**UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549**

**FORM 10-K**

**x****                             ****ANNUALREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

**For the Fiscal Year EndedSeptember 30, 2006**

**o****                                ****TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

**For the Transition Periodfrom                 to                 **

**Commission File Number 1-8931**

**CUBIC CORPORATION**

Exact Name of Registrant as Specified in itsCharter

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

 

**9333Balboa AvenueSan Diego, California 92123Telephone (858) 277-6780**

Securities registered pursuant to Section 12(b)of the Act:

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

 

Securities registered pursuant to Section 12(b) of the Act:

**None**

Indicateby check mark if the registrant is a well known seasoned issuer, as defined inRule 405 of the Securities Act.

Yes o      No x    

Indicatedby check mark if the registrant is not required to file reports pursuant toSection 13 or Section 15(d) of the Act.

Yes o      No x    

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

Yes x    No o

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

Yes x    No o

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

Yes x    No o

Indicate by check mark whether the registrant is a shell company (asdefined in Rule 12b-2 of the Act)

Yes o    No x

The aggregate market value of 16,029,954 shares ofvoting stock held by non-affiliates of the registrant was: $383,757,000 as ofMarch 31, 2006, based on the closing stock price on that date.

Number of shares of common stock outstanding as of November 17, 2006including shares held by affiliates is: 26,719,663 (after deducting 8,945,066shares held as treasurystock).

Parts I and III incorporate information byreference from the Registrant’s definitive proxy statement which will be filedno later than 120 days after the close of the Registrant’s year-end, and nolater than 30 days prior to the Annual Shareholders’ Meeting.

**DOCUMENTS INCORPORATED BYREFERENCE:**

Portionsof the Registrant’s Proxy Statement for its 2006 Annual Meeting of Shareholdersto be held on February 20, 2007, are incorporated by reference intoPart III of this Annual Report on Form 10-K.

 

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**PART I**

**Item 1.****    BUSINESS.**

**GENERAL**

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

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

Equipment for use in customizedmilitary range instrumentation, training and applications systems, simulators,communications and surveillance systems, surveillance receivers, poweramplifiers, and avionics systems.

Automated revenue collectionsystems, including contactless smart cards, passenger gates, central computersystems and ticket vending machines for mass transit networks, including railsystems, buses, and parking applications.

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

In 2006, growth in our defense segment slowed to about 4% from the prioryear.  Compared to 2005,  training systems sales were virtually flatand mission support services grew by 2%, while our communications andelectronics business grew by 23% due to new contracts we won last year. Thedefense segment made one small strategic acquisition of a training systemsbusiness during the year; however, we continue to evaluate possible targets forfuture defense-related acquisitions. Transportation systems sales have leveledoff in recent years primarily because of the completion of the initial phase ofthe fare collection system in London in 2003. The business has expanded in otherregions to largely offset the decrease in sales in the U.K

During fiscal year 2006, approximately 52% of our total business wasconducted, either directly or indirectly, with various agencies of the UnitedStates government.  Most of the remainderof our revenue was from local, regional and foreign governments or agencies.

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

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**BUSINESS SEGMENTS**

Information regarding the amounts of revenue, operating profit and lossand identifiable assets attributable to each of our business segments, is setforth in Note 10 to the Consolidated Financial Statements for the year endedSeptember 30, 2006. Additional information regarding the amounts of revenue andoperating profit and loss attributable to major classes of products andservices is set forth in Management’s Discussion and Analysis which follows atItem 7.

**DEFENSE**

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

**Training Systems**

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

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

TSBU’s Land Combat Training involves systems analogous to air ranges forground force training.  TSBU providedturnkey systems to instrument two U.S. Army training centers in past years atFort Polk, LA (Joint Readiness Training Center – JRTC) and Hohenfels, Germany(Combat Maneuver Training Center – CMTC) and is engaged in a multiyear effortto expand capability of the Alaska Training Range.  The unit also built ranges in recent yearsfor the British Army in the U.K. and Canada. TSBU is currently working on similar land combat training centers forCanada, Australia and for customers in the Middle East and Far East. To meetnew customer demand for mobile instrumented training, TSBU has also developed atransportable, deployable system, known as I-HITS, now being fielded by the U.S.Army. In 2005, TSBU was awarded a five-year $72 million IDIQ contract toproduce I-HITS for the U.S. Army.

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

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the U.S. and at our New Zealand-based subsidiary, Oscmar International.  In 2005, Cubic was awarded a 5-year $113million IDIQ contract to produce MILES Individual Weapon System (IWS) kits forthe U. S. Army.

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

**Mission Support Services**

CDA’s Mission Support Business Unit (MSBU), along with the separateForce Modernization Division (FMD), is a leading provider of tacticalknowledge-based services to the U.S. Government and allied nations, with anemphasis on military training.  Ourmission support business consists of approximately 3,300 people at more than100 locations throughout the world.  Ourpersonnel serve with clients in their actual environments and prepare forcesthrough comprehensive training, exercises, education, and operational supportto meet the full scope of their missions, from large scale combat operations,to special operations, peacekeeping, consequence management, and humanitarianassistance operations worldwide.  We alsoplan, prepare, execute and document realistic and focused mission rehearsalexercises (including live and computer-based) as final preparation of forcesprior to their deployment to mission areas. In addition, we provide high level consultation and advisory services tothe governments and militaries of allied nations.  U.S. government service contracts aretypically awarded on a competitive basis with options for multiple years.  In this competitive market, MSBU and FMD areviewed as premier service providers and formidable competitors.  We typically compete as prime contractors tothe government, but also team with other companies depending on the skillsrequired.  Much of our early workcentered on battle command training and simulation, in which militarycommanders are taught to make correct decisions in battle situations.  More recently, the business base has broadenedto include integrated live, virtual, and constructive training support,distance learning, knowledge management, weapons effects modeling, intelligenceanalysis, homeland security training and exercises, and military forcemodernization.

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

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

Cubic initiated and has continued to operate the Korea Battle SimulationCenters (KBSC) since their inception in 1991. KBSC prepare U.S. and allied forces in Korea to deal with situationswhich may develop in their areas of responsibility and include the world’slargest and most complex training event, the annual ULCHI FOCUS LENS exercise.

At the U.S. Army I Corps Battle Simulation Center, Cubic provides thetechnical and operational expertise necessary to support worldwide training,exercises, evaluations, and mission rehearsals for I Corps active and reservecomponent units, the new Stryker brigades, other services, and joint commands.

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Cubic supports the Defense Threat Reduction Agency (DTRA) withtechnology-based engineering and other services necessary to accomplish DTRA’smission of predicting and defeating the effects of chemical, biological,radiological, nuclear and high explosive (CBRNE) weapons.  Cubic supports DTRA with modeling andsimulations to assess and predict the effects of such weapons in combat andother environments. Additionally, Cubic provides comprehensive support to helpplan, manage, and execute DTRA’s worldwide CBRNE exercise program, which trainssenior U.S. and allied civilian and military personnel, first responders, andother users of DTRA products.

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

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

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

**Communications & Electronics**

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

CEBU’s Personnel Locator System (PLS) is standard equipment on U.S.aircraft with a search-rescue mission.  We have continued to receive orders for anupgraded PLS which has been redesigned to interface with all modern search andrescue system standards, thus positioning us for major platform upgradesexpected over the next few years.

CEBU has also begun to successfully leverage its communicationsproducts portfolio to move into larger subsystem and system level programs inthe areas of communications interception and jamming (Electronic Warfare) andcommunications intelligence.  We havebeen awarded contracts by the U.S. Navy and intelligence services for theinitial development of these systems which could evolve to production contractsand potentially lead to new opportunities within these services.

**Raw Materials**:

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

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**Backlog**:

Funded sales backlog of the defense segment at September 30, 2006 was$509 million compared to $476 million at September 30, 2005.  Total backlog, including unfundedcustomer orders, was $763 million at September 30, 2006 compared to $728million at September 30, 2005. Approximately$360 million of the September 30, 2006 total backlog is not expected to becompleted by September 30, 2007.

**Competition**:

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

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

**TRANSPORTATION SYSTEMS**

CubicTransportation Systems (“CTS”) is the leading turnkey solution provider ofautomated fare collection systems for public transport authoritiesworldwide.  We provide a range of serviceand system solutions for the bus, bus rapid transit, light rail, commuter rail,heavy rail, ferry and parking markets. These solutions and services include system design, central computersystems, equipment design and manufacturing, device-level software,integration, test, installation, warranty, maintenance, computer hostingservices, call center services, card management and distribution services,financial clearing and settlement, multi-application support and outsourcingservices.  In addition, CTS designs,develops and manufactures special technology components, such as smart cardreaders and magnetic ticket transports for use within its suite of farecollection equipment consisting of on-bus solutions, access control solutions,vending solutions, retail and card issuing solutions, and mobile inspection andsales solutions.

Overthe years, the transportation segment has been awarded over 400 projects in 40major markets on 5 continents.  Activeprojects include London, 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, andSweden.

Theseprograms provide a base of current business and the potential for additionalfuture business as the systems are expanded. In 1998, Transaction Systems Limited (TranSys), a joint venture companyin which Cubic has a 37.5% ownership, was awarded a contract called “PRESTIGE”to outsource the London Transport fare collection services.  This 17-year contract, now in its ninth year,is the largest automated fare collection contract ever awarded.  Our share of the work, including all contractchange orders to date, exceeds $1 billion over the 17-year life of thecontract.

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**IndustryOverview**

Transportagencies, particularly those based in the U.S., rely heavily on federal, stateand local government for subsidies in capital investments, including newprocurements and/or upgrades of automated fare collection systems.  The average lifecycle for fare collectionsystems is 12 to 15 years.  Procurementstend to follow a long and strict competitive bid process where low price is asignificant factor.

Theautomated fare collection business is a niche market able to sustain only arelatively few number of suppliers. Because of the long life expectancy of these systems and only a fewcompanies able to supply them, there is fierce competition to win these jobs,often resulting in low initial contract profitability.

Advancesin communications, networking and security technologies are enablinginteroperability of multiple modes of transportation within a single networkedsystem as well as interoperability of multiple operators within a singlenetworked system.  As such, there is agrowing 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**:

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

**Backlog**:

Funded sales backlog of the transportation systems segment at September30, 2006 and 2005 amounted to $716 million and $733 million, respectively.Approximately $525 million of the September 30, 2006 total backlog is notexpected to be completed by September 30, 2007.

**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, Scheidt & Bachmann andERG.  In addition, there are many smallerlocal companies, particularly in European and Asian markets.  For large national tenders, it is commonpractice to form consortiums that include, in addition to the fare collectioncompanies noted above, telecommunications, consulting and computer services companiesincluding Keane, Siemens, Accenture, Metropolitan Transit Railway Corporation,Unisys, Computer Sciences Corporation and EDS. These procurement activities are very competitive and require that wehave highly skilled and experienced technical personnel to compete. We believethat our competitive advantages include intermodal and interagency regionalintegration expertise, technical skills, past contract performance, systemsquality and reliability, experience in the industry and long-term customerrelationships.

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**OTHER OPERATIONS**

ConsolidatedConverting Company converts corrugated paper stock into pizza boxes and otherfood related corrugated products.

**Raw Materials**:

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

**Backlog**:

Consolidated Converting Company had little sales backlog at September30, 2006 and 2005. The business does not track sales backlog due to theshort-term conversion of customer orders into sales and the absence oflong-term contracts.

**Competition**:

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

**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 competitive award of acontract to provide the next generation U.S. mobile ground trainingsystem.  Starting in the early 1980’s webuilt sophisticated ground training instrumented facilities for the U.S. and foreignmilitaries.  Our experience andinnovation in this area of training technology was a key factor in the recentaward by the U.S. Army of a five year $72 million IDIQ contract for the firstmobile training facilities known as Initial-Homestation InstrumentationTraining System or “I-HITS”.  These newmobile training facilities will be deployed into combat areas and will utilizethe latest in training technologies. Since the initial U.S. Army award in 2005,we have received four additional awards under this contract for I-HITSsystems.

Inour transportation segment we have had a relationship with the WashingtonMetropolitan Area Transportation Authority (WMATA) for over 30 years, since wefirst implemented their magnetic ticketing system, and have over the yearsinstalled a complete back office system and over 4,000 pieces ofequipment.  In 1999, we upgraded theirsystem with SmarTripÒ, the first contactless smart cardimplementation in the U.S. and have since added other applications such asparking, security access and prepaid transit benefits to the system.  We are currently rolling out the SmarTripsystem to 1,600

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WMATAbuses, to over 2,000 buses throughout the Baltimore and Northern Virginiaregion and to the regional rail system. We are also supplying a point-of-sale distribution network and upgradingthe central computer system to offer region-wide services and to interface to athird party operated customer service center. Similarly, we are regionalizingintegrated fare collection systems in London, New York and Southern California.

**Maintain a Diversified Business Mix**

Wehave a diverse mix of business in our defense and transportation systemssegments. Approximately 52% 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 6% of consolidated sales in 2006. The London area continuesto be one of our strongest markets for transportation systems but we do notrely significantly on any single customer in the transportation systems market.

We also seek a reasonable balance between systems and service work inboth the defense and transportation segments. In aggregate, approximately 40%of our sales revenue in 2006 was from service type work. We believe that astrong base of service work helps to smooth the revenue fluctuations inherentin systems type work.

**Pursue Strategic Acquisitions**

Throughselective strategic acquisitions we seek to expand our customer base, broadenour technical solutions, gain staffing resources and leverage our entry intorelated new markets. In our defense segment we acquired a small virtualtraining product line in 2006 that broadened our presence in the small armsvirtual training market.  With ourimproved financial performance in 2006, we anticipate a renewed focus onacquisitions in fiscal 2007. We are focused on specific growth opportunities inthe defense marketplace and select market opportunities in transportation.

**OTHER MATTERS**

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

We do not engage in any business that is seasonal in nature. Because ourrevenues are generated primarily from work on contracts performed by ouremployees and subcontractors, first quarter revenues tend to be lower than theother three quarters due to our policy of providing many of our employees sevenholidays in the first quarter, compared to one or two in each of the otherquarters of the year. This is not necessarily a consistent pattern as itdepends upon actual activities in any given year.

The cost of Company sponsored research and development (R&D)activities was $6.1 million, $8.1 million, $5.5 million in 2006, 2005, 2004,respectively. We do not rely heavilyon independent R&D, as most of our new product development occurs inconjunction with the performance of work on our contracts. The amount ofcontract-required product development activity was $64 million in 2006 comparedto $65 million and $51 million in 2005 and 2004, respectively; however, these costsare included in cost of sales as they are directly related to contractperformance.

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

We employed approximately 6,000 persons at September 30, 2006.

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

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**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 suchadditional risks and uncertainties actually occur, our business, results ofoperations or financial 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 or futuregovernment contracts could adversely affect our sales and cash flows and ourability to fund our growth.***

Our revenues fromcontracts, directly or indirectly, with foreign and United States, state,regional and local governmental agencies represented more than 95% of our totalrevenues in fiscal year 2006.  Althoughthese various government agencies are subject to common budgetary pressures andother factors, many of our various government customers exercise independentpurchasing decisions.  Because of theconcentration of business with governmental agencies, we are vulnerable toadverse changes in our revenues, income and cash flows if a significant numberof our government contracts or subcontracts or prospects are delayed orcanceled for budgetary or other reasons.

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

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

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

·                  changes ingovernment programs or requirements or their timing;

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

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

·                  governmentappropriations delays or shutdowns;

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

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

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

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

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

In the past, ourbusinesses have been adversely affected by significant changes in governmentspending during periods of declining budgets. A significant decline in overall spending, or the decision not toexercise options to renew contracts, or the loss of or substantial decline inspending on a large program in which we participate could materially adverselyaffect our business, prospects, financial condition or results ofoperations.  As an example, the U.S.defense and intelligence budgets generally, and spending in specific agencieswith which we work, such as the Department of Defense, have declined from timeto time for extended periods since the mid-1980s, resulting in program delays,program cancellations and a

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slowing of new programstarts.  Although spending ondefense-related programs by the U.S. government has recently increased, futurelevels of expenditures and authorizations for those programs may decrease,remain constant or shift to programs in areas where we do not currently provideproducts or services.

Even though our contractperiods of performance for a program may exceed one year, Congress must usuallyapprove funds for a given program each fiscal year and may significantly reducefunding of a program in a particular year. Significant reductions in these appropriations or the amount of newdefense contracts awarded may affect our ability to complete contracts, obtainnew work and grow our business.  Congressdoes not always enact spending bills by the beginning of the new fiscalyear.  Such delays leave the affectedagencies under-funded which delays their ability to contract.  Future delays and uncertainties in fundingcould impose additional business risks on us.

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

Government contractstypically contain provisions and are subject to laws and regulations that givethe government agencies rights and remedies not typically found in commercialcontracts, including providing the government agency with the ability tounilaterally:

·                  terminate ourexisting contracts;

·                  reduce the valueof our existing contracts;

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

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

·                  control andpotentially prohibit the export of our products;

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

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

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

Most U.S. governmentagencies and some other agencies with which we contract can terminate theircontracts with us for convenience, and in that event we generally may recoveronly our incurred or committed costs, settlement expenses and profit on thework completed prior to termination.  Ifan agency terminates a contract with us for default, we are denied any recoveryand may be liable for excess costs incurred by the agency in procuringundelivered items from an alternative source. We may receive show-cause or cure notices under contracts that, if notaddressed to the agency’s satisfaction, could give the agency the right toterminate those contracts for default or to cease procuring our services underthose contracts.

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

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

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

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

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

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

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

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

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

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

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

·                  the need toaccurately estimate the resources and cost structure that will be required toperform any fixed-price contract that we are awarded.

We may not be affordedthe opportunity in the future to bid on contracts that are held by othercompanies and are scheduled to expire if the agency decides to extend the existingcontract.  If we are unable to winparticular contracts that are awarded through the competitive bidding process,we may not be able to operate in the market for services that are providedunder those contracts for a number of years. If we win a contract, and upon expiration, if the customer requiresfurther services of the type provided by the contract, there is frequently acompetitive rebidding process and there can be no assurance that we will winany particular bid, or that we will be able to replace business lost uponexpiration or completion of a contract.

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

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

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

Many of our governmentcontracts are subject to cost audits which may occur several years after theperiod to which the audit relates.  If anaudit identifies significant unallowable costs, we could incur a materialcharge to our earnings or reduction in our cash position.

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

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

·                  devaluations andfluctuations in currency exchange rates;

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

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

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

·                  costs ofcompliance with local laws, including labor laws;

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

·                  unfamiliar andunknown business practices and customs;

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

·                  the complexityand necessity of using foreign representatives and consultants;

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

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

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

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

Our foreign subsidiariesand joint ventures 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 our fixed-pricecontracts if we fail to estimate accurately the time and resources necessary tosatisfy our obligations.***

Approximately 74% of ourrevenues in 2006 were from fixed-price contracts under which we bear the riskof cost overruns.  Our profits areadversely affected if our costs under these contracts exceed the assumptions weused in bidding for the contract.  Often,we are required to fix the price for a contract before the projectspecifications are finalized, which increases the risk that we will incorrectlyprice these contracts. The complexity of many of our engagements makesaccurately estimating the time and resources required more difficult.

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

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

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

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

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

·                  regulations ofmost state and regional agencies and foreign governments similar to thosedescribed above;

·                  theSarbanes-Oxley Act of 2002; and

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

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***Our failure to identify, attract and retain qualifiedtechnical and management personnel could adversely affect our existingbusinesses.***

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

***We may incur significant costs in protecting ourintellectual property which could adversely affect our profit margins. Ourinability to protect our patents and proprietary rights could adversely affectour businesses’ prospects and competitive positions.***

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

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

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

Our businessesoperate in highly competitive markets. Many of our competitors are larger, better financed and better knowncompanies who may compete more effectively than we can.  In order to remain competitive, we must keepour capabilities technically advanced and compete on price and on value addedto our customers.  Our ability to competemay be adversely affected by limits on our capital resources and our ability toinvest in maintaining and expanding our market share.

***The terms of our financing arrangements may restrictour financial and operational flexibility, including our ability to invest innew business opportunities.***

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

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

***Our revenues could be less than expected if we are notable to deliver services or products as scheduled due to disruptions in supply.***

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

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

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

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

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

·                  wemay need to divert management resources to integration, which may adverselyaffect our ability to pursue other more profitable activities;

·                  integrationmay be difficult as a result of the necessity of coordinating geographicallyseparated organizations, integrating personnel with disparate businessbackgrounds and combining different corporate cultures;

·                  wemay not eliminate redundant costs in selecting acquisition candidates; and

·                  oneor more of our acquisition candidates may also have unexpected liabilities oradverse operating issues that we fail to discover through our due diligenceprocedures prior to the acquisition.

***Our results of operations have historically fluctuatedand may continue to fluctuate significantly in the future, which couldadversely affect the market price of our common stock.***

Our revenues areaffected by factors such as the unpredictability of contract awards due to thelong procurement process for most of our products and services, the potentialfluctuation of governmental agency budgets, the time it takes for the newmarkets we target to develop and for us to develop and provide products andservices for those markets, competition and general economic conditions.  Our contract type/product mix and unitvolume, our ability to keep expenses within budget, and our pricing affect ouroperating margins. Significant growth in costs to complete our contracts, suchas we experienced in our transportation systems business in 2005 and 2006, 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**

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

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

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**Item 2.****           PROPERTIES.**

Weconduct our operations in approximately 1.6 million square feet of both ownedand leased properties located in the United States and foreign countries.  We own approximately 74% of the squarefootage, including 517,000 square feet located in San Diego, California and468,000 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:**                 |       |                |
| Arlington, VA                |       | Leased              |
| Auckland, New  Zealand       |       | Leased              |
| Hampton, VA                  |       | Leased              |
| Honolulu, HI                 |       | Leased              |
| Kingstowne, VA               |       | Leased              |
| Lacey, WA                    |       | Leased              |
| Leavenworth, KS              |       | Leased              |
| Orlando, FL                  |       | Leased and owned    |
| San Diego, CA                |       | Leased and owned    |
| Shalimar, FL                 |       | Leased              |
| Singapore                    |       | Leased              |
| Tijuana, Mexico              |       | Leased              |
|                         |       |                |
| **Transportation  Systems:** | ** ** | ** **          |
| Auburn, NSW  Australia       |       | Leased              |
| Glostrup,  Denmark           |       | Leased              |
| Chantilly, VA                |       | Leased              |
| Frankfurt,  Germany          |       | Leased              |
| London, England              |       | Leased              |
| Los Angeles, CA              |       | Leased              |
| Montreal, Canada             |       | Leased              |
| New York, NY                 |       | Leased and owned    |
| Merthsham,  Surrey, England  |       | Leased              |
| Salfords,  Surrey, England   |       | Owned               |
| San Diego, CA                |       | Owned               |
| Tullahoma, TN                |       | Owned               |
|                         |       |                |
| **Other:**                   |       |                |
| Whittier, CA                 |       | Leased              |
|                         |       |                |
| **Investment  properties:**  |       |                |
| Teterboro, NJ                |       | Leased              |
| Vancouver,  Canada           |       | Leased              |

 

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**Item 3.****           LEGALPROCEEDINGS.**

In 1991, the government ofIran commenced an arbitration proceeding against the Company seeking $12.9million for reimbursement of payments made for equipment that was to comprisean Air Combat Maneuvering Range pursuant to a sales contract and aninstallation contract executed in 1977, and an additional $15 million forunspecified damages. The Company contested the action and brought acounterclaim for compensatory damages of $10.4 million.  In May 1997, the arbitral tribunal awarded thegovernment of Iran $2.8 million, plus simple interest at the rate of 12% perannum from September 21, 1991 through May 5, 1997. In December 1998, the UnitedStates District Court granted a motion by the government of Iran confirming thearbitral award but denied Iran’s request for additional interest and costs.Both parties have appealed. In October 2004, the 9th Circuit Court of Appeals issued a decision inthe case of two interveners who are attempting to claim an attachment on theamount that was awarded to Iran in the original arbitration. The Court deniedone of the intervener’s liens but confirmed the second one’s lien. Iran askedthe U.S. Supreme Court to review the 9th Circuit decision and to void the initialjudgment against it. In 2006, the Supreme Court returned the case to the 9th Circuit for reconsideration,suggesting that the claimed lien cannot be enforced. The dispute between Iranand Cubic is on hold in the 9th Circuit and the obligation upon Cubic to payis stayed. 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 9th Circuit case against Iran, andmanagement believes that a license from the U.S. government would be requiredin any case to make payment to or on behalf of Iran. 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 systemcustomer in North America issued a “cure notice” to the Company, alleging thatits performance was not in accord with the contract. After unsuccessfulnegotiations with the customer, in March 2005, the Company filed for atemporary restraining order requesting that the customer be restrained fromfurther interfering with the Company’s performance and from issuing atermination notice. The next business day, the customer issued a letterterminating the contract for default. In April 2005, the customer filed a claimfor breach of contract, seeking damages for “all actual, consequential andliquidated damages sustained” as well as attorney’s fees. The contract limitsliability to the contract value of $8.2 million, but the customer appears to beattempting to avoid that limitation. In May 2005, the Company filed an answerand general denial and subsequently filed a verified petition alleging breachof contract and other substantive claims, claiming the amount owed under thecontract of $4.2 million, plus interest and attorney’s fees. Managementbelieves that both the customer’s default notice and claim for damages areunsupported and the Company is vigorously defending against the allegations.Based on the advice of counsel, management believes the Company had substantiallycompleted the contract prior to termination and that the remaining contractvalue is due and that the Company will prevail at trial; therefore, noliability has been recorded for the former customer’s claim as of September 30,2006. 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 companythat Cubic had an alleged agreement with to potentially bid on a portion ofautomated fare collection contracts filed a court claim for breach of contract,fraud, negligent misrepresentation, theft of trade secrets, and other relatedallegations. The claim seeks $15.0 million in compensatory damages, punitivedamages, disgorgement of profits and a permanent injunction. In accordance withthe underlying contract arbitration clause, in July 2005 the Company filed aclaim with the American Arbitration Association and requested the court case bestayed or dismissed. The Court denied the Company’s motion to transfer the caseto arbitration. The Company has appealed that decision to the California Courtof Appeals. Based on information currently available, management believes thereis no merit to the claim and that it will prevail in this matter. Therefore, noliability has been recorded as of September 30, 2006.

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From time-to-time, agencies of the U.S. and foreign governments mayinvestigate whether the Company’s operations are being conducted in accordancewith applicable regulatory requirements. Such investigations, whether relatingto government 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.

The Company is not a party to any other materialpending proceedings and management considers all other matters to be ordinaryproceedings incidental to the business. Management believes the outcome ofthese proceedings and the proceedings described above will not have amaterially adverse effect on the Company’s financial position.

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

Informationregarding submission of matters to a vote of security holders is incorporatedherein by reference from our definitive Proxy Statement, which will be filed nolater than 30 days prior to the date of the Annual Meeting of Shareholders.

**PART II**

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

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

MARKETAND DIVIDEND INFORMATION

|                | ** ** | **Sales Price of Common Shares** | ** ** | ** **           | ** ** |
|----------------|------------|------------------------------------------------------|------------|----------------------|------------|
| ** **     | ** ** | **Fiscal 2006**                                 | ** ** | **Fiscal 2005** | ** ** | **Dividends per Share** | ** ** |
| ** **     | ** ** | **High**                                             | ** ** | **Low**              | ** ** | **High** | ** ** | **Low** | ** ** | **Fiscal 2006** | ** ** | **Fiscal 2005** | ** ** |
| First quarter  |       | $                                                    | 20.56      |                 | $          | 15.63 |   | $ | 25.92 |   | $ | 21.36 |   | — |   | — |   |
| Second quarter |       | 23.94                                                |       | 20.74                |       | 24.15 |   | 18.35 |   | $ | .09 |   | $ | .09 |   |
| Third quarter  |       | 24.40                                                |       | 18.27                |       | 19.80 |   | 16.53 |   | — |   | — |   |
| Fourth quarter |       | 20.74                                                |       | 18.30                |       | 19.47 |   | 16.61 |   | $ | .09 |   | $ | .09 |   |
|                |            |                                                      |            |                      |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

On November 17, 2006, the closing price of our common stock on theAmerican Stock Exchange was $21.86.

There were approximately 1,100 shareholders of record of our commonstock as of November 17, 2006.

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**Item 6.****           SELECTEDFINANCIAL DATA.**

FINANCIAL HIGHLIGHTS AND SUMMARY OF CONSOLIDATEDOPERATIONS

(amounts in thousands, except per share data)
| ** **                                    | ** ** | **Years Ended September 30,** | ** ** |
|-----------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                    | ** ** | **2006**                                     | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|                                          |       |                                         |       |   |   |   |   |   |   |   |   |
| **Results  of Operations:**                   | ** ** | ** **                                   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Sales                                         |       | $                                            | 821,386    |   | $ | 804,372 |   | $ | 722,012 |   | $ | 634,061 |   | $ | 559,604 |   |
| Cost of sales                                 |       | 687,213                                      |       | 672,541 |   | 549,170 |   | 493,377 |   | 426,012 |   |
| Selling, general  and administrative expenses |       | 97,166                                       |       | 110,644 |   | 107,139 |   | 87,888 |   | 85,459 |   |
| Interest expense                              |       | 5,112                                        |       | 5,386 |   | 4,658 |   | 3,659 |   | 3,538 |   |
| Income taxes                                  |       | 12,196                                       |       | 453 |   | 19,394 |   | 18,514 |   | 11,484 |   |
| Net income                                    |       | 24,133                                       |       | 11,628 |   | 36,911 |   | 36,519 |   | 29,437 |   |
|                                          |       |                                         |       |   |   |   |   |   |   |   |   |
| Average number  of shares outstanding         |       | 26,720                                       |       | 26,720 |   | 26,720 |   | 26,720 |   | 26,720 |   |
|                                          |       |                                         |       |   |   |   |   |   |   |   |   |
| **Per  Share Data:**                          | ** ** | ** **                                   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income                                    |       | $                                            | 0.90       |   | $ | 0.44 |   | $ | 1.38 |   | $ | 1.37 |   | $ | 1.10 |   |
| Cash dividends                                |       | 0.18                                         |       | 0.18 |   | 0.16 |   | 0.14 |   | 0.13 |   |
|                                          |       |                                         |       |   |   |   |   |   |   |   |   |
| **Year-End  Data:**                           | ** ** | ** **                                   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Shareholders’  equity                    |       | $                                            | 323,226    |   | $ | 297,158 |   | $ | 298,767 |   | $ | 255,292 |   | $ | 213,163 |   |
| Equity per share                              |       | 12.10                                        |       | 11.12 |   | 11.18 |   | 9.55 |   | 7.98 |   |
| Total assets                                  |       | 548,071                                      |       | 547,280 |   | 542,924 |   | 460,226 |   | 374,459 |   |
| Long-term debt                                |       | 38,159                                       |       | 43,776 |   | 50,037 |   | 47,142 |   | 48,571 |   |

 

This summary should beread in conjunction with the related consolidated financial statements and  accompanying notes.

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**Item 7.****           MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDRESULTS OF OPERATIONS.**

Our two primary businesses are in the defense and transportation industries. For the year ended September 30, 2006, 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 52% of sales in 2006 compared to 53% in 2005 and 50% in 2004.

Cubic Defense Applications (CDA) is organized intothree market-focused business units: Training Systems Business Unit (TSBU),Mission Support Services Business Unit (MSBU), and Communications &Electronics Business Unit (CEBU).  Thesegment is a diversified supplier of constructive, live and virtual militarytraining systems, services and communication systems and products to the U.S.Department of Defense, other government agencies and allied nations. We designinstrumented range systems for fighter aircraft, armored vehicles and infantryforce-on-force live training; weapons effects simulations; laser-based tacticaland communication systems; and precision gunnery solutions.  Our services are focused on training missionsupport, computer simulation training, distributed interactive simulation,development of military training doctrine, force modernization services forNATO entrants and field operations and maintenance. Our communications productsare aimed at intelligence, surveillance, and search and rescue markets. Thesegment also has a 50% interest in a joint venture which in 2006 received itsfirst contracts to produce certain advanced tactical systems for the U.S. andIsrael.

Cubic Transportation Systems develops and deliversinnovative fare collection systems for public transit authoritiesworldwide.  We provide hardware, softwareand multiagency, multimodal transportation integration technologies andservices that allow the agencies to efficiently collect fares, manage theiroperations, reduce shrinkage and make using public transit a more convenientand attractive option for commuters.

**Consolidated Overview**

Sales in fiscal2006 increased by 2% to $821.4 million compared to $804.4 million in 2005.Sales in 2005 represented an 11% increase over 2004 sales of $722.0 million.The sales growth in both 2005 and 2006 came from our defense segment, whiletransportation systems sales were nearly flat for the three year period from2004 to 2006. Essentially all the growth in defense sales in both years camefrom existing businesses, with an immaterial amount coming from a small strategicacquisition we made in 2006. We also made two small transportation systemsacquisitions, one at the end of 2004 and one early in 2005, which added about$4.3 million and $9.1 million to fiscal 2006 and 2005 transportation systemssales, respectively. Seethe segment discussions following for further analysis of segment sales.

Operating income more than doubled in 2006 to $30.9 million from $13.1million in 2005. The primary reason for the improvement in 2006 was that ourtransportation business returned to profitability after having incurred anoperating loss in fiscal 2005. Defense operating income also increased in 2006,at a slightly better rate than the growth in defense sales. Costs of compliancewith Section 404 of the Sarbanes-Oxley Act of 2002, which are included incorporate and other costs in our segment reporting, decreased in fiscal 2006 to$0.9 million compared to $1.4 million in 2005, our initial year of compliance.Operating income decreased by 76% in 2005 from 2004 operating income of $54.2million. The primary reason for the large decrease was the operating lossincurred in 2005 by our transportation systems segment, in addition to a smalldecrease in defense operating income. See the segment discussions following forfurther details of segment operating results.

Net income morethan doubled from $11.6 million ($0.44 per share) in 2005 to $24.1 million($.90 per share) in 2006, primarily because of the improvement intransportation systems operating results. Net income in 2005 had dropped fromthe 2004 level of $36.9 million ($1.38 per share) primarily because of theoperating loss in transportation systems in 2005, and was further impacted bythe decrease in defense segment operating income in that year. Approximately$4.3 million, after applicable income taxes, of the

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2006 net incomewas from a gain on thesale of real estate that had been held for investment purposes for many years,but was sold in the first quarter of the fiscal year. Approximately $2.8million of the 2005 net income was from a reduction in tax contingencyreserves in the fourth quarter, while $2.3 million, after taxes, of the 2004net income was from a gain on the sale of a life insurance policy in the thirdquarter. In 2004, a loss provision for a legal matter had also reduced netincome in the fourth quarter by approximately $3.8 million after taxes.

The gross margin from product sales improved slightlyin 2006 to 16.0% from 15.1% in 2005, due to improved performance in thetransportation systems segment. However, cost growth on a training systemscontract in the defense segment and on several transportation systems contractsin 2006, kept the gross margin from products lower than the 2004 level of26.6%.  The gross margin from servicesales was 16.9% in 2006, compared to 18.1% in 2005 and 19.6% in 2004. Theprimary cause of the decreasing service gross margin during the three yearperiod was lower sales from a service contract in Europe that had generatedhigher than average gross margins. This contract continues to decrease in scopeand is expected to be completed in the second quarter of fiscal 2007.

Selling, general and administrative(SG&A) expenses decreased to 11.8% of sales in 2006 compared to 13.8% in2005 and 14.8% in 2004. SG&A expenses were $13.5 million lower in 2006 thanin 2005, with the decrease coming from both segments. In 2005, the defensesegment incurred higher than normal selling expenses related to contractproposals, while such activities returned to a more normal level in 2006. Lowertransportation systems selling expenses and staffing reductions contributed toreduced SG&A expenses in that segment. In addition, an allowance fordoubtful accounts provision of more than $4 million had contributed to higherSG&A expenses in transportation systems in 2005. Transportation systemsSG&A expenses decreased in 2005 despite the allowance for doubtful accountsprovision, due to a reduction in legal, consulting and engineering supportcosts incurred in 2004 related to a contractual dispute with a former subcontractor.

Company sponsoredresearch and development (R&D) spending decreased in 2006 from the 2005level, however, R&D costs continued to be incurred primarily in connectionwith customer funded activities. We do not rely heavily on company sponsored R&D,as most of our new product development occurs in conjunction with theperformance of work on our contracts. The amount of contract requireddevelopment activity in 2006 was $64 million, compared to $65 million in 2005and $51 million in 2004; however, these costs are included in cost of sales asthey are directly related to contract performance.

Interest anddividend income increased in 2006 over both 2005 and 2004 due primarily tohigher interest rates in 2006. Other income was lower in 2006 than in 2005 and2004 due in part to lower rental income, resulting from the sale of the realestate mentioned above. Other income in 2005 had also included higher foreigncurrency exchange gains on intercompany advances to our U.K. subsidiary.Interest expense decreased in 2006 from the 2005 level primarily because of areduction in long-term borrowings. Interest expense was higher in both 2005 and2006 than in 2004 due primarily to higher levels of short-term borrowingsduring each of those years.

Our effective taxrate for 2006 was 33.6% of pretax income compared to 3.7% in 2005 and 34.4% in2004. Tax expense in 2006 included a provision of $1.6 million for taxes dueupon the repatriation of capital to the U.S. from our U.K. subsidiary duringthe year. The effective rate in both 2006 and 2005 benefited from the reversalof tax contingency provisions amounting to $1.1 million and $2.8 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.

In December 2004, Financial Accounting Standards Board Position109-2 was issued and established standards for how an issuer accounts for aspecial one-time dividends received deduction on the repatriation of certainforeign earnings to a U.S. taxpayer pursuant to the American Jobs Creation Actof 2004 (the Act). The Financial Accounting Standards Board (FASB) staffbelieves that the lack of clarification of certain provisions within the Actand the timing of the enactment necessitated a practical exception to theStatement of Financial Accounting Standards No. 109, *Accounting for Income Taxes*

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(SFAS 109), requirement to reflect in the period of enactment theeffect of a new tax law. Accordingly, an enterprise was allowed time beyond thefinancial reporting period of enactment to evaluate the effect of the Act onits plan for reinvestment or repatriation of foreign earnings for purposes ofapplying SFAS 109. We determined during the third fiscal quarter of 2006 thatwe had sufficient information to make an informed decision on the impact of theAct on our repatriation plans and a provision of $1.5 million was recorded atthat time. In the fourth quarter, an extraordinary dividend, as defined by theAct, was paid by our U.K. subsidiary amounting to $48.3 million.

In light of thisextraordinary dividend and changing market conditions, we have reevaluated ourcapital requirements in Europe to determine what portion of our investment canbe considered indefinitely reinvested. Our analysis determined that the levelof investment we currently have in Europe will be required for the foreseeablefuture and is considered indefinitely reinvested; therefore, no provision fortaxes due upon repatriation has been provided. However, we currently have nofirm plans to invest further capital in Europe, so we have concluded that wewill provide for U.S. taxes on future earnings in Europe until such time as ourplans for investment in Europe become solidified.

Tax legislation enacted in 2004 repealed the Extraterritorial Income(ETI) exclusion relating to export sales. Over a transition period which beganin 2005, the new tax rules phase-out the ETI exclusion benefit and provide fora new tax deduction in computing profits from the sale of products manufacturedin the United States. The tax benefit we may realize from the new legislationis expected to be substantially equivalent to the benefit we realized under therepealed ETI exclusion; however, changing business conditions could affect thisbenefit in the future.

**DefenseSegment**
| **Years ended September 30,** | ** ** | **2006**               | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|----------------------------------------------|------------|------------------------|------------|------------|------------|------------|------------|
| ** **                                   | ** ** | **(in millions)** | ** ** |
|                                         |       |                   |       |       |       |       |       |
| **Defense  Segment Sales**                   | ** ** | ** **             | ** ** | ** ** | ** ** | ** ** | ** ** |
| Communications  and electronics (CEBU)       |       | $                      | 64.6       |       | $          | 52.5       |       | $ | 65.5 |   |
| Training systems  (TSBU)                     |       | 228.0                  |       | 227.9      |       | 181.6      |       |
| Mission support  services (MSBU)             |       | 262.9                  |       | 257.0      |       | 202.4      |       |
| Tactical systems  and other                  |       | 7.3                    |       | 6.0        |       | 3.4        |       |
|                                         |       | $                      | 562.8      |       | $          | 543.4      |       | $ | 452.9 |   |
|                                         |       |                   |       |       |       |       |       |
| **Defense  Segment Operating Income**        | ** ** | ** **             | ** ** | ** ** | ** ** | ** ** | ** ** |
| Communications  and electronics (CEBU)       |       | $                      | 3.9        |       | $          | (4.8       | )          | $ | 6.8 |   |
| Training systems  (TSBU)                     |       | 9.7                    |       | 18.2       |       | 15.2       |       |
| Mission support  services (MSBU)             |       | 20.6                   |       | 17.9       |       | 12.3       |       |
| Tactical systems  and other                  |       | (2.8                   | )          | (1.2       | )          | 0.2        |       |
|                                         |       | $                      | 31.4       |       | $          | 30.1       |       | $ | 34.5 |   |

 

As depicted in the table above, sales from our defense segmentincreased 4% in 2006 to $562.8 million from $543.4 million in 2005, afterhaving increased by 20% in 2005 from the 2004 level of $452.9 million. Alldefense business units generated higher sales in 2006, with the biggestincrease coming from CEBU. In 2005 sales from CEBU decreased from the 2004level, while the other defense business units experienced significant growth.The caption “Tactical systems and other” in the table above includes operatingresults of our 50% owned joint venture company as well as advanced programs forthe development of new defense technologies. The joint venture company beganwork on its first contracts in 2006, which is reflected in the sales amountsabove.

Operating incomein our defense segment increased to $31.4 million in 2006 from $30.1 million in2005, a 4% increase, after having decreased in 2005 by 13% from $34.5 millionin 2004. The increase in 2006 operating income was primarily due to aturnaround to profitability in CEBU, which incurred an operating loss in 2005.MSBU operating income increased in both 2005 and 2006, while TSBU operatingincome decreased by nearly 50% in 2006 after having increased in 2005. Thejoint venture company incurred

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operating lossesof $2.0 million and $1.3 million in 2006 and 2005, respectively, and is notexpected to generate operating profits in the near term as it is still in itsstart-up phase. Operating income amounts in the above table for 2005 and 2004have been revised from previous reports to conform to the 2006 method ofallocating corporate costs to the business units.

**Communications and Electronics (CEBU)**

Sales from CEBU increased from $52.5 million in 2005 to $64.6 millionin 2006, a 23% increase, after having decreased 20% in 2005 from the 2004 levelof $65.5 million. The business unit has gone through a transition during thistime period as new data link technology has been developed to replace legacydata link systems and the business unit has transitioned to building more poweramplifiers than surveillance receivers. The sales increase in 2006 cameprimarily from contracts for the new data link technology, in addition togrowth in sales of avionics products and power amplifiers. Sales in 2005 haddecreased primarily because of the completion of contracts for legacy datalinks in 2004.

Operating income from CEBU also reflects the transition that has takenplace during this period. Operating income improved to $3.9 million in2006 from the operating loss of $4.8 million incurred in 2005. Operating incomein 2006 came primarily from the sale of power amplifiers and data links, inaddition to the favorable settlement of a long-standing dispute with a customerduring the year, which added $1.2 million to operating income. The operatingloss in communications and electronics in 2005 was primarily due to cost growthtotaling nearly $5 million on two contracts, one a program for the developmentof new data link technology and the other a program involving a newintelligence application of our data link and receiver technology. In addition,approximately $2 million in overstocked or obsolete surveillance receiverinventory was written down in value to zero in 2005. CEBU operating income wasbolstered in 2004 by high margins on a legacy data link contract with a foreigncustomer, which was completed that year. Avionics products, such as ourpersonnel locator systems had also generated higher operating income in 2004;however, this was offset by operating losses from the surveillance receiver productline.

**Training Systems (TSBU)**

Sales of training systems were virtually flat from 2005, increasingslightly to $228.0 million in 2006 compared to $227.9 million in 2005, afterhaving increased in 2005 by 25% from $181.6 million in 2004.  Air combat training and laser engagementsystems (MILES) sales increased in 2006 compared to 2005 while ground combattraining sales decreased slightly from the 2005 level. Delayed U.S. governmentfunding for small arms training systems in 2006 also resulted in lower salesfrom this product line. Work continued in 2006 on development of the nextgeneration air combat training system known as P5 and on ground combat trainingranges in Canada, Australia and the Middle East. Sales in 2005 increased over2004 as a result of growth in sales from these air and ground combat trainingsystems as well as the MILES product line.

TSBU operating income fell nearly 50% to $9.7 million in 2006 from$18.2 million in 2005. The primary reason for the decrease was cost growth of$4.6 million that was accrued on a contract for the development of a groundcombat training system for a foreign customer. In addition, operating incomefrom small arms training systems was lower, due to planned development costs of$1.9 million for new weapons simulations systems for this product line inan effort to become more competitive. This major weapons simulationsdevelopment effort is now complete. Lower sales of small arms virtual trainingsystems, as mentioned above, further impacted operating income from thisproduct line. Operating income in 2005 was up by 20% from 2004 operating incomeof $15.2 million. This increase was the result of higher sales from groundcombat training and MILES contracts.

**Mission Support Services (MSBU)**

Sales from MSBU increased in 2006 to $262.9 million compared to $257.0million in 2005, a 2% increase. This increase followed a 27% sales increase in2005 from $202.4 million in 2004. The increase in 2006 sales came despite a $20million decrease in sales from the Joint Readiness Training Center (JRTC)contract in Fort Polk, LA, due to a reduction in training exercises conductedby the customer. Sales from all MSBU contracts other than theJRTC increased by 15% between 2005 and 2006, as the result of both newcontracts and the expansion of existing programs. The most significant growthin 2006 sales came from contracts for

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modeling the effects of weapons of mass destruction. Sales in 2005 grewfrom the 2004 level due primarily to higher sales from the JRTC contractbecause of an increase in training exercises that year. Sales from contractsfor modeling the effects of weapons of mass destruction also increased in 2005over the 2004 level.

Operating income from MSBU increased in 2006 to $20.6 million from$17.9 million in 2005, an increase of 15%. Operating income in 2005 increased46% over the 2004 level of $12.3 million. Operating income as a percentage ofsales increased during the three year period due to improved operatingperformance on several contracts and due to sales growth without a proportionalincrease in SG&A expenses. Operating income as a percentage of salesincreased to 7.8% in 2006, compared to 7.0% in 2005 and 6.1% in 2004.

**Transportation Systems Segment**

Transportationsystems sales trended down slightly for the 2004 to 2006 period. Sales for 2006were $243.9 million compared to $245.8 million in 2005 and $253.5 million in2004. Sales in North America increased in 2006 compared to 2005, while sales inAustralia decreased and European sales were consistent from year to year.Increased sales from a contract in Sweden in 2006 helped to offset an anticipated decrease in sales from thePRESTIGE contract in London and from European service contracts. As we havediscussed in previous reports, the PRESTIGE system is in the operations andmaintenance phase, which generates lower sales than the system design andinstallation phase. Service sales were lower in Europe primarily because of thegradual phase-out of old ticket issuing equipment which is being replaced bymodern equipment requiring less maintenance. We are competing for the contractsto provide the new equipment and have been successful in winning a portion ofthe work awarded thus far. In addition, we completed a contract for themaintenance of communications equipment in London at the end of fiscal 2005which was not renewed in 2006, further impacting service sales. Thereduction in sales in 2005 from 2004 resulted from a decrease in North Americansales by 15%, while sales in Australia and Europe increased about 14%. We anticipate lower sales from thetransportation systems segment in fiscal 2007 due to the expected completion ofseveral systems contracts in North America and a decrease in opportunities tosell new systems in the near term.

We madeacquisitions of two small parking system companies, one at the end of 2004 andone early in 2005, which added $4.3 million and $9.1 million, respectively, tofiscal 2006 and 2005 transportation product sales in North America.

The transportationsystems segment returned to profitability in 2006, with operating income of$2.8 million, compared to an operating loss of $13.8 million in 2005 andoperating income of $28.2 million in 2004. In 2006, healthy operating incomefrom contracts in Europe was partially offset by operating losses on contractsin North America and Australia. Projected costs to complete fare collection systems on severalNorth American and one Australian contract increased by approximately $21 million more than we had estimated lastyear; therefore, we recorded a loss of that amount on these contracts duringthe year. The primary cause of the cost growth was an increase in engineeringhours incurred to complete the projects, in addition to project managementcosts incurred due to delays in project completion. This compares to costgrowth of approximately $28 million on these contracts in 2005.

The design, manufacture and a substantial portion of the installationof equipment on the North American and Australian contracts referred to aboveis complete. Nevertheless, there continues to be risk that we will not be ableto complete these contracts within our current estimates. These risks includepotential higher costs for integration, customer-caused delays in theinstallation of hardware and other customer directed changes. We also believethat customer directed work outside the scope of the contracts and customerdelay of progress toward completion of these contracts has resulted in aportion of the cost growth we have already experienced. We are continuing to assessthe contractual basis for claims on these contracts and measuring the costimpact related to these customer required changes to the scope of work. Whilewe believe we are entitled to recover some of the additional costs we haveincurred and costs we may incur in the future due to customer delays orchanges, the amount of recovery from claims cannot be determined at this time.Therefore, all related costs have been expensed and no revenues from theseclaims have been recorded to date.

Also included in the results described above are operating losses of$3.4 million in 2006 and $4.5 million

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in 2005 from the parking businesses we acquired in late 2004 and early2005. This was the result of cost growth on two contracts as well a lack ofsufficient sales volume to absorb the overhead costs of the business. Thesebusinesses have now been incorporated into our other North American operations.

In 2005 we also recorded an allowance of $4.2 million for doubtfulcollection of an accounts receivable balance with a customer that terminatedits contract with us. This provision is included in 2005 SG&A expenses inthe consolidated statement of income. We believe that we have substantiallyperformed the requirements of the contract such that this payment is due to usand we believe the termination attempt by this customer is unwarranted.

**Backlog**
| September 30,             | ** ** | **2006**               | ** ** | **2005**   | ** ** |
|--------------------------------|------------|------------------------|------------|------------|------------|
| ** **                     | ** ** | **(in millions)** | ** ** |
| **Total backlog**              | ** ** | ** **             | ** ** | ** ** | ** ** |
| Transportation systems         |       | $                      | 715.6      |       | $          | 733.3 |   |
| Defense                        |       |                   |       |       |       |
| Communications and electronics |       | 71.9                   |       | 57.3       |       |
| Training systems               |       | 285.9                  |       | 318.9      |       |
| Mission support services       |       | 366.4                  |       | 344.1      |       |
| Tactical systems and other     |       | 38.8                   |       | 7.4        |       |
| Total defense                  |       | 763.0                  |       | 727.7      |       |
| Total                          |       | $                      | 1,478.6    |       | $          | 1,461.0 |   |
|                           |       |                   |       |       |       |
| **Funded backlog**             | ** ** | ** **             | ** ** | ** ** | ** ** |
| Transportation systems         |       | $                      | 715.6      |       | $          | 733.3 |   |
| Defense                        |       |                   |       |       |       |
| Communications and electronics |       | 71.9                   |       | 57.3       |       |
| Training systems               |       | 285.9                  |       | 318.9      |       |
| Mission support services       |       | 112.2                  |       | 92.0       |       |
| Tactical systems and other     |       | 38.8                   |       | 7.4        |       |
| Total defense                  |       | 508.8                  |       | 475.6      |       |
| Total                          |       | $                      | 1,224.4    |       | $          | 1,208.9 |   |

 

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

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.

**NewAccounting Standards**

On July 13, 2006, the Financial Accounting Standards Board issuedInterpretation No. 48, *Accounting forUncertainty in Income Taxes*(FIN 48), which is effective for fiscalyears beginning after December 31, 2006. The purpose of FIN 48 is to clarifyand set forth consistent rules for accounting for uncertain tax positions inaccordance with FAS 109, *Accounting forIncome Taxes*. The cumulative effect of applying the provisions ofthis interpretation are required to be reported separately as an adjustment tothe opening balance of retained earnings in the year of adoption. We are in theprocess of reviewing and evaluating FIN 48, and therefore the ultimate impactof its adoption is not yet known.

In September 2006, theFinancial Accounting Standards Board published FASB Statement of FinancialAccounting Standards No. 158 (SFAS 158), **Employers’ Accounting for Defined BenefitPension and Other Postretirement Plans,**to require an employerto fully recognize the obligations associated with

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single-employer definedbenefit pension, retiree healthcare, and other postretirement plans in theirfinancial statements. The new standard is effective for fiscal years endingafter December 15, 2006.  Previous standardsrequired an employer to disclose the complete funded status of its plan only inthe notes to the financial statements. Moreover, because those standardsallowed an employer to delay recognition of certain changes in plan assets andobligations that affected the costs of providing benefits, employers reportedan asset or liability that almost always differed from the plan’s fundedstatus. Under SFAS 158, a defined benefit postretirement plan sponsor that is apublic or private company or a nongovernmental not-for-profit organization must(a) recognize in its statement of financial position an asset for a plan’soverfunded status or a liability for the plan’s underfunded status, (b) measurethe plan’s assets and its obligations that determine its funded status as ofthe end of the employer’s fiscal year (with limited exceptions), and (c)recognize, as a component of other comprehensive income, the changes in thefunded status of the plan that arise during the year but are not recognized ascomponents of net periodic benefit cost pursuant to SFAS 87, **Employers’Accounting for Pensions,**or SFAS 106, **Employers’ Accounting for PostretirementBenefits Other Than Pensions.**SFAS 158 also requires anemployer to disclose in the notes to financial statements additionalinformation on how delayed recognition of certain changes in the funded statusof a defined benefit postretirement plan affects net periodic benefit cost forthe next fiscal year.  We are in theprocess of reviewing and evaluating SFAS 158, and therefore the ultimate impactof its adoption in not yet known.

In May 2005, the FASB issuedSFAS No. 154, “Accounting Changes and Error Corrections” (SFAS 154). ThisStatement replaces APB Opinion No. 20, “Accounting Changes,” and SFAS 3, “ReportingAccounting Changes in Interim Financial Statements.” SFAS 154 sets forthnew guidelines on accounting for voluntary changes in accounting principle andrequires certain disclosures. It also applies to the unusual situation in whichan accounting pronouncement is issued but does not include specific transitionguidelines. This Statement requires such accounting principle changes to beapplied retrospectively to all prior periods presented and an adjustment to thebalance of assets or liabilities affected along with an offsetting adjustment toretained earnings for the cumulative effect on periods prior to thosepresented. This Statement carries forward without change the guidance in APBOpinion No. 20 for reporting the correction of an error and a change inaccounting estimate. SFAS 154 will be effective for the Company beginning withfiscal year 2007.

**Liquidityand Capital Resources**

Cash flows fromoperations totaled $31.4 million in 2006 compared to $54.7 million in 2005.Operating activities had used cash of $28.2 million in 2004. A decrease inaccounts receivable of $5.8 million in 2006 and $38.5 million in 2005contributed to the positive cash flows. Both the defense and transportationsystems segments generated positive cash flows in 2006, with the larger amountcontributed by transportation systems. Operating cash flows from the defensesegment were positive in all three years, while transportation systemsoperating cash flows were positive in 2006 and 2005 after having been negativein 2004.

We have classifiedcertain unbilled accounts receivable balances as noncurrent because we do notexpect to receive payment within one year from the balance sheet date. AtSeptember 30, 2006, this balance improved to $2.2 million compared to $22.9million at September 30, 2005.

Cash flows used ininvesting activities in 2006 included $9.8 million in capital expenditures,partially offset by proceeds of $8.0 million from the investment real estatesale. We also invested $8.9 million of our excess cash in short-terminvestments in 2006. In 2005, investing activities included $8.3 million incapital expenditures, partially offset by the liquidation of $6.2 million inshort-term investments. Investing activities in 2004 included a $13.6 millioncash receipt from the sale of a life insurance policy, $6.9 million in capitalexpenditures, $7.1 million used for acquisitions and the net purchase ofshort-term investments of $3.2 million.

Financingactivities in 2006 included the repayment of short term borrowings of $16.4million and scheduled payments on long-term borrowings of $6.1 million, inaddition to the payment of a dividend to shareholders of $4.8 million (18 centsper share). Financing activities in 2005 included scheduled debt payments of$6.1 million, dividends paid to shareholders of $4.8 million and net borrowingsof $0.7 million on a short-term basis. In 2004 we obtained a $9.0 millionmortgage on our facility in the U.K. and

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used the proceedsto repay short-term borrowings in the U.K. We also borrowed $25 million on a short-term basis in the U.S. and NewZealand that year to fund working capital requirements. Other financingactivities in 2004 included scheduled debt payments of $1.9 million and thepayment of $4.3 million in dividends to shareholders.

Accumulated other comprehensive income increased by$6.7 million in 2006 because of foreign currency translation adjustments of$4.3 million and a decrease in the minimum liability for our pension plan of$2.4 million. This increases the positive balance in accumulated othercomprehensive to $8.4 million income as of September 30, 2006 compared to $1.7million at September 30, 2005.

The pension plan under-funded balance improved fromthe September 30, 2005 balance of $41.1 million to $32.2 million at September30, 2006. Of this improvement, $7.4 million was the result of our decision todiscontinue accrual of benefits under the defined benefit pension plan thatprovides benefits to certain U.S. based employees, effective January 1, 2007.We will replace this benefit with a company match of employee’s contributionsup to 3% of their qualified pay under our existing defined contribution 401(k) plan.Over the long-term, the cost of this defined contribution is expected to beequivalent to or slightly lower than the cost of the defined benefit pensionplan; however, we expect this change will result in a more consistent andpredictable retirement cost in the future. The remainder of the improvement inthe funding position can be attributed to a return on plan assets for the yearthat was higher than our assumed rate of return.

The net deferred tax asset was $26.4 million atSeptember 30, 2006 compared to $28.1 million at September 30, 2005. Of theseamounts, $4.7 million and $6.0 million at September 30, 2006 and 2005,respectively, resulted from the tax effect of recording an additional minimumpension liability. We expect to generate sufficient taxable income in thefuture such that the net deferred tax asset will be realized.

Our financialcondition remains strong with working capital of $277.5 million and a currentratio of 2.7 at September 30, 2006. We expect that cash on hand and our abilityto access 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, 2006, $19.9million of this capacity was used, leaving an additional $130.1 millionavailable.  Our total debt to capitalratio at September 30, 2006 was less than 15%. In addition, our cash andshort-term investments totaled $51.3 million at September 30, 2006 which wasnearly the level of our total short and long-term borrowings of $54.2 million.

The following is a schedule of our contractual obligations outstandingas of September 30, 2006:
|                       | ** ** | **Total**              | ** ** | **Less than 1  Year** | ** ** | **1 - 3 years** | ** ** | **4 - 5 years** | ** ** | **After 5 years** | ** ** |
|-----------------------|------------|------------------------|------------|---------------------------------|------------|--------------------------------|------------|--------------------------------|------------|-----------------------------|------------|
| ** **            | ** ** | **(in millions)** | ** ** |
|                  |       |                   |       |                            |       |                           |       |                           |       |                        |       |
| Long-term debt        |       | $                      | 44.2       |                            | $          | 6.1                            |       | $                              | 12.1       |                        | $          | 9.3 |   | $ | 16.8 |   |
| Interest payments     |       | 10.8                   |       | 2.5                             |       | 3.9                            |       | 2.5                            |       | 1.9                         |       |
| Operating leases      |       | 18.6                   |       | 5.0                             |       | 7.1                            |       | 4.1                            |       | 2.4                         |       |
| Deferred compensation |       | 8.3                    |       | 0.8                             |       | 0.8                            |       | 0.7                            |       | 6.0                         |       |
|                       |            |                        |            |                                 |            |                                |            |                                |            |                             |            |  |  |  |  |  |

 

**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

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reasonable under the circumstances. Materially different results can occur as circumstances change and additional information becomes known.

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

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

*Revenue Recognition*

Most of our business is derived from long-term development, productionand system integration contracts which we account for consistent with theAmerican 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 revenue basedon a ratio of the costs incurred to the estimated total costs at completion.Amounts representing contract change orders, claims or other items are includedin the contract value only when they can be reliably estimated and realizationis considered probable. Provisions are made on a current basis to fullyrecognize any anticipated losses on contracts.

We record sales under cost-reimbursement-type contracts as we incur thecosts. Incentives or penalties and awards applicable to performance on contractsare considered 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. We have accountingpolicies in place to address these and other complex issues in accounting forlong-term contracts.

Sales of products are recorded when a firm sales agreement is in place,delivery has occurred and collectibility of the fixed or determinable salesprice is reasonably assured. Sales of services are recorded when performed inaccordance with contracts or service agreements.  Sales and profits on contracts thatspecify multiple deliverables are allocated to separate units of accountingwhen there is objective evidence that each accounting unit has value to thecustomer on a stand-alone basis.

*Income Taxes*

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

Tax regulations require items to be included in the tax return at different times than the items are reflected in the financial statements and are referred to as timing differences. In addition, some expenses are not deductible on our tax return and are referred to as permanent differences. Timing differences create deferred tax assets and liabilities. Deferred tax assets generally represent items that can be used as a tax

29

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deduction or credit in future years for which we have already recorded the benefit in our income statement. We establish valuation allowances for our deferred tax assets when the amount of expected future taxable income is not likely to support the use of the deduction or credit. Deferred tax liabilities generally represent deductions we have taken on our tax return but have not yet recognized as expense in our financial statements. We have not recognized any United States tax expense on undistributed earnings of our foreign subsidiaries since we intend to reinvest the earnings outside the United States for the foreseeable future. These undistributed earnings totaled approximately $37.3 million at September 30, 2006.

*Valuation of Goodwill*

We evaluate ourrecorded goodwill balances for potential impairment annually by comparing thefair value of each reporting unit to its carrying value, including recordedgoodwill. We have not yet had a case where the carrying value exceeded the fairvalue; however, if it did, impairment would be measured by comparing thederived fair value of goodwill to its carrying value, and any impairmentdetermined would be recorded in the current period. To date there has been noimpairment of our recorded goodwill. Goodwill balances by reporting unit are asfollows:
| September 30,           | ** ** | **2006**               | ** ** | **2005** | ** ** |
|------------------------------|------------|------------------------|------------|----------|------------|
| ** **                   | ** ** | **(in millions)** | ** ** |
|                         |       |                   |       |     |       |
| Defense systems and products |       | $                      | 16.5       |     | $          | 16.6 |   |
| Defense services             |       | 9.7                    |       | 9.7      |       |
| Transportation systems       |       | 8.6                    |       | 8.2      |       |
| Total goodwill               |       | $                      | 34.8       |     | $          | 34.5 |   |

 

Determining thefair value of a reporting unit for purposes of the goodwill impairment test isjudgmental in nature and often involves the use of significant estimates andassumptions. These estimates and assumptions could have a significant impact onwhether or not an impairment charge is recognized and also the magnitude of anysuch charge. We currently perform internal valuation analysis and considerother market information that is publicly available. Estimates of fair valueare primarily determined using discounted cash flows and comparisons withrecent transactions. 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.

For fiscal 2006, the discounted cash flows for each reporting unit werebased on discrete three-year financial forecasts developed by management forplanning purposes. Cash flows beyond the three-year discrete forecasts wereestimated based on projected growth rates and financial ratios, influenced byan analysis of historical ratios, and by calculating a terminal value at theend of ten years. The compound annual growth rates for sales ranged from 4.0%to 8.0% and for operating profit margins ranged from 6.5% to 8.0% for thereporting units, beyond the discrete forecast period. The future cash flowswere discounted to present value using a discount rate of 9%. We did notrecognize any goodwill impairment as a result of performing this annual test. Avariance in the discount rate, the estimated sales growth rate or the operatingprofit margin could have a significant impact on the estimated fair value ofthe reporting unit and consequently the amount of identified goodwillimpairment. For example, a 3% decrease in the assumed operating profit marginin either the defense systems and products or the transportation systemsreporting units would have resulted in an indication of impairment that wouldhave led us to further quantify the possible impairment and potentially recorda charge to write-down these assets.

*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.

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

·                  Discount rates

·                  Inflation

·                  Salary growth

·                  Expected return on plan assets

·                  Retirement rates

·                  Mortality rates

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

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 2006 by about $600 thousand, before applicable income taxes.

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

**InterestRate Risk**

We invest in moneymarket instruments and short-term marketable debt and equity securities thatare tied to floating interest rates being offered at the time the investment ismade. We maintain short-term borrowing arrangements in the U.S., U.K., NewZealand, which are also tied to floating interest rates (LIBOR and the U.S.prime rate and the U.K. and New Zealand base rates). We also have seniorunsecured notes payable to insurance companies that are due in annualinstallments. These notes have fixed coupon interest rates. See Note 5 to theConsolidated Financial Statements for more information.

Interest incomeearned on our short-term investments is affected by changes in the generallevel of U.S. and U.K. interest rates. These income streams are generally nothedged.  Interest expense incurred underthe short-term borrowing arrangements is affected by changes in the generallevel of interest rates in the U.S., U.K., and New Zealand. The expense relatedto these cost streams is usually not hedged since it is either revolving,payable within three months and/or immediately callable by the lender at anytime. Interest expense incurred under the long-term notes payable is notaffected by changes in any interest rate because it is fixed.  However, we have in the past, and may in thefuture, use an interest rate swap to essentially convert this fixed rate into afloating rate for some or all of the long-term debt outstanding.  The purpose of a swap would be to tie theinterest expense risk related to these borrowings to the interest income riskon our short-term investments, thereby mitigating our net interest rate risk.We believe that we are not significantly exposed to interest rate risk at thispoint in time.  There was no interestrate swap outstanding at September 30, 2006.

**ForeignCurrency Exchange Risk**

In the ordinarycourse of business, we enter into firm sale and purchase commitmentsdenominated in many foreign currencies. We have a policy to hedge those commitments greater than $20,000 byusing foreign currency exchange forward and option contracts that aredenominated in currencies other than the functional currency of the subsidiaryresponsible for the commitment, typically the British pound, Canadian dollar,Euro, New Zealand 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 and expect to use this controlto mitigate foreign currency exchange risk.

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

CUBIC CORPORATION

CONSOLIDATED BALANCE SHEETS
| ** **                                 | ** ** | **September 30,**  | ** ** |
|--------------------------------------------|------------|-------------------------|------------|
| ** **                                 | ** ** | **2006**                | ** ** | **2005** | ** ** |
| ** **                                 | ** ** | **(in thousands)** | ** ** |
| ASSETS                                     |       |                    |       |   |   |
|                                       |       |                    |       |   |   |
| CURRENT ASSETS                             |       |                    |       |   |   |
| Cash and cash  equivalents                 |       | $                       | 42,380     |   | $ | 48,860 |   |
| Short-term  investments                    |       | 8,874                   |       | — |   |
| Accounts  receivable:                      |       |                    |       |   |   |
| Trade and other  receivables               |       | 15,686                  |       | 11,085 |   |
| Long-term  contracts                       |       | 319,847                 |       | 304,688 |   |
| Allowance for  doubtful accounts           |       | (5,086                  | )          | (5,002 | ) |
|                                       |       | 330,447                 |       | 310,771 |   |
|                                       |       |                    |       |   |   |
| Inventories                                |       | 20,209                  |       | 21,530 |   |
| Deferred income  taxes                     |       | 19,042                  |       | 18,838 |   |
| Prepaid expenses  and other current assets |       | 17,117                  |       | 17,871 |   |
| TOTAL CURRENT ASSETS                       |       | 438,069                 |       | 417,870 |   |
|                                       |       |                    |       |   |   |
| LONG-TERM CONTRACT  RECEIVABLES            |       | 2,200                   |       | 22,900 |   |
|                                       |       |                    |       |   |   |
| PROPERTY, PLANT AND  EQUIPMENT             |       |                    |       |   |   |
| Land and land  improvements                |       | 14,412                  |       | 14,990 |   |
| Buildings and  improvements                |       | 43,779                  |       | 41,154 |   |
| Machinery and  other equipment             |       | 83,301                  |       | 79,713 |   |
| Leasehold  improvements                    |       | 5,368                   |       | 3,665 |   |
| Accumulated  depreciation and amortization |       | (92,296                 | )          | (87,345 | ) |
|                                       |       | 54,564                  |       | 52,177 |   |
|                                       |       |                    |       |   |   |
| OTHER ASSETS                               |       |                    |       |   |   |
| Deferred income  taxes                     |       | 7,360                   |       | 9,253 |   |
| Goodwill                                   |       | 34,750                  |       | 34,473 |   |
| Miscellaneous  other assets                |       | 11,128                  |       | 10,607 |   |
|                                       |       | 53,238                  |       | 54,333 |   |
|                                       |       |                    |       |   |   |
| TOTAL ASSETS                               |       | $                       | 548,071    |   | $ | 547,280 |   |

 

See accompanying notes.

33

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| ** **                                                         | ** ** | **September 30,**  | ** ** |
|--------------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                         | ** ** | **2006**                | ** ** | **2005** | ** ** |
| ** **                                                         | ** ** | **(in thousands)** | ** ** |
| LIABILITIES AND  SHAREHOLDERS’ EQUITY                         |       |                    |       |   |   |
|                                                               |       |                    |       |   |   |
| CURRENT LIABILITIES                                                |       |                    |       |   |   |
| Short-term  borrowings                                             |       | $                       | 10,000     |   | $ | 26,302 |   |
| Trade accounts  payable                                            |       | 23,240                  |       | 30,256 |   |
| Customer  advances                                                 |       | 43,752                  |       | 41,239 |   |
| Accrued  compensation                                              |       | 37,176                  |       | 36,601 |   |
| Accrued pension  liability                                         |       | 6,283                   |       | 7,953 |   |
| Other current  liabilities                                         |       | 26,919                  |       | 27,270 |   |
| Income taxes  payable                                              |       | 7,099                   |       | 6,571 |   |
| Current  maturities of long-term debt                              |       | 6,078                   |       | 6,040 |   |
| TOTAL CURRENT  LIABILITIES                                         |       | 160,547                 |       | 182,232 |   |
|                                                               |       |                    |       |   |   |
| LONG-TERM DEBT                                                     |       | 38,159                  |       | 43,776 |   |
|                                                               |       |                    |       |   |   |
| OTHER LIABILITIES                                                  |       |                    |       |   |   |
| Accrued pension  liability                                         |       | 18,208                  |       | 16,179 |   |
| Deferred  compensation                                             |       | 7,565                   |       | 7,584 |   |
|                                                               |       |                    |       |   |   |
| MINORITY INTEREST                                                  |       | 366                     |       | 351 |   |
|                                                               |       |                    |       |   |   |
| COMMITMENTS AND  CONTINGENCIES                                     |       | —                  |       | — |   |
|                                                               |       |                    |       |   |   |
| SHAREHOLDERS’ EQUITY                                          |       |                    |       |   |   |
| Preferred stock,  no par value:                                    |       |                    |       |   |   |
| Authorized—5,000,000  shares                                  |       |                    |       |   |   |
| Issued and  outstanding—none                                  |       | —                  |       | — |   |
| Common stock, no  par value:                                       |       |                    |       |   |   |
| Authorized—50,000,000  shares                                 |       |                    |       |   |   |
| Issued—35,664,729  shares, outstanding—26,719,663 shares |       | 234                     |       | 234 |   |
| Additional  paid-in capital                                        |       | 12,123                  |       | 12,123 |   |
| Retained  earnings                                                 |       | 338,523                 |       | 319,200 |   |
| Accumulated  other comprehensive income                            |       | 8,415                   |       | 1,667 |   |
| Treasury stock  at cost—8,945,066 shares                      |       | (36,069                 | )          | (36,066 | ) |
|                                                               |       | 323,226                 |       | 297,158 |   |
|                                                               |       |                    |       |   |   |
| TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY                    |       | $                       | 548,071    |   | $ | 547,280 |   |

 

See accompanyingnotes.

34

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CUBIC CORPORATION

CONSOLIDATED STATEMENTSOF INCOME
| ** **                                     | ** ** | **Years Ended September 30,**                                    | ** ** |
|------------------------------------------------|------------|---------------------------------------------------------------------------------|------------|
| ** **                                     | ** ** | **2006**                                                                        | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                     | ** ** | **(amounts in thousands, except per share data)** | ** ** |
|                                           |       |                                                                            |       |   |   |   |   |
| Net sales:                                     |       |                                                                            |       |   |   |   |   |
| Products                                       |       | $                                                                               | 489,286    |   | $ | 459,050 |   | $ | 445,646 |   |
| Services                                       |       | 332,100                                                                         |       | 345,322 |   | 276,366 |   |
|                                           |       | 821,386                                                                         |       | 804,372 |   | 722,012 |   |
| Costs and expenses:                            |       |                                                                            |       |   |   |   |   |
| Products                                       |       | 411,181                                                                         |       | 389,555 |   | 327,047 |   |
| Services                                       |       | 276,032                                                                         |       | 282,986 |   | 222,123 |   |
| Selling, general  and administrative expenses  |       | 97,166                                                                          |       | 110,644 |   | 107,139 |   |
| Research and  development                      |       | 6,112                                                                           |       | 8,083 |   | 5,494 |   |
| Provision for  litigation                      |       | —                                                                          |       | — |   | 6,000 |   |
|                                           |       | 790,491                                                                         |       | 791,268 |   | 667,803 |   |
|                                           |       |                                                                            |       |   |   |   |   |
| Operating income                               |       | 30,895                                                                          |       | 13,104 |   | 54,209 |   |
|                                           |       |                                                                            |       |   |   |   |   |
| Other income  (expenses):                      |       |                                                                            |       |   |   |   |   |
| Gain on sale of  assets                        |       | 7,237                                                                           |       | — |   | 4,510 |   |
| Interest and  dividends                        |       | 1,891                                                                           |       | 1,046 |   | 431 |   |
| Interest expense                               |       | (5,112                                                                          | )          | (5,386 | ) | (4,658 | ) |
| Other income                                   |       | 433                                                                             |       | 2,668 |   | 1,813 |   |
| Minority  interest in loss of subsidiary       |       | 985                                                                             |       | 649 |   | — |   |
|                                           |       |                                                                            |       |   |   |   |   |
| Income before income  taxes                    |       | 36,329                                                                          |       | 12,081 |   | 56,305 |   |
|                                           |       |                                                                            |       |   |   |   |   |
| Income taxes                                   |       | 12,196                                                                          |       | 453 |   | 19,394 |   |
|                                           |       |                                                                            |       |   |   |   |   |
| Net income                                     |       | $                                                                               | 24,133     |   | $ | 11,628 |   | $ | 36,911 |   |
|                                           |       |                                                                            |       |   |   |   |   |
| Basic and diluted net  income per common share |       | $                                                                               | 0.90       |   | $ | 0.44 |   | $ | 1.38 |   |
|                                           |       |                                                                            |       |   |   |   |   |
| Average number of common shares outstanding    |       | 26,720                                                                          |       | 26,720 |   | 26,720 |   |

 

Seeaccompanying notes.

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CUBICCORPORATION

CONSOLIDATEDSTATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
| ** **                                                 | ** ** | ** **        | ** ** | ** **   | ** ** | **Accumulated**        | ** ** | ** **   | ** ** | ** **     | ** ** | ** ** | ** ** |
|------------------------------------------------------------|------------|-------------------|------------|--------------|------------|------------------------|------------|--------------|------------|----------------|------------|------------|------------|
| ** **                                                 | ** ** | ** **        | ** ** | ** **   | ** ** | **Other**              | ** ** | ** **   | ** ** | **Additional** | ** ** | ** ** | ** ** |
| **(in thousands except**                         | ** ** | **Comprehensive** | ** ** | **Treasury** | ** ** | **Comprehensive**      | ** ** | **Retained** | ** ** | **Paid-in**    | ** ** | **Common** | ** ** |
| **per share amounts)**                           | ** ** | **Income**        | ** ** | **Stock**    | ** ** | **Income (Loss)** | ** ** | **Earnings** | ** ** | **Capital**    | ** ** | **Stock**  | ** ** |
| October 1, 2003                                            |       |              |       | (36,066      | )          | (745                   | )          | 279,746      |       | 12,123         |       | 234        |       |
|                                                       |       |              |       |         |       |                   |       |         |       |           |       |       |       |
| Comprehensive income:                                      |       |              |       |         |       |                   |       |         |       |           |       |       |       |
| Net income                                                 |       | $                 | 36,911     |         | —     |                   | —     |         | 36,911     |           | —     |       | —     |   |
| Realized gains  on short-term investments                  |       | (160              | )          | —       |       | (160                   | )          | —       |       | —         |       | —     |       |
| Decrease in  minimum pension liability                     |       | 2,568             |       | —       |       | 2,568                  |       | —       |       | —         |       | —     |       |
| Foreign currency  translation adjustment                   |       | 8,788             |       | —       |       | 8,788                  |       | —       |       | —         |       | —     |       |
| Net unrealized  losses from cash flow hedges               |       | (356              | )          | —       |       | (356                   | )          | —       |       | —         |       | —     |       |
| Comprehensive  income                                      |       | $                 | 47,751     |         |       |                   |       |         |       |           |       |       |       |   |
|                                                       |       |              |       |         |       |                   |       |         |       |           |       |       |       |
| Cash dividends paid —  $.16 per share of common stock |       |              |       | —       |       | —                 |       | (4,276       | )          | —         |       | —     |       |
|                                                       |       |              |       |         |       |                   |       |         |       |           |       |       |       |
| September 30, 2004                                         |       |              |       | (36,066      | )          | 10,095                 |       | 312,381      |       | 12,123         |       | 234        |       |
|                                                       |       |              |       |         |       |                   |       |         |       |           |       |       |       |
| Comprehensive income:                                      |       |              |       |         |       |                   |       |         |       |           |       |       |       |
| Net income                                                 |       | $                 | 11,628     |         | —     |                   | —     |         | 11,628     |           | —     |       | —     |   |
| Increase in  minimum pension liability                     |       | (4,027            | )          | —       |       | (4,027                 | )          | —       |       | —         |       | —     |       |
| Foreign currency  translation adjustment                   |       | (3,970            | )          | —       |       | (3,970                 | )          | —       |       | —         |       | —     |       |
| Net unrealized  losses from cash flow hedges               |       | (431              | )          | —       |       | (431                   | )          | —       |       | —         |       | —     |       |
| Comprehensive  income                                      |       | $                 | 3,200      |         |       |                   |       |         |       |           |       |       |       |   |
|                                                       |       |              |       |         |       |                   |       |         |       |           |       |       |       |
| Cash dividends paid —  $.18 per share of common stock |       |              |       | —       |       | —                 |       | (4,809       | )          | —         |       | —     |       |
|                                                       |       |              |       |         |       |                   |       |         |       |           |       |       |       |
| September 30, 2005                                         |       |              |       | $            | (36,066    | )                      | $          | 1,667        |       | $              | 319,200    |       | $          | 12,123 |   | $ | 234 |   |
|                                                       |       |              |       |         |       |                   |       |         |       |           |       |       |       |
| 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    |       | $          | 12,123 |   | $ | 234 |   |

 

See accompanying notes.

36

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CUBIC CORPORATION

CONSOLIDATED STATEMENTSOF CASH FLOWS
| ** **                                                                                   | ** ** | **Years Ended September 30,** | ** ** |
|----------------------------------------------------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                                                                   | ** ** | **2006**                                     | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                                   | ** ** | **(in thousands)**                      | ** ** |
| Operating Activities:                                                                        |       |                                         |       |   |   |   |   |
| Net income                                                                                   |       | $                                            | 24,133     |   | $ | 11,628 |   | $ | 36,911 |   |
| Adjustments to  reconcile net income to net cash provided by (used in) operating activities: |       |                                         |       |   |   |   |   |
| Depreciation and  amortization                                                               |       | 8,490                                        |       | 8,631 |   | 7,466 |   |
| Deferred income  taxes                                                                       |       | 514                                          |       | (7,967 | ) | 52 |   |
| Provision for  doubful accounts                                                              |       | 145                                          |       | 4,136 |   | (193 | ) |
| Gain on sale of  assets                                                                      |       | (7,237                                       | )          | — |   | (4,510 | ) |
| Minority  interest in loss of subsidiary                                                     |       | (985                                         | )          | (649 | ) |   |   |
| Changes in  operating assets and liabilities, net of effects from acquisitions:              |       |                                         |       |   |   |   |   |
| Accounts  receivable                                                                         |       | 5,793                                        |       | 38,480 |   | (84,534 | ) |
| Inventories                                                                                  |       | 1,577                                        |       | 3,048 |   | 2,638 |   |
| Prepaid expenses                                                                             |       | (2,051                                       | )          | (4,865 | ) | (3,327 | ) |
| Accounts payable  and other current liabilities                                              |       | (2,112                                       | )          | 12,122 |   | 8,948 |   |
| Customer  advances                                                                           |       | 2,279                                        |       | (9,893 | ) | 9,047 |   |
| Income taxes                                                                                 |       | 155                                          |       | 885 |   | (129 | ) |
| Other items -  net                                                                           |       | 653                                          |       | (843 | ) | (556 | ) |
| NET CASH PROVIDED BY  (USED IN) OPERATING ACTIVITIES                                         |       | 31,354                                       |       | 54,713 |   | (28,187 | ) |
|                                                                                         |       |                                         |       |   |   |   |   |
| Investing Activities:                                                                        |       |                                         |       |   |   |   |   |
| Acquisition of  businesses, net of cash acquired                                             |       | (785                                         | )          | (358 | ) | (7,141 | ) |
| Proceeds from  sale of assets                                                                |       | 8,028                                        |       | — |   | 13,610 |   |
| Decrease  (increase) in short-term investments                                               |       | (8,874                                       | )          | 6,200 |   | (3,206 | ) |
| Purchases of  property, plant and equipment                                                  |       | (9,789                                       | )          | (8,311 | ) | (6,949 | ) |
| Other items -  net                                                                           |       | (513                                         | )          | (3,256 | ) | (784 | ) |
| NET CASH USED IN  INVESTING ACTIVITIES                                                       |       | (11,933                                      | )          | (5,725 | ) | (4,470 | ) |
|                                                                                         |       |                                         |       |   |   |   |   |
| Financing Activities:                                                                        |       |                                         |       |   |   |   |   |
| Change in  short-term borrowings                                                             |       | (16,437                                      | )          | 683 |   | 17,876 |   |
| Proceeds from  issuance of long-term debt                                                    |       | —                                       |       | — |   | 9,026 |   |
| Principal  payments on long-term debt                                                        |       | (6,052                                       | )          | (6,069 | ) | (1,902 | ) |
| Purchases of  treasury stock                                                                 |       | (3                                           | )          | — |   | — |   |
| Dividends paid  to shareholders                                                              |       | (4,810                                       | )          | (4,809 | ) | (4,276 | ) |
| NET CASH PROVIDED BY  (USED IN) FINANCING ACTIVITIES                                         |       | (27,302                                      | )          | (10,195 | ) | 20,724 |   |
|                                                                                         |       |                                         |       |   |   |   |   |
| Effect of exchange  rates on cash                                                            |       | 1,401                                        |       | (555 | ) | 185 |   |
|                                                                                         |       |                                         |       |   |   |   |   |
| NET INCREASE (DECREASE)  IN CASH AND CASH EQUIVALENTS                                        |       | (6,480                                       | )          | 38,238 |   | (11,748 | ) |
|                                                                                         |       |                                         |       |   |   |   |   |
| Cash and cash  equivalents at the beginning of the year                                      |       | 48,860                                       |       | 10,622 |   | 22,370 |   |
|                                                                                         |       |                                         |       |   |   |   |   |
| CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR                                             |       | $                                            | 42,380     |   | $ | 48,860 |   | $ | 10,622 |   |

 

See accompanying notes.

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CUBIC CORPORATION

NOTES TOCONSOLIDATED FINANCIAL STATEMENTS

September 30, 2006

NOTE 1—SUMMARY OFSIGNIFICANT ACCOUNTING POLICIES

Organization andNature of the Business: Cubic Corporation (“Cubic” or “the Company”) designs, develops andmanufactures products which are mainly electronic in nature, providesgovernment services and services related to products previously produced byCubic and others. The Company’s principal lines of business are defenseelectronics and transportation fare collection systems. Principal customers fordefense products and services are the United States and foreign governments.Transportation fare collection systems are sold primarily to large localgovernment agencies in the United States and worldwide.

Principles ofConsolidation:  Theconsolidated financial statements include the accounts of Cubic Corporation,its majority-owned subsidiaries and a 50% owned joint venture of which theCompany is the primary beneficiary. All significant intercompany balances andtransactions have been eliminated in consolidation. The consolidation offoreign subsidiaries requires translation of their assets and liabilities intoU.S. dollars at year-end exchange rates. Statements of income and cash flowsare translated at the average exchange rates for each year.

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

Concentration ofCredit Risk:  TheCompany has established guidelines pursuant to which its cash and cashequivalents are diversified among various money market instruments andinvestment funds. These guidelines emphasize the preservation of capital byrequiring minimum credit ratings assigned by established credit organizations.  Diversification is achieved by specifyingmaximum investments in each instrument type and issuer. The majority of theseinvestments 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 fair value of long-term debt is basedupon quoted market prices for the same or similar debt instruments andapproximates the carrying value of the debt. Receivables consist primarily of amounts due from U.S. and foreigngovernments for defense products and local government agencies fortransportation systems.  Due to thenature of its customers, the Company generally does not requirecollateral.  The Company has limitedexposure to credit risk as the Company has historically collected substantiallyall of its receivables from government agencies.  The Company generally requires no allowancefor doubtful accounts for these customers unless specific contractualcircumstances warrant it.

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

Inventories:  Inventories are stated at the lower of costor market. Cost is determined using primarily the first-in, first-out (FIFO)method, which approximates current replacement cost. Work in process is statedat the actual production and engineering costs incurred to date, includingapplicable overhead, and is reduced by charging any amounts in excess ofestimated realizable value to cost of sales. Although costs incurred forcertain government contracts include general and administrative costs asallowed by government cost accounting standards, the amounts remaining ininventory at September 30, 2006 and 2005 were immaterial.

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Property, Plantand Equipment: Property, plant and equipment are carried at cost. Depreciation isprovided in amounts sufficient to amortize the cost of the depreciable assetsover their estimated useful lives. Generally, straight-line methods are usedfor real property over estimated useful lives ranging from 15 to 39 years orthe term of the underlying lease for leasehold improvements.  Accelerated methods (declining balance and sum-of-the-years-digits)are used for machinery and equipment over estimated useful lives ranging fromfive to seven years.  Provisions fordepreciation of plant and equipment and amortization of leasehold improvementsamounted to $7,648,000, $8,096,000, and $6,979,000 in 2006, 2005 and 2004,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, 2006 are asfollows:
| ** **                                                | ** ** | **Transportation  Segment** | ** ** | **Defense  Segment** | ** ** | **Total** | ** ** |
|-----------------------------------------------------------|------------|-----------------------------|------------|----------------------|------------|-----------|------------|
| ** **                                                | ** ** | **(in thousands)**     | ** ** |
| Balances at  October 1, 2004                              |       | $                           | 7,951      |                 | $          | 27,222    |       | $ | 35,173 |   |
| Goodwill acquired during the year                         |       | 358                         |       | —               |       | 358       |       |
| Utilization of net operating loss carryforwards  acquired |       | —                      |       | (968                 | )          | (968      | )          |
| Foreign currency exchange rate changes                    |       | (159                        | )          | 69                   |       | (90       | )          |
| Balances at  September 30, 2005                           |       | 8,150                       |       | 26,323               |       | 34,473    |       |
| Foreign currency exchange rate changes                    |       | 465                         |       | (188                 | )          | 277       |       |
| Balances at September  30, 2006                           |       | $                           | 8,615      |                 | $          | 26,135    |       | $ | 34,750 |   |

 

Impairment ofLong-Lived Assets:  Thecarrying values of long-lived assets other than goodwill are generallyevaluated for impairment only if events or changes in facts and circumstancesindicate that carrying values may not be recoverable. Any impairment determinedwould be recorded in the current period and would be measured by comparing thefair value 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 beenrecorded for the years ended September 30, 2006, 2005, and 2004.

DeferredCompensation:  Deferredcompensation includes amounts due under an arrangement under which certainmembers of management may elect to defer receiving payment for a portion oftheir compensation until periods after their respective retirements.  Interest on such accrued compensation accruesat market rates, 5.1% at September 30, 2006, until such time as it is paid infull.

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ComprehensiveIncome:  Comprehensiveincome and its components are presented in the statement of changes inshareholders’ equity.  Accumulatedcomprehensive income (loss) consisted of the following:
| September 30,                          | ** ** | **2006**                | ** ** | **2005** | ** ** |
|---------------------------------------------|------------|-------------------------|------------|----------|------------|
| ** **                                  | ** ** | **(in thousands)** | ** ** |
| Minimum pension  liability                  |       | $                       | (8,633     | )        | $          | (11,069 | ) |
| Foreign currency  translation               |       | 17,048                  |       | 12,728   |       |
| Net unrealized  gains from cash flow hedges |       | —                  |       | 8        |       |
|                                        |       | $                       | 8,415      |     | $          | 1,667 |   |

 

The minimumpension liability is shown net of tax benefits of $4,650,000 and $5,961,000 atSeptember 30, 2006 and 2005, respectively. Deferred income taxes are not recognized for translation-relatedtemporary differences of foreign subsidiaries whose undistributed earnings areconsidered to be permanently invested. The net unrealized gain from cash flow hedges is shown net of taxliabilities of $0 and $4,000 in 2006 and 2005, respectively.

Gain on Sale ofAssets:  During thefirst quarter of fiscal year 2006, the Company sold real estate that had beenheld for investment purposes for approximately $8 million, resulting in a gainbefore applicable income taxes of $7.2 million.

RevenueRecognition:  Sales andprofits under the Company’s long-term fixed-price contracts, which generally requirea significant amount of development effort in relation to total contract value,are recognized using the cost-to-cost percentage of completion method ofaccounting. Sales and profits are recorded based on the ratio of costs incurredto estimated total costs at completion. In the early stages of contractperformance, profit is not recognized until progress is demonstrated orcontract milestones are reached.

Sales undercost-reimbursement type contracts are recorded as costs are incurred.Applicable estimated profits are included in earnings based on the ratio ofcosts incurred to the estimated total costs at completion. Sales of productsare recorded when a firm sales agreement is in place, delivery has occurred andcollectibility of the fixed or determinable sales price is reasonably assured.Sales of services are recorded when performed in accordance with contracts orservice agreements.

Amountsrepresenting contract change orders, claims or other items are included in thecontract value only when they can be reliably estimated and realization isconsidered probable. Incentives or penalties and awards applicable toperformance on contracts are considered in estimating sales and profits, andare recorded when there is sufficient information to assess anticipatedcontract performance. Incentive provisions that increase or decrease earningsbased solely on a single significant event are not recognized until the eventoccurs.

Sales and profitson contracts that specify multiple deliverables are allocated to separate unitsof accounting when there is objective evidence that each accounting unit hasvalue to the customer on a stand-alone basis.

Provisions aremade on a current basis to fully recognize any anticipated losses oncontracts.  Cash received prior torevenue recognition is classified as customer advances on the balance sheet.

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Income taxes:  The provision for income taxes includes federal, state, local, and foreign taxes.  Tax credits, primarily for research and development and export programs are recognized as a reduction of the provision for income taxes in the year in which they are available for tax purposes.  Deferred income taxes are provided on temporary differences between assets and liabilities for financial reporting and tax purposes as measured by enacted tax rates expected to apply when the temporary differences are settled or realized.  Valuation allowances are established for deferred tax assets when the amount of expected future taxable income is not likely to support the use of the deduction or credit. Deferred tax liabilities generally represent deductions that have been taken on tax returns but have not yet been recognized as expense in the financial statements. The Company has not recognized any United States tax expense on undistributed earnings of its foreign subsidiaries since it intends to reinvest the earnings outside the United States for the foreseeable future. Such undistributed earnings totaled approximately $37.3 million at September 30, 2006.

Earnings Per Share:  Per share amounts are based upon the weightedaverage number of shares of common stock outstanding.

Derivative Financial Instruments:   The Company’s use of derivativefinancial instruments is limited to foreign exchange forward and optioncontracts used to hedge significant contract sales and purchase commitmentsthat are denominated in currencies other than the functional currency of thesubsidiary responsible 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 and payments to foreign vendors, and the value of foreign currencydenominated receipts from customers. At September 30, 2006, the Company hadforeign exchange contracts with a notional value of $100.5 million outstanding.

The Companyaccounts for derivatives pursuant to SFAS 133, *Accountingfor Derivative Instruments and Hedging Activities*, as amended. Thisstandard requires that all derivative instruments be recognized in thefinancial statements and measured at fair value regardless of the purpose orintent for holding them. The classification of gains and losses resulting fromchanges in the fair values of derivatives is dependent on the intended use ofthe derivative 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, 2006, 2005 and 2004.

AccountingStandards:  OnJuly 13, 2006, the Financial Accounting Standards Board issued InterpretationNo. 48, *Accounting for Uncertainty in IncomeTaxes*(FIN 48), which is effective for fiscal years beginning afterDecember 31, 2006. The purpose of FIN 48 is to clarify and set forth consistentrules for accounting for uncertain tax positions in accordance with FAS 109, *Accounting for Income Taxes*. Thecumulative effect of applying the provisions of this interpretation arerequired to be reported separately as an adjustment to the opening balance ofretained earnings in the year of adoption. Management is in the process ofreviewing and evaluating FIN 48, and therefore the ultimate impact of its adoptionis not yet known.

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In September 2006, the Financial AccountingStandards Board published FASB Statement of Financial Accounting Standards(SFAS) No. 158 (SFAS 158), **Employers’ Accounting for Defined Benefit Pension andOther Postretirement Plans,**to require an employer to fullyrecognize the obligations associated with single-employer defined benefitpension, retiree healthcare, and other postretirement plans in their financialstatements. The new standard is effective for fiscal years ending after December15, 2006. Previous standards required an employer to disclose the completefunded status of its plan only in the notes to the financial statements.Moreover, because those standards allowed an employer to delay recognition ofcertain changes in plan assets and obligations that affected the costs ofproviding benefits, employers reported an asset or liability that almost alwaysdiffered from the plan’s funded status. Under SFAS 158, a defined benefitpostretirement plan sponsor that is a public or private company or anongovernmental not-for-profit organization must (a) recognize in its statementof financial position an asset for a plan’s overfunded status or a liabilityfor the plan’s underfunded status, (b) measure the plan’s assets and itsobligations that determine its funded status as of the end of the employer’sfiscal year (with limited exceptions), and (c) recognize, as a component ofother comprehensive income, the changes in the funded status of the plan thatarise during the year but are not recognized as components of net periodicbenefit cost pursuant to SFAS 87, **Employers’ Accounting for Pensions,**orSFAS 106, **Employers’Accounting for Postretirement Benefits Other Than Pensions.**SFAS158 also requires an employer to disclose in the notes to financial statementsadditional information on how delayed recognition of certain changes in thefunded status of a defined benefit postretirement plan affects net periodicbenefit cost for the next fiscal year. We are in the process of reviewing and evaluating SFAS 158, andtherefore the ultimate impact of its adoption in not yet known.

In May 2005, the FASB issued SFAS No. 154, “AccountingChanges and Error Corrections” (SFAS 154). This Statement replaces APB OpinionNo. 20, “Accounting Changes,” and SFAS 3, “Reporting Accounting Changes inInterim Financial Statements.” SFAS 154 sets forth new guidelines on accountingfor voluntary changes in accounting principle and requires certain disclosures.It also applies to the unusual situation in which an accounting pronouncementis issued but does not include specific transition guidelines. This Statementrequires such accounting principle changes to be applied retrospectively to allprior periods presented and an adjustment to the balance of assets or liabilitiesaffected along with an offsetting adjustment to retained earnings for thecumulative effect on periods prior to those presented. This Statement carriesforward without change the guidance in APB Opinion No. 20 for reporting thecorrection of an error and a change in accounting estimate. SFAS 154 will beeffective for the Company beginning with fiscal year 2007.

Use of Estimates:  The preparation of financial statements inconformity with U.S. generally accepted accounting principles requiresmanagement to make estimates and assumptions that affect the amounts reportedin the financial statements and accompanying notes. Significant estimatesinclude the estimated total costs at completion of the Company’s long-termcontracts, estimated discounted cash flows of reporting units used for goodwillimpairment testing, and the estimated rates of return and discount ratesrelated to the Company’s defined benefit pension plans. Actual results coulddiffer from those estimates.

Risks andUncertainties:  TheCompany is subject to the normal risks and uncertainties of performing large,multiyear, often fixed-price contracts. In addition, the Company is subject toaudit of incurred costs related to many of its U.S. Government contracts. Theseaudits could produce different results than the Company has estimated; however,the Company’s experience has been that its costs are acceptable to thegovernment.

Reclassifications:  Deferred tax assets amounting toapproximately $6.0 million as of September 30, 2005 were reclassified fromcurrent to noncurrent assets to conform to the current year classification.

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NOTE2—INVESTMENTS IN JOINT VENTURES

TheCompany is 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. The agreement requires the Company to invest up to $15 million in thejoint venture over the first three years of operation, which commenced in 2005,while Rafael will provide certain of its intellectual property to the jointventure in a royalty-free arrangement. As of September 30, 2006 the Company hadinvested $4 million in the joint venture. In 2006 the agreement was amended toallow the joint venture to borrow up to $1 million each from Rafael and Cubic.As of September 30, 2006 outstanding borrowings under this arrangement amountedto $800 thousand from each party. In 2006, the joint venture was awarded itsfirst contract and generated sales of approximately $1.0 million. It incurredoperating losses of $2.0 million and $1.3 million in 2006 and 2005,respectively.

Under the provisions of FIN 46 “*Consolidationof Variable Interest Entities,*” the Company consolidates the abovejoint venture, as it is the primary beneficiary of the joint venturearrangement. Minority interest in the net loss from this business is reflectedin the consolidated income statements and minority interest in the net assetsof the joint venture is included in the consolidated balance sheets.

The Company owns37.5% of the common stock of Transaction Systems Limited (TranSys), anunconsolidated joint venture company in the United Kingdom. This joint venturecompany was formed to bid on a contract called “PRESTIGE” (Procurement ofRevenue Services, Ticketing, Information, Gates and Electronics), the purposeof which is to outsource most of the functions of the Transport for London(TfL) fare collection system for a period of seventeen years. In August 1998,TranSys was awarded the contract and began operations. Cubic and the otherparties to the joint venture participate in the PRESTIGE contract solelythrough subcontracts from TranSys. All of the work to be performed by TranSysis subcontracted to the joint venture partners and the joint venture providesfor the pass-through of virtually all revenues from TfL to the joint venturepartners. As a result, TranSys has operated on a break-even basis and isexpected to continue to do so. If TranSys were to eventually generate a netincome or loss, the joint venture partners would share in this income or lossin accordance with their percentage ownership in the joint venture. The Company’sinvestment in the joint venture is immaterial.

TfLelected to finance the project through private financing rather than incurringpublic debt. Financing for the project was provided by a syndicate of bankswhich participated in creating the project’s financial structure. During thefirst four years of the project, through August 2002, the banks providedfinancing to TranSys totaling 200 million British Pounds (approximately $374million). Debt servicing began in 2003 and will continue until the debt isfully paid in 2013. This debt is guaranteed by TfL and is nonrecourse to thejoint venture partners.

TheCompany has also provided certain performance guarantees to various partiesrelated to the PRESTIGE contract and the TranSys joint venture, including TfL,the banks and the joint venture partners. The joint venture partners have alsoprovided similar performance guarantees to the same parties and to Cubic.

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Summarizedunaudited financial information for this unconsolidated joint venture is asfollows:
| **September 30,**                            | ** ** | ** ** | ** ** | **2006**               | ** ** | **2005**   | ** ** |
|---------------------------------------------------|------------|------------|------------|------------------------|------------|------------|------------|
| ** **                                        | ** ** | ** ** | ** ** | **(in millions)** | ** ** |
| **Balance  Sheets:**                              | ** ** | ** ** | ** ** | ** **             | ** ** | ** ** | ** ** |
| Cash                                              |       |       |       | $                      | 55.6       |       | $          | 49.7 |   |
| Other current  assets                             |       |       |       | 73.0                   |       | 54.8       |       |
| Noncurrent  unbilled contract accounts receivable |       |       |       | 229.4                  |       | 240.2      |       |
| Total Assets                                      |       |       |       | $                      | 358.0      |       | $          | 344.7 |   |
|                                              |       |       |       |                   |       |       |       |
| Current  liabilities                              |       |       |       | $                      | 49.8       |       | $          | 36.7 |   |
| Long-term debt                                    |       |       |       | 308.2                  |       | 308.0      |       |
| Equity                                            |       |       |       | —                 |       | —     |       |
| Total  Liabilities and Equity                     |       |       |       | $                      | 358.0      |       | $          | 344.7 |   |

 
| **Years ended  September 30,** | ** ** | **2006**          | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|--------------------------------|------------|-------------------|------------|------------|------------|------------|------------|
| ** **                     | ** ** | **(in millions)** | ** ** |
| **Statement  of Operations:**  | ** ** | ** **        | ** ** | ** ** | ** ** | ** ** | ** ** |
| Sales                          |       | $                 | 118.6      |       | $          | 132.0      |       | $ | 136.0 |   |
| Operating profit               |       | $                 | —     |       | $          | —     |       | $ | — |   |
| Net income                     |       | $                 | —     |       | $          | —     |       | $ | — |   |

 

NOTE 3—ACCOUNTSRECEIVABLE

The components ofaccounts receivable under long-term contracts are as follows:
| **September 30,**                                                       | ** ** | **2006**                | ** ** | **2005** | ** ** |
|------------------------------------------------------------------------------|------------|-------------------------|------------|----------|------------|
| ** **                                                                   | ** ** | **(in thousands)** | ** ** |
| U.S. Government  Contracts:                                                  |       |                    |       |     |       |
| Amounts billed                                                               |       | $                       | 36,146     |     | $          | 43,381 |   |
| Recoverable costs and accrued profits on progress  completed—not billed |       | 62,986                  |       | 88,490   |       |
|                                                                         |       | 99,132                  |       | 131,871  |       |
| Commercial  Customers:                                                       |       |                    |       |     |       |
| Amounts billed                                                               |       | 35,069                  |       | 26,237   |       |
| Recoverable costs and accrued profits on progress  completed—not billed |       | 187,846                 |       | 169,480  |       |
|                                                                         |       | 222,915                 |       | 195,717  |       |
|                                                                         |       | 322,047                 |       | 327,588  |       |
| Less estimated amounts not currently due—commercial  customers          |       | (2,200                  | )          | (22,900  | )          |
|                                                                         |       | $                       | 319,847    |     | $          | 304,688 |   |

 

A portion ofrecoverable costs and accrued profits on progress completed is billable underprogress payment provisions of the related contracts. The remainder of theseamounts is billable upon delivery of

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products or furnishing ofservices, with an immaterial amount subject to retainage provisions of thecontracts.  It is anticipated thatsubstantially all of the unbilled portion of receivables identified as currentassets will be billed and collected under progress billing provisions of thecontracts or upon completion of performance tests and/or acceptance by thecustomers during fiscal 2007.

NOTE4—INVENTORIES

Inventoriesare classified as follows:
| **September 30,**                                           | ** ** | **2006**                | ** ** | **2005** | ** ** |
|------------------------------------------------------------------|------------|-------------------------|------------|----------|------------|
| ** **                                                       | ** ** | **(in thousands)** | ** ** |
|                                                             |       |                    |       |     |       |
| Finished  products                                               |       | $                       | 563        |     | $          | 471 |   |
| Work in process  and inventoried costs under long-term contracts |       | 16,194                  |       | 17,113   |       |
| Materials and  purchased parts                                   |       | 3,452                   |       | 3,946    |       |
|                                                             |       | $                       | 20,209     |     | $          | 21,530 |   |

 

AtSeptember 30, 2006 and 2005, work in process and inventoried costs underlong-term contracts included approximately $7.7 million and $5.8 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.

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NOTE5—FINANCING ARRANGEMENTS

Long-term debtconsists of the following:
| **September 30,**                                                                                                                                                                     | ** ** | **2006**                | ** ** | **2005** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|----------|------------|
| ** **                                                                                                                                                                                 | ** ** | **(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. |       | $                       | 32,000     |     | $          | 36,000 |   |
|                                                                                                                                                                                       |       |                    |       |     |       |
| Unsecured note  payable to an insurance company, with annual principal payments of $1,429,000  due in November. Interest at 6.11% is payable semiannually in November and  May.            |       | 4,286                   |       | 5,714    |       |
|                                                                                                                                                                                       |       |                    |       |     |       |
| Mortgage note  from a UK financial institution, with quarterly installments of principal and  interest at 6.5%                                                                        |       | 7,951                   |       | 8,102    |       |
|                                                                                                                                                                                       |       |                    |       |     |       |
|                                                                                                                                                                                       |       | 44,237                  |       | 49,816   |       |
| Less current  portion                                                                                                                                                                      |       | (6,078                  | )          | (6,040   | )          |
|                                                                                                                                                                                       |       |                    |       |     |       |
|                                                                                                                                                                                       |       | $                       | 38,159     |     | $          | 43,776 |   |

 

The terms of thenotes payable and other financial instruments include provisions that requireand/or limit, among other financial ratios and measurements, the permittedlevels of working capital, debt and tangible net worth and coverage of fixedcharges. The Company has also provided certain performance guarantees tovarious parties related to the PRESTIGE contract and the TranSys joint venture.As consideration for the performance guarantee, the Company has agreed tocertain financial covenants including limits on working capital, debt, tangiblenet worth and cash flow coverage. At September 30, 2006, the most restrictivecovenant under these agreements leaves consolidated retained earnings of $124.0million available for the payment of dividends to shareholders, purchases ofthe Company’s common stock and other charges to shareholders’ equity. To date,there have been no covenant violations and the Company believes it will be ableto meet the covenant financial performance obligations described above.

The Companymaintains a short-term borrowing arrangement totaling 10 million British pounds(equivalent to approximately $18.7 million) with a U.K. financial institutionto help meet the short-term working capital requirements of its subsidiary,Cubic Transportation Systems Ltd. Any outstanding balances are guaranteed byCubic Corporation, are repayable on demand, and bear interest at the bank’sbase rate, as defined, plus one percent. At September 30, 2006, no amounts wereoutstanding under this borrowing arrangement.

The Companymaintains a short-term borrowing arrangement in New Zealand totaling $2 millionNew Zealand dollars (equivalent to approximately $1.3 million) to help meet theshort-term working capital requirements of its subsidiary in that country.  At September 30, 2006, no amounts wereoutstanding under this borrowing arrangement.

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The Company has a $150 million revolving line of credit arrangement witha group of U.S. banks which expires in March 2010. As of September 30, 2006 theCompany had $10 million of short-term debt outstanding under this line ofcredit at an interest rate of 6.2% and $9.9 million in letters of credit.

Maturities oflong-term debt for each of the five years in the period ending September 30,2011, are as follows: 2007 – $6.0 million; 2008 – $6.0 million; 2009 – $6.0 million; 2010 – $4.6 million; 2011 –$4.6 million.

Interest paidamounted to $4.7 million, $5.5 million, and $4.6 million in 2006, 2005, and2004, respectively.

As of September30, 2006 the Company had letters of credit and bank guarantees outstandingtotaling $67.5 million, which guarantee either the Company’s performance orcustomer advances under certain contracts. In addition, the Company hadfinancial letters of credit outstanding totaling $6.2 million as of September30, 2006, which primarily guarantee the Company’s payment of certainself-insured liabilities. The Company has never had a drawing on a letter ofcredit instrument, 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 $3.0million and $3.1 million as of September 30, 2006 and 2005, respectively.

NOTE 6—COMMITMENTS

The Company leasescertain office, manufacturing and warehouse space, and miscellaneous computerand other office equipment under noncancelable operating leases expiring invarious years through 2015.  Theseleases, some of which may be renewed for periods up to 10 years, generallyrequire the lessee to pay all maintenance, insurance and property taxes.Several leases are subject to periodic adjustment based on price indices orcost increases. Rental expense, net of sublease income, for all operatingleases amounted to $6.9 million, $6.8 million, and $5.4 million in 2006, 2005,and 2004, respectively.

Futureminimum payments, net of minimum sublease income, under noncancelable operatingleases with initial terms of one year or more consist of the following atSeptember 30, 2006 (in thousands):

| 2007       |   | $     | 5,032  |   |
|------------|--------|-------|--------|--------|
| 2008       |   | 3,841 |   |
| 2009       |   | 3,214 |   |
| 2010       |   | 2,166 |   |
| 2011       |   | 1,916 |   |
| Thereafter |   | 2,369 |   |
|       |   | $     | 18,538 |   |

 

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NOTE 7—INCOMETAXES

Significantcomponents of the provision for income taxes are as follows:
| **Years ended September 30,** | ** ** | **2006**                | ** ** | **2005** | ** ** | **2004** | ** ** |
|----------------------------------------------|------------|-------------------------|------------|----------|------------|----------|------------|
| ** **                                   | ** ** | **(in thousands)** | ** ** |
|                                         |       |                    |       |     |       |     |       |
| Current:                                     |       |                    |       |     |       |     |       |
| Federal                                      |       | $                       | 4,623      |     | $          | 725      |       | $ | 11,069 |   |
| State                                        |       | 1,526                   |       | 1,224    |       | 2,516    |       |
| Foreign                                      |       | 5,533                   |       | 6,471    |       | 5,757    |       |
| Total current                                |       | 11,682                  |       | 8,420    |       | 19,342   |       |
|                                         |       |                    |       |     |       |     |       |
| Deferred  (credit):                          |       |                    |       |     |       |     |       |
| Federal                                      |       | (594                    | )          | (5,534   | )          | (298     | )          |
| State                                        |       | 325                     |       | (1,274   | )          | 152      |       |
| Foreign                                      |       | 783                     |       | (1,159   | )          | 198      |       |
| Total deferred                               |       | 514                     |       | (7,967   | )          | 52       |       |
| Total income tax  expense                    |       | $                       | 12,196     |     | $          | 453      |       | $ | 19,394 |   |

 

48

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Deferred taxassets and liabilities are determined based on differences between financialreporting and tax bases of assets and liabilities, and are measured using theenacted tax rates and laws that will be in effect when the differences areexpected to reverse. Significant components of the Company’s deferred taxassets and liabilities are as follows:
| **September 30,**                                  | ** ** | **2006**                | ** ** | **2005** | ** ** |
|---------------------------------------------------------|------------|-------------------------|------------|----------|------------|
| ** **                                              | ** ** | **(in thousands)** | ** ** |
| Deferred tax  assets:                                   |       |                    |       |     |       |
| Accrued employee benefits                               |       | $                       | 6,523      |     | $          | 5,236 |   |
| Additional minimum pension liability                    |       | 4,650                   |       | 5,960    |       |
| Allowance for doubtful accounts                         |       | 2,265                   |       | 1,962    |       |
| Long-term contracts and inventory valuation  reductions |       | 9,142                   |       | 10,281   |       |
| Allowances for loss contingencies                       |       | 4,371                   |       | 4,119    |       |
| Deferred compensation                                   |       | 3,123                   |       | 3,103    |       |
| Book over tax depreciation                              |       | 1,594                   |       | 1,919    |       |
| Other                                                   |       | 534                     |       | 1,042    |       |
| Deferred tax assets                                     |       | 32,202                  |       | 33,622   |       |
|                                                    |       |                    |       |     |       |
| Deferred tax  liabilities:                              |       |                    |       |     |       |
| Amortization of goodwill and intangibles                |       | 2,652                   |       | 2,370    |       |
| Prepaid expenses                                        |       | 1,740                   |       | 1,268    |       |
| State taxes                                             |       | 1,276                   |       | 1,079    |       |
| Other                                                   |       | 132                     |       | 814      |       |
| Deferred tax liabilities                                |       | 5,800                   |       | 5,531    |       |
| Net deferred tax asset                                  |       | $                       | 26,402     |     | $          | 28,091 |   |

 

49

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The reconciliationof income tax computed at the U.S. federal statutory tax rate to income taxexpense is as follows:
| **Years ended September 30,**             | ** ** | **2006**                | ** ** | **2005** | ** ** | **2004** | ** ** |
|----------------------------------------------------------|------------|-------------------------|------------|----------|------------|----------|------------|
| ** **                                               | ** ** | **(in thousands)** | ** ** |
|                                                     |       |                    |       |     |       |     |       |
| Tax at federal  statutory rate                           |       | $                       | 12,715     |     | $          | 4,228    |       | $ | 19,707 |   |
| State income taxes  (benefit), net of federal tax effect |       | 1,203                   |       | (32      | )          | 1,734    |       |
| Income exclusion on  export sales                        |       | (727                    | )          | (437     | )          | (946     | )          |
| Nondeductible expenses                                   |       | 292                     |       | 291      |       | 288      |       |
| Reversal of reserve  accrued for tax contingencies       |       | (1,060                  | )          | (2,788   | )          | —   |       |
| Tax effect from foreign  earnings repatriation           |       | 1,660                   |       | —   |       | —   |       |
| Tax effect from foreign  subsidiaries                    |       | (866                    | )          | (647     | )          | (668     | )          |
| Tax credits and other                                    |       | (1,021                  | )          | (162     | )          | (721     | )          |
|                                                     |       | $                       | 12,196     |     | $          | 453      |       | $ | 19,394 |   |

 

The Company is subject to ongoing audits from various taxing authoritiesin the jurisdictions in which it does business. As of September 30, 2006, the Company’s open tax years in significantjurisdictions include 2004-2006 in both the U.S. and the U.K. The Companybelieves it has adequately provided for uncertain tax issues not yet resolvedwith federal, state and foreign tax authorities. Although not probable, themost adverse resolution of these issues could result in additional charges toearnings in future periods. Based upon a consideration of all relevant factsand circumstances, the company does not believe the ultimate resolution ofuncertain tax issues for all open tax periods will have a materially adverseeffect upon its results of operations or financial condition. As of September30, 2006 and 2005 the Company had income tax reserves of $5.6 million and $8.8million, respectively, included in Income Taxes Payable.

As indicated in the table above, in 2006 and 2005 the Company was ableto reverse $1.1 and $2.8 million, respectively, of tax reserves established inprevious years due to the resolution of uncertain tax issues.

The Company made income taxpayments, net of refunds, totaling $11.6 million, $6.9 million, and $18.7million in 2006, 2005, and 2004, respectively.

Income beforeincome taxes includes the following components:
| **Years ended September 30,** | ** ** | **2006**                | ** ** | **2005** | ** ** | **2004** | ** ** |
|----------------------------------------------|------------|-------------------------|------------|----------|------------|----------|------------|
| ** **                                   | ** ** | **(in thousands)** | ** ** |
|                                         |       |                    |       |     |       |     |       |
| United States                                |       | $                       | 17,346     |     | $          | (1,151   | )          | $ | 37,383 |   |
| Foreign                                      |       | 18,983                  |       | 13,232   |       | 18,922   |       |
| Total                                        |       | $                       | 36,329     |     | $          | 12,081   |       | $ | 56,305 |   |

 

50

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In December 2004, Financial Accounting Standards Board Position109-2 was issued and established standards for how an issuer accounts for aspecial one-time dividends received deduction on the repatriation of certainforeign earnings to a U.S. taxpayer pursuant to the American Jobs Creation Actof 2004 (the Act). The Financial Accounting Standards Board (FASB) staffbelieves that the lack of clarification of certain provisions within the Actand the timing of the enactment necessitated a practical exception to theStatement of Financial Accounting Standards No. 109, *Accounting for Income Taxes*(SFAS 109),requirement to reflect in the period of enactment the effect of a new tax law.Accordingly, an enterprise was allowed time beyond the financial reportingperiod of enactment to evaluate the effect of the Act on its plan forreinvestment or repatriation of foreign earnings for purposes of applyingSFAS 109. During the third fiscal quarter of 2006 management determinedthat the Company had sufficient information to make an informed decision on theimpact of the Act on its repatriation plans and a provision of $1.5 million wasrecorded at that time. In the fourth quarter, an extraordinary dividend, asdefined by the Act, was paid by the Company’s U.K. subsidiary amounting to$48.3 million.

In light of this extraordinarydividend and changing market conditions, management reevaluated the Company’scapital requirements in Europe to determine what portion of its investment canbe considered indefinitely reinvested. Management’s analysis determined thatthe level of investment the Company currently has in Europe will be requiredfor the foreseeable future and is considered indefinitely reinvested;therefore, no additional provision for taxes due upon repatriation has beenprovided. However, the Company currently has no firm plans to invest furthercapital in Europe, so management has concluded that a provision for U.S. taxeson any future earnings in Europe will me made until such time as the Company’splans for investment in Europe become solidified.

Undistributedearnings of all the Company’s foreign subsidiaries amounted to approximately$37.3 million at September 30, 2006. Those earnings are considered to beindefinitely reinvested, and accordingly, no provision for U.S. federal andstate income taxes has been provided thereon. Upon distribution of thoseearnings in the form of dividends or otherwise, the Company would be subject toboth U.S. income taxes and withholding taxes payable to the foreign countries,but would also 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; however, the Company does not believe the amount wouldbe material.

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NOTE8—PENSION, PROFIT SHARING AND OTHER RETIREMENT PLANS

The Company hasprofit sharing and other defined contribution retirement plans that providebenefits for most employees in the U.S. An employee is eligible to participatein these plans 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 five years. A substantial portion of Companycontributions to these plans is discretionary with the Board of Directors.Company contributions to the plans aggregated $11.6 million, $11.5 million and$9.9 million in 2006, 2005 and 2004, respectively.

Approximatelyone-half of the Company’s nonunion employees in the U.S. are covered by anoncontributory defined benefit pension plan. The Company and its Board ofDirectors have approved an amendment to freeze plan benefits (“curtailment”).The effect of the curtailment is that no new benefits will be accrued afterDecember 31, 2006. The financial impact of this curtailment is reflected in thefollowing disclosures. Approximately one-half of the Company’s Europeanemployees are covered by a contributory defined benefit pension plan. TheCompany’s funding policy provides that contributions will be at least equal tothe minimum amounts mandated by statutory requirements. The following tablesets forth changes in the benefit obligation and plan assets for these definedbenefit plans and the net amount recognized in the Consolidated Balance Sheets:
| **September 30,**                              | ** ** | **2006**                | ** ** | **2005**   | ** ** |
|-----------------------------------------------------|------------|-------------------------|------------|------------|------------|
| ** **                                          | ** ** | **(in thousands)** | ** ** |
| **Change  in benefit obligations:**                 | ** ** | ** **              | ** ** | ** ** | ** ** |
| Net benefit obligation at the beginning of the year |       | $                       | 158,008    |       | $          | 130,728 |   |
| Service cost                                        |       | 8,041                   |       | 7,347      |       |
| Interest cost                                       |       | 8,930                   |       | 7,902      |       |
| Actuarial loss (gain)                               |       | (506                    | )          | 16,288     |       |
| Curtailment                                         |       | (7,416                  | )          | —     |       |
| Participant contributions                           |       | 1,081                   |       | 1,079      |       |
| Gross benefits paid                                 |       | (3,285                  | )          | (3,649     | )          |
| Foreign currency exchange rate changes              |       | 3,647                   |       | (1,687     | )          |
| Net benefit  obligation at the end of the year      |       | 168,500                 |       | 158,008    |       |
|                                                     |            |                         |            |            |            |  |  |

 

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| **September 30,**                                                                               | ** ** | **2006**                | ** ** | **2005**   | ** ** |
|------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|------------|------------|
| ** **                                                                                           | ** ** | **(in thousands)** | ** ** |
| **Change  in plan assets:**                                                                          | ** ** | ** **              | ** ** | ** ** | ** ** |
| Fair value of  plan assets at the beginning of the year                                              |       | 116,906                 |       | 96,473     |       |
| Actual return on  plan assets                                                                        |       | 13,125                  |       | 16,566     |       |
| Employer  contributions                                                                              |       | 6,506                   |       | 8,170      |       |
| Participant  contributions                                                                           |       | 1,081                   |       | 1,079      |       |
| Gross benefits  paid                                                                                 |       | (3,285                  | )          | (3,649     | )          |
| Administrative  expenses                                                                             |       | (566                    | )          | (545       | )          |
| Foreign currency  exchange rate changes                                                              |       | 2,578                   |       | (1,188     | )          |
| Fair value of  plan assets at the end of the year                                                    |       | 136,345                 |       | 116,906    |       |
|                                                                                                 |       |                    |       |       |       |
| **Net  amount recognized:**                                                                          | ** ** | ** **              | ** ** | ** ** | ** ** |
| Funded status                                                                                        |       | (32,155                 | )          | (41,102    | )          |
| Unrecognized net  actuarial loss                                                                     |       | 21,308                  |       | 33,999     |       |
| Unrecognized  prior service cost                                                                     |       | 7                       |       | 164        |       |
| Net amount  recognized                                                                               |       | $                       | (10,840    | )          | $          | (6,939 | ) |
|                                                                                                 |       |                    |       |       |       |
| **Amounts  recognized in the Consolidated Balance Sheets:**                                          | ** ** | ** **              | ** ** | ** ** | ** ** |
| Accrued benefit  cost                                                                                |       | $                       | (10,840    | )          | $          | (6,939 | ) |
| Additional  minimum liability                                                                        |       | (13,290                 | )          | (17,193    | )          |
| Deferred tax  asset                                                                                  |       | 4,650                   |       | 5,960      |       |
| Intangible asset                                                                                     |       | 7                       |       | 164        |       |
| Accumulated  other comprehensive loss                                                                |       | 8,633                   |       | 11,069     |       |
| Net amount  recognized                                                                               |       | $                       | (10,840    | )          | $          | (6,939 | ) |
|                                                                                                 |       |                    |       |       |       |
| **Information  for pension plans with an accumulated benefit obligation in excess of plan  assets:** | ** ** | ** **              | ** ** | ** ** | ** ** |
| Projected  benefit obligation                                                                        |       | $                       | 168,500    |       | $          | 158,008 |   |
| Accumulated  benefit obligation                                                                      |       | 152,269                 |       | 137,763    |       |
| Fair value of plan  assets                                                                           |       | 136,345                 |       | 116,906    |       |

 
| **Years ended September 30,**  | ** ** | **2006**                | ** ** | **2005** | ** ** | **2004** | ** ** |
|-----------------------------------------------|------------|-------------------------|------------|----------|------------|----------|------------|
| ** **                                    | ** ** | **(in thousands)** | ** ** |
| ** **                                    |       |                    |       |     |       |     |       |
| **Components  of net periodic benefit cost:** |       |                    |       |     |       |     |       |
| Service cost                                  |       | $                       | 8,041      |     | $          | 7,347    |       | $ | 7,129 |   |
| Interest cost                                 |       | 8,930                   |       | 7,902    |       | 7,512    |       |
| Expected return  on plan assets               |       | (9,687                  | )          | (8,216   | )          | (7,110   | )          |
| Amortization of:                              |       |                    |       |     |       |     |       |
| Prior service  cost                           |       | 27                      |       | 26       |       | 23       |       |
| Actuarial (gain)  loss                        |       | 2,393                   |       | 1,565    |       | 2,098    |       |
| Curtailment  charge                           |       | 131                     |       | —   |       | —   |       |
| Administrative  expenses                      |       | 127                     |       | 99       |       | 94       |       |
| Net pension cost                              |       | $                       | 9,962      |     | $          | 8,723    |       | $ | 9,746 |   |

 

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**Additionalinformation**

**Assumptions:**
| **Years ended September 30,**                                                                         | ** ** | **2006**                | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|----------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|------------|------------|------------|------------|
| ** **                                                                                                           | ** ** | **(in thousands)** | ** ** |
| **Weighted-average assumptions used to determine  benefit obligation at September 30:**                              | ** ** | ** **              | ** ** | ** ** | ** ** | ** ** | ** ** |
| Discount rate                                                                                                        |       | 5.6                     | %          | 5.5        | %          | 6.0        | %          |
| Rate of compensation increase                                                                                        |       | 4.5                     | %          | 4.5        | %          | 4.1        | %          |
| **Weighted-average assumptions used to determine  net periodic benefit cost for the years ended September 30:** | ** ** | ** **              | ** ** | ** ** | ** ** | ** ** | ** ** |
| Discount rate                                                                                                        |       | 5.4                     | %          | 6.0        | %          | 6.0        | %          |
| Expected return on plan assets                                                                                       |       | 8.2                     | %          | 8.2        | %          | 8.2        | %          |
| Rate of  compensation increase                                                                                       |       | 4.5                     | %          | 4.1        | %          | 4.0        | %          |

 

The Company’spension plans weighted average asset allocations by asset category as ofSeptember 30 were as follows:
|                    | ** ** | **2006** | ** ** | **2005** | ** ** |
|--------------------|------------|----------|------------|----------|------------|
| Equity  securities |       | 73       | %          | 75       | %          |
| Debt securities    |       | 22       | %          | 18       | %          |
| Real estate        |       | 4        | %          | 4        | %          |
| Other              |       | 1        | %          | 3        | %          |
| Total              |       | 100      | %          | 100      | %          |

 

The Company has theresponsibility to formulate the investment policies and strategies for theplans’ assets. The overall policies and strategies include: maintain thehighest possible return commensurate with the level of assumed risk, preservethe benefit security for the plans’ participants, and minimize the necessity ofCompany contributions by maintaining a ratio of plan assets to liabilities inexcess of 1.0.

The Company does not involve itself with the day-to-day operations andselection process of individual securities and investments, and, accordingly,has retained the professional services of investment management organizationsto fulfill those tasks. The investment management organizations have investmentdiscretion over the assets placed under their management. The Company provideseach investment manager with specific investment guidelines relevant to itsasset class. The table below presents the ranges for each major category of theplans’ assets at September 30, 2006:
| Asset Category                         | ** ** | **Allocation  Range** | ** ** |
|---------------------------------------------|------------|-----------------------|------------|
| Equity  securities                          |       | 50% to 85%  |       |
| Debt securities                             |       | 10% to 60%  |       |
| Other, primarily cash  and cash equivalents |       | 0% to 15%   |       |

 

The pension plansheld no positions in Cubic Corporation common stock as of September 30, 2006and 2005.

The Companyexpects to contribute a minimum of $6.3 million to its pension plans in 2007.

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**Estimatedfuture benefit payments**

The followingpension benefit payments, which reflect expected future service, asappropriate, are expected to be paid:
| 2007      |   | $      | 4,299  |   |
|-----------|--------|--------|--------|--------|
| 2008      |   | 4,905  |   |
| 2009      |   | 5,385  |   |
| 2010      |   | 5,877  |   |
| 2001      |   | 6,730  |   |
| 2011-2016 |   | 40,909 |   |

 

NOTE 9—LEGALMATTERS

In 1991, the government ofIran commenced an arbitration proceeding against the Company seeking $12.9million for reimbursement of payments made for equipment that was to comprisean Air Combat Maneuvering Range pursuant to a sales contract and aninstallation contract executed in 1977, and an additional $15 million forunspecified damages. The Company contested the action and brought a counterclaimfor compensatory damages of $10.4 million. In May 1997, the arbitral tribunal awarded the government of Iran $2.8million, plus simple interest at the rate of 12% per annum from September 21,1991 through May 5, 1997. In December 1998, the United States District Courtgranted a motion by the government of Iran confirming the arbitral award butdenied Iran’s request for additional interest and costs. Both parties haveappealed. In October 2004, the 9th Circuit Court of Appeals issued a decision inthe case of two interveners who are attempting to claim an attachment on theamount that was awarded to Iran in the original arbitration. The Court deniedone of the intervener’s liens but confirmed the second one’s lien. Iran askedthe U.S. Supreme Court to review the 9th Circuit decision and to void the initialjudgment against it. In 2006, the Supreme Court returned the case to the 9th Circuit for reconsideration,suggesting that the claimed lien cannot be enforced. The dispute between Iranand Cubic is on hold in the 9th Circuit and the obligation upon Cubic to payis stayed. 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 9th Circuit case against Iran, andmanagement believes that a license from the U.S. government would be requiredin any case to make payment to or on behalf of Iran. 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 North Americaissued a “cure notice” to the Company, alleging that its performance was not inaccord with the contract. After unsuccessful negotiations with the customer, inMarch 2005, the Company filed for a temporary restraining order requesting thatthe customer be restrained from further interfering with the Company’sperformance and from issuing a termination notice. The next business day, the customerissued a letter terminating the contract for default. In April 2005, thecustomer filed a claim for breach of contract, seeking damages for “all actual,consequential and liquidated damages sustained” as well as attorney’s fees. Thecontract limits liability to the contract value of $8.2 million, but thecustomer appears to be attempting to avoid that limitation. In May 2005, theCompany filed an answer and general denial and subsequently filed a verifiedpetition alleging breach of contract and other substantive claims, claiming theamount owed under the contract of $4.2 million, plus interest and attorney’sfees. Management believes that both the customer’s default notice and claim fordamages are unsupported and the Company is vigorously

55

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defending against the allegations. Based onthe advice of counsel, management believes the Company had substantiallycompleted the contract prior to termination and that the remaining contractvalue is due and that the Company will prevail at trial; therefore, no liabilityhas been recorded for the former customer’s claim as of September 30, 2006.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 companythat Cubic had an alleged agreement with to potentially bid on a portion ofautomated fare collection contracts filed a court claim for breach of contract,fraud, negligent misrepresentation, theft of trade secrets, and other relatedallegations. The claim seeks $15.0 million in compensatory damages, punitivedamages, disgorgement of profits and a permanent injunction. In accordance withthe underlying contract arbitration clause, in July 2005 the Company filed aclaim with the American Arbitration Association and requested the court case bestayed or dismissed. The Court denied the Company’s motion to transfer the caseto arbitration. The Company has appealed that decision to the California Courtof Appeals. Based on information currently available, management believes thereis no merit to the claim and that it will prevail in this matter. Therefore, noliability has been recorded as of September 30, 2006.

From time-to-time, agencies of the U.S. and foreign governments mayinvestigate whether the Company’s operations are being conducted in accordancewith applicable regulatory requirements. Such investigations, whether relatingto government 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 or debarmentfrom future government contracting. Government investigations often take years to complete and most resultin no adverse action against the Company.

The Company is not a party to any other materialpending proceedings and management considers all other matters to be ordinaryproceedings incidental to the business. Management believes the outcome ofthese proceedings and the proceedings described above will not have amaterially adverse effect on the Company’s financial position.

NOTE 10—BUSINESS SEGMENTINFORMATION

###### Description of the types of products andservices from which each reportable segment derives its revenues:

The Company has two primary business segments:transportation systems and defense. The transportation systems segment designs,produces, installs and services electronic revenue collection systems for masstransit projects, including railways and buses. The defense segment performswork under U.S. and foreign government contracts relating to electronic defensesystems and equipment, computer simulation training, development of trainingdoctrine, and field operations and maintenance. Products include customizedrange instrumentation and training systems, simulators, communications andsurveillance systems, avionics systems, power amplifiers and receivers.

###### Measurement of segment profit or loss andsegment 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.

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###### Factors management used to identify theCompany’s reportable segments:

The Company’s reportable segments are business unitsthat offer different products and services. The reportable segments are eachmanaged separately because they develop and manufacture distinct products withdifferent customer bases.

Businesssegment financial data is as follows:
| **Years ended September 30,** | ** ** | **2006**               | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|----------------------------------------------|------------|------------------------|------------|------------|------------|------------|------------|
| ** **                                   | ** ** | **(in millions)** | ** ** |
| **Sales:**                                   | ** ** | ** **             | ** ** | ** ** | ** ** | ** ** | ** ** |
| Transportation systems                       |       | $                      | 243.9      |       | $          | 245.8      |       | $ | 253.5 |   |
| Defense                                      |       | 562.8                  |       | 543.4      |       | 452.9      |       |
| Other                                        |       | 14.7                   |       | 15.2       |       | 15.6       |       |
| Total sales                                  |       | 821.4                  |       | 804.4      |       | 722.0      |       |
|                                         |       |                   |       |       |       |       |       |
| **Operating  income:**                       | ** ** | ** **             | ** ** | ** ** | ** ** | ** ** | ** ** |
| Transportation systems                       |       | $                      | 2.8        |       | $          | (13.8      | )          | $ | 28.2 |   |
| Defense                                      |       | 31.4                   |       | 30.1       |       | 34.5       |       |
| Provision for litigation                     |       | —                 |       | —     |       | (6.0       | )          |
| Unallocated corporate expenses and other     |       | (3.3                   | )          | (3.2       | )          | (2.5       | )          |
| Total operating  income                      |       | $                      | 30.9       |       | $          | 13.1       |       | $ | 54.2 |   |
|                                         |       |                   |       |       |       |       |       |
| **Assets:**                                  | ** ** | ** **             | ** ** | ** ** | ** ** | ** ** | ** ** |
| Transportation systems                       |       | $                      | 214.9      |       | $          | 211.8      |       | $ | 241.1 |   |
| Defense                                      |       | 267.2                  |       | 255.2      |       | 245.0      |       |
| Corporate and other                          |       | 66.0                   |       | 80.3       |       | 56.9       |       |
| Total assets                                 |       | $                      | 548.1      |       | $          | 547.3      |       | $ | 543.0 |   |

 

57

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| **Years ended September 30,** | ** ** | **2006**               | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|----------------------------------------------|------------|------------------------|------------|------------|------------|------------|------------|
| ** **                                   | ** ** | **(in millions)** | ** ** |
| **Depreciation  and amortization:**          | ** ** | ** **             | ** ** | ** ** | ** ** | ** ** | ** ** |
| Transportation systems                       |       | $                      | 2.6        |       | $          | 3.2        |       | $ | 2.5 |   |
| Defense                                      |       | 5.3                    |       | 4.9        |       | 4.6        |       |
| Corporate and other                          |       | 0.6                    |       | 0.5        |       | 0.4        |       |
| Total  depreciation and amortization         |       | $                      | 8.5        |       | $          | 8.6        |       | $ | 7.5 |   |
|                                         |       |                   |       |       |       |       |       |
| **Expenditures  for long-lived assets:**     | ** ** | ** **             | ** ** | ** ** | ** ** | ** ** | ** ** |
| Transportation systems                       |       | $                      | 0.9        |       | $          | 3.2        |       | $ | 2.6 |   |
| Defense                                      |       | 8.5                    |       | 4.5        |       | 4.1        |       |
| Corporate and other                          |       | 0.4                    |       | 0.6        |       | 0.2        |       |
| Total  expenditures for long-lived assets    |       | $                      | 9.8        |       | $          | 8.3        |       | $ | 6.9 |   |
|                                         |       |                   |       |       |       |       |       |
| **Geographic  Information:**                 | ** ** | ** **             | ** ** | ** ** | ** ** | ** ** | ** ** |
| Sales (a):                                   |       |                   |       |       |       |       |       |
| United States                                |       | $                      | 566.8      |       | $          | 531.5      |       | $ | 494.5 |   |
| United Kingdom                               |       | 120.2                  |       | 119.9      |       | 120.3      |       |
| Canada                                       |       | 28.6                   |       | 44.4       |       | 30.7       |       |
| Far East                                     |       | 26.1                   |       | 23.6       |       | 29.3       |       |
| Other                                        |       | 79.7                   |       | 85.0       |       | 47.2       |       |
| Total sales                                  |       | $                      | 821.4      |       | $          | 804.4      |       | $ | 722.0 |   |

 

(a) Sales are attributed tocountries or regions based on the location of customers.
| Long-lived assets, net:      |   |   |   |   |   |   |   |
|------------------------------|--------|--------|--------|--------|--------|--------|--------|
| United States                |   | $      | 48.3   |   | $      | 45.2   |   | $ | 41.4 |   |
| United Kingdom               |   | 12.5   |   | 12.9   |   | 13.9   |   |
| Other foreign countries      |   | 1.8    |   | 2.7    |   | 2.6    |   |
| Total long-lived assets, net |   | $      | 62.6   |   | $      | 60.8   |   | $ | 57.9 |   |

 

Defense segment salesinclude $427.2 million, $426.9 million and $360.3 million in 2006, 2005, and2004, respectively, of sales to U.S. Government agencies.  No other single customer accounts for 10% ormore of the Company’s revenue.

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NOTE 11—SUMMARY OFQUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

The following is a summary of the quarterly results of operations forthe years ended September 30, 2006 and 2005:
| ** **            | ** ** | **Quarter Ended**                                             | ** ** |
|-----------------------|------------|--------------------------------------------------------------------|------------|
| ** **            | ** ** | **December 31**                                               | ** ** | **March 31** | ** ** | **June 30** | ** ** | **September 30** | ** ** |
| ** **            | ** ** | **(in thousands, except per share data)** | ** ** |
| Fiscal 2006           |       |                                                               |       |   |   |   |   |   |   |
| Net sales             |       | $                                                                  | 195,041    |   | $ | 206,639 |   | $ | 214,954 |   | $ | 204,752 |   |
| Operating income      |       | 8,566                                                              |       | 1,525 |   | 10,319 |   | 10,485 |   |
| Net income            |       | 10,509                                                             |       | 729 |   | 5,976 |   | 6,919 |   |
| Net income per  share |       | 0.39                                                               |       | 0.03 |   | 0.22 |   | 0.26 |   |
|                  |       |                                                               |       |   |   |   |   |   |   |
| Fiscal 2005           |       |                                                               |       |   |   |   |   |   |   |
| Net sales             |       | $                                                                  | 189,940    |   | $ | 182,053 |   | $ | 213,790 |   | $ | 218,589 |   |
| Operating income      |       | 7,573                                                              |       | 1,522 |   | 1,618 |   | 2,391 |   |
| Net income            |       | 5,253                                                              |       | 554 |   | 822 |   | 4,999 |   |
| Net income per share  |       | 0.20                                                               |       | 0.02 |   | 0.03 |   | 0.19 |   |

 

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**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

The Board of Directors andStockholders of Cubic Corporation

We have audited the accompanying consolidatedbalance sheets of Cubic Corporation as of September 30, 2006 and 2005, and therelated consolidated statements of income, changes in shareholders’ equity andcash flows for each of the three years in the period ended September 30, 2006.These financial statements are the responsibility of the Company’s management.Our responsibility is to express an opinion on these financial statements basedon our audits.

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation.We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred toabove present fairly, in all material respects, the consolidated financialposition of Cubic Corporation at September 30, 2006 and 2005, and theconsolidated results of its operations and its cash flows for each of the threeyears in the period ended September 30, 2006, in conformity with U.S. generallyaccepted accounting principles.

We also have audited, in accordance with thestandards of the Public Company Accounting Oversight Board (United States), theeffectiveness of Cubic Corporation’s internal control over financial reportingas of September 30, 2006, based on criteria established in InternalControl-Integrated Framework issued by the Committee of Sponsoring Organizationsof the Treadway Commission and our report dated November 29, 2006 expressed anunqualified opinion thereon.
|                   | /s/    ERNST & YOUNG LLP |   |
|-------------------|--------------------------------------------------|--------|
|              |                                             |
| San Diego, CA     |                                             |
| November 29, 2006 |                                             |

 

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**Item 9.****           DISAGREEMENTS ON ACCOUNTING AND FINANCIALDISCLOSURE**.

None.

**Item 9a.****     CONTROLS AND 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, 2006. 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 of theSarbanes-Oxley Act, management has conducted an assessment, including testing,using the criteria in Internal Control — Integrated Framework, issued by theCommittee of Sponsoring Organizations of the Treadway Commission (COSO). TheCompany’s system of internal control over financial reporting is designed toprovide reasonable assurance regarding the reliability of financial reportingand the preparation of financial statements for external purposes in accordancewith generally accepted accounting principles. Because of its inherentlimitations, internal control over financial reporting may not prevent ordetect misstatements. Also, projections of any evaluation of effectiveness tofuture 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.

Based on its assessment,management has concluded that the Company maintained effective internal controlover financial reporting as of September 30, 2006, based on criteria inInternal Control – Integrated Framework, issued by the COSO. Management’sassessment of the effectiveness of the Company’s internal control overfinancial reporting as of September 30, 2006, has been audited by Ernst &Young LLP, an independent registered public accounting firm, as stated in theirreport which follows.

61

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**REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

The Board of Directors andStockholders of Cubic Corporation

We have audited management’s assessment, included inthe accompanying Management’s Report on Internal Control Over FinancialReporting, that Cubic Corporation maintained effective internal control overfinancial reporting as of September 30, 2006, based on criteria established inInternal Control—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. Our responsibility is to express an opinionon management’s assessment and an opinion on the effectiveness of the Company’sinternal control over financial reporting based on our audit.

We conducted our audit in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether effective internal control over financial reporting wasmaintained in all material respects. Our audit included obtaining an understandingof internal control over financial reporting, evaluating management’sassessment, testing and evaluating the design and operating effectiveness ofinternal control, and performing such other procedures as we considerednecessary in the circumstances. We believe that our audit provides a reasonablebasis for our opinion.

A company’s internal control over financialreporting is a process designed to provide reasonable assurance regarding thereliability of financial reporting and the preparation of financial statementsfor external purposes in accordance with generally accepted accountingprinciples. A company’s internal control over financial reporting includesthose policies and procedures that (1) pertain to the maintenance of recordsthat, in reasonable detail, accurately and fairly reflect the transactions anddispositions of the assets of the company; (2) provide reasonable assurancethat transactions are recorded as necessary to permit preparation of financialstatements in accordance with generally accepted accounting principles, andthat receipts and expenditures of the company are being made only in accordancewith authorizations of management and directors of the company; and (3) providereasonable assurance regarding prevention or timely detection of unauthorizedacquisition, use, or disposition of the company’s assets that could have amaterial effect on the financial statements.

Because of its inherent limitations, internalcontrol over financial reporting may not prevent or detect misstatements. Also,projections of any evaluation of effectiveness to future periods are subject tothe risk that controls may become inadequate because of changes in conditions,or that the degree of compliance with the policies or procedures maydeteriorate.

In our opinion, management’s assessment that CubicCorporation maintained effective internal control over financial reporting asof September 30, 2006, is fairly stated, in all material respects, based on theCOSO criteria. Also, in our opinion, Cubic Corporation maintained, in allmaterial respects, effective internal control over financial reporting as ofSeptember 30, 2006, based on the COSO criteria.

We also have audited, in accordance with thestandards of the Public Company Accounting Oversight Board (United States), theconsolidated balance sheets of Cubic Corporation as of September 30, 2006 and2005, and the related statements of income, shareholders’ equity, and cashflows for each of the three years in the period ended September 30, 2006 ofCubic Corporation and our report dated November 29, 2006 expressed anunqualified opinion thereon.
|                        | /s/    ERNST  & YOUNG LLP |   |
|------------------------|---------------------------------------------------|--------|
|                   |                                              |
| San Diego,  California |                                              |
| November 29,  2006     |                                              |

 

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***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 2006 that have materiallyaffected, or are reasonably likely to materially affect the Company’s internalcontrol over financial reporting.

**PART III**

**Item 10. DIRECTORS ANDEXECUTIVE OFFICERS OF THE REGISTRANT**.

Certain information regarding directors andexecutive officers is incorporated herein by reference from our definitiveProxy Statement, which will be filed no later than 30 days prior to the date ofthe Annual Meeting of Shareholders.

The Company has adopted a code of ethics thatapplies to its principle executive officer, principle financial officer, andits principle accounting officer.  Suchcode of ethics appears on our web site at:http://www.cubic.com/corp1/invest/governance.html.

**Item 11. EXECUTIVECOMPENSATION**.

Information regarding executive compensation 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 12. SECURITY OWNERSHIP OFCERTAIN BENEFICIAL OWNERS AND MANAGEMENT**.

Information regarding security ownership ofcertain beneficial owners and management is incorporated herein by referencefrom our definitive Proxy Statement, which will be filed no later than 30 daysprior to the date of the Annual Meeting of Shareholders.

**Item 13. CERTAIN RELATIONSHIPSAND RELATED TRANSACTIONS**.

Information regarding certain relationships andrelated transactions is incorporated herein by reference from our definitiveProxy Statement, which will be filed no later than 30 days prior to the date ofthe Annual Meeting of Shareholders.

**Item 14. PRINCIPAL ACCOUNTANTFEES AND SERVICES.**

Information regarding principal accountant feesand services is incorporated herein by reference from our definitive ProxyStatement, which will be filed no later than 30 days prior to the date of theAnnual Meeting of Shareholders.

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**PART IV**

**Item 15. EXHIBITS, FINANCIALSTATEMENT SCHEDULES**

(a)           Documents filed as part of this Report:

(1)           The following consolidated financial statements ofCubic Corporation, as referenced in Item 8:

Consolidated Balance Sheets

September 30, 2006 and 2005

Consolidated Statements of Income

Years ended September 30, 2006,2005 and 2004

Consolidated Statements of Changes in Shareholders’Equity

Years ended September 30, 2006,2005 and 2004

Consolidated Statements of Cash Flows

Years ended September 30, 2006,2005 and 2004

Notes to Consolidated Financial Statements

September 30, 2006

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

None are required underthe applicable accounting rules and regulations of the Securities and ExchangeCommission.

(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.                                 |
|   | 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 | Transition Protection  Plan. Incorporated by reference from Form 10-K filed for the fiscal year  ended September 30, 2005, 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 | Deferred Compensation  Plan Summary.  Incorporated by  reference from Form 8-K filed April 6, 2005, file No. 1-8931, Exhibit 10.                            |
|   | 10.6 | Retention Bonus  Agreement dated October 4, 2006. incorporated by reference from form 8-K  filed October 6, 2006, file No. 1-8931, Exhibit 10.1                  |
|   | 21.1 | List of Subsidiaries                                                                                                                                             |
|   | 23.1 | Consent of Independent  Registered Accounting Firm.                                                                                                              |
|   | 31.1 | Section 302  Certifications.                                                                                                                                     |
|   | 32.1 | Section 906  Certifications.                                                                                                                                     |

 

(c)           Financial Statement Schedules

None

64

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**SIGNATURES**

Pursuant to the requirements of Sections 13 or 15(d) of the SecuritiesExchange Act of 1934, the Registrant has duly caused this report to be signedon its behalf by the undersigned, thereunto duly authorized:
| (Registrant) | CUBIC  CORPORATION |
|--------------|--------------------|
|         |               |
| *12/5/06*    | * *           |   /s/ Walter J. Zable | * * |
| Date         |               |   WALTER J. ZABLE, President |

 

Pursuant to the requirements ofthe Securities Exchange Act of 1934, this report has been signed below by thefollowing persons on behalf of the Registrant and in the capacities and on thedates indicated:
|      |          |                               |                      |      |      |                                                                                         |
|-----------|----------|------------------------------------|---------------------------|-----------|-----------|----------------------------------------------------------------------------------------------|
| *12/5/06* | * * | * *                           |  /s/ Walter J. Zable | * *  | *12/5/06* | * *                                                                                     | /s/ Raymond E. Peet |
| Date      |     | WALTER J. ZABLE,                   |                      | Date      |      | RAYMOND E. PEET,                                                                             |
|      |     | President, Chief Executive Officer |                      |      |      | Director                                                                                     |
|      |     | and Chairman of the Board of       |                      |      |      |                                                                                         |
|      |     | Directors                          |                      |      |      |                                                                                         |
|      |     |                               |                      | *12/5/06* | * *  |  /s/ Robert S. Sullivan                                                                 |
| *12/5/06* | * * | * *                           | /s/ Walter C. Zable       | * *  | Date      |                                                                                         |  ROBERT S. SULLIVAN, |
| Date      |     | WALTER C. ZABLE,                   |                      |      |      |  Director                                                                               |
|      |     | Vice President and Vice Chairman   |                      |      |      |                                                                                         |
|      |     | of the Board of Directors          |                      | *12/5/06* | * *  |  /s/ Robert D. Weaver                                                                   |
|      |     |                               |                      | Date      |      |  ROBERT D. WEAVER,                                                                      |
|      |     |                               |                      |      |      |  Director                                                                               |
| *12/5/06* | * * | * *                           | /s/ Richard C. Atkinson   | * *  | * *  | * *                                                                                     | * * |
| Date      |     | RICHARD C. ATKINSON,               |                      |      |      |                                                                                         |
|      |     | Director                           |                      | *12/5/06* | * *  |  /s/ William W. Boyle                                                                   |
|      |     |                               |                      | Date      |      |  WILLIAM W. BOYLE,                                                                      |
| *12/5/06* | * * | * *                           | /s/ Raymond L. deKozan    | * *  |      |                                                                                         |  Director, Senior Vice President and |
| Date      |     | RAYMOND L. deKOZAN,                |                      | * *  | * *  |  Chief Financial Officer                                                                |
|      |     | Director, Senior Group Vice        |                      |      |      |                                                                                         |
|      |     | President                          |                      | *12/4/06* | * *  |  /s/ Mark A. Harrison                                                                   |
|      |     |                               |                      | Date      |      |  MARK A. HARRISON,                                                                      |
| * *  | * * | * *                           | * *                  |      |      |  Vice President and Corporate    Controller (Principal Accounting    Officer) |

 

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