 2007 had included the repayment of shortterm borrowings of $10.0 million and scheduled payments on long-term borrowingsof $6.1 million, in addition to the payment of a dividend to shareholders of$4.8 million (18 cents per share). Financing activities in 2006 had includedscheduled debt payments of $6.1 million, repayment of short-term borrowings of$16.4 million and dividends to shareholders of $4.8 million.

 

Accumulatedother comprehensive income decreased $23.6 million in 2008 because of foreigncurrency translation adjustments of $11.2 million and an increase in therecorded liability for our pension plans of $12.4 million, after applicableincome taxes. These adjustments decreased the positive balance in accumulatedother comprehensive income from $31.2 million as of September 30, 2007 to$7.6 million at September 30, 2008.

 

Thepension plan unfunded balance increased from the September 30, 2007balance of $1.5 million to $16.4 million at September 30, 2008. Thisdecrease in the funding position can be attributed to a return on plan assetsfor the year that was much lower than our assumed rate of return but was partiallyoffset by the effect of an increase in the discount rate we used to calculatethe pension liability.

 

Thenet deferred tax asset increased to $31.7 million at September 30, 2008compared to $18.7 million at September 30, 2007. The primary reason forthe increase is that the effect of recording adjustments to the pensionliability through other comprehensive income resulted in a deferred tax assetof $4.0 million at September 30, 2008 compared to a deferred tax liabilityof $2.7 million at September 30, 2007. We expect to generate sufficienttaxable income in the future such that the net deferred tax asset will berealized.

 

Our financial conditionremains strong with working capital of $279 million and a current ratio of 2.4to 1 at September 30, 2008. We expect that cash on hand and our ability toaccess the debt markets will be adequate to meet our working capitalrequirements for the foreseeable future. In addition to the short-termborrowing arrangements we have in the U.K. and New Zealand, we have a committed five year creditfacility from a group of financial institutions in the U.S., aggregating $150million.  As of September 30, 2008,$24.1 million of this capacity was used for letters of credit, leaving anadditional $125.9 million available.  Ourtotal debt to capital ratio at September 30, 2008 was less than 10%. Inaddition, our cash balance totaled $112.7 million at September 30, 2008which exceeded our total long-term debt by $81.0 million. Our cash is investedprimarily in highly liquid government treasury instruments in the U. S. andEurope.

 

29

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Thefollowing is a schedule of our contractual obligations outstanding as of September 30,2008:

 
| ** **             | ** ** | **Total**          | ** ** | **Less than 1  Year** | ** ** | **1 - 3 years** | ** ** | **4 - 5 years** | ** ** | **After 5 years** | ** ** |
|------------------------|------------|--------------------|------------|---------------------------------|------------|--------------------------------|------------|--------------------------------|------------|-----------------------------|------------|
|                   |       | **(in  millions)** |       |
| Long-term debt         |       | $                  | 31.7       |                            | $          | 6.0                            |       | $                              | 9.2        |                        | $          | 9.2 |   | $ | 7.3 |   |
| Interest  payments     |       | 6.5                |       | 1.7                             |       | 2.6                            |       | 1.3                            |       | 0.9                         |       |
| Operating leases       |       | 15.1               |       | 5.6                             |       | 6.2                            |       | 3.0                            |       | 0.3                         |       |
| Deferred  compensation |       | 8.6                |       | 0.8                             |       | 1.2                            |       | 0.9                            |       | 5.7                         |       |
|                   |       | $                  | 61.9       |                            | $          | 14.1                           |       | $                              | 19.2       |                        | $          | 14.4 |   | $ | 14.2 |   |

 

**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*

 

Asignificant portion of our business is derived from long-term development,production and system integration contracts which we account for consistentwith the American Institute of Certified Public Accountants’ (AICPA) audit andaccounting guide, *Audits of Federal Government Contractors*,and the AICPA’s Statement of Position No. 81-1, *Accountingfor Performance of Construction-Type and Certain Production-Type Contracts*.We consider the nature of these contracts, and the types of products andservices provided, when we determine the proper accounting for a particularcontract. Generally, we record revenue for long-term fixed price contracts on apercentage of completion basis using the cost-to-cost method to measureprogress toward completion. Most of our long-term fixed-price contracts requireus to deliver minimal quantities over a long period of time or to perform asubstantial level of development effort in relation to the total value of thecontract. Under the cost-to-cost method of accounting, we recognize revenuebased on a ratio of the costs incurred to the estimated total costs atcompletion. For certain other long-term, fixed price production contracts notrequiring substantial development effort we use the units-of-deliverypercentage completion method as the basis to measure progress toward completingthe contract and recognizing sales. The units-of-delivery measure is a

 

30

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modificationof the percentage-of-completion method, which recognizes revenues as deliveriesare made to the customer generally using unit sales values in accordance withthe contract terms. We estimate profit as the difference between totalestimated revenue and total estimated cost of a contract and recognize thatprofit over the life of the contract based on deliveries. Amounts representingcontract change orders, claims or other items are included in the contractvalue only when they can be reliably estimated and realization is consideredprobable. Provisions are made on a current basis to fully recognize anyanticipated losses on contracts.

 

Werecord sales under cost-reimbursement-type contracts as we incur the costs.Incentives or penalties and awards applicable to performance on contracts areconsidered in estimating sales and profits, and are recorded when there issufficient information to assess anticipated contract performance. Incentiveprovisions that increase or decrease earnings based solely on a singlesignificant event are not recognized until the event occurs.

 

Salesof products are recorded when a firm sales agreement is in place, delivery hasoccurred and collectibility of the fixed or determinable sales price isreasonably assured. Sales for Fixed-Price Service Contracts that do not containmeasurable units of work performed are generally recognized on straight-linebasis over the contractual service period, unless evidence suggests that therevenue is earned, or obligations fulfilled, in a different manner. Sales forFixed-Price Service Contracts that contain measurable units of work performedare recognized when the units of work are completed.

 

Sales and profits oncontracts that specify multiple deliverables are allocated to separate units ofaccounting when there is objective evidence that each accounting unit has valueto the customer on a stand-alone basis.

 

*Income Taxes*

 

Significant judgment is required in determining our income tax provisions and in evaluating our tax return positions. In accordance with FASB Interpretation No. 48 (FIN 48), we establish reserves when, despite our belief that our tax return positions are fully supportable, we believe it is more-likely-than-not a tax position taken or expected to be taken in a tax return, if examined, would 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 U.S. for the foreseeable future. These undistributed earnings totaled approximately $52.4 million at September 30, 2008. Annually we evaluate the capital requirements in our foreign subsidiaries and determine the amount of excess capital, if any, that is available for distribution. Whether or not we actually repatriate the excess capital in the form of a dividend, we would provide for U.S. taxes on the amount determined to be available for distribution. This evaluation is judgmental in nature and, therefore, the amount of U.S. taxes provided on undistributed earnings of our foreign subsidiaries is affected by these judgments. Based on this analysis in 2008, we determined that 11.0 million British pounds ($21.7 million) was excess capital in the U.K. and that 7.0 million New Zealand Dollars ($5.0 million) was excess capital in New Zealand and paid dividends in these amounts to the U.S. parent company.  U.S. taxes provided on these dividends amounted to $3.9 million in 2008.

 

31

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*Valuation of Goodwill*

 

We evaluate our recordedgoodwill balances for potential impairment annually by comparing the fair valueof each reporting unit to its carrying value, including recorded goodwill. Ourannual testing date is June 30. 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,**        | ** ** | **2008**          | ** ** | **2007** | ** ** |
|-------------------------------|------------|-------------------|------------|----------|------------|
| ** **                    | ** ** | **(in millions)** | ** ** |
|                          |       |              |       |     |       |
| Defense systems  and products |       | $                 | 16.1       |     | $          | 16.9 |   |
| Defense services              |       | 36.7              |       | 9.7      |       |
| Transportation  systems       |       | 8.2               |       | 9.4      |       |
| Total goodwill                |       | $                 | 61.0       |     | $          | 36.0 |   |

 

Determining the fairvalue of a reporting unit for purposes of the goodwill impairment test isjudgmental in nature and involves the use of estimates and assumptions. Theseestimates and assumptions could have a significant impact on whether or not animpairment charge is recognized and also the magnitude of any such charge. Wecurrently perform internal valuation analysis and consider other marketinformation that is publicly available. Estimates of fair value are primarilydetermined using discounted cash flows and comparisons with recenttransactions. These approaches use significant estimates and assumptionsincluding projected future cash flows, discount rate reflecting the inherentrisk in future cash flows, perpetual growth rate and determination ofappropriate market comparables.

 

Forfiscal 2008, the discounted cash flows for each reporting unit were based ondiscrete three-year financial forecasts developed by management for planningpurposes. Cash flows beyond the three-year discrete forecasts were estimatedbased on projected growth rates and financial ratios, influenced by an analysisof historical ratios, and by calculating a terminal value at the end of tenyears. The compound annual growth rates for sales ranged from 4.0% to 8.0% andfor operating profit margins ranged from 7.0% to 8.0% for the reporting units,beyond the discrete forecast period. The future cash flows were discounted topresent value using a discount rate of 9.1%. We did not recognize any goodwillimpairment as a result of performing this annual test. Changes in estimates andassumptions we make in conducting our goodwill assessment could affect theestimated fair value of one or more of our reporting units and could result ina goodwill impairment charge in a future period. However, a 10% decrease in theestimated fair value of any of our reporting units at June 30, 2008 wouldnot have resulted in a goodwill impairment charge.

 

*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

 

32

 

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.

 

Changes in the above assumptions can affect our financial statements, although the relatively small size of our defined benefit pension plans in relation to the size of the Company limit the impact any individual assumption changes can have. For example, a 50 basis point change in the assumed rate of return on assets would have changed the pension expense recorded in 2008 by about $0.8 million, before applicable income taxes.

 

**Item 7a. QUANTITATIVE ANDQUALITATIVE DISCLOSURE ABOUT MARKET RISK**

 

**Interest Rate Risk**

 

We invest in money marketinstruments and short-term marketable debt securities that are tied to floatinginterest rates being offered at the time the investment is made. We maintainshort-term borrowing arrangements in the U.S., U.K. and New Zealand which arealso tied to floating interest rates (LIBOR and the U.S. prime rate and theU.K. and New Zealand base rates). We also have senior unsecured notes payableto insurance companies that are due in annual installments. These notes havefixed coupon interest rates. See Note 6 to the Consolidated FinancialStatements for more information.

 

Interest income earned onour short-term investments is affected by changes in the general level of U.S.and U.K. interest rates. These income streams are generally not hedged.  Interest expense incurred under the short-termborrowing arrangements is affected by changes in the general level of interestrates in the U.S., U.K. and New Zealand. The expense related to these coststreams is usually not hedged since it is either revolving, payable withinthree months and/or immediately callable by the lender at any time. Interestexpense incurred under the long-term notes payable is not affected by changesin any interest rate because it is fixed. However, we have in the past, and may in the future, use an interestrate swap to essentially convert this fixed rate into a floating rate for someor all of the long-term debt outstanding. The purpose of a swap would be to tie the interest expense risk relatedto these borrowings to the interest income risk on our short-term investments,thereby mitigating our net interest rate risk. We believe that we are notsignificantly exposed to interest rate risk at this point in time.  There was no interest rate swap outstandingat September 30, 2008.

 

**Foreign Currency Exchange Risk**

 

In the ordinary course ofbusiness, we enter into firm sale and purchase commitments denominated in manyforeign currencies.  We have a policy tohedge those commitments greater than $20,000 by using foreign currency exchangeforward and option contracts that are denominated in currencies other than thefunctional currency of the subsidiary responsible for the commitment, typicallythe British pound, Canadian dollar, Singapore dollar, Euro, Swedish krona, NewZealand dollar and Australian dollar. These contracts are designed to be effective hedges regardless of thedirection or magnitude of any foreign currency exchange rate change, becausethey result in an equal and opposite income or cost stream that offsets thechange in the value of the underlying commitment.  See Note 1 to the Consolidated FinancialStatements for more information on our foreign currency translation andtransaction accounting policies.  We alsouse balance sheet hedges to mitigate foreign exchange risk.  This strategy involves incurring Britishpound denominated debt (See Interest Rate Risk above) and having the option ofpaying off the debt using U.S. dollar or British pound funds. We do not believethat we are significantly exposed to foreign currency exchange rate risk atthis point in time.

 

Investments in ourforeign subsidiaries in the U.K., Australia, New Zealand, and Canada are nothedged because we consider them to be invested indefinitely.  In addition, we generally have control overthe timing and amount of earnings repatriation, if any, and expect to use thiscontrol to mitigate foreign currency exchange risk.

 

33

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**Item 8.    FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA.**

** **

CUBIC CORPORATION

 

CONSOLIDATED BALANCE SHEETS

 
| ** **                                 | ** ** | **September 30,** | ** ** |
|--------------------------------------------|------------|------------------------|------------|
| ** **                                 | ** ** | **2008**               | ** ** | **2007** | ** ** |
| ** **                                 | ** ** | **(in thousands)**     | ** ** |
| ASSETS                                     |       |                   |       |   |   |
|                                       |       |                   |       |   |   |
| CURRENT ASSETS                             |       |                   |       |   |   |
| Cash and cash  equivalents                 |       | $                      | 112,696    |   | $ | 73,563 |   |
| Short-term  investments                    |       | —                 |       | 27,200 |   |
| Accounts  receivable:                      |       |                   |       |   |   |
| Trade and other  receivables               |       | 9,014                  |       | 13,024 |   |
| Long-term  contracts                       |       | 264,748                |       | 297,792 |   |
| Allowance for  doubtful accounts           |       | (4,878                 | )          | (5,144 | ) |
|                                       |       | 268,884                |       | 305,672 |   |
|                                       |       |                   |       |   |   |
| Inventories                                |       | 45,118                 |       | 27,342 |   |
| Deferred income  taxes                     |       | 27,082                 |       | 18,492 |   |
| Prepaid expenses  and other current assets |       | 21,548                 |       | 21,105 |   |
| TOTAL CURRENT  ASSETS                      |       | 475,328                |       | 473,374 |   |
|                                       |       |                   |       |   |   |
| LONG-TERM  CONTRACT RECEIVABLES            |       | 19,930                 |       | 16,650 |   |
|                                       |       |                   |       |   |   |
| PROPERTY, PLANT  AND EQUIPMENT             |       |                   |       |   |   |
| Land and land  improvements                |       | 15,408                 |       | 14,601 |   |
| Buildings and  improvements                |       | 43,379                 |       | 46,519 |   |
| Machinery and  other equipment             |       | 83,598                 |       | 84,149 |   |
| Leasehold  improvements                    |       | 4,656                  |       | 4,299 |   |
| Accumulated depreciation  and amortization |       | (93,154                | )          | (92,317 | ) |
|                                       |       | 53,887                 |       | 57,251 |   |
|                                       |       |                   |       |   |   |
| OTHER ASSETS                               |       |                   |       |   |   |
| Deferred income  taxes                     |       | 4,631                  |       | 195 |   |
| Goodwill                                   |       | 61,032                 |       | 36,003 |   |
| Purchased  intangibles                     |       | 19,060                 |       | 1,922 |   |
| Miscellaneous  other assets                |       | 7,384                  |       | 7,170 |   |
|                                       |       | 92,107                 |       | 45,290 |   |
|                                       |       |                   |       |   |   |
| TOTAL ASSETS                               |       | $                      | 641,252    |   | $ | 592,565 |   |

 

See accompanyingnotes.

 

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CUBIC CORPORATION

 

CONSOLIDATED BALANCESHEETS—continued

 
| ** **                                                      | ** ** | **September 30,** | ** ** |
|-----------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                      | ** ** | **2008**               | ** ** | **2007** | ** ** |
| ** **                                                      | ** ** | **(in thousands)**     | ** ** |
| LIABILITIES AND  SHAREHOLDERS’ EQUITY                      |       |                   |       |   |   |
|                                                            |       |                   |       |   |   |
| CURRENT  LIABILITIES                                            |       |                   |       |   |   |
| Trade accounts  payable                                         |       | $                      | 23,288     |   | $ | 27,992 |   |
| Customer  advances                                              |       | 74,963                 |       | 58,412 |   |
| Accrued  compensation                                           |       | 41,111                 |       | 38,183 |   |
| Other current  liabilities                                      |       | 44,721                 |       | 31,787 |   |
| Income taxes  payable                                           |       | 6,017                  |       | 4,905 |   |
| Current  maturities of long-term debt                           |       | 6,045                  |       | 6,138 |   |
| TOTAL CURRENT  LIABILITIES                                      |       | 196,145                |       | 167,417 |   |
|                                                            |       |                   |       |   |   |
| LONG-TERM DEBT                                                  |       | 25,700                 |       | 32,699 |   |
|                                                            |       |                   |       |   |   |
| OTHER  LIABILITIES                                              |       |                   |       |   |   |
| Accrued pension  liability                                      |       | 16,451                 |       | 1,530 |   |
| Deferred  compensation                                          |       | 7,821                  |       | 8,148 |   |
| Income taxes  payable                                           |       | 6,283                  |       | — |   |
|                                                            |       |                   |       |   |   |
| COMMITMENTS AND  CONTINGENCIES                                  |       |                   |       |   |   |
|                                                            |       |                   |       |   |   |
| SHAREHOLDERS’  EQUITY                                      |       |                   |       |   |   |
| Preferred stock,  no par value (in thousands):                  |       |                   |       |   |   |
| Authorized—5,000  shares                                   |       |                   |       |   |   |
| Issued and  outstanding—none                               |       | —                 |       | — |   |
| Common stock, no  par value (in thousands):                     |       |                   |       |   |   |
| Authorized—50,000  shares                                  |       |                   |       |   |   |
| 2008—Issued  35,673 shares, outstanding—26,727 shares |       |                   |       |   |   |
| 2007—Issued  35,665 shares, outstanding—26,720 shares |       | 12,485                 |       | 12,357 |   |
| Retained  earnings                                              |       | 404,868                |       | 375,299 |   |
| Accumulated  other comprehensive income                         |       | 7,570                  |       | 31,184 |   |
| Treasury stock  at cost (in thousands):                         |       |                   |       |   |   |
| 2008—8,945  shares; 2007—8,945 shares                 |       | (36,071                | )          | (36,069 | ) |
|                                                            |       | 388,852                |       | 382,771 |   |
|                                                            |       |                   |       |   |   |
| TOTAL  LIABILITIES AND SHAREHOLDERS’ EQUITY                |       | $                      | 641,252    |   | $ | 592,565 |   |

 

See accompanyingnotes.

 

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CUBICCORPORATION

 

CONSOLIDATEDSTATEMENTS OF INCOME

 
| ** **                                        | ** ** | **Years Ended September 30,**                | ** ** |
|---------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                        | ** ** | **2008**                                          | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                        | ** ** | **(amounts in thousands, except per share data)** | ** ** |
|                                              |       |                                              |       |   |   |   |   |
| Net sales:                                        |       |                                              |       |   |   |   |   |
| Products                                          |       | $                                                 | 478,478    |   | $ | 517,165 |   | $ | 489,286 |   |
| Services                                          |       | 402,657                                           |       | 372,705 |   | 332,100 |   |
|                                              |       | 881,135                                           |       | 889,870 |   | 821,386 |   |
| Costs and  expenses:                              |       |                                              |       |   |   |   |   |
| Products                                          |       | 376,213                                           |       | 415,729 |   | 411,181 |   |
| Services                                          |       | 333,268                                           |       | 311,811 |   | 276,032 |   |
| Selling, general  and administrative expenses     |       | 99,956                                            |       | 95,054 |   | 97,166 |   |
| Restructuring  costs                              |       | 6,203                                             |       | — |   | — |   |
| Research and  development                         |       | 12,231                                            |       | 5,178 |   | 6,112 |   |
|                                              |       | 827,871                                           |       | 827,772 |   | 790,491 |   |
|                                              |       |                                              |       |   |   |   |   |
| Operating income                                  |       | 53,264                                            |       | 62,098 |   | 30,895 |   |
|                                              |       |                                              |       |   |   |   |   |
| Other income  (expenses):                         |       |                                              |       |   |   |   |   |
| Gain on sale of  assets                           |       | 1,238                                             |       | 1,052 |   | 7,237 |   |
| Interest and  dividends                           |       | 6,351                                             |       | 3,431 |   | 1,891 |   |
| Interest expense                                  |       | (2,745                                            | )          | (3,403 | ) | (5,112 | ) |
| Other income  (expense)                           |       | (653                                              | )          | 1,299 |   | 433 |   |
| Minority  interest in loss (income) of subsidiary |       | (216                                              | )          | 771 |   | 985 |   |
|                                              |       |                                              |       |   |   |   |   |
| Income before  income taxes                       |       | 57,239                                            |       | 65,248 |   | 36,329 |   |
|                                              |       |                                              |       |   |   |   |   |
| Income taxes                                      |       | 20,385                                            |       | 23,662 |   | 12,196 |   |
|                                              |       |                                              |       |   |   |   |   |
| Net income                                        |       | $                                                 | 36,854     |   | $ | 41,586 |   | $ | 24,133 |   |
|                                              |       |                                              |       |   |   |   |   |
| Basic and  diluted net income per common share    |       | $                                                 | 1.38       |   | $ | 1.56 |   | $ | 0.90 |   |
|                                              |       |                                              |       |   |   |   |   |
| Average number  of common shares outstanding      |       | 26,725                                            |       | 26,720 |   | 26,720 |   |

 

See accompanyingnotes.

 

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CUBIC CORPORATION

 

CONSOLIDATEDSTATEMENTS OF CASH FLOWS

 
| ** **                                                                         | ** ** | **Years Ended September 30,** | ** ** |
|------------------------------------------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                                                         | ** ** | **2008**                                     | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                                                               |       |                                         |       | **(in  thousands)** |   |   |   |
| Operating  Activities:                                                             |       |                                         |       |   |   |   |   |
| Net income                                                                         |       | $                                            | 36,854     |   | $ | 41,586 |   | $ | 24,133 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |       |                                         |       |   |   |   |   |
| Depreciation and  amortization                                                     |       | 9,688                                        |       | 8,854 |   | 8,490 |   |
| Deferred income  taxes                                                             |       | (6,203                                       | )          | 745 |   | 514 |   |
| Provision for  doubtful accounts                                                   |       | (39                                          | )          | 19 |   | 145 |   |
| Gain on sale of  assets                                                            |       | (1,238                                       | )          | (1,052 | ) | (7,237 | ) |
| Minority  interest in income (loss) of subsidiary                                  |       | 216                                          |       | (771 | ) | (985 | ) |
| Changes in  operating assets and liabilities, net of effects from acquisitions:    |       |                                         |       |   |   |   |   |
| Accounts  receivable                                                               |       | 40,495                                       |       | 18,091 |   | 5,793 |   |
| Inventories                                                                        |       | (18,748                                      | )          | (7,610 | ) | 1,577 |   |
| Prepaid expenses                                                                   |       | 451                                          |       | (8,048 | ) | (2,051 | ) |
| Accounts payable  and other current liabilities                                    |       | 4,037                                        |       | 9,965 |   | (2,112 | ) |
| Customer  advances                                                                 |       | 16,952                                       |       | 12,181 |   | 2,279 |   |
| Income taxes                                                                       |       | 7,835                                        |       | (2,741 | ) | 155 |   |
| Other items -  net                                                                 |       | 2,355                                        |       | (2,063 | ) | 629 |   |
| NET CASH  PROVIDED BY OPERATING ACTIVITIES                                         |       | 92,655                                       |       | 69,156 |   | 31,330 |   |
|                                                                               |       |                                         |       |   |   |   |   |
| Investing  Activities:                                                             |       |                                         |       |   |   |   |   |
| Acquisition of  businesses, net of cash acquired                                   |       | (53,776                                      | )          | — |   | (785 | ) |
| Proceeds from  sale of assets                                                      |       | 1,779                                        |       | 3,775 |   | 8,028 |   |
| Proceeds from  sale of short-term investments                                      |       | 66,160                                       |       | 241,606 |   | 4,000 |   |
| Purchases of  short-term investments                                               |       | (39,070                                      | )          | (259,935 | ) | (12,850 | ) |
| Purchases of  property, plant and equipment                                        |       | (8,100                                       | )          | (6,098 | ) | (9,789 | ) |
| Other items -  net                                                                 |       | (2,254                                       | )          | (139 | ) | (513 | ) |
| NET CASH USED IN  INVESTING ACTIVITIES                                             |       | (35,261                                      | )          | (20,791 | ) | (11,909 | ) |
|                                                                               |       |                                         |       |   |   |   |   |
| Financing  Activities:                                                             |       |                                         |       |   |   |   |   |
| Change in  short-term borrowings                                                   |       | —                                       |       | (10,000 | ) | (16,437 | ) |
| Principal  payments on long-term debt                                              |       | (6,112                                       | )          | (6,112 | ) | (6,052 | ) |
| Proceeds from  issuance of common stock                                            |       | 128                                          |       | — |   | — |   |
| Purchases of  treasury stock                                                       |       | (2                                           | )          | — |   | (3 | ) |
| Dividends paid  to shareholders                                                    |       | (4,810                                       | )          | (4,810 | ) | (4,810 | ) |
| NET CASH USED IN  FINANCING ACTIVITIES                                             |       | (10,796                                      | )          | (20,922 | ) | (27,302 | ) |
|                                                                               |       |                                         |       |   |   |   |   |
| Effect of  exchange rates on cash                                                  |       | (7,465                                       | )          | 3,740 |   | 1,401 |   |
|                                                                               |       |                                         |       |   |   |   |   |
| NET INCREASE  (DECREASE) IN CASH AND CASH EQUIVALENTS                              |       | 39,133                                       |       | 31,183 |   | (6,480 | ) |
|                                                                               |       |                                         |       |   |   |   |   |
| Cash and cash  equivalents at the beginning of the year                            |       | 73,563                                       |       | 42,380 |   | 48,860 |   |
|                                                                               |       |                                         |       |   |   |   |   |
| CASH AND CASH  EQUIVALENTS AT THE END OF THE YEAR                                  |       | $                                            | 112,696    |   | $ | 73,563 |   | $ | 42,380 |   |

 

See accompanying notes.

 

37

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CUBIC CORPORATION

 

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

 
| ** **                                                 | ** ** | ** **        | ** ** | ** **   | ** ** | **Accumulated**   | ** ** | ** **   | ** ** | ** ** | ** ** | ** **         | ** ** |
|------------------------------------------------------------|------------|-------------------|------------|--------------|------------|-------------------|------------|--------------|------------|------------|------------|--------------------|------------|
| ** **                                                 | ** ** | ** **        | ** ** | ** **   | ** ** | **Other**         | ** ** | ** **   | ** ** | ** ** | ** ** | **Number**         | ** ** |
| **(in thousands except**                         | ** ** | **Comprehensive** | ** ** | **Treasury** | ** ** | **Comprehensive** | ** ** | **Retained** | ** ** | **Common** | ** ** | **of Shares** | ** ** |
| **per share amounts)**                           | ** ** | **Income**        | ** ** | **Stock**    | ** ** | **Income**        | ** ** | **Earnings** | ** ** | **Stock**  | ** ** | **Outstanding**    | ** ** |
| October 1,  2005                                      |       |              |       | $            | (36,066    | )                 | $          | 1,667        |       | $          | 319,200    |               | $          | 12,357 |   | 26,720 |   |
|                                                       |       |              |       |         |       |              |       |         |       |       |       |               |       |
| Comprehensive  income:                                     |       |              |       |         |       |              |       |         |       |       |       |               |       |
| Net income                                                 |       | $                 | 24,133     |         | —     |              | —     |         | 24,133     |       | —     |               | —     |   |
| Decrease in  minimum pension liability                     |       | 2,435             |       | —       |       | 2,435             |       | —       |       | —     |       | —             |       |
| Foreign currency  translation adjustment                   |       | 4,321             |       | —       |       | 4,321             |       | —       |       | —     |       | —             |       |
| Net unrealized  losses from cash flow hedges               |       | (8                | )          | —       |       | (8                | )          | —       |       | —     |       | —             |       |
| Comprehensive  income                                      |       | $                 | 30,881     |         |       |              |       |         |       |       |       |               |       |   |
|                                                       |       |              |       |         |       |              |       |         |       |       |       |               |       |
| Purchase of  treasury stock                                |       |              |       | (3           | )          | —            |       | —       |       | —     |       | —             |       |
| Cash dividends  paid — $.18 per share of common stock |       |              |       | —       |       | —            |       | (4,810       | )          | —     |       | —             |       |
|                                                       |       |              |       |         |       |              |       |         |       |       |       |               |       |
| September 30,  2006                                   |       |              |       | (36,069      | )          | 8,415             |       | 338,523      |       | 12,357     |       | 26,720             |       |
|                                                       |       |              |       |         |       |              |       |         |       |       |       |               |       |
| Comprehensive  income:                                     |       |              |       |         |       |              |       |         |       |       |       |               |       |
| Net income                                                 |       | $                 | 41,586     |         | —     |              | —     |         | 41,586     |       | —     |               | —     |   |
| Decrease in minimum  pension liability                     |       | 13,580            |       | —       |       | 13,580            |       | —       |       | —     |       | —             |       |
| Foreign currency  translation adjustment                   |       | 9,189             |       | —       |       | 9,189             |       | —       |       | —     |       | —             |       |
| Comprehensive  income                                      |       | $                 | 64,355     |         |       |              |       |         |       |       |       |               |       |   |
|                                                       |       |              |       |         |       |              |       |         |       |       |       |               |       |
| Cash dividends  paid — $.18 per share of common stock |       |              |       | —       |       | —            |       | (4,810       | )          | —     |       | —             |       |
|                                                       |       |              |       |         |       |              |       |         |       |       |       |               |       |
| September 30,  2007                                   |       |              |       | (36,069      | )          | 31,184            |       | 375,299      |       | 12,357     |       | 26,720             |       |
|                                                       |       |              |       |         |       |              |       |         |       |       |       |               |       |
| Comprehensive  income:                                     |       |              |       |         |       |              |       |         |       |       |       |               |       |
| Net income                                                 |       | $                 | 36,854     |         | —     |              | —     |         | 36,854     |       | —     |               | —     |   |
| Increase in  minimum pension liability                     |       | (12,383           | )          | —       |       | (12,383           | )          | —       |       | —     |       | —             |       |
| Foreign currency  translation adjustment                   |       | (11,231           | )          | —       |       | (11,231           | )          | —       |       | —     |       | —             |       |
| Comprehensive  income                                      |       | $                 | 13,240     |         |       |              |       |         |       |       |       |               |       |   |
|                                                       |       |              |       |         |       |              |       |         |       |       |       |               |       |
| Adoption of  FIN48                                         |       |              |       | —       |       | —            |       | (2,475       | )          | —     |       | —             |       |
| Stock issued  under equity incentive plan                  |       |              |       | —       |       | —            |       | —       |       | 128        |       | 7                  |       |
| Purchase of  treasury stock                                |       |              |       | (2           | )          | —            |       | —       |       | —     |       | —             |       |
| Cash dividends  paid — $.18 per share of common stock |       |              |       | —       |       | —            |       | (4,810       | )          | —     |       | —             |       |
|                                                       |       |              |       |         |       |              |       |         |       |       |       |               |       |
| September 30,  2008                                   |       |              |       | $            | (36,071    | )                 | $          | 7,570        |       | $          | 404,868    |               | $          | 12,485 |   | 26,727 |   |

 

See accompanying notes.

 

38

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CUBIC CORPORATION

 

NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS

 

September 30, 2008

 

NOTE 1—SUMMARY OFSIGNIFICANT ACCOUNTING POLICIES

 

Organization and Natureof the Business:  CubicCorporation (“Cubic” or “the Company”) designs, develops and manufacturesproducts which are mainly electronic in nature, provides government servicesand services related to products previously produced by Cubic and others. TheCompany’s principal lines of business are defense and transportation farecollection systems. Principal customers for defense products and services arethe United States and foreign governments. Transportation fare collectionsystems are sold primarily to large local government agencies in the UnitedStates and worldwide.

 

Principles ofConsolidation:  Theconsolidated financial statements include the accounts of Cubic Corporation, itsmajority-owned subsidiaries and a 50% owned joint venture of which the Companywas the primary beneficiary prior to its sale during 2008. All significantintercompany balances and transactions have been eliminated in consolidation.The consolidation of foreign subsidiaries requires translation of their assetsand liabilities into U.S. dollars at year-end exchange rates. Statements ofincome and cash flows are translated at the average exchange rates for eachyear. Transaction gains and losses on advances to foreign subsidiaries amountedto a $1.0 million loss in 2008, a gain of $0.7 million in 2007 and zero in2006.

 

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

 

Concentration of CreditRisk:  The Company hasestablished guidelines pursuant to which its cash and cash equivalents arediversified among various money market instruments and investment funds. Theseguidelines emphasize the preservation of capital by requiring minimum creditratings assigned by established credit organizations. Diversification isachieved by specifying maximum investments in each instrument type and issuer.The majority of these investments are not on deposit in federally insured accounts.

 

Fair Value of Financial Instruments:  Financial instruments, includingcash equivalents, accounts receivable, accounts payable and accruedliabilities, are carried at cost, which management believes approximates thefair value because of the short-term maturity of these instruments. The fairvalue of long-term debt is based upon quoted market prices for the same orsimilar debt instruments and approximates the 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 thenature of its customers, the Company generally does not require collateral. TheCompany has limited exposure to credit risk as the Company has historicallycollected substantially all of its receivables from government agencies. TheCompany generally requires no allowance for doubtful accounts for thesecustomers unless specific contractual circumstances warrant it.

 

Short-term Investments:  Short-term investments include highly liquid, investment grade,institutional money market debt instruments categorized as available-for-salesecurities as defined by Statement of Financial Accounting Standards 115, *Accounting for Certain Investments in Debt and Equity Securities*.Any net excess of fair market value over cost would be included in AccumulatedOther Comprehensive Income (Loss) on the Consolidated Balance Sheets.

 

39

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CUBIC CORPORATION

 

NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS—Continued

 

NOTE 1—SUMMARY OFSIGNIFICANT ACCOUNTING POLICIES—Continued

 

Werecord short-term investments at fair value. At year end, our investmentportfolio included the following:

 
| ** **                            | ** ** | **2008**                | ** ** | **2007**  | ** ** |
|---------------------------------------|------------|-------------------------|------------|-----------|------------|
| ** **                            | ** ** | **Amortized**           | ** ** | **Fair**  | ** ** | **Amortized** | ** ** | **Fair** | ** ** |
| **September 30,**                | ** ** | **Cost**                | ** ** | **Value** | ** ** | **Cost** | ** ** | **Value** | ** ** |
|                                  |       | **(in thousands)** |       |
| Money market  preferred stock         |       | $                       | —     |      | $          | — |   | $ | 11,600 |   | $ | 11,600 |   |
| Debt securities  purchased at auction |       | —                  |       | —    |       | 15,600 |   | 15,600 |   |
|                                  |       | $                       | —     |      | $          | — |   | $ | 27,200 |   | $ | 27,200 |   |

 

Inventories:  Inventories are stated at the lower of costor market. Cost is determined using the first-in, first-out (FIFO) method,which approximates current replacement cost. Work in process is stated at theactual production and engineering costs incurred to date, including applicableoverhead, and is reduced by charging any amounts in excess of estimatedrealizable value to cost of sales. Where contracts include advances,performance-based payments and progress payments, the advances are reflected asan offset against any related inventory balances. Costs incurred for certaingovernment contracts include general and administrative costs as allowed bygovernment cost accounting standards. The amounts remaining in inventory at September 30,2008 and 2007 were $5.1 million and $0.7 million respectively.

 

Property, Plant andEquipment:  Property,plant and equipment are carried at cost. Depreciation is provided in amountssufficient to amortize the cost of the depreciable assets over their estimateduseful lives. Generally, straight-line methods are used for real property overestimated useful lives ranging from 15 to 39 years or the term of theunderlying lease for leasehold improvements. Accelerated methods (decliningbalance and sum-of-the-years-digits) are used for machinery and equipment overestimated useful lives ranging from five to seven years. Provisions fordepreciation of plant and equipment and amortization of leasehold improvementsamounted to $8.3 million, $7.9 million and $7.6 million in 2008, 2007 and 2006,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 ofgoodwill to its carrying value, and any impairment determined would be recordedin the current period. To date there has been no impairment of the Company’srecorded goodwill.

 

The changes in thecarrying amount of goodwill for the two years ended September 30, 2008 areas follows:

 
| ** **                              | ** ** | **Transportation  Segment** | ** ** | **Defense  Segment**    | ** ** | **Total**  | ** ** |
|-----------------------------------------|------------|-----------------------------|------------|-------------------------|------------|------------|------------|
| ** **                              | ** ** | ** **                  | ** ** | **(in thousands)** | ** ** | ** ** | ** ** |
| Balances at  October 1, 2006       |       | $                           | 8,615      |                    | $          | 26,135     |       | $ | 34,750 |   |
| Foreign currency  exchange rate changes |       | 747                         |       | 506                     |       | 1,253      |       |
| Balances at  September 30, 2007    |       | 9,362                       |       | 26,641                  |       | 36,003     |       |
| Goodwill  acquired during the year      |       | —                      |       | 27,045                  |       | 27,045     |       |
| Reduction of  acquired tax accrual      |       | —                      |       | (435                    | )          | (435       | )          |
| Foreign currency  exchange rate changes |       | (1,152                      | )          | (429                    | )          | (1,581     | )          |
| Balances at  September 30, 2008    |       | $                           | 8,210      |                    | $          | 52,822     |       | $ | 61,032 |   |

 

40

----

 

CUBIC CORPORATION

 

NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS—Continued

 

NOTE 1—SUMMARY OFSIGNIFICANT ACCOUNTING POLICIES—Continued

 

Purchased IntangibleAssets:  The tablebelow summarizes the Company’s purchased intangible assets as follows:

 
| ** **                        | ** ** | **September 30, 2008** | ** ** | **September 30, 2007** | ** ** |
|-----------------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| **(in thousands)**           | ** ** | **Gross  Carrying  Amount**      | ** ** | **Accumulated  Amortization**    | ** ** | **Net  Carrying  Amount** | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Net Carrying  Amount** | ** ** |
| Contract and  program intangibles |       | $                                | 19,545     |                             | $          | (3,139 | ) | $ | 16,406 |   | $ | 4,732 |   | $ | (2,810 | ) | $ | 1,922 |   |
| Other purchased  intangibles      |       | 2,787                            |       | (133                             | )          | 2,654 |   | — |   | — |   | — |   |
| Total                             |       | $                                | 22,332     |                             | $          | (3,272 | ) | $ | 19,060 |   | $ | 4,732 |   | $ | (2,810 | ) | $ | 1,922 |   |

 

The company’s purchasedintangible assets are subject to amortization and are being amortized on acombination of straight-line and sum-of-the-years-digits basis over a weightedaverage period of 6 years. Total amortization expense for 2008, 2007 and 2006,was $1.3 million, $0.9 million and $0.8 million, respectively.

 

The table below showsexpected amortization for purchased intangibles as of September 30, 2008,for each of the next five years (in thousands):

 
| 2009       |   | $     | 5,607  |   |
|------------|--------|-------|--------|--------|
| 2010       |   | 4,690 |   |
| 2011       |   | 3,642 |   |
| 2012       |   | 2,650 |   |
| 2013       |   | 1,734 |   |
| Thereafter |   | 737   |   |
|       |   | $     | 19,060 |   |

 

Impairment of Long-LivedAssets:  The carryingvalues of long-lived assets other than goodwill are generally evaluated forimpairment only if events or changes in facts and circumstances indicate thatcarrying values may not be recoverable. Any impairment determined would berecorded in the current period and would be measured by comparing the fairvalue of the related asset to its carrying value. Fair value is generallydetermined by identifying estimated undiscounted cash flows to be generated bythose assets. No impairments have been recorded for the years ended September 30,2008, 2007 and 2006.

 

Deferred Compensation:  Deferred compensation includes amounts dueunder an arrangement in which participating members of management may elect todefer receiving payment for a portion of their compensation a minimum of fiveyears or until periods after their respective retirements. Interest on deferredcompensation accrues at market rates, until such time as it is paid in full.The interest rate is adjusted semi-annually and was 5.125% at September 30,2008.

 

41

----

 

CUBIC CORPORATION

 

NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS—Continued

 

NOTE 1—SUMMARY OFSIGNIFICANT ACCOUNTING POLICIES—Continued

 

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

 
| **September 30,**           | ** ** | **2008**                | ** ** | **2007** | ** ** |
|----------------------------------|------------|-------------------------|------------|----------|------------|
| ** **                       | ** ** | **(in thousands)** | ** ** |
| Adjustment to  pension liability |       | $                       | (7,436     | )        | $          | 4,947 |   |
| Foreign currency  translation    |       | 15,006                  |       | 26,237   |       |
|                             |       | $                       | 7,570      |     | $          | 31,184 |   |

 

The adjustment to thepension liability is shown net of a tax benefit of $4.0 million and a taxprovision of $2.7 million at September 30, 2008 and 2007, respectively. Deferredincome taxes are not recognized for translation-related temporary differencesof foreign subsidiaries whose undistributed earnings are considered to bepermanently invested.

 

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. For certain other long-term, fixed priceproduction contracts not requiring substantial development effort the Companyuses the units-of-delivery percentage of completion method as the basis tomeasure progress toward completing the contract and recognizing sales.

 

Sales undercost-reimbursement type contracts are recorded as costs are incurred. Profitsare included in earnings based on the ratio of costs incurred to the estimatedtotal costs at completion. Sales of products are recorded when a firm salesagreement is in place, delivery has occurred and collectibility of the fixed ordeterminable sales price is reasonably assured. Sales for Fixed-Price Service Contracts thatdo not contain measurable units of work performed are generally recognized onstraight-line basis over the contractual service period, unless evidencesuggests that the revenue is earned, or obligations fulfilled, in a differentmanner. Sales for Fixed-Price Service Contracts that contain measurable unitsof work performed are recognized when the units of work are completed.

 

Amounts representingcontract change orders, claims or other items are included in the contractvalue only when they can be reliably estimated and realization is consideredprobable. Incentives or penalties and awards applicable to performance oncontracts are considered in estimating sales and profits, and are recorded whenthere is sufficient information to assess anticipated contract performance.Incentive provisions that increase or decrease earnings based solely on asingle significant event are not recognized until the event occurs.

 

Sales and profits oncontracts that specify multiple deliverables are allocated to separate units ofaccounting when there is objective evidence that each accounting unit has valueto the customer on a stand-alone basis.

 

Provisions are made on acurrent basis to fully recognize any anticipated losses on contracts. Cashreceived prior to revenue recognition is classified as customer advances on thebalance sheet.

 

42

----

 

CUBICCORPORATION

 

NOTESTO CONSOLIDATED FINANCIAL STATEMENTS—Continued

 

NOTE1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES—Continued

 

Income Taxes: The provision for income taxes includes federal, state, local, andforeign taxes.  Tax credits, primarily forresearch and development and export programs are recognized as a reduction ofthe provision for income taxes in the year in which they are available for taxpurposes.  Deferred income taxes areprovided on temporary differences between assets and liabilities for financialreporting and tax purposes as measured by enacted tax rates expected to applywhen the temporary differences are settled or realized.  Valuation allowances are established fordeferred tax assets when the amount of expected future taxable income is notlikely to support the use of the deduction or credit. Deferred tax liabilitiesgenerally represent deductions that have been taken on tax returns but have notyet been recognized as expense in the financial statements. Annually the Companyevaluates the capital requirements of its foreign subsidiaries and determinesthe amount of excess capital, if any, that is available for distribution. TheCompany provides for U.S. taxes on the amount determined to be excess capitalavailable for distribution. The Company has not recognized United States taxexpense on $52.4 million of undistributed earnings of its foreign subsidiariesat September 30, 2008, since it intends to reinvest the earnings outsidethe United States for the foreseeable future.

 

Earnings Per Share: Per share amounts are based upon the weighted average number of sharesof common stock outstanding.

 

RestructuringActivity: In the fourth quarter of 2008 the Company reducedits defense segment facility workforce by 139 employees. In addition,6 corporate office positions were eliminated. Affected employees receivedseverance pay and outplacement assistance, as well as company paid medicalcoverage for a defined period based on years of service. The cost of thisrestructuring was $6.2 million and is reflected in the company’s results forthe fourth quarter.

 

Thefollowing table presents a rollforward of the Company’s restructuringliability, which is included within other current liabilities in the auditedconsolidated balance sheets (in thousands):

 
| ** **                               | ** ** | **Employee**   | ** ** |
|------------------------------------------|------------|----------------|------------|
| ** **                               | ** ** | **Separation** | ** ** |
| ** **                               | ** ** | **Expenses**   | ** ** |
| Liability as of  September 30, 2007 |       | $              | —     |   |
| Additions                                |       | 6,203          |       |
| Cash Payments                            |       | (4,523         | )          |
| Liability as of  September 30, 2008 |       | $              | 1,680      |   |

 

DerivativeFinancial Instruments:   The Company’s use of derivative financialinstruments is limited to foreign exchange forward and option contracts used tohedge significant contract sales, purchase Commitments and investments that aredenominated in currencies other than the functional currency of the subsidiaryresponsible for the commitment and to hedge net advances to foreignsubsidiaries.  The purpose of the Company’sforeign currency hedging activities is to fix the dollar value of specificcommitments, investments, payments to foreign vendors, and the value of foreigncurrency denominated receipts from customers. At September 30, 2008, theCompany had foreign exchange contracts with a notional value of $135.6 millionoutstanding.

 

43

----

 

CUBICCORPORATION

 

NOTESTO CONSOLIDATED FINANCIAL STATEMENTS—Continued

 

NOTE1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES—Continued

 

The Company accountsfor derivatives pursuant to SFAS 133, *Accountingfor Derivative Instruments and Hedging Activities*, as amended. Thisstandard requires that all derivative instruments be recognized in the financialstatements and measured at fair value regardless of the purpose or intent forholding them. The classification of gains and losses resulting from changes inthe fair values of derivatives is dependent on the intended use of thederivative and its resulting designation. The change in fair value of the ineffectiveportion of a hedge, and changes in fair values of derivatives that are notconsidered highly effective hedges are immediately recognized in earnings. Ifthe derivative is designated as a fair value hedge, the changes in theestimated fair value of the derivative and the underlying hedged item arerecognized in earnings. If the derivative is designated as a cash flow hedge,the effective portions of changes in the fair value of the derivative arerecorded in other comprehensive income and are subsequently recognized inearnings when the hedged item affects earnings. Ineffectiveness between thechange in fair value of the derivatives and the change in fair value of hedgeditems was immaterial for the years ended September 30, 2008, 2007 and2006.

 

New AccountingStandards:  In July 2006, theFinancial Accounting Standards Board (FASB) issued Interpretation No. 48, *Accounting for Uncertainty in Income Taxes*(FIN48), which was effective for the Company on October 1, 2007. The purposeof FIN 48 is to clarify and set forth consistent rules for accounting foruncertain tax positions in accordance with SFAS 109, *Accounting for Income Taxes*. The cumulative effect ofapplying the provisions of this interpretation are required to be reportedseparately as an adjustment to the opening balance of retained earnings in theyear of adoption. The effect of adopting FIN 48 on the Company’s financial conditionat September 30, 2008 has been included in the accompanying consolidatedfinancial statements. See Note 8 for further discussion of the effect ofadopting FIN 48 on the Company’s consolidated financial statements.

 

In September 2006,the FASB issued SFAS No. 157, *Fair Value Measurements*,effective**for financial statements issued forfiscal years beginning after November 15, 2007 and interim periods withinthose fiscal years, which for the Company is the quarter ending December 31,2008. SFAS 157 defines fair value, establishes a framework and gives guidanceregarding the methods used for measuring fair value, and expands disclosuresabout fair value measurements. Management does not expect that the adoption ofSFAS 157 will have a material impact on the Company’s results of operations,financial position or cash flows.

 

In February 2007,the FASB issued SFAS No. 159, *The Fair Value Option forFinancial Assets and Financial Liabilities – Including an Amendment of FASBStatement No. 115*, effective**for financialstatements issued for fiscal years beginning after November 15, 2007 andinterim periods within those fiscal years, which for the Company is the quarterending December 31, 2008. This statement permits an entity to choose tomeasure many financial instruments and certain other items at fair value atspecified election dates. Subsequent unrealized gains and losses on items forwhich the fair value option has been elected will be reported in earnings.Management does not expect that the adoption of SFAS 159 will have a materialimpact on the Company’s results of operations, financial position or cashflows.

 

InDecember 2007 the FASB issued SFAS No. 141(R),*BusinessCombinations,* effective for fiscalyears beginning on or after December 15, 2008, which for the Company isthe fiscal year beginning October 1, 2009. This statement applies to alltransactions or other events in which an entity obtains control of one or morebusinesses. This statement applies to all business entities, including mutualentities that previously used the pooling-of-interests method of accounting forsome business combinations. Management does not expect that the adoption of SFAS 141(R) willhave a material impact on the Company’s results of operations, financialposition or cash flows.

 

44

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CUBICCORPORATION

 

NOTESTO CONSOLIDATED FINANCIAL STATEMENTS—Continued

 

NOTE1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES—Continued

 

In March 2008 the FASB issued SFAS No. 161,***Disclosures about Derivative Instruments and HedgingActivities—an amendment of FASB Statement No. 133*, effective for interim periods beginning after November 15, 2008,which for the Company is the quarter ending March 31, 2009. This statementrequires enhanced disclosures about an entity’s financial position, financialperformance, and cash flows. The statement requires that objectives for usingderivative instruments be disclosed in terms of underlying risks and accountingdesignation. Managementdoes not expect that the adoption of SFAS 161 will have a material impact onthe Company’s results of operations, financial position or cash flows.

 

Use of Estimates: The preparation of financial statements in conformity with U.S.generally accepted accounting principles requires management to make estimatesand assumptions that affect the amounts reported in the financial statementsand accompanying notes. Significant estimates include the estimated total costsat completion of the Company’s long-term contracts, estimated discounted cashflows of reporting units used for goodwill impairment testing, and theestimated rates of return and discount rates related to the Company’s definedbenefit pension plans. Actual results could differ from those estimates.

 

Risks and Uncertainties: The Company is subject to the normal risks and uncertainties ofperforming large, multiyear, often fixed-price contracts. In addition, theCompany is subject to audit of incurred costs related to many of its U.S. Governmentcontracts. These audits could produce different results than the Company hasestimated; however, the Company’s experience has been that its costs areacceptable to the government.

 

NOTE 2—ACQUISITION

 

On July 29,2008 the Company acquired all outstanding capital stock from the five shareholdersof the privately-held Omega Training Group, Inc., headquartered inColumbus, Georgia.  The purchase was for$61.0 million in cash which was funded from existing cash reserves.  Cashconsideration paid including costs of the acquisition, net of cash acquired, asof September 30, 2008 totaled $53.8 million.  The Company’s additional $6.1 millionobligation in accordance with the agreement is included in other currentliabilities at September 30, 2008, and has been subsequently paid. Omegaprovides training, testing, analysis, logistics and staffing services to U.S.Army locations at the U.S. Army Infantry School at Fort Benning, Fort Bliss,Fort Jackson and Fort Hood.  None of these locations are significantcustomers of the Company’s defense segment. Founded in 1990, Omega now has 790 employees. Omega will be managedwithin the Company’s Mission Support Services business.

 

Thefollowing table summarizes the allocation of the purchase price for Omega (inmillions):

 
| Goodwill                |   | $    | 27.0   |   |
|-------------------------|--------|------|--------|--------|
| Trade name              |   | 2.8  |   |
| Customer  relationships |   | 14.7 |   |
| Backlog                 |   | 2.2  |   |
| Net assets  assumed     |   | 14.3 |   |
| Total                   |   | $    | 61.0   |   |

 

Theintangible assets which include trade name, customer relationships, and backloghave a weighted average useful life of 6 years from the date of acquisition.These intangible assets are included in “Miscellaneous other assets” on theConsolidated Balance sheets. Management expects the purchased intangibles andgoodwill to be deductible in its tax returns over a 15 year period, which willgenerate deferred tax liabilities to the extent the deductions exceed bookexpense. The operations and assets of Omega for the two month period from July 29,2008 to September 30, 2008 are included in the defense segment.

 

45

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CUBICCORPORATION

 

NOTESTO CONSOLIDATED FINANCIAL STATEMENTS—Continued

 

NOTE 3—INVESTMENTS INVARIABLE INTEREST ENTITIES

 

TheCompany was party to a 50/50 joint venture arrangement with the U.S. subsidiaryof Rafael Armament Development Authority Ltd. (Rafael), an Israeli company, tomanufacture certain of their products for sale to the U.S. and Israeli defenseforces. During thefourth quarter of fiscal year 2008, the Company sold its interest in the jointventure arrangement to Rafael for approximately $1.8 million, resulting in again before applicable income taxes of $1.2 million, which is included in “Gainon sale of assets” on the Consolidated Statements of Income.  The joint venture generatedsales of $8.3 million, $6.4 million, and $1.0 million in 2008, 2007 and 2006,respectively, and generated operating income of $0.4 million in 2008 andoperating losses of $1.4 million and $1.9 million in 2007 and 2006,respectively.

 

Under the provisions of FASB Interpretation No. 46 “*Consolidation of Variable Interest Entities,*”(FIN46) the Company consolidated the above joint venture, as it was the primarybeneficiary of the joint venture arrangement prior to its sale. Minorityinterest in the net income and loss from this business is reflected inconsolidated income.

 

The Company owns 37.5% ofthe common stock of Transaction Systems Limited (TranSys), a special-purposecompany formed in the United Kingdom to bid on a contract called “PRESTIGE”(Procurement of Revenue Services, Ticketing, Information, Gates andElectronics), which outsourced most of the functions of the Transport forLondon (TfL) fare collection system for a period of up to seventeen years. In August 1998,TranSys was awarded the contract and began operations. Cubic and the other37.5% shareholder participate in the PRESTIGE contract solely throughsubcontracts from TranSys. All of the work to be performed by TranSys issubcontracted to the two 37.5% shareholders and the arrangement provides forthe pass-through of virtually all revenues from TfL to the two shareholders. Asa result, TranSys has operated on a break-even basis and is expected tocontinue to do so. If TranSys were to eventually generate a net income or loss,the shareholders would share in this income or loss in accordance with theirpercentage ownership in TranSys. The Company’s investment in TranSys isimmaterial. TranSys is considered a variable interest entity under theprovisions of FIN 46; however, the Company does not consolidate TranSys, as itis not considered the primary beneficiary as defined in FIN 46.

 

In August 2008, TfLnotified TranSys that they will be terminating the PRESTIGE fare collectionsystem contract as of August 2010 in accordance with the early terminationprovision of the contract. As a result of this termination for convenience,upon completion if the contract in 2010, the operations of TranSys will cease.

 

Financing for the projectwas provided by a syndicate of banks which participated in creating the project’sfinancial structure. Debt servicing began in 2003 and will continue until theend of the contract in August 2010, at which time TfL is obligated to payTranSys an amount sufficient to repay the loan, subject to a possible withhold,as described below. This debt is guaranteed by TfL and is nonrecourse to theshareholders of TranSys.

 

Thecontract termination notice triggers a requirement for TranSys to engage anindependent engineer to produce a report on the state of the assets associatedwith the PRESTIGE system. The engineer has to deliver a report eleven monthsbefore the end of the contract, stating whether, in their opinion, the farecollection system assets are able to pass a “Performance Test” for a period oftwo years beyond the contract termination. The Performance Test requires theassets to perform at contractual minimum levels with broadly the same level ofmaintenance as that performed under the contract. If the engineer determinesthat the assets may fail the Performance Test then TranSys and itssubcontractors have an eleven month period to carry out the necessaryremediation of the assets.

 

46

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CUBICCORPORATION

 

NOTESTO CONSOLIDATED FINANCIAL STATEMENTS—Continued

 

NOTE 3—INVESTMENTS INVARIABLE INTEREST ENTITIES—Continued

 

Followingthe termination of the contract in August 2010, the same engineer willdeliver a “Supplementary Report” which is a follow up assessment to take intoaccount the remediation efforts of TranSys and its subcontractors, and to givean opinion on the remaining level of remediation work required in order toallow the system to pass the Performance Test for the two year period. Thecontract allows TfL to withhold an amount up to approximately £40 million(currently approximately $60 million) from its final payment to TranSys pendingthe delivery of the Supplementary Report and the completion of any remediationwork identified in the report. This process is not expected to take longer thansix months and TfL would be required to pay interest on any funds withheld.

 

TranSysis required to repay the banks in August 2010 and, to the extent thatthere is a funding shortfall in TranSys because of a withhold by TfL, the 37.5%shareholders are each required to provide TranSys with 50% of the cash requiredto fully repay the debt until the funds are returned to TranSys by TfL, atwhich time the shareholders would be repaid by TranSys. While there is thepossibility that TfL will withhold some amount from TranSys upon contracttermination, Cubic management does not believe this will be necessary. Inrecent years the fare collection system has consistently exceeded thecontractual performance levels and Cubic management believes that sufficientcosts have been included in its estimated costs to complete the contract tocontinue this level of performance for the required period. In addition, sinceCubic has been selected as the successor contractor to the PRESTIGE contract,management believes TfL will have no reason to withhold funds to assure anyrequired remediation will be completed.

 

The Company has providedcertain performance guarantees to various parties related to the PRESTIGEcontract and TranSys, including TfL, the banks and the TranSys shareholders.The other TranSys shareholders have provided similar performance guarantees tothe same parties and to Cubic.

 

Summarized unauditedfinancial information for TranSys is as follows:

 
| **September 30,**                           | ** ** | **2008**               | ** ** | **2007** | ** ** |
|--------------------------------------------------|------------|------------------------|------------|----------|------------|
| ** **                                       | ** ** | **(in millions)** | ** ** |
| **Balance Sheets:**                              |       |                   |       |     |       |
| Cash                                             |       | $                      | 43.7       |     | $          | 66.1 |   |
| Other current assets                             |       | 116.3                  |       | 121.4    |       |
| Noncurrent unbilled contract accounts receivable |       | 171.6                  |       | 222.5    |       |
| Total Assets                                     |       | $                      | 331.6      |     | $          | 410.0 |   |
|                                             |       |                   |       |     |       |
| Current liabilities                              |       | $                      | 33.9       |     | $          | 66.4 |   |
| Long-term debt                                   |       | 297.7                  |       | 343.6    |       |
| Equity                                           |       | —                 |       | —   |       |
| Total Liabilities and Equity                     |       | $                      | 331.6      |     | $          | 410.0 |   |
|                                             |       |                   |       |     |       |   |   |
| **Years ended September 30,**               | ** ** | **2008**               | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                       | ** ** | **(in millions )**     | ** ** |
| **Statement  of Operations:**                    |       |                   |       |     |       |   |   |
| Sales                                            |       | $                      | 215.3      |     | $          | 210.8 |   | $ | 118.6 |   |
| Operating profit                                 |       | $                      | —     |     | $          | — |   | $ | — |   |
| Net income                                       |       | $                      | —     |     | $          | — |   | $ | — |   |

 

47

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CUBICCORPORATION

 

NOTESTO CONSOLIDATED FINANCIAL STATEMENTS—Continued

 

NOTE 4—ACCOUNTSRECEIVABLE

 

The components ofaccounts receivable under long-term contracts are as follows:

 
| **September 30,**                                                       | ** ** | **2008**            | ** ** | **2007** | ** ** |
|------------------------------------------------------------------------------|------------|---------------------|------------|----------|------------|
| ** **                                                                   | ** ** | **(in thousands )** | ** ** |
| U.S. Government  Contracts:                                                  |       |                |       |     |       |
| Amounts billed                                                               |       | $                   | 60,016     |     | $          | 55,362 |   |
| Recoverable  costs and accrued profits on progress completed—not billed |       | 50,600              |       | 61,620   |       |
|                                                                         |       | 110,616             |       | 116,982  |       |
| Commercial  Customers:                                                       |       |                |       |     |       |
| Amounts billed                                                               |       | 47,209              |       | 45,692   |       |
| Recoverable  costs and accrued profits on progress completed—not billed |       | 126,853             |       | 151,768  |       |
|                                                                         |       | 174,062             |       | 197,460  |       |
|                                                                         |       | 284,678             |       | 314,442  |       |
| Less unbilled  amounts not currently due—commercial customers           |       | (19,930             | )          | (16,650  | )          |
|                                                                         |       | $                   | 264,748    |     | $          | 297,792 |   |

 

A portion of recoverablecosts and accrued profits on progress completed is billable under progress paymentprovisions of the related contracts. The remainder of these amounts is billableupon delivery of products or furnishing of services, with an immaterial amountsubject to retainage provisions of the contracts.  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 2009.

 

NOTE 5—INVENTORIES

 

Inventories areclassified as follows:

 
| **September 30,**                                           | ** ** | **2008**                | ** ** | **2007** | ** ** |
|------------------------------------------------------------------|------------|-------------------------|------------|----------|------------|
| ** **                                                       | ** ** | **(in thousands)** | ** ** |
| ** **                                                       | ** ** | ** **              | ** ** |
| Finished  products                                               |       | $                       | 172        |     | $          | 240 |   |
| Work in process  and inventoried costs under long-term contracts |       | 64,179                  |       | 25,005   |       |
| Customer  advances                                               |       | (20,783                 | )          | —   |       |
| Materials and  purchased parts                                   |       | 1,550                   |       | 2,097    |       |
|                                                             |       | $                       | 45,118     |     | $          | 27,342 |   |

 

AtSeptember 30, 2008 and 2007, work in process and inventoried costs underlong-term contracts included approximately $1.6 million and $8.4 million,respectively, in costs incurred outside the scope of work on several contractsin the defense segment. Management believes it is probable these costs, plus aprofit margin, will be recovered under contract change orders within the nextyear. $5.2 million of the September 30, 2007 balance related to a contractclaim with the U.S. Navy for which a contract modification was received in November 2008and is, therefore, no longer at risk.

 

48

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CUBIC CORPORATION

 

NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS—Continued

 

NOTE 6—FINANCINGARRANGEMENTS

 

Long-term debt consistsof the following:

 
| **September 30,**                                                                                                                                                                          | ** ** | **2008**                | ** ** | **2007** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|----------|------------|
| ** **                                                                                                                                                                                      | ** ** | **(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. |       | $                       | 24,000     |     | $          | 28,000 |   |
|                                                                                                                                                                                            |       |                    |       |     |       |   |   |
| Unsecured note  payable to an insurance company, with annual principal payments of $1,428,571 due in November. Interest at 6.11% is  payable semiannually in November and May.             |       | 1,429                   |       | 2,857    |       |
|                                                                                                                                                                                            |       |                    |       |     |       |
| Mortgage note  from a UK financial institution, with quarterly installments of principal and  interest at 6.5%                                                                                  |       | 6,316                   |       | 7,980    |       |
|                                                                                                                                                                                            |       |                    |       |     |       |
|                                                                                                                                                                                            |       | 31,745                  |       | 38,837   |       |
| Less current  portion                                                                                                                                                                           |       | (6,045                  | )          | (6,138   | )          |
|                                                                                                                                                                                            |       |                    |       |     |       |
|                                                                                                                                                                                            |       | $                       | 25,700     |     | $          | 32,699 |   |

 

The terms of the notespayable and other financial instruments include provisions that require and/orlimit, among other financial ratios and measurements, the permitted levels of workingcapital, debt and tangible net worth and coverage of fixed charges. The Companyhas also provided certain performance guarantees to various parties related tothe PRESTIGE contract and the TranSys arrangement. As consideration for theperformance guarantee, the Company has agreed to certain financial covenantsincluding limits on working capital, debt, tangible net worth and cash flowcoverage. At September 30, 2008, the most restrictive covenant under theseagreements leaves consolidated retained earnings of $170 million available forthe payment of dividends to shareholders, purchases of the Company’s commonstock and other charges to shareholders’ equity. To date, there have been nocovenant violations.

 

The Company maintains ashort-term borrowing arrangement totaling 6 million British pounds (equivalentto approximately $10.7 million) with a U.K. financial institution to help meetthe short-term working capital requirements of its subsidiary, CubicTransportation Systems Ltd. Any outstanding balances are guaranteed by CubicCorporation, are repayable on demand, and bear interest at the bank’s baserate, as defined, plus one percent. At September 30, 2008, no amounts wereoutstanding under this borrowing arrangement.

 

The Company maintains ashort-term borrowing arrangement in New Zealand totaling $0.5 million NewZealand dollars (equivalent to approximately $0.3 million) to help meet theshort-term working capital requirements of its subsidiary in that country.  At September 30, 2008, no amounts wereoutstanding under this borrowing arrangement.

 

49

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CUBIC CORPORATION

 

NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS—Continued

 

NOTE 6—FINANCINGARRANGEMENTS—Continued

 

The Company has a $150 million revolving line of credit arrangementwith a group of U.S. banks which expires in March 2010. Commitment feesassociated with this financing arrangement are 0.15% of the unutilized balanceper annum. As of September 30, 2008 the Company had no short-term debt outstandingunder this line of credit and $24.1 million in outstanding letters of credit.

 

Maturities of long-termdebt for each of the five years in the period ending September 30, 2013,are as follows: 2009 – $6.0 million; 2010 – $4.6 million; 2011 – $4.6 million; 2012 – $4.6 million; 2013 –$4.6 million.

 

Interest paid amounted to$2.8 million, $3.6 million, and $4.7 million in 2008, 2007 and 2006,respectively.

 

As of September 30,2008 the Company had letters of credit and bank guarantees outstanding totaling$74.5 million, which guarantee either the Company’s performance or customeradvances under certain contracts. In addition, the Company had financialletters of credit outstanding totaling $6 million as of September 30,2008, which primarily guarantee the Company’s payment of certain self-insuredliabilities. The Company has never had a drawing on a letter of creditinstrument, nor are any anticipated; therefore, the fair value of theseinstruments is estimated to be zero.

 

The Company’sself-insurance arrangements are limited to certain workers’ compensation plans,automobile liability, and product liability claims primarily related to abusiness the Company sold in 1993. Under these arrangements, the Companyself-insures only up to the amount of a specified deductible for eachclaim.  Self-insurance liabilitiesincluded in other current liabilities on the balance sheet amounted to $5.4million and $3.3 million as of September 30, 2008 and 2007, respectively.

 

NOTE 7—COMMITMENTS

 

The Company leases certainoffice, manufacturing and warehouse space, and miscellaneous computer and otheroffice equipment under noncancelable operating leases expiring in various yearsthrough 2018.  These leases, some ofwhich may be renewed for periods up to 10 years, generally require the lesseeto pay all maintenance, insurance and property taxes. Several leases aresubject to periodic adjustment based on price indices or cost increases. Rentalexpense, net of sublease income, for all operating leases amounted to $6.2 million,$6.7 million, and $6.9 million in 2008, 2007 and 2006, respectively.

 

Future minimum payments,net of minimum sublease income, under noncancelable operating leases withinitial terms of one year or more consist of the following at September 30,2008 (in thousands):

 
| 2009       |   | $     | 5,573  |   |
|------------|--------|-------|--------|--------|
| 2010       |   | 3,462 |   |
| 2011       |   | 2,753 |   |
| 2012       |   | 2,145 |   |
| 2013       |   | 825   |   |
| Thereafter |   | 339   |   |
|       |   | $     | 15,097 |   |

 

50

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CUBIC CORPORATION

 

NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS—Continued

 

NOTE 8—INCOME TAXES

 

Significant components ofthe provision for income taxes are as follows:

 
| **Years ended September 30,** | ** ** | **2008**                | ** ** | **2007** | ** ** | **2006** | ** ** |
|----------------------------------------------|------------|-------------------------|------------|----------|------------|----------|------------|
| ** **                                   | ** ** | **(in thousands)** | ** ** |
| Current:                                     |       |                    |       |     |       |     |       |
| Federal                                      |       | $                       | 8,474      |     | $          | 9,695    |       | $ | 4,623 |   |
| State                                        |       | 2,063                   |       | 2,793    |       | 1,526    |       |
| Foreign                                      |       | 16,051                  |       | 10,429   |       | 5,533    |       |
| Total current                                |       | 26,588                  |       | 22,917   |       | 11,682   |       |
|                                         |       |                    |       |     |       |     |       |
| Deferred  (credit):                          |       |                    |       |     |       |     |       |
| Federal                                      |       | (5,440                  | )          | 670      |       | (594     | )          |
| State                                        |       | (1,078                  | )          | 352      |       | 325      |       |
| Foreign                                      |       | 315                     |       | (277     | )          | 783      |       |
| Total deferred                               |       | (6,203                  | )          | 745      |       | 514      |       |
| Total income tax  expense                    |       | $                       | 20,385     |     | $          | 23,662   |       | $ | 12,196 |   |

 

Deferred tax assets andliabilities are determined based on differences between financial reporting andtax bases of assets and liabilities, and are measured using the enacted taxrates and laws that will be in effect when the differences are expected toreverse. Significant components of the Company’s deferred tax assets andliabilities are as follows:

 
| **September 30,**                                  | ** ** | **2008**                | ** ** | **2007** | ** ** |
|---------------------------------------------------------|------------|-------------------------|------------|----------|------------|
| ** **                                              | ** ** | **(in thousands)** | ** ** |
| Deferred tax  assets:                                   |       |                    |       |     |       |
| Accrued employee  benefits                              |       | $                       | 9,796      |     | $          | 7,608 |   |
| Allowance for  doubtful accounts                        |       | 1,833                   |       | 1,896    |       |
| Long-term  contracts and inventory valuation reductions |       | 14,185                  |       | 8,401    |       |
| Allowances for  loss contingencies                      |       | 4,506                   |       | 4,257    |       |
| Deferred  compensation                                  |       | 3,145                   |       | 3,205    |       |
| Book over tax  depreciation                             |       | 2,295                   |       | 2,155    |       |
| Adjustment to  pension liability                        |       | 4,003                   |       | —   |       |
| Other                                                   |       | 1,498                   |       | —   |       |
| Deferred tax  assets                                    |       | 41,261                  |       | 27,522   |       |
|                                                    |       |                    |       |     |       |
| Deferred tax  liabilities:                              |       |                    |       |     |       |
| Adjustment to  pension liability                        |       | —                  |       | 2,665    |       |
| Amortization of  goodwill and intangibles               |       | 3,726                   |       | 2,972    |       |
| Prepaid expenses                                        |       | 2,007                   |       | 1,925    |       |
| State taxes                                             |       | 1,316                   |       | 975      |       |
| Other                                                   |       | 2,499                   |       | 298      |       |
| Deferred tax  liabilities                               |       | 9,548                   |       | 8,835    |       |
| Net deferred tax  asset                                 |       | $                       | 31,713     |     | $          | 18,687 |   |

 

51

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CUBIC CORPORATION

 

NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS—Continued

 

NOTE 8—INCOMETAXES—Continued

 

The reconciliation ofincome tax computed at the U.S. federal statutory tax rate to income taxexpense is as follows:

 
| **Years ended September 30,**       | ** ** | **2008**                | ** ** | **2007** | ** ** | **2006** | ** ** |
|----------------------------------------------------|------------|-------------------------|------------|----------|------------|----------|------------|
| ** **                                         | ** ** | **(in thousands)** | ** ** |
|                                               |       |                    |       |     |       |     |       |
| Tax at federal  statutory rate                     |       | $                       | 20,034     |     | $          | 22,837   |       | $ | 12,715 |   |
| State income  taxes, net of federal tax effect     |       | 640                     |       | 2,044    |       | 1,203    |       |
| Income exclusion  on export sales                  |       | —                  |       | (192     | )          | (727     | )          |
| Nondeductible  expenses                            |       | 152                     |       | 157      |       | 292      |       |
| Reversal of  reserve accrued for tax contingencies |       | (1,205                  | )          | (911     | )          | (1,060   | )          |
| Tax effect from  foreign earnings repatriation     |       | 3,856                   |       | 2,626    |       | 1,660    |       |
| Tax effect from  foreign subsidiaries              |       | (2,651                  | )          | (1,368   | )          | (866     | )          |
| Tax credits and  other                             |       | (441                    | )          | (1,531   | )          | (1,021   | )          |
|                                               |       | $                       | 20,385     |     | $          | 23,662   |       | $ | 12,196 |   |

 

TheCompany is subject to ongoing audits from various taxing authorities in thejurisdictions in which it does business. As of September 30, 2008, the Company’s open tax years insignificant jurisdictions include 2005-2008 in both the U.S. and the U.K. TheCompany believes it has adequately provided for uncertain tax issues not yetresolved with federal, state and foreign tax authorities. Although notprobable, the most adverse resolution of these issues could result inadditional charges to earnings in future periods. Based upon a consideration ofall relevant facts and circumstances, the company does not believe the ultimateresolution of uncertain tax issues for all open tax periods will have amaterially adverse effect upon its results of operations or financialcondition. As of September 30, 2008 and 2007 the Company had income taxreserves of $6.3 million and $5.4 million, respectively, included inNon-current Income Taxes Payable at September 30, 2008, and Current IncomeTaxes Payable at September 30, 2007.

 

Asindicated in the table above, in 2008, 2007 and 2006 the Company was able toreverse $1.2 million, $0.9 million and $1.1 million, respectively, of taxreserves established in previous years due to the resolution of uncertain taxissues.

 

TheCompany made income tax payments, net of refunds, totaling $18.2 million, $26.2million and $11.6 million in 2008, 2007 and 2006, respectively.

 

Income before incometaxes includes the following components:

 
| **Years ended September 30,** | ** ** | **2008**                | ** ** | **2007** | ** ** | **2006** | ** ** |
|----------------------------------------------|------------|-------------------------|------------|----------|------------|----------|------------|
| ** **                                   | ** ** | **(in thousands)** | ** ** |
|                                         |       |                    |       |     |       |     |       |
| United States                                |       | $                       | 4,920      |     | $          | 33,412   |       | $ | 17,346 |   |
| Foreign                                      |       | 52,319                  |       | 31,836   |       | 18,983   |       |
| Total                                        |       | $                       | 57,239     |     | $          | 65,248   |       | $ | 36,329 |   |

 

52

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CUBIC CORPORATION

 

NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS—Continued

 

NOTE 8—INCOMETAXES—Continued

 

Management evaluates theCompany’s capital requirements in its foreign subsidiaries on an annual basisto determine what level of capital is needed for the long-term operations ofthe businesses. U.S. taxes are provided on the amount of capital that isdetermined to be in excess of the long-term requirements of the business andis, therefore, available for distribution. In 2008, management determined that 11million British Pounds ($21.7 million) was excess capital in the U.K. and 7million New Zealand Dollars ($5.0 million) was excess capital in New Zealandand paid dividends of those amounts to the U.S. parent company in 2008. U.S.taxes provided on these dividends amounted to approximately $3.9 million in2008. The remainder of the capital in the Company’s foreign operations isconsidered indefinitely reinvested; therefore, no additional amount for taxesdue upon repatriation has been provided.

 

Undistributed earnings ofall the Company’s foreign subsidiaries amounted to approximately $52.4 millionat September 30, 2008. Those earnings are considered to be indefinitelyreinvested, and accordingly, no provision for U.S. federal and state incometaxes has been provided thereon. Upon distribution of those earnings in theform of dividends or otherwise, the Company would be subject to both U.S.income taxes and withholding taxes payable to the foreign countries, but wouldalso be able to offset unrecognized foreign tax credit carryforwards.Determination of the total amount of unrecognized deferred U.S. income taxliability is not practicable because of the complexities associated with itshypothetical calculation.

 

Effective October 1,2007, the Company adopted FASB Interpretation No. 48, Accounting forUncertainty in Income Taxes (FIN 48). FIN 48 prescribes a more-likely-than-notthreshold for financial statement recognition and measurement of a tax positiontaken or expected to be taken in a tax return. This interpretation alsoprovides guidance in de-recognition of income tax assets and liabilities,classification of current and deferred income tax assets and liabilities,accounting for interest and penalties associated with tax positions, accountingfor income taxes in interim periods and income tax disclosures. The cumulativeeffects of applying this interpretation were to increase non-current taxliabilities by $5.0 million, decrease retained earnings by $2.5 million andincrease net deferred income tax assets by $2.5 million as of October 1,2007.

 

TheCompany has recorded liabilities for unrecognized tax benefits related topermanent and temporary tax adjustments which totaled $5.8 million at September 30,2008 and $10.0 million at October 1, 2008, after the adjustment to thebeginning balance of retained earnings. The net decrease in the liability of$4.2 million resulted from the following:

 
| **Years ended September 30,**                     | ** ** | **2008**                | ** ** |
|------------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                       | ** ** | **(in thousands)** | ** ** |
|                                                             |       |                    |       |
| Balance at  October 1, 2007                                 |       | $                       | 10,001     |   |
| Increase  (decrease) related to tax positions in prior years     |       |                    |       |
| Recognition of  benefits from change in tax method of accounting |       | (1,577                  | )          |
| Recognition of  benefits from expiration of statutes             |       | (2,673                  | )          |
| Tax postions  related to the current year                        |       | 1,008                   |       |
| Decreases  related to settlements with taxing authoritites       |       | (914                    | )          |
| Balance at  September 30, 2008                              |       | $                       | 5,845      |   |

 

53

----

 

CUBIC CORPORATION

 

NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS—Continued

 

NOTE 8—INCOMETAXES—Continued

 

At September 30,2008, the amount of unrecognized tax benefits from permanent tax adjustmentsthat, if recognized, would affect the effective rate was $2.9 million, and $2.9million would decrease goodwill. Over the next year, the Company does notexpect a significant increase or decrease in the unrecognized tax benefitsrecorded as of September 30, 2008. The amount of net interest andpenalties recognized as a component of income tax expense during the yearsended September 30, 2008, 2007 and 2006 was not material.  Interest and penalties accrued at September 30,2008 amounted to $0.5 million.

 

NOTE 9—PENSION, PROFITSHARING AND OTHER RETIREMENT PLANS

 

The Company has profitsharing and other defined contribution retirement plans that provide benefitsfor most employees in the U.S. An employee is eligible to participate in theseplans after six months to one year of service, and may make additionalcontributions to the plans from their date of hire. These plans provide forfull vesting of benefits over periods from zero to five years. More than halfof the Company contributions to these plans are discretionary with the Board ofDirectors. Company contributions to the plans aggregated $14.2 million, $13.6million and $11.6 million in 2008, 2007 and 2006, respectively.

 

Approximately one-fourthof the Company’s non-union employees in the U.S. are covered by anoncontributory defined benefit pension plan. The Company amended the plan tofreeze plan benefits as of December 31, 2006 (“curtailment”). The effectof the curtailment is that no new benefits will be accrued after that date. Thefinancial impact of this curtailment is reflected in the following disclosures.Approximately one-half of the Company’s European employees are covered by acontributory defined benefit pension plan. The Company’s funding policyprovides that contributions will be at least equal to the minimum amountsmandated by statutory requirements. September 30 is used as themeasurement date for these plans.

 

The unrecognized amountsrecorded in accumulated other comprehensive income will be subsequentlyrecognized as net periodic pension cost, consistent with the Company’shistorical accounting policy for amortizing those amounts. Actuarial gains andlosses that arise in future periods and are not recognized as net periodicpension cost in those periods will be recognized as increases or decreases inother comprehensive income, net of tax, in the period they arise. Actuarialgains and losses recognized in other comprehensive income are adjusted as theyare subsequently recognized as a component of net periodic pension cost.

 

54

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CUBIC CORPORATION

 

NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS—Continued

 

NOTE 9—PENSION, PROFITSHARING AND OTHER RETIREMENT PLANS—Continued

 

The following table setsforth changes in the projected benefit obligation and fair value of plan assetsand the funded status for these defined benefit plans:

 
| **September 30,**                                  | ** ** | **2008**                | ** ** | **2007** | ** ** |
|---------------------------------------------------------|------------|-------------------------|------------|----------|------------|
| ** **                                              | ** ** | **(in thousands)** | ** ** |
| **Change  in benefit obligations:**                     |       |                    |       |     |       |
| Net benefit  obligation at the beginning of the year    |       | $                       | 164,075    |     | $          | 168,500 |   |
| Service cost                                            |       | 3,520                   |       | 5,056    |       |
| Interest cost                                           |       | 9,761                   |       | 9,581    |       |
| Actuarial gain                                          |       | (19,898                 | )          | (21,405  | )          |
| Participant  contributions                              |       | 1,211                   |       | 1,185    |       |
| Gross benefits  paid                                    |       | (5,148                  | )          | (4,584   | )          |
| Foreign currency  exchange rate changes                 |       | (8,081                  | )          | 5,742    |       |
| Net benefit  obligation at the end of the year          |       | 145,440                 |       | 164,075  |       |
|                                                    |       |                    |       |     |       |
| **Change  in plan assets:**                             |       |                    |       |     |       |
| Fair value of  plan assets at the beginning of the year |       | 162,542                 |       | 136,345  |       |
| Actual return on  plan assets                           |       | (24,913                 | )          | 19,209   |       |
| Employer  contributions                                 |       | 3,380                   |       | 6,372    |       |
| Participant  contributions                              |       | 1,211                   |       | 1,185    |       |
| Gross benefits  paid                                    |       | (5,148                  | )          | (4,584   | )          |
| Administrative  expenses                                |       | (809                    | )          | (693     | )          |
| Foreign currency  exchange rate changes                 |       | (7,274                  | )          | 4,711    |       |
| Fair value of  plan assets at the end of the year       |       | 128,989                 |       | 162,545  |       |
|                                                    |       |                    |       |     |       |
| Unfunded status  of the plans                           |       | (16,451                 | )          | (1,530   | )          |
| Unrecognized net  actuarial (gain) loss                 |       | 11,439                  |       | (7,612   | )          |
| Net amount  recognized                                  |       | $                       | (5,012     | )        | $          | (9,142 | ) |
|                                                    |       |                    |       |     |       |
| **Amounts  recognized in Accumulated OCI**              |       |                    |       |     |       |
| Liability  adjustment to OCI                            |       | $                       | (11,439    | )        | $          | 7,612 |   |
| Deferred tax  asset (liability)                         |       | 4,003                   |       | (2,665   | )          |
| Accumulated  other comprehensive income (loss)          |       | $                       | (7,436     | )        | $          | 4,947 |   |

 

55

----

 

CUBIC CORPORATION

 

NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS—Continued

 

NOTE 9—PENSION, PROFITSHARING AND OTHER RETIREMENT PLANS—Continued

 

The accumulated benefitobligation (ABO) for all defined benefit pension plans was approximately $133.6million at September 30, 2008. For the defined benefit pension plan inwhich the ABO was in excess of the fair value of plan assets, the projectedbenefit obligation , ABO and fair value of plan assets were as follows:

 
| **September 30,**          | ** ** | **2008**                | ** ** | **2007** | ** ** |
|---------------------------------|------------|-------------------------|------------|----------|------------|
| ** **                      | ** ** | **(in thousands)** | ** ** |
| Projected  benefit obligation   |       | $                       | 91,988     |     | $          | 102,162 |   |
| Accumulated  benefit obligation |       | 91,988                  |       | 102,162  |       |
| Fair value of  plan assets      |       | 82,534                  |       | 101,816  |       |
|                                 |            |                         |            |          |            |  |  |

 

The components of netperiodic pension cost were as follows:

 
| **Years ended September 30,** | ** ** | **2008**                | ** ** | **2007** | ** ** | **2006** | ** ** |
|----------------------------------------------|------------|-------------------------|------------|----------|------------|----------|------------|
| ** **                                   | ** ** | **(in thousands)** | ** ** |
|                                         |       |                    |       |     |       |     |       |
| Service cost                                 |       | $                       | 3,520      |     | $          | 5,056    |       | $ | 8,041 |   |
| Interest cost                                |       | 9,761                   |       | 9,581    |       | 8,930    |       |
| Expected return  on plan assets              |       | (12,706                 | )          | (11,323  | )          | (9,687   | )          |
| Amortization of:                             |       |                    |       |     |       |     |       |
| Prior service  cost                          |       | —                  |       | 7        |       | 27       |       |
| Actuarial loss                               |       | (243                    | )          | 458      |       | 2,393    |       |
| Curtailment  charge                          |       | —                  |       | —   |       | 131      |       |
| Administrative  expenses                     |       | 112                     |       | 114      |       | 127      |       |
| Net pension cost                             |       | $                       | 444        |     | $          | 3,893    |       | $ | 9,962 |   |

 
| **Years ended September 30,**                                                                      | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|-------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Weighted-average  assumptions used to determine benefit obligation at September 30:                          |       |     |       |     |       |     |       |
| Discount rate                                                                                                     |       | 7.3      | %          | 6.2      | %          | 5.6      | %          |
| Rate of  compensation increase                                                                                    |       | 4.8      | %          | 4.4      | %          | 4.5      | %          |
| Weighted-average  assumptions used to determine net periodic benefit cost for the years ended  September 30: |       |     |       |     |       |     |       |
| Discount rate                                                                                                     |       | 6.2      | %          | 5.6      | %          | 5.4      | %          |
| Expected return  on plan assets                                                                                   |       | 8.0      | %          | 8.1      | %          | 8.2      | %          |
| Rate of  compensation increase                                                                                    |       | 4.4      | %          | 4.5      | %          | 4.5      | %          |

 

56

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CUBIC CORPORATION

 

NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS—Continued

 

NOTE 9—PENSION, PROFITSHARING AND OTHER RETIREMENT PLANS—Continued

 

The Company’s pensionplans weighted average asset allocations by asset category as of September 30were as follows:

 
| ** **         | ** ** | **2008** | ** ** | **2007** | ** ** |
|--------------------|------------|----------|------------|----------|------------|
| Equity  securities |       | 71       | %          | 74       | %          |
| Debt securities    |       | 22       | %          | 21       | %          |
| Real estate        |       | 5        | %          | 4        | %          |
| Other              |       | 2        | %          | 1        | %          |
| 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 benefit security for the plans’ participants, and minimize thenecessity of Company contributions by maintaining a ratio of plan assets toliabilities in excess of 1.0.

 

TheCompany does not involve itself with the day-to-day operations and selectionprocess of individual securities and investments, and, accordingly, has retainedthe professional services of investment management organizations to fulfillthose tasks. The investment management organizations have investment discretionover the assets placed under their management. The Company provides eachinvestment manager with specific investment guidelines relevant to its assetclass. The table below presents the ranges for each major category of the plans’assets at September 30, 2008:

 
| **Asset Category**                     | ** ** | **Allocation  Range** | ** ** |
|---------------------------------------------|------------|-----------------------|------------|
| Equity  securities                          |       | 35% to 65   | %          |
| Debt securities                             |       | 15% to 65   | %          |
| Other, primarily  cash and cash equivalents |       | 0% to 40    | %          |

 

The pension plans held nopositions in Cubic Corporation common stock as of September 30, 2008 and2007.

 

The Company expects tocontribute approximately $3.2 million to its pension plans in 2009.

 

The following pensionbenefit payments, which reflect expected future service, as appropriate, areexpected to be paid (in thousands):

 
| 2009      |   | $6,572 |   |
|-----------|--------|--------|--------|
| 2010      |   | 7,282  |   |
| 2011      |   | 7,742  |   |
| 2012      |   | 8,384  |   |
| 2013      |   | 8,822  |   |
| 2014-2018 |   | 54,212 |   |

 

57

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CUBIC CORPORATION

 

NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS—Continued

 

NOTE 10—LEGAL MATTERS

 

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, thearbitral tribunal awarded the government of Iran $2.8 million, plus simpleinterest at the rate of 12% per annum from September 21, 1991 through May 5,1997. In December 1998, the United States District Court granted a motionby the government of Iran confirming the arbitral award but denied Iran’srequest for additional interest and costs. Both parties have appealed. In October 2004,the 9th Circuit Court of Appeals issued a decision in the case oftwo interveners who are attempting to claim an attachment on the amount thatwas awarded to Iran in the original arbitration. The Court denied one of theintervener’s liens but confirmed the second one’s lien. Iran asked the U.S.Supreme Court to review the 9th Circuit decision and to void theinitial judgment against it. In 2006, the Supreme Court returned the case tothe 9th Circuit for reconsideration, suggesting that the claimedlien cannot be enforced. The Court of Appeal then ruled that the lien was validunder the Terrorism Risk Insurance Act and Iran’s petition for review by theSupreme Court was granted; therefore, while the dispute between Iran and Cubicis on hold in the 9th Circuit the obligation upon Cubic to pay isstayed. Under current United States law and policy, any payment to theRevolutionary Government of Iran must first be licensed by the U.S. government.The Company is unaware of the likelihood of the U.S. government granting such alicense. The Company is continuing to pursue its appeal in the 9thCircuit case against Iran, and management believes that a license from the U.S.government would be required in any case to make payment to or on behalf ofIran. However, in light of the 9th Circuit Court’s decision in therelated intervener’s case, in 2004 the Company established a reserve of $6million for the estimated potential liability and will continue to accrueinterest on this amount until the 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 damages sustained”as well as attorney’s fees. The contract limits liability to the contract valueof $8.2 million, but the customer appears to be attempting to avoid that limitation.In May 2005, the Company filed an answer and general denial andsubsequently filed a verified petition alleging breach of contract and othersubstantive claims, claiming the amount owed under the contract of $4.2million, plus interest and attorney’s fees. Management believes that both thecustomer’s default notice and claim for damages are unsupported and the Companyis 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; therefore, no liability has beenrecorded for the former customer’s claim as of September 30, 2008.However, due to the uncertainty of collecting the outstanding receivablebalance an allowance for doubtful accounts of $4.2 million was established andall costs incurred in the performance of the contract and costs incurredoutside the scope of the contract were expensed in the year ended September 30,2005.

 

58

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CUBIC CORPORATION

 

NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS—Continued

 

NOTE10—LEGAL MATTERS—Continued

 

In June 2005, acompany that Cubic had an alleged agreement with, to potentially bid on aportion of automated fare collection contracts, filed a court claim for breachof contract, fraud, negligent misrepresentation, theft of trade secrets, andother related allegations. The claim seeks $15.0 million in compensatorydamages, punitive damages, disgorgement of profits and a permanentinjunction.  In November 2008 theCompany agreed to settle this claim for a nominal amount.  Documents are expected to be finalized in December 2008.

 

InMay 2007 the Company filed a claim with the U.S. Navy for $6.2 millionarising out of allegedly defective specifications, the late delivery ofgovernment-furnished equipment and the Navy’s attempt to unilaterally imposeadditional contract requirements in connection with a contract whose initialaward value was $31.8 million.  In February 2008, the Navy asserted acounter-claim seeking a $4.1 million reduction in the contract price because itallegedly relaxed certain specifications, provided more government-furnishedequipment than was required and had to revise certain equipment and manualsfurnished by the Company.  In November 2008 a negotiated settlementagreement was reached whereby the Company will receive payment of approximately$4.0 million for its additional costs incurred in performance of the contractand will furnish additional equipment in satisfaction of the customer’srequirements. The settlement also resolves the Navy’s $4.1 millioncounterclaim. In the year ended September 30, 2008, inventoried costsrelated to this claim were reduced to the settlement amount and a provision wasmade for the Company’s remaining obligations arising from the settlementagreement.

 

Fromtime-to-time, agencies of the U.S. and foreign governments may investigatewhether the Company’s operations are being conducted in accordance withapplicable regulatory requirements. Such investigations, whether relating togovernment contracts or conducted for other reasons, could result inadministrative, civil or criminal liabilities, including repayments, fines orpenalties being imposed upon the Company, or could lead to suspension ordebarment from future government contracting. Government investigations often take years to complete and most resultin no adverse action against the Company.

 

TheCompany is not a party to any other material pending proceedings and managementconsiders all other matters to be ordinary proceedings incidental to thebusiness. Management believes the outcome of these proceedings and the proceedingsdescribed above will not have a materially adverse effect on the Company’sfinancial position.

 

NOTE 11—BUSINESS SEGMENTINFORMATION

 

###### Description of the types ofproducts and services from which each reportable segment derives its revenues:

######  

The Company has two primarybusiness segments: transportation systems and defense. The transportationsystems segment designs, produces, installs and services electronic revenuecollection systems for mass transit projects, including railways and buses. Thedefense segment performs work under U.S. and foreign government contractsrelating to electronic defense systems and equipment, computer simulationtraining, development of training doctrine, and field operations andmaintenance. Products include customized range instrumentation and trainingsystems, simulators, communications and surveillance systems, avionics systems,power amplifiers and receivers.

 

###### Measurement of segment profit orloss and segment assets:

######  

The Companyevaluates performance and allocates resources based on total segment operatingprofit or loss. The accounting policies of the reportable segments are the sameas those described in the summary of significant accounting policies.Intersegment sales and transfers are immaterial.

 

59

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CUBIC CORPORATION

 

NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS—Continued

 

NOTE 11—BUSINESS SEGMENTINFORMATION—Continued

 

###### Factors management used to identifythe Company’s reportable segments:

######  

The Company’s reportable segmentsare business units that offer different products and services. The reportablesegments are each managed separately because they develop and manufacturedistinct products with different customer bases.

 

Business segmentfinancial data is as follows:

 
| **Years ended September 30,** | ** ** | **2008**               | ** ** | **2007** | ** ** | **2006** | ** ** |
|----------------------------------------------|------------|------------------------|------------|----------|------------|----------|------------|
| ** **                                   | ** ** | **(in millions)** | ** ** |
| **Sales:**                                   |       |                   |       |     |       |     |       |
| Transportation  systems                      |       | $                      | 272.3      |     | $          | 236.6    |       | $ | 243.9 |   |
| Defense                                      |       | 607.8                  |       | 641.1    |       | 562.8    |       |
| Other                                        |       | 1.0                    |       | 12.2     |       | 14.7     |       |
| Total sales                                  |       | $                      | 881.1      |     | $          | 889.9    |       | $ | 821.4 |   |
|                                         |       |                   |       |     |       |     |       |
| **Operating  income:**                       |       |                   |       |     |       |     |       |
| Transportation  systems                      |       | $                      | 43.0       |     | $          | 20.1     |       | $ | 2.8 |   |
| Defense                                      |       | 18.3                   |       | 44.2     |       | 31.4     |       |
| Restructuring  activity                      |       | (6.2                   | )          | —   |       | —   |       |
| Unallocated  corporate expenses and other    |       | (1.8                   | )          | (2.2     | )          | (3.3     | )          |
| Total operating  income                      |       | $                      | 53.3       |     | $          | 62.1     |       | $ | 30.9 |   |
|                                         |       |                   |       |     |       |     |       |
| **Assets:**                                  |       |                   |       |     |       |     |       |
| Transportation  systems                      |       | $                      | 144.5      |     | $          | 170.6    |       | $ | 207.8 |   |
| Defense                                      |       | 357.2                  |       | 293.1    |       | 255.1    |       |
| Corporate and  other                         |       | 139.6                  |       | 128.9    |       | 85.2     |       |
| Total assets                                 |       | $                      | 641.3      |     | $          | 592.6    |       | $ | 548.1 |   |
|                                         |       |                   |       |     |       |     |       |
| **Depreciation  and amortization:**          |       |                   |       |     |       |     |       |
| Transportation  systems                      |       | $                      | 1.8        |     | $          | 2.2      |       | $ | 2.6 |   |
| Defense                                      |       | 7.4                    |       | 6.1      |       | 5.3      |       |
| Corporate and  other                         |       | 0.5                    |       | 0.5      |       | 0.6      |       |
| Total  depreciation and amortization         |       | $                      | 9.7        |     | $          | 8.8      |       | $ | 8.5 |   |
|                                         |       |                   |       |     |       |     |       |
| **Expenditures  for long-lived assets:**     |       |                   |       |     |       |     |       |
| Transportation  systems                      |       | $                      | 1.0        |     | $          | 1.8      |       | $ | 0.9 |   |
| Defense                                      |       | 4.8                    |       | 4.3      |       | 8.5      |       |
| Corporate and  other                         |       | 2.3                    |       | —   |       | 0.4      |       |
| Total  expenditures for long-lived assets    |       | $                      | 8.1        |     | $          | 6.1      |       | $ | 9.8 |   |

 

60

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CUBIC CORPORATION

 

NOTESTO CONSOLIDATED FINANCIAL STATEMENTS—Continued

 

NOTE 11—BUSINESS SEGMENTINFORMATION—Continued

 
| **Years ended September 30,** | ** ** | **2008**               | ** ** | **2007** | ** ** | **2006** | ** ** |
|----------------------------------------------|------------|------------------------|------------|----------|------------|----------|------------|
| ** **                                   | ** ** | **(in millions)** | ** ** |
| **Geographic  Information:**                 |       |                   |       |     |       |     |       |
| Sales (a):                                   |       |                   |       |     |       |     |       |
| United States                                |       | $                      | 532.3      |     | $          | 606.6    |       | $ | 566.8 |   |
| United Kingdom                               |       | 189.6                  |       | 153.1    |       | 120.2    |       |
| Canada                                       |       | 25.4                   |       | 26.5     |       | 28.6     |       |
| Australia                                    |       | 43.0                   |       | 26.9     |       | 27.3     |       |
| Middle East                                  |       | 37.8                   |       | 17.2     |       | 18.6     |       |
| Far East                                     |       | 38.1                   |       | 43.4     |       | 26.1     |       |
| Other                                        |       | 14.9                   |       | 16.2     |       | 33.8     |       |
| Total sales                                  |       | $                      | 881.1      |     | $          | 889.9    |       | $ | 821.4 |   |

 

----

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

 
| Long-lived  assets, net:      |   |   |   |   |   |   |   |
|-------------------------------|--------|--------|--------|--------|--------|--------|--------|
| United States                 |   | $      | 47.4   |   | $      | 48.0   |   | $ | 48.3 |   |
| United Kingdom                |   | 12.0   |   | 14.1   |   | 12.5   |   |
| Other foreign  countries      |   | 1.9    |   | 2.0    |   | 1.8    |   |
| Total long-lived  assets, net |   | $      | 61.3   |   | $      | 64.1   |   | $ | 62.6 |   |

 

Defense segment salesinclude $477.8 million, $484.4 million and $427.2 million in 2008, 2007 and2006, respectively, of sales to U.S. Government agencies.  Transportation systems sales include $110.7million, $71.4 million, and $49.7 million of sales to TranSys in 2008, 2007 and2006, respectively. No other single customer accounts for 10% or more of theCompany’s revenue.

 

NOTE 12—SUMMARY OFQUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

 

The following is a summaryof the quarterly results of operations for the years ended September 30,2008 and 2007:

### ** **

| ** **            | ** ** | **Quarter Ended**                                             | ** ** |
|-----------------------|------------|--------------------------------------------------------------------|------------|
| ** **            | ** ** | **December 31**                                               | ** ** | **March 31** | ** ** | **June 30** | ** ** | **September 30** | ** ** |
| ** **            | ** ** | **(in thousands, except per share data)** | ** ** |
| Fiscal 2008           |       |                                                               |       |   |   |   |   |   |   |
| Net sales             |       | $                                                                  | 202,722    |   | $ | 210,280 |   | $ | 232,892 |   | $ | 235,241 |   |
| Operating income      |       | 17,088                                                             |       | 13,886 |   | 11,475 |   | 10,815 |   |
| Net income            |       | 10,676                                                             |       | 9,646 |   | 8,478 |   | 8,054 |   |
| Net income per  share |       | 0.40                                                               |       | 0.36 |   | 0.32 |   | 0.30 |   |
|                  |       |                                                               |       |   |   |   |   |   |   |
| Fiscal 2007           |       |                                                               |       |   |   |   |   |   |   |
| Net sales             |       | $                                                                  | 202,935    |   | $ | 230,041 |   | $ | 233,749 |   | $ | 223,145 |   |
| Operating income      |       | 11,691                                                             |       | 17,799 |   | 16,560 |   | 16,048 |   |
| Net income            |       | 8,325                                                              |       | 11,211 |   | 11,177 |   | 10,873 |   |
| Net income per  share |       | 0.31                                                               |       | 0.42 |   | 0.42 |   | 0.41 |   |

 

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**REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

 

The Board of Directors and Stockholders of CubicCorporation

 

Wehave audited the accompanying consolidated balance sheets of Cubic Corporationas of September 30, 2008 and 2007, and the related consolidated statementsof income, changes in shareholders’ equity and cash flows for each of the threeyears in the period ended September 30, 2008. 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 at September 30,2008 and 2007, and the consolidated results of its operations and its cashflows for each of the three years in the period ended September 30, 2008,in conformity with U.S. generally accepted accounting principles.

 

Asdisclosed in Note 9 in the notes to the consolidated financial statements, theCompany adopted Statement of Financial Accounting Standards (SFAS) No. 158,*Employers Accounting for Defined Benefit Pensionsand Other Postretirement Plans*, an amendment to SFAS No. 87,88, 106, and 132(R) during the year ended September 30, 2007.

 

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 of September 30,2008, based on criteria established in Internal Control-Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commissionand our report dated December 2, 2008 expressed an unqualified opinionthereon.
|   |                                             |
|--------|--------------------------------------------------|
|   | /s/   ERNST &  YOUNG LLP |

 

San Diego, CA

December 2,2008

 

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

 

None.

 

**Item 9a. CONTROLSAND PROCEDURES**.

 

***Evaluation of Disclosure Controls andProcedures*** – TheCompany’s management conducted an evaluation, under the supervision and withthe participation 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, 2008. Based on thisevaluation, the Company’s management, including theChief Executive Officer and Chief 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 and evaluatingthe Company’s disclosure controls and procedures, the Company’s managementrecognizes that any controls, no matter how well designed and operated, canprovide only reasonable assurance of achieving the desired control objectives.

 

***Management’s Report on Internal Control over Financial Reporting***

 

Managementis responsible for establishing and maintaining adequate internal control overfinancial reporting for the Company. In order to evaluate the effectiveness ofinternal control over financial reporting, as required by Section 404 ofthe Sarbanes-Oxley Act, management has conducted an assessment, includingtesting, using the criteria in Internal Control — Integrated Framework, issuedby the Committee of Sponsoring Organizations of the Treadway Commission (COSO).The Company’s system of internal control over financial reporting is designedto provide reasonable assurance regarding the reliability of financialreporting and the preparation of financial statements for external purposes inaccordance with generally accepted accounting principles. Because of itsinherent limitations, internal control over financial reporting may not preventor detect misstatements. Also, projections of any evaluation of effectivenessto future periods are subject to the risk that controls may become inadequatebecause of changes in conditions, or that the degree of compliance with thepolicies or procedures may deteriorate.

 

Management’sassessment of and conclusion on the effectiveness of internal control overfinancial reporting did not include the internal controls of Omega TrainingGroup, Inc. (Omega), acquired in the fourth quarter of 2008. Omega isincluded in the consolidated financial statements of Cubic Corporation andconstituted $72.0 million and $9.6 million of total assets and liabilities,respectively, as of September 30, 2008 and $12.6 million and $2.3 millionof total revenues and operating income, respectively, for the fiscal year thenended. Management did not assess the effectiveness of internal control overfinancial reporting at the entity listed above due to the timing of theacquisition.

 

***Changes in Internal Controls Over FinancialReporting*** – Therewere no changes in the Company’s internal control over financial reporting thatoccurred during the fourth fiscal quarter of 2008 that have materiallyaffected, or are reasonably likely to materially affect the Company’s internalcontrol over financial reporting. The Company acquired Omega in the fourthquarter of 2008, as mentioned in the preceding paragraph; however, the Companydoes not believe this acquisition will have a material affect on the Company’sinternal control over financial reporting.

 

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**REPORT OF INDEPENDENT REGISTEREDPUBLIC ACCOUNTING FIRM**

 

TheBoard of Directors and Stockholders of Cubic Corporation

 

Wehave audited Cubic Corporation’s internal control over financial reporting asof September 30, 2008, based on criteria established in InternalControl—Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission (the COSO criteria). Cubic Corporation’smanagement is responsible for maintaining effective internal control overfinancial reporting, and for its assessment of the effectiveness of internalcontrol over financial reporting included in the accompanying Management’sReport on Internal Control over Financial Reporting. Our responsibility is toexpress an opinion on the company’s internal control over financial reportingbased 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, assessing the risk that a material weaknessexists, testing and evaluating the design and operating effectiveness ofinternal control based on the assessed risk, and performing such otherprocedures as we considered necessary in the circumstances. We believe that ouraudit provides a reasonable basis for our opinion.

 

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) pertainto the maintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (2) providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally acceptedaccounting principles, and that receipts and expenditures of the company arebeing made only in accordance with authorizations of management and directorsof the company; and (3) provide reasonable assurance regarding preventionor timely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material 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.

 

Asindicated in the accompanying Management’s Report on Internal Control OverFinancial Reporting, management’s assessment of and conclusion on theeffectiveness of internal control over financial reporting did non include theinternal controls of Omega Training Group, Inc., which is included in the2008 consolidated financial statements of Cubic Corporation and constituted$72.0 million and $9.6 million of total assets and total liabilities,respectively, as of September 30, 2008 and $12.6 million and $1.4 million oftotal revenues and net income, respectively, for the fiscal year then ended.Our audit of internal control over financial reporting of Cubic Corporationalso did not include an evaluation of internal control over financial reportingof the entity listed above.

 

Inour opinion, Cubic Corporation maintained, in all material respects, effectiveinternal control over financial reporting as of September 30, 2008, basedon the COSO criteria.

 

64

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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, 2008 and 2007, and the relatedstatements of income, shareholders’ equity, and cash flows for each of thethree years in the period ended September 30, 2008 of Cubic Corporationand our report dated December 2, 2008 expressed an unqualified opinionthereon.
|                   |                                             |
|------------------------|--------------------------------------------------|
|                   | /s/   ERNST &  YOUNG LLP |
|                   |                                             |
| San  Diego, California |
| December 2,  2008 |

 

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**PART III**

 

**Item 10. DIRECTORSAND EXECUTIVE OFFICERS OF THE REGISTRANT**.

 

Certaininformation regarding directors and executive officers is incorporated hereinby reference from our definitive Proxy Statement, which will be filed no laterthan 30 days prior to the date of the Annual Meeting of Shareholders.

 

The Company hasadopted a code of ethics that applies to its principle executive officer,principle financial officer, and its principle accounting officer. Such code ofethics appears on our web site at:http://www.cubic.com/corp1/invest/governance.html.

 

**Item 11. EXECUTIVECOMPENSATION**.

 

Informationregarding executive compensation is incorporated herein by reference from ourdefinitive Proxy Statement, which will be filed no later than 30 days prior tothe date of the Annual Meeting of Shareholders.

 

**Item 12. SECURITYOWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT**.

 

Informationregarding security ownership of certain beneficial owners and management 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 13. CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS**.

 

Informationregarding certain relationships and related transactions is incorporated hereinby reference from our definitive Proxy Statement, which will be filed no laterthan 30 days prior to the date of the Annual Meeting of Shareholders.

 

**Item 14. PRINCIPALACCOUNTANT FEES AND SERVICES.**

 

Informationregarding principal accountant fees and services 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.

 

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**PART IV**

 

**Item 15. EXHIBITS,FINANCIAL STATEMENT SCHEDULES**

 

(a)           Documents filed as part of thisReport:

 
| (1) | The following  consolidated financial statements of Cubic Corporation, as referenced in Item  8: |
|-----|--------------------------------------------------------------------------------------------------|

 

ConsolidatedBalance Sheets

September 30,2008 and 2007

 

ConsolidatedStatements of Income

Yearsended September 30, 2008, 2007 and 2006

 

ConsolidatedStatements of Changes in Shareholders’ Equity

Yearsended September 30, 2008, 2007 and 2006

 

ConsolidatedStatements of Cash Flows

Yearsended September 30, 2008, 2007 and 2006

 

Notesto Consolidated Financial Statements

September 30,2008

 
| (2) | The following  consolidated financial statement schedules of Cubic Corporation and  subsidiaries, as referenced in Item 15(d): |
|-----|--------------------------------------------------------------------------------------------------------------------------------|

 

Noneare required under the applicable accounting rules and regulations of theSecurities and Exchange Commission.

 

(b)                                 Exhibits:

 
|   | 3.1  |   | Amended and Restated  Certificate of Incorporation. Incorporated by reference from Form 10-Q  for the quarter ended June 30, 2006, file No. 1-8931,  Exhibit 3.1. |
|--------|------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | 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(ii).                              |
|   | 10.1 |   | 2005 Equity Incentive  Plan. Incorporated by reference from Form 10-K filed for the fiscal year  ended September 30, 2005, file No. 1-8931, Exhibit 10.1          |
|   | 10.2 |   | Amended Transition  Protection Plan. Incorporated by reference from Form 10-K filed for the  fiscal year ended September 30, 2007, file No. 1-8931,  Exhibit 10.2 |
|   | 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 |   | Revised Deferred  Compensation Plan. Incorporated by reference to Form 10-Q for the  quarter ended March 31, 2008, file No. 1-8931, Exhibit 10.4                  |
|   | 21.1 |   | List of Subsidiaries                                                                                                                                                                  |
|   | 23.1 |   | Consent of Independent  Registered Accounting Firm.                                                                                                                                   |
|   | 31.1 |   | Section 302  Certifications.                                                                                                                                                     |
|   | 32.1 |   | Section 906  Certifications.                                                                                                                                                     |

 

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**SIGNATURES**

 

Pursuant to therequirements of Sections 13 or 15(d) of the Securities Exchange Act of1934, the Registrant has duly caused this report to be signed on its behalf bythe undersigned, thereunto duly authorized:

 
| (Registrant) | CUBIC  CORPORATION |
|--------------|--------------------|
|         |               |
| *12/2/08*    |               | /s/ Walter J. Zable |   |
| Date         |               | WALTER J. ZABLE,  President |   |

 

Pursuant to therequirements of the Securities Exchange Act of 1934, this report has beensigned below by the following persons on behalf of the Registrant and in thecapacities and on the dates indicated:

 

 
| *12/2/08* |   | /s/ Walter J. Zable                  |   |   |   |   |
|-----------|--------|--------------------------------------|--------|--------|--------|--------|
| Date      |   | WALTER J. ZABLE,                     |   |   |   |   |
|      |   | President, Chief  Executive Officer  |   |   |   |   |
|      |   | and Chairman of the  Board of        |   |   |   |   |
|      |   | Directors                            |   |   |   |   |
|      |   |                                 |   |   |   |   |
| *12/2/08* |   | /s/ Walter C. Zable                  |   |   |   |   |
| Date      |   | WALTER C. ZABLE,                     |   |   |   |   |
|      |   | Vice President and Vice  Chairman    |   |   |   |   |
|      |   | of the Board of  Directors           |   |   |   |   |
|      |   |                                 |   |   |   |   |
| *12/2/08* |   | /s/ Raymond L. deKozan               |   |   |   |   |
| Date      |   | RAYMOND L. deKOZAN,                  |   |   |   |   |
|      |   | Director, Senior Group  Vice         |   |   |   |   |
|      |   | President                            |   |   |   |   |
|      |   |                                 |   |   |   |   |
| *12/2/08* |   | /s/ Raymond E. Peet                  |   |   |   |   |
| Date      |   | RAYMOND E. PEET,                     |   |   |   |   |
|      |   | Director                             |   |   |   |   |
|      |   |                                 |   |   |   |   |
| *12/2/08* |   | /s/ John H. Warner                   |   |   |   |   |
| Date      |   | JOHN H. WARNER,                      |   |   |   |   |
|      |   | Director                             |   |   |   |   |
|      |   |                                 |   |   |   |   |
| *12/2/08* |   | /s/ Robert S. Sullivan               |   |
| Date      |   | ROBERT S. SULLIVAN,                  |   |
|      |   | Director                             |   |
|      |   |                                 |   |
| *12/2/08* |   | /s/ Bruce G. Blakley                 |   |
| Date      |   | BRUCE G. BLAKLEY,                    |   |
|      |   | Director                             |   |
|      |   |                                 |   |
| *12/2/08* |   | /s/ William W. Boyle                 |   |
| Date      |   | WILLIAM W. BOYLE,                    |   |
|      |   | Director, Senior Vice  President and |   |
|      |   | Chief Financial Officer              |   |
|      |   |                                 |   |
| *12/2/08* |   | /s/ Mark A. Harrison                 |   |
| Date      |   | MARK A. HARRISON,                    |   |
|      |   | Vice President and Corporate         |   |
|      |   | Controller (Principal Accounting     |   |
|      |   | Officer)                             |   |

 

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