**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-K**

 

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

**EXCHANGE ACT OF 1934**

 

**For theFiscal Year Ended September 30, 2007**

 

**CommissionFile Number  1-8931**

 

**CUBIC CORPORATION**

Exact Name ofRegistrant as Specified in its Charter

 

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

 

**9333Balboa Avenue**

**SanDiego, California 92123**

**Telephone(858) 277-6780**

 

Securitiesregistered pursuant to Section 12(b) of the Act:

 

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

 

Securitiesregistered pursuant to Section 12(g) of the Act:

**None**

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

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

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

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

 

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

Largeaccelerated filer  o     Acceleratedfiler  x          Non-acceleratedfiler  o

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

 

Theaggregate market value of 15,549,143 shares of voting stock held bynon-affiliates of the registrant was: $336,483,455 as of March 31, 2007, basedon the closing stock price on that date.

 

Numberof shares of common stock outstanding as of November 9, 2007 including sharesheld by affiliates is: 26,719,663 (after deducting 8,945,066 shares held astreasury stock).

 

**DOCUMENTSINCORPORATED BY REFERENCE:**

 

Portions of the Registrant’s Proxy Statement for its 2008 Annual Meetingof Shareholders to be held on February 26, 2008, are incorporated by referenceinto Part 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 the State of California in 1949 andbegan operations in 1951. In 1984, the Company moved its corporate domicile tothe State of Delaware.

 

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

 

Equipment for use incustomized military range instrumentation, training and applications systems,simulators, communications and surveillance systems, surveillance receivers,power amplifiers, and avionics systems.

 

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

 

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

 

During fiscal year 2007,approximately 54% of our total business was conducted, either directly orindirectly, with various agencies of the United States government. Most of theremainder of our revenue was from local, regional and foreign governments oragencies.

 

Cubic’s internet addressis www.Cubic.com. The content on our website is available for informationpurposes only. It should not be relied upon for investment purposes, nor is itincorporated by reference into this Form 10-K. We make available free of chargeon or through our Internet website under the heading “Investor Information,”our reports on Form 10-K, quarterly reports on Form 10-Q, current reports onForm 8-K and amendments to those reports as soon as reasonably practicableafter we electronically file such material with the Securities and ExchangeCommission.

 

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**BUSINESSSEGMENTS**

 

Information regarding theamounts of revenue, operating profit and loss and identifiable assetsattributable to each of our business segments, is set forth in Note 10 to theConsolidated Financial Statements for the year ended September 30, 2007.Additional information regarding the amounts of revenue and operating profitand loss attributable to major classes of products and services is set forth inManagement’s Discussion and Analysis which follows at Item 7.

 

**DEFENSE**

 

Cubic’s defense businesssegment consists of three market-focused business units: Readiness Systems,Mission Support Services, and Communications & Electronics. Our productsinclude customized military range instrumentation systems, tactical engagementsimulation systems, firearm simulation systems, communications and surveillancesystems, surveillance receivers, power amplifiers, and avionics systems. Ourservices include training mission support, 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. Inaddition, we frequently contract or team with other leading defense suppliers.In addition to the three business units, we formed a joint venture with RafaelArmament Development Authority Ltd., an Israeli company, to produce certainRafael defense systems in the United States for Israel and for U.S. customers.

 

OurTraining Systems Business Unit changed its name this year to Readiness SystemsBusiness Unit which we believe reflects defense market trends and ourbroadening capabilities. Readiness Systems better describes the market we serveand encompasses not only our heritage in training systems and products, but thevalue and opportunities for these systems and underlying technologies totransition into operational equipment.

 

**Readiness Systems**

 

Our Readiness SystemsBusiness Unit (RSBU) is a pioneer and market leader in the design andproduction of instrumented training systems for military customers. Thesesystems generally permit live training in air and land combat environments,with weapons and other effects simulated by electronic and/or laser technology.The systems also enable the collection (based on Global Positioning Systemtechnology) and analysis of behavior and event data for determination of combateffectiveness and lessons learned. As such, the systems generally have a highdegree of communications and software sophistication.

 

RSBU’s business isorganized into Air Combat Training, Land Combat Training, Tactical EngagementSimulation, and Simulation Systems. In Air Combat Training, Cubic was theinitial developer 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 ACMIsystems permit forces to train on either a fixed geographic range or in a “rangeless”environment. Many other nations employ Cubic’s ACMI systems.

 

RSBU’s Land CombatTraining involves systems analogous to air ranges for ground force training. Cubicprovided turnkey systems to instrument two U.S. Army training centers in pastyears at Fort Polk, LA (Joint Readiness Training Center – JRTC) and Hohenfels,Germany (Combat Maneuver Training Center – CMTC) and is engaged in a multiyeareffort to expand capability of the Alaska Training Range. The unit also builtranges in recent years for the British Army in the U.K. and Canada. RSBU iscurrently working on similar land combat training centers for Canada, Australiaand for customers in the Middle East and Far East. To meet new customer demandfor mobile instrumented training, Cubic has also developed a transportable,deployable system, known as I-HITS, now being fielded by the U.S. Army. In2005, Cubic was awarded a five-year $72 million IDIQ contract to produce I-HITSfor the U.S. Army.

 

Laser-based TacticalEngagement Simulation systems, generally known as MILES (Multiple Integrated

 

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Laser Engagement Simulators),are used at combat training centers (CTC) and in other training environments topermit weapons to be used realistically, registering hits or kills, withoutlive ammunition. RSBU supplies MILES equipment as part of CTC contracts and asan independent product line. Cubic MILES systems are being heavily utilized byU.S. Army and Marine Corps forces, as well as Air Force security forces, otherU.S. agencies and many international customers. We produce MILES equipment inthe U.S. and at our New Zealand-based subsidiary, Cubic Defence New Zealand. In2005, Cubic was awarded a 5-year $113 million IDIQ contract to produce MILESIndividual Weapon System (IWS) kits for the U.S. Army.

 

RSBU’s Simulation SystemsDivision (SSD) produces virtual training systems, employing actual or realisticweapons and systems together with visual imagery to simulate actual battlefieldor other environments. SSD also produces combat system and maintenancetrainers.

 

**Mission Support Services**

 

Our Mission SupportServices Business Unit (MSBU) is a leading provider of tactical knowledge-basedservices to the U.S. Government and allied nations, with an emphasis onmilitary training. MSBU consists of approximately 3,800 people at more than 100locations throughout the world. Our personnel serve with clients in theiractual environments and prepare forces through comprehensive training,exercises, education, and operational support to meet the full scope of theirmissions, from large scale combat operations, to special operations, peacekeeping,consequence management, and humanitarian assistance operations worldwide. Wealso plan, prepare, execute and document realistic and focused missionrehearsal exercises (including live and computer-based) as final preparation offorces prior to their deployment to mission areas. In addition, we provide highlevel consultation and advisory services to the governments and militaries ofallied nations. U.S. government service contracts are typically awarded on acompetitive basis with options for multiple years. In this competitive market,Cubic is viewed as a premier service provider and formidable competitor. Wetypically compete as prime contractors to the government, but also team withother companies depending on the skills required. Much of our early workcentered on battle command training and simulation, in which militarycommanders are taught to make correct decisions in battle situations. Morerecently, the business base has broadened to include integrated live, virtual,and constructive training support, distance learning, knowledge management,weapons effects and analytical modeling, intelligence analysis, homelandsecurity training and exercises, and military force modernization.

 

Our programs includeproviding mission support services to three of the Army’s major combat trainingcenters, to the Joint Readiness Training Center (JRTC) as prime contractor, andto the National Training Center (NTC) and Battle Command Training Program(BCTP) as a principal subcontractor. These services include planning, executingand documenting large scale exercises aimed at stressing U.S. forces insituations as close to actual combat as possible. Cubic also assists the ArmyNational Guard in developing and implementing a similar home station combattraining capability at selected Guard locations in the U.S.

 

At U.S. Joint ForcesCommand, Cubic supports and helps manage all aspects of the operations of theJoint Warfighting Center (JWFC), including support to worldwide exercises andthe development and fielding of the Joint National 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 virtuallyall Marine Corps simulation-based exercises worldwide since 1998, directlypreparing Marines for combat operations. Cubic provides support for trainingand professional military education to the U.S. Army’s Quartermaster Center andSchool and to the Transportation School; and provides contractor logistics and training support necessary tooperate and maintain a wide variety of flight simulation systems, UnmannedAerial Vehicles (UAV), and other facilities worldwide for U.S. and alliedforces under multiple long-term contracts. In addition, we provide a broadrange of operational support to the U.S. Navy’s Anti-Submarine Warfare (ASW)Command.

 

Cubic initiated and hascontinued to operate the Korea Battle Simulation Center (KBSC) since itsinception in 1991. KBSC prepares U.S. and allied forces in Korea to deal withsituations which may develop in their 

 

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areas of responsibilityand includes support to the world’s largest and most complex simulation-basedtraining events.

 

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

 

Cubic supports theDefense Threat Reduction Agency (DTRA) with technology-based engineering andother services necessary to accomplish DTRA’s mission of predicting anddefeating the effects of chemical, biological, radiological, nuclear and highexplosive (CBRNE) weapons. Cubic supports DTRA with modeling and simulations toanalyze, assess and predict the effects of such weapons in combat and otherenvironments. Additionally, Cubic provides comprehensive support to help plan,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 multiplecontracts with the U.S. Army and other government agencies to improve thequality and reach of training and education initiatives for individuals upthrough large organizations. Cubic’s products and capabilities includedevelopment and deployment of curriculum and related courseware, computer-basedtraining, knowledge management and distribution, advanced distance learningtools, serious games for training, and other advanced education programs forU.S. and allied forces.

 

An important part ofCubic’s services business is to provide specialized teams of military expertsto advise the governments and militaries of the nations of the former WarsawPact and Soviet Union in the transformation of their militaries to a NATOenvironment. These very broad defense modernization contracts entail sweepingvision and minute detail, involving both the nations’ strategic foundation andthe detailed planning of all aspects of reform. Cubic also operates battlesimulation centers for select countries in Central and Eastern Europe.

 

We believe thecombination and scope of Cubic’s mission support services and readiness systemsbusiness is unique in the industry, permitting us to offer customers a completetraining and readiness capability from one source.

 

**Communications & Electronics**

 

Our Communications andElectronics Business Unit (CEBU) is a supplier of secure data links,intelligence receivers, high power RF amplifiers, direction finding systems andsearch and rescue avionics to the U.S. military, other agencies and alliednations. CEBU’s products support the strong military trend towardnetwork-centric warfare, intelligence collection and overall modernizationinitiatives. The unit has long supplied the air/ground secure data link for theU.S. Army/Air Force Joint STARS system and supplies the principal datalink forthe United Kingdom’s ASTOR program. Capitalizing on a multiyear internalR&D program, CEBU won a competitive contract in fiscal 2003 to develop andproduce the next-generation Common Data Link Subsystem (CDLS) for the U.S. Navy.CDLS is now being installed on major surface ships of the U.S. fleet. Smaller,tactical versions of our Common Data Link have been selected for both legacyand new military platforms, such as UAVs, which require high performance in asmall package. These contracts include the U.K. Watchkeeper, the U.S. NavyFirescout, and the U.S. Army Shadow UAV programs.

 

CEBU’s Personnel LocatorSystem (PLS) is standard equipment on U.S. aircraft with a search-rescue mission. We have continued to receive ordersfor an upgraded PLS which has been redesigned to interface with all modernsearch and rescue system standards, thus positioning us for major platformupgrades expected over the next few years.

 

CEBUalso supplies high power amplifiers, intelligence receivers and directionfinding systems to major primes and end users for both domestic and internationalapplications. These include systems used by the Canadian Coast Guard, the U.S.Navy and the U.S. Air Force. System level applications of these products to theworldwide Electronic Warfare marketplace is a major thrust for this businessarea.

 

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**Raw Materials**:

 

The principal rawmaterials used by the defense segment are sheet aluminum and steel, copperelectrical wire, and composite products. A significant portion of the segment’send products are composed of purchased electronic components and subcontractedparts and supplies. These items are primarily procured from commercial sources.In general, supplies of raw materials and purchased parts are adequate to meetthe requirements of the segment.

 

**Backlog**:

 

Funded sales backlog ofthe defense segment at September 30, 2007 was $602 million compared to $509million at September 30, 2006. Total backlog, including unfunded customerorders, was $1,247 million at September 30, 2007 compared to $763 million atSeptember 30, 2006. Approximately $770 million of the September 30, 2007 totalbacklog is not expected to be completed by September 30, 2008.

 

**Competition**:

 

Cubic’s broad defensebusiness portfolio means we compete with numerous companies, large and small,domestic and international. In many cases, we have also teamed with these samecompanies on specific bid opportunities. Well known Cubic competitors includeLockheed Martin, Northrop Grumman, General Dynamics, Boeing, L3 Communicationsand SAIC. While Cubic is generally smaller than its competition, we believe ourcompetitive advantages include an outstanding record of past performance,strong incumbent relationships, and the ability to rapidly focus technology andinnovation to solve customer problems.

 

Projects must compete forfunding in the defense budget. While the U.S. defense budget has seen aboveaverage increases in recent years, long-term growth will only occur in thosesegments which offer very high payoff and are consistent with warfightingpriorities 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 military priorities include lighter, faster,more lethal forces with the ability and training to rapidly adapt to newsituations based on superior knowledge of the battle environment. Superiorknowledge is enabled by systems which rapidly collect, process and disseminatethe right information to the right place at the right time, resulting in whatDoD calls network-centric warfare. We believe Cubic’s training systems,training support and intelligence, surveillance and reconnaissance capabilitiesare well matched to these sustainable defense priorities.

 

**TRANSPORTATION SYSTEMS**

 

Cubic Transportation Systems (“CTS”) is the leading turnkey solutionprovider of automated fare collection systems for public transport authoritiesworldwide. We provide a range of service and system solutions for the bus, busrapid transit, light rail, commuter rail, heavy rail, ferry and parking markets.These solutions and services include system design, central computer systems,equipment design and manufacturing, device-level software, integration, test,installation, warranty, maintenance, computer hosting services, call centerservices, card management and distribution services, financial clearing andsettlement, multi-application support and outsourcing services. In addition,CTS designs, develops and manufactures special technology components, such assmart card readers and magnetic ticket transports for use within its suite offare collection equipment consisting of on-bus solutions, access controlsolutions, vending solutions, retail and card issuing solutions, and mobileinspection and sales solutions.

 

Over the years, the transportation segmenthas been awarded over 400 projects in 40 major 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.

 

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These programs provide a base of currentbusiness and the potential for additional future business as the systems areexpanded. In 1998, Transaction Systems Limited (TranSys), a joint venturecompany in which Cubic has a 37.5% ownership, was awarded a contract called “PRESTIGE”to outsource the London Transport fare collection services. This 17-yearcontract, now in its tenth year, is the largest automated fare collectioncontract ever awarded. Our share of the work, including all contract changeorders to date, exceeds $1 billion over the 17-year life of the contract.

 

**Industry Overview**

 

Transport agencies, particularly those basedin the U.S., rely heavily on federal, state and local government for subsidiesin capital investments, including new procurements and/or upgrades of automatedfare collection systems. The average lifecycle for rail fare collection systemsis 12 to 15 years, and for bus systems is 7 to 10 years.. Procurements tend tofollow a long and strict competitive bid process where low price is a significantfactor.

 

The automated fare collection business is aniche market able to sustain only a relatively few number of suppliers. Becauseof the long life expectancy of these systems and only a few companies able tosupply them, there is fierce competition to win these jobs, often resulting inlow initial contract profitability.

 

Advances in communications, networking andsecurity technologies are enabling interoperability of multiple modes oftransportation within a single networked system as well as interoperability ofmultiple operators within a single networked system. As such, there is agrowing trend for regional ticketing systems, usually built around a largetransit agency and including neighboring operators, all sharing a commonregional smart card. There is an emerging trend for other applications to beadded to these regional systems to expand the utility of the smart card,offering higher value and incentives to the end users and lowering costs andcreating new revenue streams for the regional 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-application support. Insome cases, operators are choosing to outsource the ongoing operations andcommercialization of these regional ticketing systems. This growing new marketprovides the opportunity to establish lasting relationships and grow revenuesand profits over the long-term.

 

**Raw Materials**:

 

Raw materials used inthis segment include sheet steel, composite products, copper electrical wireand castings. A significant portion of the segment’s end product is composed ofpurchased electronic components and subcontracted parts and supplies. All ofthese items are procured from commercial sources. In general, supplies of rawmaterials and purchased parts are adequate to meet the requirements of thesegment.

 

**Backlog**:

 

Funded sales backlog ofthe transportation systems segment at September 30, 2007 and 2006 amounted to$787 million and $716 million, respectively. Approximately $578 million of theSeptember 30, 2007 backlog is not expected to be completed by September 30,2008.

 

**Competition**:

 

We are one of several companies involved inproviding automated fare collection systems solutions and services for publictransport operators worldwide including such foreign competitors as Thales,ACS, Scheidt & Bachmann and ERG. In addition, there are many smaller localcompanies, particularly in European and Asian markets. For large nationaltenders, it is common practice to form consortiums that include, in addition tothe fare collection companies noted above, telecommunications, consulting andcomputer services companies including Keane, Siemens, Accenture, MetropolitanTransit Railway Corporation, and EDS. These procurement activities are verycompetitive and require that we have highly skilled and experienced technicalpersonnel to compete. We believe that our competitive 

 

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advantages include intermodal and interagencyregional integration expertise, technical skills, past contract performance,systems quality and reliability, experience in the industry and long-term customerrelationships.

 

**BUSINESSSTRATEGY**

 

Our objective is to consistently grow sales,improve profitability and deliver attractive returns on capital. We intend tobuild 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**

 

We seek to maintain long-term relationshipswith our customers through repeat business by continuing to achieve high levelsof performance on our existing contracts. By achieving this goal we 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.

 

An example of this in our defense segment isthe recent award of a contract to provide the next generation U.S. air combattraining system. Starting in 1971 Cubic developed the first generation of AirCombat Maneuvering Instrumentation system, or ACMI, for the U.S. Military forlive combat training. In 2003 the company was awarded the P5 $525 million ID/IQcontract to deliver the latest technology for rangeless live training to theU.S. and foreign militaries. In 2007 the company was awarded a $50.3 millioncontract to develop the next generation of live training for the F35 jointStrike Fighter aircraft using embedded technology. Thus since the initialcontract in 1971 the company has successfully and continuously supplied theU.S. and foreign militaries the latest in air combat training technologies

 

In our transportation segment we have had acontinuous relationship with Transport for London (TfL) since the 1970’s. Startingwith a small trial of magnetic ticketing and gating in 1978, the company hascontinuously delivered fare collection equipment and systems to TfL as itsexclusive fare collection system supplier. Today under the PRESTIGE contractthere are 10 million Oyster smart cards in circulation making this one of thelargest transportation smart card systems in the world. In 2007 the companybegan trial applications of a new combination Oyster Card and bank credit/debitcard known as the Barclaycard OnePulse card. Looking forward into 2008 this newcard will be launched throughout the United Kingdom and this upgrade willcontinue to enhance the system we have developed for TfL. Similarly, we areregionalizing integrated fare collection systems in Washington D.C., New Yorkand Southern California.

 

**Maintain a Diversified BusinessMix**

 

We have a diverse mix of business in ourdefense and transportation systems segments. Approximately 54% of our sales aremade directly or indirectly to the U.S. government; however, this represents awide variety of product and service sales to many different U.S. governmentagencies. The largest single contract in the transportation segment is thePRESTIGE contract in London which represented about 8% of consolidated sales in2007.

 

We also seek a reasonablebalance between systems and service work in both the defense and transportationsegments. In aggregate, approximately 42% of our sales revenue in 2007 was fromservice type work. We believe that a strong base of service work helps tosmooth the revenue fluctuations inherent in systems type work.

 

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**Pursue Strategic Acquisitions**

 

With our strong financialposition we are focused on finding attractive acquisitions to enhance ourmarket position. We are focused on specific growth opportunities in the defensemarketplace in the communications and services areas, specific marketopportunities in transportation and opportunities in adjacent markets in smartcards and security that leverage our customer base and skills.

 

**OTHERMATTERS**

 

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

 

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

 

The cost of Companysponsored research and development (R&D) activities was $5.2 million, $6.1million and $8.1 million in 2007, 2006 and 2005, respectively. We do not relyheavily on independent R&D, as most of our new product development occursin conjunction with the performance of work on our contracts. The amount ofcontract-required product development activity was $66 million in 2007 comparedto $64 million and $65 million in 2006 and 2005, respectively; however, thesecosts are included in cost of sales as they are directly related to contractperformance.

 

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

 

We employed approximately6,000 persons at September 30, 2007.

 

Our domestic products andservices are sold almost entirely by our employees. Overseas sales are madeeither directly or through representatives or agents.

 

**RISKFACTORS**

 

The followingare some of the factors we believe could cause our actual results to differmaterially from expected and historical results. Additional risks anduncertainties not presently known to us, or that we currently see asimmaterial, may also harm our business. If any of the risks or uncertaintiesdescribed below or any such additional risks and uncertainties actually occur,our business, results of operations or financial condition could be materiallyand adversely affected.

 

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

*** ***

Our revenues fromcontracts, directly or indirectly, with foreign and United States, state,regional and local governmental agencies represented more than 95% of our totalrevenues in fiscal year 2007. Although these various government agencies aresubject to common budgetary pressures and other factors, many of our variousgovernment customers exercise independent purchasing 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.

 

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

 

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

 

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

 

•                  changes ingovernment programs or requirements or their timing;

 

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

 

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

 

•                  governmentappropriations delays or shutdowns;

 

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

 

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

 

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

 

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

 

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

*** ***

In the past, ourbusinesses have been adversely affected by significant changes in governmentspending during periods of declining budgets. A significant decline in overallspending, or the decision not to exercise options to renew contracts, or theloss of or substantial decline in spending on a large program in which weparticipate could materially adversely affect our business, prospects,financial condition or results of operations. As an example, the U.S. defenseand intelligence budgets generally, and spending in specific agencies withwhich we work, such as the Department of Defense, have declined from time totime for extended periods since the 1980s, resulting in program delays, programcancellations and a slowing of new program starts. Although spending ondefense-related programs by the U.S. government has recently increased, futurelevels of expenditures and authorizations for those programs may decrease,remain constant or shift to programs in areas where we do not currently provideproducts or services.

 

Even though ourcontract periods of performance for a program may exceed one year, Congressmust usually approve funds for a given program each fiscal year and maysignificantly reduce funding of a program in a particular year. Significantreductions in these appropriations or the amount of new defense contractsawarded may affect our ability to complete contracts, obtain new work and growour business. Congress does not always enact spending bills by the beginning ofthe new fiscal year. Such delays leave the affected agencies under-funded whichdelays 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.***

*** ***

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

 

•                  terminate ourexisting contracts;

 

•                  reduce the valueof our existing contracts;

 

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

 

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

 

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•                  control andpotentially prohibit the export of our products;

 

•                  cancel or delayexisting multiyear contracts and related orders if the necessary funds for contractperformance 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.government agencies and some other agencies with which we contract canterminate their contracts with us for convenience, and in that event wegenerally may recover only our incurred or committed costs, settlement expensesand profit on the work completed prior to termination. If an agency terminatesa contract with us for default, we are denied any recovery and may be liablefor excess costs incurred by the agency in procuring undelivered items from analternative source. We may receive show-cause or cure notices under contractsthat, if not addressed to the agency’s satisfaction, could give the agency theright to terminate those contracts for default or to cease procuring ourservices under those contracts.

 

The PRESTIGEcontract with TfL, through the TranSys joint venture, contains a terminationfor convenience clause that provides for possible termination of the contractafter twelve years, which would be in August of 2010. This termination clauseoutlines the obligations of the customer should they elect to exercise thiscontract provision, including penalty payments to TranSys and early payment ofthe debt, among other requirements. Because of these onerous requirements, wedo not believe it would be in the best interests of TfL to terminate thecontract early; however, they may do so. The contract is now in its tenth yearand the customer must notify TranSys by October 2008 if they should elect toterminate the contract at the end of year twelve.

 

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

 

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

*** ***

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

 

•                  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 beafforded the opportunity in the future to bid on contracts that are held byother companies and are scheduled to expire if the agency decides to extend theexisting contract. If we are unable to win 

 

11

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particularcontracts that are awarded through the competitive bidding process, we may notbe able to operate in the market for services that are provided under thosecontracts for a number of years. If we win a contract, and upon expiration, ifthe customer requires further services of the type provided by the contract,there is frequently a competitive rebidding process and there can be noassurance that we will win any particular bid, or that we will be able toreplace business lost upon expiration or completion of a contract.

 

Because of thecomplexity and scheduling of contracting with government agencies, weoccasionally incur costs before receiving contractual funding by the governmentagency. In some circumstances, we may not be able to recover these costs inwhole or in part under subsequent contractual actions.

 

If we are unableto consistently retain existing contracts or win new contract awards, ourbusiness prospects, financial condition and results of operations will beadversely affected.

 

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

** **

Many of our governmentcontracts are subject to cost audits which may occur several years after theperiod to which the audit relates. If an audit identifies significantunallowable costs, we could incur a material charge to our earnings orreduction in our cash position.

 

***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 in foreignlaws that adversely affect our ability to sell our products or services or ourability 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;

 

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

 

•                  the complexityand necessity of using foreign representatives and consultants;

 

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

 

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

 

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

 

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

 

Our foreignsubsidiaries and joint ventures generally conduct business in foreigncurrencies and enter into contracts and make purchase commitments that aredenominated in foreign currencies. Accordingly, we are exposed to fluctuationsin exchange rates, which could have a significant impact on our results ofoperations. We have no control over the factors that generally affect thisrisk, such as economic, financial and political events and the supply of anddemand for applicable currencies. While we use foreign exchange forward andoption contracts to hedge significant contract sales and purchase commitmentsthat 

 

12

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are denominated inforeign currencies, our hedging strategy may not prevent us from incurringlosses 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 68%of our revenues in 2007 were from fixed-price contracts under which we bear therisk of cost overruns. Our profits are adversely affected if our costs underthese contracts exceed the assumptions we used 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 businessesmust comply with and are affected by various government regulations that impactour operating costs, profit margins and our internal organization and operationof our businesses. These regulations affect how we do business and, in someinstances, impose added costs. Any changes in applicable laws could adverselyaffect our financial performance. Any material failure to comply withapplicable laws could result in contract termination, price or fee reductionsor suspension or debarment from contracting. The more significant regulationsinclude:

 

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

 

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

 

•                  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.

 

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

*** ***

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

 

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

*** ***

We seek to protectproprietary technology and inventions through patents and other proprietary-rightprotection. The laws of some foreign countries do not protect proprietaryrights to the same extent as the laws of the 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 taken measures to protect our trade secrets andknow-how, including the use of 

 

13

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confidentialityagreements with our employees, consultants and advisors. These agreements maybe breached and remedies for a breach may not be sufficient to compensate usfor damages incurred. We generally control and limit access to our productdocumentation and other proprietary information. Other parties mayindependently develop our know-how or otherwise obtain access to ourtechnology.

 

***We compete primarily for government contracts againstmany companies that are larger, better financed and better known than us. If weare unable to compete effectively, our business and prospects will be adverselyaffected.***

** **

Our businessesoperate in highly competitive markets. Many of our competitors are larger,better financed and better known companies who may compete more effectivelythan we can. In order to remain competitive, we must keep our capabilitiestechnically advanced and compete on price and on value added to our customers. Ourability to compete may be adversely affected by limits on our capital resourcesand our ability to invest in maintaining and expanding our market share.

 

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

*** ***

We currently haveunsecured borrowing arrangements. The terms of these borrowing arrangementsinclude provisions that require and/or limit our levels of working capital,debt and net worth and coverage of fixed charges. We also have providedperformance guarantees to various customers that include financial covenantsincluding limits on working capital, debt, tangible net worth and cash flowcoverage.

 

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

 

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

*** ***

Because ourinternal manufacturing capacity is limited, we use contract manufacturers.While we use care in selecting our manufacturers, we have less control over thereliability of supply, quality and price of products or components than if wemanufactured them. In some cases, we obtain products from a sole supplier or alimited group of suppliers. Consequently, we risk disruptions in our supply ofkey products and components if our suppliers fail or are unable to performbecause of strikes, natural disasters, financial condition or other factors. Anymaterial supply disruptions could adversely affect our ability to perform ourobligations under our contracts and could result in cancellation of contractsor purchase orders, penalties, delays in realizing revenues, payment delays, aswell as adversely affect our ongoing product cost structure.

 

***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 have disputes with subcontractors. A failureby a subcontractor to satisfactorily deliver products or services may adverselyaffect our ability to perform our obligations as a prime contractor. Anysubcontractor performance deficiencies could result in the customer terminatingour contract for default, which could expose us to liability for excess costsof reprocurement by the customer and have a material adverse effect on ourability to compete for other contracts.

 

***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 tointegrate acquired entities successfully without substantial expense, delay oroperational or financial problems. The acquisition and integration of newbusinesses involves risk. The integration of acquired businesses may be costlyand may adversely impact our results of operations or financial condition:

 

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

 

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

 

14

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

 

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

 

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

*** ***

Our revenues areaffected by factors such as the unpredictability of contract awards due to thelong procurement process for most of our products and services, the potentialfluctuation of governmental agency budgets, the time it takes for the newmarkets we target to develop and for us to develop and provide products andservices for those markets, competition and general economic conditions. Ourcontract type/product mix and unit volume, our ability to keep expenses withinbudget, and our pricing affect our operating margins. Significant growth incosts to complete our contracts, such as we experienced in our transportationsystems business in 2005 and 2006, may adversely affect our results ofoperations in future periods. These factors and other risk factors describedherein may adversely affect our results of operations and cause our financialresults to fluctuate significantly on a quarterly 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 marketprice of our securities may decline 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. Thesestatements involve estimates, assumptions and uncertainties, including thosediscussed in “Risk Factors” and elsewhere throughout this filing and in thedocuments incorporated by reference into this filing that could cause actualresults to differ materially from those 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 financial and/or operating performance is notnecessarily a reliable indicator of future performance and you should not useour historical performance to anticipate results or future period trends. Further,any forward-looking statement speaks only as of the date on which it is made,and we undertake no obligation to update any forward-looking statement toreflect events or circumstances after the date on which the statement is madeor to reflect the occurrence of unanticipated events. New factors emerge fromtime to time, and it is not possible for us to predict which factors willarise. In addition, we cannot assess the impact of each factor on our businessor the extent to which any factor, or combination of factors, may cause actualresults to differ materially from those contained in any forward-lookingstatements.

 

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

 

We conduct our operationsin approximately 1.5 million square feet of both owned and leased propertieslocated in the United States and foreign countries. We own approximately 76% ofthe square footage, including 498,000 square feet located in San Diego,California and 467,000 square feet located in Orlando, Florida. All owned andleased properties are considered in good condition and, with the exception ofthe Orlando facility, adequately utilized. The following table identifies significantproperties 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               |
| Cummings, GA                |       | Leased               |
| ** **                  | ** ** | ** **           |
| **Transportation Systems:** | ** ** | ** **           |
| Brisbane, 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                |
|                        |       |                 |
| **Investment properties:**  |       |                 |
| Teterboro, NJ               |       | Leased               |
| Vancouver, Canada           |       | Leased               |

 

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**Item 3.****           LEGAL PROCEEDINGS.**

 

In 1991,the government of Iran commenced an arbitration proceeding against the Companyseeking $12.9 million for reimbursement of payments made for equipment that wasto comprise an 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, thearbitral tribunal awarded the government of Iran $2.8 million, plus simpleinterest at the rate of 12% per annum from September 21, 1991 through May 5,1997. In December 1998, the United States District Court granted a motion bythe government of Iran confirming the arbitral award but denied Iran’s requestfor additional interest and costs. Both parties have appealed. In October 2004,the 9th Circuit Court of Appeals issued a decision in the case oftwo interveners who are attempting to claim an attachment on the amount thatwas awarded to Iran in the original arbitration. The Court denied one of theintervener’s liens but confirmed the second one’s lien. Iran asked the U.S.Supreme Court to review the 9th Circuit decision and to void theinitial judgment against it. In 2006, the Supreme Court returned the case tothe 9th Circuit for reconsideration, suggesting that the claimedlien cannot be enforced. The Court of Appeal then ruled that the lien was validunder the Terrorism Risk Insurance Act. We believe that Iran will seek furtherreview from the Supreme Court; therefore, while the dispute between Iran andCubic is on hold in the 9th Circuit 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 9thCircuit case against Iran, and management believes that a license from the U.S.government would be required in any case to make payment to or on behalf ofIran. However, in light of the 9th Circuit Court’s decision in therelated intervener’s case, in 2004 the Company established a reserve of $6million for the estimated potential liability and will continue to accrueinterest on this amount until the ultimate outcome of the case is determined.

 

InJanuary 2005, a bus fare collection system customer in North America issued a “curenotice” to the Company, alleging that its performance was not in accord withthe contract. After unsuccessful negotiations with the customer, in March 2005,the Company filed for a temporary restraining order requesting that thecustomer be restrained from further interfering with the Company’s performanceand 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 defending against theallegations. Based on the advice of counsel, management believes the Companyhad substantially completed the contract prior to termination and that theremaining contract value is due and that the Company will prevail at trial;therefore, no liability has been recorded for the former customer’s claim as ofSeptember 30, 2007. However, due to the uncertainty of collecting theoutstanding receivable balance an allowance for doubtful accounts of $4.2million was established and all costs incurred in the performance of thecontract and costs incurred outside the scope of the contract were expensed inthe year ended September 30, 2005.

 

In June2005, a company that Cubic had an alleged agreement with, to potentially bid ona portion of automated fare collection contracts, filed a court claim forbreach of contract, fraud, negligent misrepresentation, theft of trade secrets,and other related allegations. The claim seeks $15.0 million in compensatorydamages, punitive damages, disgorgement of profits and a permanent injunction.The claim is now in arbitration. Based on information currently available,management believes there is no merit to the claim and that it will prevail inthis matter. Therefore, no liability has been recorded as of September 30,2007.

 

From time-to-time, agencies of the U.S. andforeign governments may investigate whether the Company’s 

 

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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 oftentake years to complete and most result in no adverse action against theCompany.

 

The Company is not a party to anyother material pending proceedings and management considers all other mattersto be ordinary proceedings incidental to the business. Management believes theoutcome of these proceedings and the proceedings described above will not havea materially adverse effect on the Company’s financial position.

 

**Item 4.****           SUBMISSION OFMATTERS TO A VOTE OF SECURITY HOLDERS.**

 

Information regardingsubmission of matters to a vote of security holders is incorporated herein byreference from our definitive Proxy Statement, which will be filed no laterthan 30 days prior to the date of the Annual Meeting of Shareholders.

 

**PART II**

 

**Item 5.****           MARKET FOR THEREGISTRANT’S COMMON STOCK AND RELATED SECURITY****            HOLDERMATTERS**.

 

The principal market onwhich our common stock is being traded is the American Stock Exchange under thesymbol CUB. The closing high and low sales prices for the stock, as reported inthe consolidated transaction reporting system on the American Stock Exchangefor the quarterly periods during the past two fiscal years, and dividendinformation for those periods, are as follows:

 

MARKET AND DIVIDENDINFORMATION

 
| ** **  | ** ** | **Sales Price of Common Shares** | ** ** | ** **           | ** ** |
|-------------|------------|------------------------------------------------------|------------|----------------------|------------|
| ** **  | ** ** | **Fiscal 2007**                                 | ** ** | **Fiscal 2006** | ** ** | **Dividends per Share** | ** ** |
| **Quarter** | ** ** | **High**                                             | ** ** | **Low**              | ** ** | **High** | ** ** | **Low** | ** ** | **Fiscal 2007** | ** ** | **Fiscal 2006** | ** ** |
| First       |       | $                                                    | 22.82      |                 | $          | 19.06 |   | $ | 20.56 |   | $ | 15.63 |   | — |   | — |   |
| Second      |       | 22.37                                                |       | 19.99                |       | 23.94 |   | 20.74 |   | $ | 0.09 |   | $ | 0.09 |   |
| Third       |       | 30.14                                                |       | 20.12                |       | 24.40 |   | 18.27 |   | — |   | — |   |
| Fourth      |       | 46.43                                                |       | 27.23                |       | 20.74 |   | 18.30 |   | $ | 0.09 |   | $ | 0.09 |   |
|             |            |                                                      |            |                      |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

On November 9, 2007, theclosing price of our common stock on the American Stock Exchange was $41.23.

 

There were approximately1,000 shareholders of record of our common stock as of November 9, 2007.

 

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**Item 6. SELECTED FINANCIALDATA.**

 

FINANCIALHIGHLIGHTS AND SUMMARY OF CONSOLIDATED OPERATIONS

 

(amounts inthousands, except per share data)

 
| ** **                                    | ** ** | **Years Ended September 30,** | ** ** |
|-----------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                    | ** ** | **2007**                                     | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                          |       |                                         |       |   |   |   |   |   |   |   |   |
| **Results  of Operations:**                   |       |                                         |       |   |   |   |   |   |   |   |   |
| Sales                                         |       | $                                            | 889,870    |   | $ | 821,386 |   | $ | 804,372 |   | $ | 722,012 |   | $ | 634,061 |   |
| Cost of sales                                 |       | 727,540                                      |       | 687,213 |   | 672,541 |   | 549,170 |   | 493,377 |   |
| Selling, general  and administrative expenses |       | 95,054                                       |       | 97,166 |   | 110,644 |   | 107,139 |   | 87,888 |   |
| Interest expense                              |       | 3,403                                        |       | 5,112 |   | 5,386 |   | 4,658 |   | 3,659 |   |
| Income taxes                                  |       | 23,662                                       |       | 12,196 |   | 453 |   | 19,394 |   | 18,514 |   |
| Net income                                    |       | 41,586                                       |       | 24,133 |   | 11,628 |   | 36,911 |   | 36,519 |   |
|                                          |       |                                         |       |   |   |   |   |   |   |   |   |
| Average number  of shares outstanding         |       | 26,720                                       |       | 26,720 |   | 26,720 |   | 26,720 |   | 26,720 |   |
|                                          |       |                                         |       |   |   |   |   |   |   |   |   |
| **Per  Share Data:**                          |       |                                         |       |   |   |   |   |   |   |   |   |
| Net income                                    |       | $                                            | 1.56       |   | $ | 0.90 |   | $ | 0.44 |   | $ | 1.38 |   | $ | 1.37 |   |
| Cash dividends                                |       | 0.18                                         |       | 0.18 |   | 0.18 |   | 0.16 |   | 0.14 |   |
|                                          |       |                                         |       |   |   |   |   |   |   |   |   |
| **Year-End  Data:**                           |       |                                         |       |   |   |   |   |   |   |   |   |
| Shareholders’  equity                    |       | $                                            | 382,771    |   | $ | 323,226 |   | $ | 297,158 |   | $ | 298,767 |   | $ | 255,292 |   |
| Equity per share                              |       | 14.33                                        |       | 12.10 |   | 11.12 |   | 11.18 |   | 9.55 |   |
| Total assets                                  |       | 592,565                                      |       | 548,071 |   | 547,280 |   | 542,924 |   | 460,226 |   |
| Long-term debt                                |       | 32,699                                       |       | 38,159 |   | 43,776 |   | 50,037 |   | 47,142 |   |

 

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 AND****       RESULTSOF OPERATIONS.**

 

Our two primary businesses are in the defense and transportation industries. For the year ended September 30, 2007, 72% of sales were derived from defense, while 28% were derived from transportation fare collection systems and other commercial operations. These are high technology businesses that design, manufacture and integrate complex systems to meet the needs of various federal and regional government agencies in the U.S. and other nations around the world. The U.S. Government remains our largest customer, accounting for approximately 54% of sales in 2007 compared to 52% in 2006 and 53% in 2005.

 

Our defense segmentis organized into three market-focused business units: Readiness Systems(formerly known as Training Systems) Business Unit (RSBU), Mission SupportServices Business Unit (MSBU), and Communications & Electronics BusinessUnit (CEBU). The segment is a diversified supplier of constructive, live andvirtual military training systems, services and communication systems andproducts to the U.S. Department of Defense, other government agencies andallied nations. We design instrumented range systems for fighter aircraft,armored vehicles and infantry force-on-force live training; weapons effectssimulations; laser-based tactical and communication systems; and precisiongunnery solutions. Our services are focused on training mission support,computer simulation training, distributed interactive simulation, developmentof military training doctrine, force modernization services for NATO entrantsand field operations and maintenance. Our communications products are aimed atintelligence, surveillance, and search and rescue markets. The segment also hasa 50% interest in a joint venture which produces components of advancedtactical systems for the U.S. and Israel.

 

CubicTransportation Systems develops and delivers innovative fare collection systemsfor public transit authorities worldwide. We provide hardware, software andmultiagency, multimodal transportation integration technologies and servicesthat allow the agencies to efficiently collect fares, manage their operations,reduce shrinkage and make using public transit a more convenient and attractiveoption for commuters.

 

**ConsolidatedOverview**

 

Sales in fiscal 2007increased by 8% to $889.9 million compared to $821.4 million in 2006. Sales in2006 had increased 2% over 2005 sales of $804.4 million. Sales growth in thethree year period from 2005 to 2007 all came from our defense segment, whiletransportation systems sales trended slightly downward during the three yearperiod. Nearly all the growth in defense sales was organic, coming fromexisting subsidiaries, with an immaterial amount coming from a small strategicacquisition we made in 2006. See the segment discussions following for further analysis of segmentsales.

 

Operatingincome doubled in fiscal 2007 to $62.1 million from $30.9 million in 2006,after having more than doubled in 2006 from $13.1 million in 2005. Theimprovement in 2007 came from both segments with transportation systemsincreasing significantly from a low level in 2006 and defense improving by morethan 40%. In fiscal 2006 the primary reason for the improvement 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. See the segmentdiscussions following for further details of segment operating results.

 

Net income increased 72%in fiscal 2007 to $41.6 million ($1.56 per share) from $24.1 million ($.90 pershare) in 2006. Net income in 2006 had more than doubled from $11.6 million($0.44 per share) in 2005. Included in 2007 was a gain on the sale of ourcorrugated box business in the fourth quarter of approximately $0.6 million,after applicable income taxes. We had owned this small business since the 1960’sand over the years realized a high rate of return on our investment; however,in recent years competition and raw material prices had driven profit marginsdown. Since this business is not a part of our core mission, we determined thatit was time for us to divest it. Approximately $4.3 million, after applicableincome taxes, of the 2006 net income was from a gain on the sale of real estate that hadbeen held for investment purposes for many years, but was sold in the firstfiscal quarter of 2006. Reductions in tax contingency reserves accounted forapproximately $0.9 million, $1.1 million and $2.8 million, 

 

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respectively,of the 2007, 2006 and 2005 net income.

 

The gross margin fromproduct sales improved again in 2007 to 19.6% from 16.0% in 2006, due toimproved performance from our defense readiness systems business and thetransportation systems segment. The gross margin for product sales had beendown to 15.1% in 2005, as a result of cost growth in the transportation systemssegment that year. The gross margin from service sales was 16.3% in 2007,compared to 16.9% in 2006 and 18.1% in 2005. The primary cause of thedecreasing service gross margin during the three year period was lower salesfrom a service contract in Europe that had generated higher than average grossmargins. This contract was completed in the second quarter of fiscal 2007.

 

Selling,general and administrative (SG&A) expenses decreased to 10.7% of sales in2007 compared to 11.8% in 2006 and 13.8% in 2005. SG&A expenses decreasedin 2007, to $95.1 million compared to $97.2 million in 2006. SG&A increasedin the defense segment due to somewhat higher selling expenses and due togrowth of the business, while SG&A decreased in the transportation segmentdue to cost cutting measures. In 2006 SG&A expenses had decreased $13.5million from the 2005 level, with the decrease coming from both segments. In2005, the defense segment had incurred higher than normal selling expensesrelated to contract proposals, while such activities returned to a more normallevel in 2006. Lower transportation systems selling expenses and staffingreductions contributed to reduced SG&A expenses in 2006. In addition, anallowance for doubtful accounts provision of more than $4 million hadcontributed to higher SG&A expenses in transportation systems in 2005.

 

Company sponsoredresearch and development (R&D) spending decreased to $5.2 million in 2007,compared to $6.1 million in 2006 and $8.1 million 2005. Our R&D spendingcontinues to be incurred primarily in connection with customer fundedactivities. We do not rely heavily on company sponsored R&D, as most of ournew product development occurs in conjunction with the performance of work onour contracts. The amount of contract required development activity in 2007 was$66 million, compared to $64 million in 2006 and $65 million in 2005; however,these costs are included in cost of sales as they are directly related tocontract performance.

 

Interest and dividendincome increased in 2007 over both 2006 and 2005 due primarily to higheravailable cash balances for investment. Other income increased in 2007 over2006 as a result of foreign currency exchange gains on advances to our foreignsubsidiaries. Other income had decreased in 2006 compared to 2005 in partbecause of lower rental income, resulting from the sale of the real estatementioned above. Other income in 2005 had also included foreign currencyexchange gains on advances to foreign subsidiaries. Interest expense decreasednearly $2 million in 2007 compared to 2006 and 2005 because of a reduction inboth short- and long-term borrowings.

 

Our effective tax ratefor 2007 was 36.3% of pretax income compared to 33.6% in 2006 and 3.7% in 2005.Our effective rate in 2007 increased in part because we recorded a provision of$2.6 million for U.S. taxes on a 7 million pound ($14.4 million) dividend fromour U.K. subsidiary that was paid in 2007. In December 2006, the U.S. Congressreinstated the Research and Experimentation (R&E) credit retroactive toJanuary 1, 2006. As a result, we recorded a tax benefit of approximately $0.5million in the first quarter of fiscal 2007 that represents the estimatedR&E credit for the nine-month period ended September 30, 2006, which wasnot previously reflected in our operating results. Tax expense in 2006had included a provision of $1.6 million for taxes due upon the repatriation ofcapital to the U.S. from our U.K. subsidiary during the year. The effectiverate in 2007, 2006 and 2005 benefited from the reversal of tax contingencyprovisions amounting to $0.9 million, $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.

 

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**Defense Segment**

 
| **Years ended September 30,** | ** ** | **2007**               | ** ** | **2006** | ** ** | **2005** | ** ** |
|----------------------------------------------|------------|------------------------|------------|----------|------------|----------|------------|
| ** **                                   | ** ** | **(in millions)** | ** ** |
|                                         | ** ** | ** **             | ** ** |
| **Defense  Segment Sales**                   |       |                   |       |     |       |     |       |
| Mission support  services (MSBU)             |       | $                      | 308.0      |     | $          | 262.9    |       | $ | 257.0 |   |
| Readiness  systems (RSBU)                    |       | 263.4                  |       | 228.0    |       | 227.9    |       |
| Communications  and electronics (CEBU)       |       | 57.4                   |       | 64.6     |       | 52.5     |       |
| Tactical systems  and other                  |       | 12.3                   |       | 7.3      |       | 6.0      |       |
|                                         |       | $                      | 641.1      |     | $          | 562.8    |       | $ | 543.4 |   |
|                                         |       |                   |       |     |       |     |       |
| **Defense  Segment Operating Income**        |       |                   |       |     |       |     |       |
| Mission support  services (MSBU)             |       | $                      | 27.6       |     | $          | 20.6     |       | $ | 17.9 |   |
| Readiness  systems (RSBU)                    |       | 18.9                   |       | 9.7      |       | 18.2     |       |
| Communications  and electronics (CEBU)       |       | (0.7                   | )          | 3.9      |       | (4.8     | )          |
| Tactical systems  and other                  |       | (1.6                   | )          | (2.8     | )          | (1.2     | )          |
|                                         |       | $                      | 44.2       |     | $          | 31.4     |       | $ | 30.1 |   |

 

As depicted in the table above, sales fromour defense segment increased 14% to $641.1 million in 2007, compared to $562.8million in 2006. Sales in 2006 had increased 4% from 2005 sales of $543.4million. Higher sales in 2007 came from RSBU and MSBU, while sales from CEBUdecreased in comparison to 2006. In 2006 sales from CEBU had increased from the2005 level, while sales from the other defense business units grew onlyslightly. The caption “Tactical systems and other” in the table above includesoperating results of our 50% owned joint venture company as well as advancedprograms for the development of new defense technologies.

 

Operating income in our defense segment increased to $44.2 million in2007 from $31.4 million in 2006, a 41% increase. In 2006, operating income hadincreased 4% from 2005 operating income of $30.1 million. Growth in 2007operating income came from RSBU and MSBU, while CEBU generated an operatingloss for the year. The increase in 2006 operating income was primarily due to aturnaround to profitability from CEBU, which had incurred an operating loss in2005. MSBU operating income increased in 2006, while RSBU operating incomedecreased by nearly 50%. The joint venture company incurred operating losses of$1.4 million, $1.9 million and $1.3 million in 2007, 2006 and 2005,respectively, although we expect its performance to improve in 2008 as itsrevenues increase.

 

**Mission Support Services (MSBU)**

 

MSBU sales increased 17% in 2007, afterhaving increased 2% in 2006 from the 2005 level. The increase in 2007 salescame from the expansion of existing programs and from new contracts won in2007. Sales were higher by nearly $14 million from the Joint Readiness TrainingCenter (JRTC) contract in Fort Polk, LA, due to an increase in trainingexercises conducted by the customer. In addition, increasedactivity from our contract with the Marine Corp. and higher sales fromcontracts for modeling the effects of weapons of mass destruction added to 2007sales. Sales growth in 2006 was limited by a reduction of training exercises atthe JRTC that decreased sales from that program by about $20 million. The mostsignificant growth in 2006 sales came from contracts for modeling the effectsof weapons of mass destruction.

 

Operating income from MSBU increased 34% in2007 after increasing 15% in 2006. Higher sales volume and award fees helped toincrease profitability in 2007 and improved operating income as a percentage ofsales to 8.9%, compared to 7.8% in 2006 and 7.0% in 2005. The most significantincreases in 2007 operating income came from the Marine Corp. and JRTCcontracts mentioned above. In 2006 a change in the mix of sales to higherprofit margin programs helped to improve operating income despite limited salesgrowth.

 

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**Readiness Systems (RSBU)**

 

RSBU sales increased 16% in 2007 over 2006after having increased only slightly in 2006 from 2005. Most of the increase in2007 sales compared to 2006 came from air combat training systems, while groundcombat training and small arms virtual training systems sales grew slightly.Work continued on the air combat training system contract known as P5 and on acontract for an Australian air combat training system. We are also working onground combat training ranges in Canada, the Far East and Middle East. In 2006,sales of air combat training systems were also higher when compared to 2005,while both small arms training systems and ground combat training systems salesdecreased slightly.

 

RSBU operating income nearly doubled in 2007from 2006, back to a level comparable to 2005. The increase in 2007 came fromhigher profit margins on higher sales of air combat training systems andimprovements in profitability of ground combat training systems and small armstraining systems. Higher profit margins from a ground combat training system inthe Far East were offset by cost growth of more than $5 million on a groundcombat training system in the Middle East, while operating income from otherground combat training systems improved slightly. Operating income from smallarms training systems improved in 2007 as the development of new weaponssimulations systems was completed in 2006, resulting in decreased costs, andbecause sales increased in 2007. The primary reason for decreased operatingincome in 2006 was cost growth of $4.6 million on a contract for thedevelopment of a ground combat training system in Canada, in addition to thesmall arms training development costs of $1.9 million mentioned above. Lowersales of small arms training systems further impacted 2006 operating incomefrom this product line.

 

**Communications and Electronics(CEBU)**

 

Sales from CEBU decreased 12% in 2007, afterhaving increased 23% in 2006 from the 2005 level. Sales increased in 2007 froma contract for the supply of data links for unmanned aerial vehicles in theU.K., however, this increase was more than offset by decreases in other datalink sales. Several of the data link contracts that had resulted in the salesgrowth in 2006 neared completion in 2007. Sales of personnel locator systemsand power amplifiers also decreased in 2007, after having increased in 2006.

 

CEBU generated an operating loss of $0.7million in 2007 due primarily to cost growth of $4.3 million on a contract forthe development of new data link technology. Profit margins on other data linkcontracts were also lower; however, this decrease was partially offset byimproved profit margins from sales of power amplifiers and personnel locatorsystems. In 2006, operating income improved to $3.9 million from the operatingloss of $4.8 million incurred in 2005. Operating income in 2006 came primarilyfrom the sale of power amplifiers and data links, in addition to the favorablesettlement of a long-standing dispute with a customer during the year, whichadded $1.2 million to operating income. The operating loss in communicationsand electronics in 2005 was primarily due to cost growth totaling nearly $5million on two contracts, one a program for the development of new data linktechnology and the other a program involving an intelligence application of ourdata link and receiver technology. In addition, approximately $2 million inoverstocked or obsolete surveillance receiver inventory was written down invalue to zero in 2005.

 

**Transportation Systems Segment**

** **
| **Years ended September 30,** | ** ** | **2007**               | ** ** | **2006** | ** ** | **2005** | ** ** |
|----------------------------------------------|------------|------------------------|------------|----------|------------|----------|------------|
| ** **                                   | ** ** | **(in millions)** | ** ** |
| Transportation  Segment Sales                |       | $                      | 236.6      |     | $          | 243.9    |       | $ | 245.8 |   |
|                                         |       |                   |       |     |       |     |       |
| Transportation  Segment Operating Income     |       | $                      | 20.1       |     | $          | 2.8      |       | $ | (13.8 | ) |

 

Transportation systems sales continued the downward trend of recentyears in 2007, decreasing 3% from the 2006 level. Sales in North America andSweden decreased in 2007 compared to 2006, while sales in 

 

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Australia and the U.K. increased. Several system installation contractsin North America were either complete or neared completion in 2007, resultingin decreased sales, while progress on a contract in Sweden was slowed due tocost growth, also resulting in lower sales in 2007 than in 2006. Sales in Australia increased due inpart to a settlement reached with the customer during the year that increasedthe value of the contract. In the U.K sales were lower from a service contractthat was phased-out because old ticket issuing equipment was replaced by modernequipment requiring less maintenance; however, this decrease was more thanoffset by higher sales from other U.K. contracts, including the PRESTIGE contractin London. A major contributor to the increase in U.K. sales was the strengthof the British Pound against the U.S. dollar, resulting in the dollar value ofsales in the U.K. increasing $10.8 million for the year when compared toaverage exchange rates experienced in 2006.

 

In 2006 increased sales from a contract in Sweden helped to offset a decrease in sales from the PRESTIGEcontract and from U.K. service contracts. Service sales were lower in the U.K.in 2006 primarily because of the gradual phase-out of ticket issuing equipmentmentioned above. In addition, we completed a contract for the maintenance ofcommunications equipment in London at the end of fiscal 2005 which was notrenewed in 2006, further impacting service sales.

 

Operatingincome in the transportation systems segment improved significantly in 2007from the low level of 2006. Settlements were reached with three customers,adding $8.6 million to operating income; however, we also added $3.4 million toour estimate of costs to complete two of these contracts, yielding a netimprovement to operating income of $5.2 million from these contractsettlements. Operating income from the Prestige contract in London increasedmore than $9 million compared to last year, including bonuses earned for systemusage and the effect of a higher currency exchange rate. Currency exchangedifferences resulted in an improvement in operating income of about $1.8million from all U.K. contracts, when comparing the 2007 average exchange rateto the 2006 rate. Cost growth on North American system installation contractsin 2007 was about $7.0 million this year compared to approximately $21.0million last year, helping to improve operating income. Lower operating incomefrom the U.K. service contract mentioned above and from spare parts sales inthe U.S. partially offset these improvements. In addition, cost growth from acontract in Sweden totaling more than $6 million for the year also impactedoperating income. Higher legal fees in 2007 further reduced operating income forthe year by $1.3 million when compared to 2006.

 

In 2006, improvedoperating income from contracts in Europe was partially offset by operatinglosses on contracts in North America and Australia. Projected costs to complete fare collectionsystems on several North American and one Australian contract increased by approximately $21 million morethan had been previously estimated. The primary cause of the cost growth was anincrease in engineering hours incurred to complete the projects, in addition toproject management costs incurred due to delays in project completion. Thiscompares to cost growth of approximately $28 million on these contracts in2005. 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.

 

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**Backlog**

 
| **September 30,**          | ** ** | **2007**               | ** ** | **2006** | ** ** |
|---------------------------------|------------|------------------------|------------|----------|------------|
| ** **                      | ** ** | **(in millions)** | ** ** |
| **Total  backlog**              |       |                   |       |     |       |
| Transportation  systems         |       | $                      | 787.3      |     | $          | 715.6 |   |
| Defense                         |       |                   |       |     |       |
| Mission support  services       |       | 776.6                  |       | 366.4    |       |
| Readiness  systems              |       | 383.4                  |       | 285.9    |       |
| Communications  and electronics |       | 56.4                   |       | 71.9     |       |
| Tactical systems  and other     |       | 30.6                   |       | 38.8     |       |
| Total defense                   |       | 1,247.0                |       | 763.0    |       |
| Total                           |       | $                      | 2,034.3    |     | $          | 1,478.6 |   |
|                            |       |                   |       |     |       |
| **Funded  backlog**             |       |                   |       |     |       |
| Transportation  systems         |       | $                      | 787.3      |     | $          | 715.6 |   |
| Defense                         |       |                   |       |     |       |
| Mission support  services       |       | 131.2                  |       | 112.2    |       |
| Readiness  systems              |       | 383.4                  |       | 285.9    |       |
| Communications  and electronics |       | 56.4                   |       | 71.9     |       |
| Tactical systems  and other     |       | 30.6                   |       | 38.8     |       |
| Total defense                   |       | 601.6                  |       | 508.8    |       |
| Total                           |       | $                      | 1,388.9    |     | $          | 1,224.4 |   |

 

In addition to the amounts identified above, the company has beenselected as a participant in or, in some cases, the sole contractor for severalsubstantial indefinite delivery/ indefinite quantity (IDIQ) contracts. IDIQcontracts are not included in backlog until an order is received.

 

Included in thetransportation systems backlog at September 30, 2007 is $510 million from tothe PRESTIGE fare collection system contract with TfL, through our jointventure company, TranSys. Of this amount $269 million relates to the last fiveyears of the contract (from August 2010 through August 2015) that is subject toa termination for convenience clause in the contract. This termination clauseoutlines the obligations of the customer should they elect to exercise thiscontract provision, including penalty payments to TranSys and early payment ofthe debt, among other requirements. Because of these onerous requirements, wedo not believe it would be in the best interests of TfL to terminate thecontract early; however, they may do so. The contract is now in its tenth yearand the customer must notify TranSys by October 2008 if they should elect toterminate the contract.

 

Ofthe increase in transportation systems backlog between September 30, 2006 andSeptember 30, 2007, approximately $49 million was the result of strengtheningof the British Pound vs. the U.S. Dollar between those dates.

 

The difference betweentotal backlog and funded backlog represents options under multiyear servicecontracts. Funding for these contracts comes from annual operating budgets ofthe U.S. government and the options are normally exercised annually. Optionsfor the purchase of additional systems or equipment are not included in backloguntil exercised.

 

**New Accounting Standards**

 

InJuly 2006, the Financial Accounting Standards Board (FASB) 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 SFAS 109, *Accounting forIncome Taxes*. The cumulative effect of applying the provisions ofthis interpretation are required to be reported separately as an adjustment tothe 

 

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openingbalance of retained earnings in the year of adoption. We will implement thisstandard in the first quarter of fiscal 2008, however, we are in the process ofreviewing and evaluating FIN 48, and therefore the ultimate impact of itsadoption is not yet known.

 

In September 2006, theFASB issued SFAS No. 157, “Fair Value Measurements.” SFAS 157 defines fairvalue, establishes a framework and gives guidance regarding the methods usedfor measuring fair value, and expands disclosures about fair valuemeasurements. SFAS 157 is effective for financial statements issued for fiscalyears beginning after November 15, 2007 and interim periods within those fiscalyears. We are currently evaluating the impact of SFAS 157 on our consolidatedresults of operations and financial position.

 

InSeptember 2006, the FASB published SFAS No. 158, **Employers’ Accounting for Defined BenefitPension and Other Postretirement Plans.****SFAS 158**requiresplan sponsors of defined benefit pension and other postretirement benefit plansto recognize the funded status of those plans in the balance sheet, measure thefair value of plan assets and benefit obligations as of the date of the fiscalyear-end balance sheet and provide additional disclosures. On September 30,2007, we adopted the recognition and disclosure provisions of SFAS 158. Theeffect of adopting SFAS 158 on our financial condition at September 30, 2007has been included in the accompanying consolidated financial statements. SFAS158 did not have an effect on our financial condition at September 30, 2006.SFAS 158’s provisions regarding the change in measurement date ofpostretirement benefit plans are not applicable as we already use a measurementdate of September 30 for our pension plans. See Note 8 for further discussionof the effect of adopting SFAS 158 on our consolidated financial statements.

 

In February 2007, theFASB issued SFAS No. 159, *The Fair Value Option forFinancial Assets and Financial Liabilities – Including an Amendment of FASBStatement No. 115*, which is effective for fiscal years beginningafter November 15, 2007. This statement permits an entity to choose to measuremany financial instruments and certain other items at fair value at specifiedelection dates. Subsequent unrealized gains and losses on items for which thefair value option has been elected will be reported in earnings. We arecurrently evaluating the potential impact of SFAS 159 on our consolidatedresults of operations and financial position.

 

**Liquidity and Capital Resources**

 

Cash flows fromoperations totaled $69.2 million in 2007, compared to $31.3 million in 2006 and$54.7 million in 2005. A decrease in accounts receivable in each of the threeyears amounting to $18.1 million, $5.8 million and $38.5 million in 2007, 2006and 2005, respectively, contributed to the positive cash flows. All of theoperating cash flows in 2007 came from the transportation systems segment, whiledefense cash flows were slightly negative for the year. Both the defense andtransportation systems segments generated positive cash flows in 2006 and 2005,with the larger amount contributed by transportation systems in 2006 and bydefense in 2005.

 

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, 2007, this balance was $16.7 million compared to $2.2 million atSeptember 30, 2006.

 

Cash flows used ininvesting activities in 2007 included $6.1 million of capital expenditures,partially offset by proceeds of $3.8 million from the sale of our corrugatedbox business. During 2007 we also invested a net of $18.3 million in financialinstruments that are classified as short-term investments. Investing activitiesin 2006 included capital expenditures of $9.8 million, proceeds from the saleof investment real estate of $8.0 million and the addition of $8.9 million inshort-term investments. In 2005, investing activities included $8.3 million ofcapital expenditures and the liquidation of $6.2 million of short-terminvestments.

 

Financing activities in2007 included the repayment of short term borrowings of $10.0 million andscheduled payments on long-term borrowings of $6.1 million, in addition to thepayment of a dividend to shareholders of $4.8 million (18 cents per share).Financing activities in 2006 included scheduled debt payments of $6.1 million,repayment of short-term borrowings of $16.4 million and dividends to 

 

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shareholders of $4.8million. In 2005 we borrowed a net $0.7 million on a short-term basis to fundworking capital requirements, made scheduled debt payments of $6.1 million andpaid dividends to shareholders of $4.8 million.

 

Accumulated other comprehensiveincome increased $22.8 million in 2007 because of foreign currency translationadjustments of $9.2 million and a decrease in the recorded liability for ourpension plans of $13.6 million. This increases the positive balance inaccumulated other comprehensive income to $31.2 million as of September 30,2007 compared to $8.4 million at September 30, 2006.

 

The pension plan under-fundedbalance improved from the September 30, 2006 balance of $32.2 million to $1.5million at September 30, 2007. This improvement in the funding position can beattributed primarily to a return on plan assets for the year that was higherthan our assumed rate of return and to an increase in the discount rate we usedto calculate the pension liability. In accordance with Statement of Financial Accounting Standards (SFAS) No. 158, **Employers’Accounting for Defined Benefit Pension and Other Postretirement Plans****, which we implemented infiscal 2007, the under-funded balance of $1.5 million is reflected on thebalance sheet as a liability at September 30, 2007.**

 

The net deferred tax assetdecreased to $18.7 million at September 30, 2007 compared to $26.4 million atSeptember 30, 2006. The primary reason for the decrease is that the effect ofrecording adjustments to the pension liability through other comprehensiveincome resulted in a deferred tax liability of $2.7 million at September 30,2007 compared to a deferred tax asset of $4.7 million at September 30, 2006. Weexpect to generate sufficient taxable income in the future such that the netdeferred tax asset will be realized.

 

Our financial conditionremains strong with working capital of $306 million and a current ratio of 2.8to 1 at September 30, 2007. We expect that cash on hand and our ability toaccess the debt markets will be adequate to meet our working capitalrequirements for the foreseeable future. In addition to the short-termborrowing arrangements we have in the U.K. and New Zealand, we have a committed five year creditfacility from a group of financial institutions in the U.S., aggregating $150million. As of September 30, 2007, $11.1 million of this capacity was used forletters of credit, leaving an additional $138.9 million available. Our totaldebt to capital ratio at September 30, 2007 was less than 10%. In addition, ourcash and short-term investments totaled $100.8 million at September 30, 2007which exceeded our total debt by $61.9 million.

 

The following is a schedule of ourcontractual obligations outstanding as of September 30, 2007:

 
| ** **             | ** ** | ** **             | ** ** | **Less than 1** | ** ** | ** **                     | ** ** | ** **                     | ** ** | ** **             | ** ** |
|------------------------|------------|------------------------|------------|---------------------------|------------|--------------------------------|------------|--------------------------------|------------|------------------------|------------|
| ** **             | ** ** | **Total**              | ** ** | **Year**                  | ** ** | **1 - 3 years** | ** ** | **4 - 5 years** | ** ** | **After 5 years** | ** ** |
| ** **             | ** ** | **(in millions)** | ** ** |
| ** **             | ** ** |                   | ** ** |
| Long-term debt         |       | $                      | 38.8       |                      | $          | 6.1                            |       | $                              | 10.8       |                   | $          | 9.4 |   | $ | 12.5 |   |
| Interest  payments     |       | 7.9                    |       | 2.2                       |       | 3.2                            |       | 1.9                            |       | 0.6                    |       |
| Operating leases       |       | 16.8                   |       | 5.3                       |       | 6.6                            |       | 4.0                            |       | 0.9                    |       |
| Deferred  compensation |       | 8.7                    |       | 0.5                       |       | 1.1                            |       | 0.8                            |       | 6.3                    |       |
|                   |       | $                      | 72.2       |                      | $          | 14.1                           |       | $                              | 21.7       |                   | $          | 16.1 |   | $ | 20.3 |   |

 

**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*

 

Asignificant portion of our business is derived from long-term development,production and system integration contracts which we account for consistentwith the American Institute of Certified Public Accountants’ (AICPA) audit andaccounting guide, *Audits of Federal Government Contractors*,and the AICPA’s Statement of Position No. 81-1, *Accountingfor Performance of Construction-Type and Certain Production-Type Contracts*.We consider the nature of these contracts, and the types of products andservices provided, when we determine the proper accounting for a particularcontract. Generally, we record revenue for long-term fixed price contracts on apercentage of completion basis using the cost-to-cost method to measureprogress toward completion. Most of our long-term fixed-price contracts requireus to deliver minimal quantities over a long period of time or to perform asubstantial level of development effort in relation to the total value of thecontract. Under the cost-to-cost method of accounting, we recognize revenuebased on a ratio of the costs incurred to the estimated total costs atcompletion. Amounts representing contract change orders, claims or other itemsare included in the contract value only when they can be reliably estimated andrealization is considered probable. Provisions are made on a current basis tofully recognize any anticipated losses on contracts.

 

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

 

Sales of products are recorded when a firmsales agreement is in place, delivery has occurred and collectibility of thefixed or determinable sales price is reasonably assured. Sales for Fixed-PriceService Contracts that do not contain measurable units of work performed aregenerally recognized on straight-line basis over the contractual serviceperiod, unless evidence suggests that the revenue is earned, or obligationsfulfilled, in a different manner. Sales for Fixed-Price Service Contracts thatcontain measurable units of work performed are recognized when the units ofwork are completed.

 

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

 

*Income Taxes*

 

Significant judgment is required in determining our income tax provisions and in evaluating our tax return positions. 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.

 

29

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Tax regulations require items to be included in the tax return at different times than the items are reflected in the financial statements and are referred to as timing differences. In addition, some expenses are not deductible on our tax return and are referred to as permanent differences. Timing differences create deferred tax assets and liabilities. Deferred tax assets generally represent items that can be used as a tax deduction or credit in future years for which we have already recorded the benefit in our income statement. We establish valuation allowances for our deferred tax assets when the amount of expected future taxable income is not likely to support the use of the deduction or credit. Deferred tax liabilities generally represent deductions we have taken on our tax return but have not yet recognized as expense in our financial statements.

 

We have not recognized any United States tax expense on undistributed earnings of our foreign subsidiaries since we intend to reinvest the earnings outside the U.S. for the foreseeable future. These undistributed earnings totaled approximately $44.5 million at September 30, 2007. Annually we evaluate the capital requirements in our foreign subsidiaries and determine the amount of excess capital, if any, that is available for distribution. Whether or not we actually repatriate the excess capital in the form of a dividend, we would provide for U.S. taxes on the amount determined to be available for distribution. This evaluation is judgmental in nature and, therefore, the amount of U.S. taxes provided on undistributed earnings of our foreign subsidiaries is affected by these judgments. Based on this analysis in 2007, we determined that 7 million British pounds ($14.4 million) was excess capital in the U.K. and paid a dividend of that amount to the U.S. parent company.

 

*Valuation of Goodwill*

 

We evaluate our recordedgoodwill balances for potential impairment annually by comparing the fair valueof each reporting unit to its carrying value, including recorded goodwill. Wehave not yet had a case where the carrying value exceeded the fair value;however, if it did, impairment would be measured by comparing the derived fairvalue of goodwill to its carrying value, and any impairment determined would berecorded in the current period. To date there has been no impairment of ourrecorded goodwill. Goodwill balances by reporting unit are as follows:

 
| **September 30,**        | ** ** | **2007**               | ** ** | **2006** | ** ** |
|-------------------------------|------------|------------------------|------------|----------|------------|
| ** **                    | ** ** | **(in millions)** | ** ** |
| ** **                    | ** ** | ** **             | ** ** |
| Defense systems  and products |       | $                      | 16.9       |     | $          | 16.5 |   |
| Defense services              |       | 9.7                    |       | 9.7      |       |
| Transportation  systems       |       | 9.4                    |       | 8.6      |       |
| Total goodwill                |       | $                      | 36.0       |     | $          | 34.8 |   |

 

Determining the fairvalue 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.

 

Forfiscal 2007, the discounted cash flows for each reporting unit were based ondiscrete three-year financial forecasts developed by management for planningpurposes. Cash flows beyond the three-year discrete forecasts were estimatedbased on projected growth rates and financial ratios, influenced by an analysisof historical ratios, and by calculating a terminal value at the end of tenyears. The compound annual growth rates for sales ranged from 4.0% to 8.0% andfor operating profit margins ranged from 7.0% to 8.0% for the reporting units,beyond the discrete forecast period. The future cash flows were discounted topresent value using a discount rate of 9.4%. We did not recognize any goodwillimpairment as a result of performing this annual test. A variance in thediscount rate, the estimated sales growth rate or the operating profit margincould have a significant impact on the estimated fair value of the reporting 

 

30

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unitand consequently the amount of identified goodwill impairment. For example, a3% decrease in the assumed operating profit margin in the defense systems andproducts reporting unit or a 3.5% decrease in the assumed operating profitmargin in the transportation systems reporting unit would have resulted in anindication of impairment that would have led us to further quantify thepossible impairment and potentially record a 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.

 

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 2007 by about $0.7 million, before applicable income taxes.

 

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

 

**Interest Rate Risk**

 

We invest in money market instruments and short-term marketable debtand equity securities that are tied to floating interest rates being offered atthe time the investment is made. We maintain short-term borrowing arrangementsin the U.S., U.K. and New Zealand which are also tied to floating interestrates (LIBOR and the U.S. prime rate and the U.K. and New Zealand base rates).We also have senior unsecured notes payable to insurance companies that are duein annual installments. These notes have fixed coupon interest rates. See Note5 to the Consolidated Financial Statements for more information.

 

Interest income earned on our short-term investments is affected bychanges in the general level of U.S. and U.K. interest rates. These incomestreams are generally not hedged. Interest expense incurred under the short-termborrowing arrangements is affected by changes in the general level of interestrates in the U.S., U.K. and New Zealand. The expense related to these coststreams is usually not hedged since it is either revolving, payable withinthree months and/or immediately callable by the lender at any time. Interestexpense incurred under the long-term notes payable is not affected by changesin any interest rate because it is fixed. However, we have in the past, and mayin the future, use an interest rate swap to essentially convert this fixed rateinto a floating rate for some or all of the long-term debt outstanding. 

 

31

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The purpose of a swap would be to tie the interest expense risk relatedto these borrowings to the interest income risk on our short-term investments,thereby mitigating our net interest rate risk. We believe that we are notsignificantly exposed to interest rate risk at this point in time. There was nointerest rate swap outstanding at September 30, 2007.

 

**Foreign Currency Exchange Risk**

 

In the ordinary course of business, we enter into firm sale andpurchase commitments denominated in many foreign currencies. We have a policyto hedge those commitments greater than $20,000 by using foreign currencyexchange forward and option contracts that are denominated in currencies otherthan the functional currency of the subsidiary responsible for the commitment,typically the British pound, Canadian dollar, Euro, Swedish krona, New Zealanddollar and Australian dollar. These contracts are designed to be effectivehedges regardless of the direction or magnitude of any foreign currencyexchange rate change, because they result in an equal and opposite income orcost stream that offsets the change in the value of the underlying commitment. SeeNote 1 to the Consolidated Financial Statements for more information on ourforeign currency translation and transaction accounting policies. We also usebalance sheet hedges to mitigate foreign exchange risk. This strategy involvesincurring British pound denominated debt (See Interest Rate Risk above) andhaving the option of paying off the debt using U.S. dollar or British poundfunds. We do not believe that we are significantly exposed to foreign currencyexchange rate risk at this point in time.

 

Investments in our foreign subsidiaries in the U.K., Australia, NewZealand, and Canada are not hedged because we consider them to be investedindefinitely. In addition, we generally have control over the timing and amountof earnings repatriation, if any, and expect to use this control to mitigateforeign currency exchange risk.

 

32

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**Item 8. FINANCIAL STATEMENTS ANDSUPPLEMENTAL DATA.**

 

CUBIC CORPORATION

 

CONSOLIDATED BALANCESHEETS

 
| ** **                                 | ** ** | **September 30,**  | ** ** |
|--------------------------------------------|------------|-------------------------|------------|
| ** **                                 | ** ** | **2007**                | ** ** | **2006** | ** ** |
| ** **                                 | ** ** | **(in thousands)** | ** ** |
| ASSETS                                     |       |                    |       |   |   |
|                                       |       |                    |       |   |   |
| CURRENT ASSETS                             |       |                    |       |   |   |
| Cash and cash  equivalents                 |       | $                       | 73,563     |   | $ | 42,380 |   |
| Short-term  investments                    |       | 27,200                  |       | 8,874 |   |
| Accounts  receivable:                      |       |                    |       |   |   |
| Trade and other  receivables               |       | 13,024                  |       | 15,686 |   |
| Long-term  contracts                       |       | 297,792                 |       | 319,847 |   |
| Allowance for  doubtful accounts           |       | (5,144                  | )          | (5,086 | ) |
|                                       |       | 305,672                 |       | 330,447 |   |
|                                       |       |                    |       |   |   |
| Inventories                                |       | 27,342                  |       | 20,209 |   |
| Deferred income  taxes                     |       | 18,492                  |       | 19,042 |   |
| Prepaid expenses  and other current assets |       | 21,105                  |       | 17,117 |   |
| TOTAL CURRENT  ASSETS                      |       | 473,374                 |       | 438,069 |   |
|                                       |       |                    |       |   |   |
| LONG-TERM  CONTRACT RECEIVABLES            |       | 16,650                  |       | 2,200 |   |
|                                       |       |                    |       |   |   |
| PROPERTY, PLANT  AND EQUIPMENT             |       |                    |       |   |   |
| Land and land  improvements                |       | 14,601                  |       | 14,412 |   |
| Buildings and  improvements                |       | 46,519                  |       | 43,779 |   |
| Machinery and  other equipment             |       | 84,149                  |       | 83,301 |   |
| Leasehold  improvements                    |       | 4,299                   |       | 5,368 |   |
| Accumulated  depreciation and amortization |       | (92,317                 | )          | (92,296 | ) |
|                                       |       | 57,251                  |       | 54,564 |   |
|                                       |       |                    |       |   |   |
| OTHER ASSETS                               |       |                    |       |   |   |
| Deferred income  taxes                     |       | 195                     |       | 7,360 |   |
| Goodwill                                   |       | 36,003                  |       | 34,750 |   |
| Miscellaneous  other assets                |       | 9,092                   |       | 11,128 |   |
|                                       |       | 45,290                  |       | 53,238 |   |
|                                       |       |                    |       |   |   |
| TOTAL ASSETS                               |       | $                       | 592,565    |   | $ | 548,071 |   |

 

See accompanying notes.

 

33

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| ** **                                                         | ** ** | **September 30,**  | ** ** |
|--------------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                         | ** ** | **2007**                | ** ** | **2006** | ** ** |
| ** **                                                         | ** ** | **(in thousands)** | ** ** |
| LIABILITIES AND  SHAREHOLDERS’ EQUITY                         |       |                    |       |   |   |
|                                                               |       |                    |       |   |   |
| CURRENT  LIABILITIES                                               |       |                    |       |   |   |
| Short-term  borrowings                                             |       | $                       | —     |   | $ | 10,000 |   |
| Trade accounts  payable                                            |       | 27,992                  |       | 23,240 |   |
| Customer  advances                                                 |       | 58,412                  |       | 43,752 |   |
| Accrued  compensation                                              |       | 38,183                  |       | 37,176 |   |
| Accrued pension  liability                                         |       | —                  |       | 6,283 |   |
| Other current  liabilities                                         |       | 31,787                  |       | 26,919 |   |
| Income taxes  payable                                              |       | 4,905                   |       | 7,099 |   |
| Current  maturities of long-term debt                              |       | 6,138                   |       | 6,078 |   |
| TOTAL CURRENT  LIABILITIES                                         |       | 167,417                 |       | 160,547 |   |
|                                                               |       |                    |       |   |   |
| LONG-TERM DEBT                                                     |       | 32,699                  |       | 38,159 |   |
|                                                               |       |                    |       |   |   |
| OTHER  LIABILITIES                                                 |       |                    |       |   |   |
| Accrued pension  liability                                         |       | 1,530                   |       | 18,208 |   |
| Deferred  compensation                                             |       | 8,148                   |       | 7,565 |   |
|                                                               |       |                    |       |   |   |
| MINORITY INTEREST                                                  |       | —                  |       | 366 |   |
|                                                               |       |                    |       |   |   |
| 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                                                 |       | 375,299                 |       | 338,523 |   |
| Accumulated  other comprehensive income                            |       | 31,184                  |       | 8,415 |   |
| Treasury stock  at cost—8,945,066 shares                      |       | (36,069                 | )          | (36,069 | ) |
|                                                               |       | 382,771                 |       | 323,226 |   |
|                                                               |       |                    |       |   |   |
| TOTAL  LIABILITIES AND SHAREHOLDERS’ EQUITY                   |       | $                       | 592,565    |   | $ | 548,071 |   |

 

See accompanying notes.

 

34

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CUBIC CORPORATION

 

CONSOLIDATED STATEMENTSOF INCOME

 
| ** **                                     | ** ** | **Years Ended September 30,**                                    | ** ** |
|------------------------------------------------|------------|---------------------------------------------------------------------------------|------------|
| ** **                                     | ** ** | **2007**                                                                        | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                     | ** ** | **(amounts in thousands, except per share data)** | ** ** |
| ** **                                     | ** ** | ** **                                                                      | ** ** |
| Net sales:                                     |       |                                                                            |       |   |   |   |   |
| Products                                       |       | $                                                                               | 517,165    |   | $ | 489,286 |   | $ | 459,050 |   |
| Services                                       |       | 372,705                                                                         |       | 332,100 |   | 345,322 |   |
|                                           |       | 889,870                                                                         |       | 821,386 |   | 804,372 |   |
| Costs and  expenses:                           |       |                                                                            |       |   |   |   |   |
| Products                                       |       | 415,729                                                                         |       | 411,181 |   | 389,555 |   |
| Services                                       |       | 311,811                                                                         |       | 276,032 |   | 282,986 |   |
| Selling, general  and administrative expenses  |       | 95,054                                                                          |       | 97,166 |   | 110,644 |   |
| Research and  development                      |       | 5,178                                                                           |       | 6,112 |   | 8,083 |   |
|                                           |       | 827,772                                                                         |       | 790,491 |   | 791,268 |   |
|                                           |       |                                                                            |       |   |   |   |   |
| Operating income                               |       | 62,098                                                                          |       | 30,895 |   | 13,104 |   |
|                                           |       |                                                                            |       |   |   |   |   |
| Other income  (expenses):                      |       |                                                                            |       |   |   |   |   |
| Gain on sale of  assets                        |       | 1,052                                                                           |       | 7,237 |   | — |   |
| Interest and  dividends                        |       | 3,431                                                                           |       | 1,891 |   | 1,046 |   |
| Interest expense                               |       | (3,403                                                                          | )          | (5,112 | ) | (5,386 | ) |
| Other income                                   |       | 1,299                                                                           |       | 433 |   | 2,668 |   |
| Minority  interest in loss of subsidiary       |       | 771                                                                             |       | 985 |   | 649 |   |
|                                           |       |                                                                            |       |   |   |   |   |
| Income before  income taxes                    |       | 65,248                                                                          |       | 36,329 |   | 12,081 |   |
|                                           |       |                                                                            |       |   |   |   |   |
| Income taxes                                   |       | 23,662                                                                          |       | 12,196 |   | 453 |   |
|                                           |       |                                                                            |       |   |   |   |   |
| Net income                                     |       | $                                                                               | 41,586     |   | $ | 24,133 |   | $ | 11,628 |   |
|                                           |       |                                                                            |       |   |   |   |   |
| Basic and  diluted net income per common share |       | $                                                                               | 1.56       |   | $ | 0.90 |   | $ | 0.44 |   |
|                                           |       |                                                                            |       |   |   |   |   |
| Average number  of common shares outstanding   |       | 26,720                                                                          |       | 26,720 |   | 26,720 |   |

 

See accompanying notes.

 

35

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CUBIC CORPORATION

 

CONSOLIDATED STATEMENTSOF CASH FLOWS

 
| ** **                                                                         | ** ** | **Years Ended September 30,** | ** ** |
|------------------------------------------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                                                         | ** ** | **2007**                                     | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                                                         | ** ** | **(in thousands)**                      | ** ** |
| Operating  Activities:                                                             |       |                                         |       |   |   |   |   |
| Net income                                                                         |       | $                                            | 41,586     |   | $ | 24,133 |   | $ | 11,628 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |       |                                         |       |   |   |   |   |
| Depreciation and  amortization                                                     |       | 8,854                                        |       | 8,490 |   | 8,631 |   |
| Deferred income  taxes                                                             |       | 745                                          |       | 514 |   | (7,967 | ) |
| Provision for  doubtful accounts                                                   |       | 19                                           |       | 145 |   | 4,136 |   |
| Gain on sale of  assets                                                            |       | (1,052                                       | )          | (7,237 | ) | — |   |
| Minority  interest in loss of subsidiary                                           |       | (771                                         | )          | (985 | ) | (649 | ) |
| Changes in  operating assets and liabilities, net of effects from acquisitions:    |       |                                         |       |   |   |   |   |
| Accounts  receivable                                                               |       | 18,091                                       |       | 5,793 |   | 38,480 |   |
| Inventories                                                                        |       | (7,610                                       | )          | 1,577 |   | 3,048 |   |
| Prepaid expenses                                                                   |       | (8,048                                       | )          | (2,051 | ) | (4,865 | ) |
| Accounts payable  and other current liabilities                                    |       | 9,965                                        |       | (2,112 | ) | 12,122 |   |
| Customer  advances                                                                 |       | 12,181                                       |       | 2,279 |   | (9,893 | ) |
| Income taxes                                                                       |       | (2,741                                       | )          | 155 |   | 885 |   |
| Other items -  net                                                                 |       | (2,063                                       | )          | 629 |   | (843 | ) |
| NET CASH  PROVIDED BY OPERATING ACTIVITIES                                         |       | 69,156                                       |       | 31,330 |   | 54,713 |   |
|                                                                               |       |                                         |       |   |   |   |   |
| Investing  Activities:                                                             |       |                                         |       |   |   |   |   |
| Acquisition of  businesses, net of cash acquired                                   |       | —                                       |       | (785 | ) | (358 | ) |
| Proceeds from  sale of assets                                                      |       | 3,775                                        |       | 8,028 |   | — |   |
| Proceeds from  sale of marketable securities                                       |       | 241,606                                      |       | 4,000 |   | 31,760 |   |
| Purchases of  marketable securities                                                |       | (259,935                                     | )          | (12,850 | ) | (25,560 | ) |
| Purchases of  property, plant and equipment                                        |       | (6,098                                       | )          | (9,789 | ) | (8,311 | ) |
| Other items -  net                                                                 |       | (139                                         | )          | (513 | ) | (3,256 | ) |
| NET CASH USED IN  INVESTING ACTIVITIES                                             |       | (20,791                                      | )          | (11,909 | ) | (5,725 | ) |
|                                                                               |       |                                         |       |   |   |   |   |
| Financing  Activities:                                                             |       |                                         |       |   |   |   |   |
| Change in  short-term borrowings                                                   |       | (10,000                                      | )          | (16,437 | ) | 683 |   |
| Principal  payments on long-term debt                                              |       | (6,112                                       | )          | (6,052 | ) | (6,069 | ) |
| Purchases of  treasury stock                                                       |       | —                                       |       | (3 | ) | — |   |
| Dividends paid  to shareholders                                                    |       | (4,810                                       | )          | (4,810 | ) | (4,809 | ) |
| NET CASH USED IN  FINANCING ACTIVITIES                                             |       | (20,922                                      | )          | (27,302 | ) | (10,195 | ) |
|                                                                               |       |                                         |       |   |   |   |   |
| Effect of  exchange rates on cash                                                  |       | 3,740                                        |       | 1,401 |   | (555 | ) |
|                                                                               |       |                                         |       |   |   |   |   |
| NET INCREASE  (DECREASE) IN CASH AND CASH EQUIVALENTS                              |       | 31,183                                       |       | (6,480 | ) | 38,238 |   |
|                                                                               |       |                                         |       |   |   |   |   |
| Cash and cash  equivalents at the beginning of the year                            |       | 42,380                                       |       | 48,860 |   | 10,622 |   |
|                                                                               |       |                                         |       |   |   |   |   |
| CASH AND CASH  EQUIVALENTS AT THE END OF THE YEAR                                  |       | $                                            | 73,563     |   | $ | 42,380 |   | $ | 48,860 |   |

 

See accompanying notes.

 

36

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CUBIC CORPORATION

 

CONSOLIDATED STATEMENTSOF CHANGES IN SHAREHOLDERS’ EQUITY

 
| ** **                                                 | ** ** | ** **        | ** ** | ** **   | ** ** | **Accumulated**   | ** ** | ** **   | ** ** | ** **     | ** ** | ** ** | ** ** |
|------------------------------------------------------------|------------|-------------------|------------|--------------|------------|-------------------|------------|--------------|------------|----------------|------------|------------|------------|
| ** **                                                 | ** ** | ** **        | ** ** | ** **   | ** ** | **Other**         | ** ** | ** **   | ** ** | **Additional** | ** ** | ** ** | ** ** |
| **(in thousands except**                         | ** ** | **Comprehensive** | ** ** | **Treasury** | ** ** | **Comprehensive** | ** ** | **Retained** | ** ** | **Paid-in**    | ** ** | **Common** | ** ** |
| **per share amounts)**                           | ** ** | **Income**        | ** ** | **Stock**    | ** ** | **Income**        | ** ** | **Earnings** | ** ** | **Capital**    | ** ** | **Stock**  | ** ** |
| October 1, 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        |       |
|                                                       |       |              |       |         |       |              |       |         |       |           |       |       |       |
| Comprehensive  income:                                     |       |              |       |         |       |              |       |         |       |           |       |       |       |
| Net income                                                 |       | $                 | 41,586     |         | —     |              | —     |         | 41,586     |           | —     |       | —     |   |
| Decrease in  minimum pension liability                     |       | 13,580            |       | —       |       | 13,580            |       | —       |       | —         |       | —     |       |
| Foreign currency  translation adjustment                   |       | 9,189             |       | —       |       | 9,189             |       | —       |       | —         |       | —     |       |
| Net unrealized  losses from cash flow hedges               |       | —            |       | —       |       | —            |       | —       |       | —         |       | —     |       |
| Comprehensive  income                                      |       | $                 | 64,355     |         |       |              |       |         |       |           |       |       |       |   |
|                                                       |       |              |       |         |       |              |       |         |       |           |       |       |       |
| Cash dividends  paid — $.18 per share of common stock |       |              |       | —       |       | —            |       | (4,810       | )          | —         |       | —     |       |
|                                                       |       |              |       |         |       |              |       |         |       |           |       |       |       |
| September 30, 2007                                         |       |              |       | $            | (36,069    | )                 | $          | 31,184       |       | $              | 375,299    |       | $          | 12,123 |   | $ | 234 |   |

 

See accompanying notes.

 

37

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CUBIC CORPORATION

 

NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS

 

September 30, 2007

 

NOTE 1—SUMMARY OFSIGNIFICANT ACCOUNTING POLICIES

 

Organization and Natureof the Business:  CubicCorporation (“Cubic” or “the Company”) designs, develops and manufacturesproducts which are mainly electronic in nature, provides government servicesand services related to products previously produced by Cubic and others. TheCompany’s principal lines of business are defense electronics andtransportation fare collection systems. Principal customers for defenseproducts 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. Transaction gainson advances to foreign subsidiaries amounted to $0.7 million, zero and $1.9million in 2007, 2006 and 2005, respectively.

 

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

 

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

 

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

 

Short-term investments:  Short-term investments include highly liquid, investment grade,institutional money market debt and preferred stock instruments categorized asavailable-for-sale securities as defined by Statement of Financial AccountingStandards 115, *Accounting for Certain Investments in Debtand Equity Securities*. Any net excess of fair market valueover cost would be included in Accumulated Other Comprehensive Income (Loss) onthe Consolidated Balance Sheets.

 

38

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We record short-term investments at fair value. Atyear end, our investment portfolio included the following:

 
| ** **                            | ** ** | **2007**                | ** ** | **2006**  | ** ** |
|---------------------------------------|------------|-------------------------|------------|-----------|------------|
| ** **                            | ** ** | **Amortized**           | ** ** | **Fair**  | ** ** | **Amortized** | ** ** | **Fair** | ** ** |
| **September 30,**                | ** ** | **Cost**                | ** ** | **Value** | ** ** | **Cost** | ** ** | **Value** | ** ** |
| ** **                            | ** ** | **(in thousands)** | ** ** |
| Money market  preferred stock         |       | $                       | 11,600     |      | $          | 11,600 |   | $ | — |   | $ | — |   |
| Debt securities  purchased at auction |       | 15,600                  |       | 15,600    |       | 8,874 |   | 8,874 |   |
|                                  |       | $                       | 27,200     |      | $          | 27,200 |   | $ | 8,874 |   | $ | 8,874 |   |

 

Approximately58% of the securities in our portfolio had contractual maturities greater thanfive years. The remaining 42% are preferred stock and are therefore perpetual.

 

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, 2007 and 2006 were immaterial.

 

Property, Plant and Equipment:  Property, plant and equipment are carried atcost. Depreciation is provided in amounts sufficient to amortize the cost ofthe depreciable assets over their estimated useful lives. Generally,straight-line methods are used for real property over estimated useful livesranging from 15 to 39 years or the term of the underlying lease for leaseholdimprovements. Accelerated methods (declining balance andsum-of-the-years-digits) are used for machinery and equipment over estimateduseful lives ranging from five to seven years. Provisions for depreciation ofplant and equipment and amortization of leasehold improvements amounted to $7.9million, $7.6 million and $8.1 million in 2007, 2006 and 2005, 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.

 

39

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The changes in thecarrying amount of goodwill for the two years ended September 30, 2007 are asfollows:

 
| ** **                              | ** ** | **Transportation**      | ** ** | **Defense** | ** ** | ** ** | ** ** |
|-----------------------------------------|------------|-------------------------|------------|-------------|------------|------------|------------|
| ** **                              | ** ** | **Segment**             | ** ** | **Segment** | ** ** | **Total**  | ** ** |
| ** **                              | ** ** | **(in thousands)** | ** ** |
| Balances at  October 1, 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     |       |
| Foreign currency  exchange rate changes |       | 747                     |       | 506         |       | 1,253      |       |
| Balances at  September 30, 2007         |       | $                       | 9,362      |        | $          | 26,641     |       | $ | 36,003 |   |

 

Impairment of Long-LivedAssets:  The carryingvalues of long-lived assets other than goodwill are generally evaluated forimpairment only if events or changes in facts and circumstances indicate thatcarrying values may not be recoverable. Any impairment determined would berecorded in the current period and would be measured by comparing the fairvalue of the related asset to its carrying value. Fair value is generallydetermined by identifying estimated undiscounted cash flows to be generated bythose assets. No impairments have been recorded for the years ended September30, 2007, 2006 and 2005.

 

Deferred Compensation:  Deferred compensation includes amounts dueunder an arrangement under which participating members of management may electto defer receiving payment for a portion of their compensation until periodsafter their respective retirements. Interest on such accrued compensationaccrues at market rates, 5.75% at September 30, 2007, until such time as it ispaid in full.

 

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

 
| **September 30,**           | ** ** | **2007**                | ** ** | **2006** | ** ** |
|----------------------------------|------------|-------------------------|------------|----------|------------|
| ** **                       | ** ** | **(in thousands)** | ** ** |
| Adjustment to  pension liability |       | $                       | 4,947      |     | $          | (8,633 | ) |
| Foreign currency  translation    |       | 26,237                  |       | 17,048   |       |
|                             |       | $                       | 31,184     |     | $          | 8,415 |   |

 

The adjustment to thepension liability is shown net of a tax provision of $2.7 million and a taxbenefit of $4.7 million at September 30, 2007 and 2006, respectively. Deferredincome taxes are not recognized for translation-related temporary differencesof foreign subsidiaries whose undistributed earnings are considered to be permanentlyinvested.

 

Gain on Sale of Assets:  During the fourth quarter of fiscal year2007, the Company sold its corrugated box business for approximately $3.8million, resulting in a gain before applicable income taxes of $1.1 million. Duringthe first quarter of fiscal year 2006, the Company sold real estate that hadbeen held for investment purposes for approximately $8 million, resulting in again before applicable income taxes of $7.2 million

 

40

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

 

Sales under cost-reimbursement type contracts are recorded as costs areincurred. Applicable estimated profits are included in earnings based on theratio of costs incurred to the estimated total costs at completion. Sales ofproducts are recorded when a firm sales agreement is in place, delivery hasoccurred and collectibility of the fixed or determinable sales price isreasonably assured. Salesfor Fixed-Price Service Contracts that do not contain measurable units of workperformed are generally recognized on straight-line basis over the contractualservice period, unless evidence suggests that the revenue is earned, orobligations fulfilled, in a different manner. Sales for Fixed-Price ServiceContracts that contain measurable units of work performed are recognized whenthe units of work are completed.

 

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

 

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

 

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

 

Income taxes:  The provision for income taxes includesfederal, state, local, and foreign taxes. Tax credits, primarily for researchand development and export programs are recognized as a reduction of theprovision for income taxes in the year in which they are available for taxpurposes. Deferred income taxes are provided on temporary differences betweenassets and liabilities for financial reporting and tax purposes as measured byenacted tax rates expected to apply when the temporary differences are settledor realized. Valuation allowances are established for deferred tax assets whenthe amount of expected future taxable income is not likely to support the useof the deduction or credit. Deferred tax liabilities generally representdeductions that have been taken on tax returns but have not yet been recognizedas expense in the financial statements. Annually the Company evaluates thecapital requirements of its foreign subsidiaries and determines the amount ofexcess capital, if any, that is available for distribution. The Companyprovides for U.S. taxes on the amount determined to be excess capital availablefor distribution. The Company has not recognized United States tax expense on$44.5 million of undistributed earnings of its foreign subsidiaries atSeptember 30, 2007, since it intends to reinvest the earnings outside theUnited States for the foreseeable future.

 

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

 

41

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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 commitments thatare 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’s foreign currency hedging activitiesis to fix the dollar value of specific commitments and payments to foreignvendors, and the value of foreign currency denominated receipts from customers.At September 30, 2007, the Company had foreign exchange contracts with anotional value of $96.4 million outstanding.

 

The Company accountsfor derivatives pursuant to SFAS 133, *Accountingfor Derivative Instruments and Hedging Activities*, as amended. Thisstandard requires that all derivative instruments be recognized in 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 theineffective portion of a hedge, and changes in fairvalues of derivatives that are not considered highly effective hedges areimmediately recognized in earnings. If the derivative is designated as a fairvalue hedge, the changes in the estimated fair value of the derivative and theunderlying hedged item are recognized in earnings. If the derivative isdesignated as a cash flow hedge, the effective portions of changes in the fairvalue of the derivative are recorded in other comprehensive income and are subsequentlyrecognized in earnings when the hedged item affects earnings. Ineffectivenessbetween the change in fair value of the derivatives and the change in fairvalue of hedged items was immaterial for the years ended September 30, 2007,2006 and 2005.

 

Accounting Standards:  In July 2006, the FinancialAccounting Standards Board (FASB) issued Interpretation No. 48, *Accounting for Uncertainty in Income Taxes*(FIN48), which is effective for fiscal years beginning after December 31, 2006. Thepurpose of FIN 48 is to clarify and set forth consistent rules for accountingfor uncertain tax positions in accordance with SFAS 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. The Company will implement the newstandard in the first quarter of fiscal 2008; however, management is in theprocess of reviewing and evaluating FIN 48, and therefore the ultimate impactof its adoption is not yet known.

 

In September 2006, theFASB issued SFAS No. 157, “Fair Value Measurements.” SFAS 157 defines fairvalue, establishes a framework and gives guidance regarding the methods usedfor measuring fair value, and expands disclosures about fair valuemeasurements. SFAS 157 is effective for financial statements issued for fiscalyears beginning after November 15, 2007 and interim periods within those fiscalyears. The Company is currently evaluating the impact of SFAS 157 on itsconsolidated results of operations and financial position.

 

InSeptember 2006, the FASB published SFAS No. 158, **Employers’ Accounting for Defined BenefitPension and Other Postretirement Plans.****SFAS 158**requiresplan sponsors of defined benefit pension and other postretirement benefit plansto recognize the funded status of those plans in the balance sheet, measure thefair value of plan assets and benefit obligations as of the date of the fiscalyear-end balance sheet and provide additional disclosures. On September 30,2007, the Company adopted the recognition and disclosure provisions of SFAS158. The effect of adopting SFAS 158 on the Company’s financial condition atSeptember 30, 2007 has been included in the accompanying consolidated financialstatements. SFAS 158 did not have an effect on the Company’s financialcondition at September 30, 2006. SFAS 158’s provisions regarding the change inmeasurement date of postretirement benefit plans

 

42

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arenot applicable as the Company already uses a measurement date of September 30for its pension plans. See Note 8 for further discussion of the effect ofadopting SFAS 158 on the Company’s consolidated financial statements.

 

In February 2007, theFASB issued SFAS No. 159, *The Fair Value Option forFinancial Assets and Financial Liabilities – Including an Amendment of FASBStatement No. 115*, which is effective for fiscal years beginningafter November 15, 2007. This statement permits an entity to choose to measuremany financial instruments and certain other items at fair value at specifiedelection dates. Subsequent unrealized gains and losses on items for which thefair value option has been elected will be reported in earnings. The Company iscurrently evaluating the potential impact of SFAS 159 on its consolidatedresults of operations and financial position.

 

Use of Estimates:  The preparation of financial statements inconformity with U.S. generally accepted accounting principles requires managementto make estimates and assumptions that affect the amounts reported in thefinancial statements and accompanying notes. Significant estimates include theestimated total costs at completion of the Company’s long-term contracts,estimated discounted cash flows of reporting units used for goodwill impairmenttesting, and the estimated rates of return and discount rates related to theCompany’s defined benefit pension plans. Actual results could differ from thoseestimates.

 

Risks and Uncertainties:  The Company is subject to the normalrisks and uncertainties of performing large, multiyear, often fixed-pricecontracts. In addition, the Company is subject to audit of incurred costsrelated to many of its U.S. Government contracts. These audits could producedifferent results than the Company has estimated; however, the Company’sexperience has been that its costs are acceptable to the government.

 

NOTE 2—INVESTMENTS INJOINT VENTURES

 

The Company is party to a50/50 joint venture arrangement with the U.S. subsidiary of Rafael ArmamentDevelopment Authority Ltd. (Rafael), an Israeli company, to manufacture certainof their products for sale to the U.S. and Israeli defense forces. Theagreement could require the Company to invest cash up to $15 million andrequires Rafael to provide certain of its intellectual property to the jointventure in a royalty-free arrangement. As of September 30, 2007 the Company hadinvested $4 million in the joint venture. In 2007 the agreement was amended toallow the joint venture to borrow up to $1.7 million each from Rafael andCubic. As of September 30, 2007 outstanding borrowings under this arrangementamounted to $1.7 million from each party. The joint venture generated sales of$6.4 million, $1.0 million and zero, and incurred operating losses of $1.4million, $1.9 million and $1.3 million in 2007, 2006 and 2005, respectively.

 

Underthe provisions of FIN 46 “*Consolidation ofVariable 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 owns 37.5% ofthe common stock of Transaction Systems Limited (TranSys), an unconsolidatedjoint venture company in the United Kingdom. This joint venture company wasformed to bid on a contract called “PRESTIGE” (Procurement of Revenue Services,Ticketing, Information, Gates and Electronics), the purpose of which is tooutsource most of the functions of the Transport for London (TfL) farecollection system for a period of seventeen years. In August 1998, TranSys wasawarded the contract

 

43

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and began operations.Cubic and the other parties to the joint venture participate in the PRESTIGEcontract solely through subcontracts from TranSys. All of the work to beperformed by TranSys is subcontracted to the joint venture partners and thejoint venture provides for the pass-through of virtually all revenues from TfLto the joint venture partners. As a result, TranSys has operated on abreak-even basis and is expected to continue to do so. If TranSys were toeventually generate a net income or loss, the joint venture partners wouldshare in this income or loss in accordance with their percentage ownership inthe joint venture. The Company’s investment in the joint venture is immaterial.

 

TfL elected to financethe project through private financing rather than incurring public debt.Financing for the project was provided by a syndicate of banks whichparticipated in creating the project’s financial structure. During the firstfour years of the project, through August 2002, the banks provided financing toTranSys totaling 200 million British Pounds (approximately $409 million). Debtservicing began in 2003 and will continue until the debt is fully paid in 2013.This debt is guaranteed by TfL and is nonrecourse to the joint venturepartners.

 

The Company has alsoprovided certain performance guarantees to various parties related to thePRESTIGE contract and the TranSys joint venture, including TfL, the banks andthe joint venture partners. The joint venture partners have also providedsimilar performance guarantees to the same parties and to Cubic.

 

Summarized unauditedfinancial information for this unconsolidated joint venture is as follows:

 
| **September 30,**                            | ** ** | **2007**               | ** ** | **2006** | ** ** |
|---------------------------------------------------|------------|------------------------|------------|----------|------------|
| ** **                                        | ** ** | **(in millions)** | ** ** |
| **Balance  Sheets:**                              |       |                   |       |     |       |
| Cash                                              |       | $                      | 66.1       |     | $          | 55.6 |   |
| Other current  assets                             |       | 121.4                  |       | 73.0     |       |
| Noncurrent  unbilled contract accounts receivable |       | 222.5                  |       | 229.4    |       |
| Total Assets                                      |       | $                      | 410.0      |     | $          | 358.0 |   |
|                                              |       |                   |       |     |       |
| Current  liabilities                              |       | $                      | 66.4       |     | $          | 49.8 |   |
| Long-term debt                                    |       | 343.6                  |       | 308.2    |       |
| Equity                                            |       | —                 |       | —   |       |
| Total  Liabilities and Equity                     |       | $                      | 410.0      |     | $          | 358.0 |   |

 
| **Years  ended September 30,** | ** ** | **2007**           | ** ** | **2006** | ** ** | **2005** | ** ** |
|--------------------------------|------------|--------------------|------------|----------|------------|----------|------------|
| ** **                     | ** ** | **(in  millions)** | ** ** |
| **Statement  of Operations:**  |       |               |       |     |       |     |       |
| Sales                          |       | $                  | 210.8      |     | $          | 118.6    |       | $ | 132.0 |   |
| Operating profit               |       | $                  | —     |     | $          | —   |       | $ | — |   |
| Net income                     |       | $                  | —     |     | $          | —   |       | $ | — |   |

 

44

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NOTE 3—ACCOUNTSRECEIVABLE

 

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

 
| **September 30,**                                                       | ** ** | **2007**                | ** ** | **2006** | ** ** |
|------------------------------------------------------------------------------|------------|-------------------------|------------|----------|------------|
| ** **                                                                   | ** ** | **(in thousands)** | ** ** |
| U.S. Government  Contracts:                                                  |       |                    |       |     |       |
| Amounts billed                                                               |       | $                       | 55,362     |     | $          | 36,146 |   |
| Recoverable  costs and accrued profits on progress completed—not billed |       | 61,620                  |       | 62,986   |       |
|                                                                         |       | 116,982                 |       | 99,132   |       |
| Commercial  Customers:                                                       |       |                    |       |     |       |
| Amounts billed                                                               |       | 45,692                  |       | 35,069   |       |
| Recoverable  costs and accrued profits on progress completed—not billed |       | 151,768                 |       | 187,846  |       |
|                                                                         |       | 197,460                 |       | 222,915  |       |
|                                                                         |       | 314,442                 |       | 322,047  |       |
| Less unbilled  amounts not currently due—commercial customers           |       | (16,650                 | )          | (2,200   | )          |
|                                                                         |       | $                       | 297,792    |     | $          | 319,847 |   |

 

A portion of recoverablecosts and accrued profits on progress completed is billable under progress payment provisions of the related contracts.The remainder of these amounts is billable upon delivery of products or furnishing of services, with animmaterial amount subject to retainage provisions of the contracts. It isanticipated that substantially all of the unbilled portion of receivablesidentified as current assets will be billed and collected under progressbilling provisions of the contracts or upon completion of performance testsand/or acceptance by the customers during fiscal 2008.

 

NOTE 4—INVENTORIES

 

Inventories areclassified as follows:

 
| **September 30,**                                           | ** ** | **2007**                | ** ** | **2006** | ** ** |
|------------------------------------------------------------------|------------|-------------------------|------------|----------|------------|
| ** **                                                       | ** ** | **(in thousands)** | ** ** |
|                                                             |       |                    |       |     |       |
| Finished  products                                               |       | $                       | 240        |     | $          | 563 |   |
| Work in process  and inventoried costs under long-term contracts |       | 25,005                  |       | 16,194   |       |
| Materials and  purchased parts                                   |       | 2,097                   |       | 3,452    |       |
|                                                             |       | $                       | 27,342     |     | $          | 20,209 |   |

 

At September 30, 2007 and 2006, work inprocess and inventoried costs under long-term contracts included approximately$8.4 million and $7.7 million, respectively, in costs incurred outside thescope of work on several contracts in the defense segment. Management believesit is probable these costs, plus a profit margin, will be recovered undercontract change orders within the next year.

 

45

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NOTE 5—FINANCINGARRANGEMENTS

 

Long-term debt consistsof the following:

 
| **September 30,**                                                                                                                                                                     | ** ** | **2007**                | ** ** | **2006** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|----------|------------|
| ** **                                                                                                                                                                                 | ** ** | **(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. |       | $                       | 28,000     |     | $          | 32,000 |   |
|                                                                                                                                                                                       |       |                    |       |     |       |
| 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.            |       | 2,857                   |       | 4,286    |       |
|                                                                                                                                                                                       |       |                    |       |     |       |
| Mortgage note  from a UK financial institution, with quarterly installments of principal and  interest at 6.5%                                                                             |       | 7,980                   |       | 7,951    |       |
|                                                                                                                                                                                       |       |                    |       |     |       |
|                                                                                                                                                                                       |       | 38,837                  |       | 44,237   |       |
| Less current  portion                                                                                                                                                                      |       | (6,138                  | )          | (6,078   | )          |
|                                                                                                                                                                                       |       |                    |       |     |       |
|                                                                                                                                                                                       |       | $                       | 32,699     |     | $          | 38,159 |   |

 

The terms of the notespayable and other financial instruments include provisions that require and/orlimit, among other financial ratios and measurements, the permitted levels ofworking capital, debt and tangible net worth and coverage of fixed charges. TheCompany has also provided certain performance guarantees to various partiesrelated to the PRESTIGE contract and the TranSys joint venture. Asconsideration for the performance guarantee, the Company has agreed to certainfinancial covenants including limits on working capital, debt, tangible net worthand cash flow coverage. At September 30, 2007, the most restrictive covenantunder these agreements leaves consolidated retained earnings of $173 millionavailable for the payment of dividends to shareholders, purchases of theCompany’s common stock and other charges to shareholders’ equity. To date,there have been no covenant violations.

 

The Company maintains ashort-term borrowing arrangement totaling 10 million British pounds (equivalentto approximately $20.5 million) with a U.K. financial institution to help meetthe short-term working capital requirements of its subsidiary, CubicTransportation Systems Ltd. Any outstanding balances are guaranteed by CubicCorporation, are repayable on demand, and bear interest at the bank’s baserate, as defined, plus one percent. At September 30, 2007, no amounts wereoutstanding under this borrowing arrangement.

 

The Company maintains ashort-term borrowing arrangement in New Zealand totaling $0.5 million NewZealand dollars (equivalent to approximately $0.4 million) to help meet theshort-term working capital requirements of its subsidiary in that country. AtSeptember 30, 2007, no amounts were outstanding under this borrowingarrangement.

 

46

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TheCompany has a $150 million revolving line of credit arrangement with a group ofU.S. banks which expires in March 2010. Commitment fees associated with thisfinancing arrangement are 0.15% of the unutilized balance per annum. As ofSeptember 30, 2007 the Company had no short-term debt outstanding under thisline of credit and $11.1 million in outstanding letters of credit.

 

Maturities of long-termdebt for each of the five years in the period ending September 30, 2012, are asfollows: 2008 – $6.1 million;  2009 –$6.1 million; 2010 – $4.7 million; 2011 – $4.7 million; 2012 – $4.7 million.

 

Interest paid amounted to$3.6 million, $4.7 million, and $5.5 million in 2007, 2006 and 2005,respectively.

 

As of September 30, 2007the Company had letters of credit and bank guarantees outstanding totaling$57.5 million, which guarantee either the Company’s performance or customeradvances under certain contracts. In addition, the Company had financialletters of credit outstanding totaling $7 million as of September 30, 2007,which primarily guarantee the Company’s payment of certain self-insuredliabilities. The Company has never had a drawing on a letter of creditinstrument, nor are any anticipated; therefore, the fair value of theseinstruments is estimated to be zero.

 

The Company’sself-insurance arrangements are limited to certain workers’ compensation plans,automobile liability, and product liability claims primarily related to abusiness the Company sold in 1993. Under these arrangements, the Companyself-insures only up to the amount of a specified deductible for each claim. Self-insuranceliabilities included in other current liabilities on the balance sheet amountedto $3.3 million and $3.0 million as of September 30, 2007 and 2006,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. These leases, some of which may be renewed forperiods up to 10 years, generally require the lessee to pay all maintenance,insurance and property taxes. Several leases are subject to periodic adjustmentbased on price indices or cost increases. Rental expense, net of subleaseincome, for all operating leases amounted to $6.7 million, $6.9 million, and$6.8 million in 2007, 2006 and 2005, respectively.

 

Future minimum payments,net of minimum sublease income, under noncancelable operating leases withinitial terms of one year or more consist of the following at September 30,2007 (in thousands):

 

| 2008       |   | $     | 5,302  |   |
|------------|--------|-------|--------|--------|
| 2009       |   | 4,028 |   |
| 2010       |   | 2,555 |   |
| 2011       |   | 2,227 |   |
| 2012       |   | 1,767 |   |
| Thereafter |   | 940   |   |
|       |   | $     | 16,819 |   |

 

47

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NOTE 7—INCOME TAXES

 

Significant components ofthe provision for income taxes are as follows:

 
| **Years ended September 30,** | ** ** | **2007**                | ** ** | **2006** | ** ** | **2005** | ** ** |
|----------------------------------------------|------------|-------------------------|------------|----------|------------|----------|------------|
| ** **                                   | ** ** | **(in thousands)** | ** ** |
| Current:                                     |       |                    |       |     |       |     |       |
| Federal                                      |       | $                       | 9,695      |     | $          | 4,623    |       | $ | 725 |   |
| State                                        |       | 2,793                   |       | 1,526    |       | 1,224    |       |
| Foreign                                      |       | 10,429                  |       | 5,533    |       | 6,471    |       |
| Total current                                |       | 22,917                  |       | 11,682   |       | 8,420    |       |
|                                         |       |                    |       |     |       |     |       |
| Deferred  (credit):                          |       |                    |       |     |       |     |       |
| Federal                                      |       | 670                     |       | (594     | )          | (5,534   | )          |
| State                                        |       | 352                     |       | 325      |       | (1,274   | )          |
| Foreign                                      |       | (277                    | )          | 783      |       | (1,159   | )          |
| Total deferred                               |       | 745                     |       | 514      |       | (7,967   | )          |
| Total income tax  expense                    |       | $                       | 23,662     |     | $          | 12,196   |       | $ | 453 |   |

 

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

 
| **September 30,**                                  | ** ** | **2007**                | ** ** | **2006** | ** ** |
|---------------------------------------------------------|------------|-------------------------|------------|----------|------------|
| ** **                                              | ** ** | **(in thousands)** | ** ** |
| Deferred tax  assets:                                   |       |                    |       |     |       |
| Accrued employee  benefits                              |       | $                       | 7,608      |     | $          | 6,523 |   |
| Additional  minimum pension liability                   |       | —                  |       | 4,650    |       |
| Allowance for  doubtful accounts                        |       | 1,896                   |       | 2,265    |       |
| Long-term  contracts and inventory valuation reductions |       | 8,401                   |       | 9,142    |       |
| Allowances for  loss contingencies                      |       | 4,257                   |       | 4,371    |       |
| Deferred  compensation                                  |       | 3,205                   |       | 3,123    |       |
| Book over tax  depreciation                             |       | 2,155                   |       | 1,594    |       |
| Other                                                   |       | —                  |       | 534      |       |
| Deferred tax  assets                                    |       | 27,522                  |       | 32,202   |       |
|                                                    |       |                    |       |     |       |
| Deferred tax  liabilities:                              |       |                    |       |     |       |
| Adjustment to  pension liability                        |       | 2,665                   |       | —   |       |
| Amortization of  goodwill and intangibles               |       | 2,972                   |       | 2,652    |       |
| Prepaid expenses                                        |       | 1,925                   |       | 1,740    |       |
| State taxes                                             |       | 975                     |       | 1,276    |       |
| Other                                                   |       | 298                     |       | 132      |       |
| Deferred tax  liabilities                               |       | 8,835                   |       | 5,800    |       |
| Net deferred tax  asset                                 |       | $                       | 18,687     |     | $          | 26,402 |   |

 

48

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

 
| **Years ended September 30,**             | ** ** | **2007**                | ** ** | **2006** | ** ** | **2005** | ** ** |
|----------------------------------------------------------|------------|-------------------------|------------|----------|------------|----------|------------|
| ** **                                               | ** ** | **(in thousands)** | ** ** |
|                                                     |       |                    |       |     |       |     |       |
| Tax at federal  statutory rate                           |       | $                       | 22,837     |     | $          | 12,715   |       | $ | 4,228 |   |
| State income  taxes (benefit), net of federal tax effect |       | 2,044                   |       | 1,203    |       | (32      | )          |
| Income exclusion  on export sales                        |       | (192                    | )          | (727     | )          | (437     | )          |
| Nondeductible  expenses                                  |       | 157                     |       | 292      |       | 291      |       |
| Reversal of  reserve accrued for tax contingencies       |       | (911                    | )          | (1,060   | )          | (2,788   | )          |
| Tax effect from  foreign earnings repatriation           |       | 2,626                   |       | 1,660    |       | —   |       |
| Tax effect from  foreign subsidiaries                    |       | (1,368                  | )          | (866     | )          | (647     | )          |
| Tax credits and  other                                   |       | (1,531                  | )          | (1,021   | )          | (162     | )          |
|                                                     |       | $                       | 23,662     |     | $          | 12,196   |       | $ | 453 |   |

 

TheCompany is subject to ongoing audits from various taxing authorities in thejurisdictions in which it does business. As of September 30, 2007, the Company’sopen tax years in significant jurisdictions include 2004-2007 in both the U.S.and the U.K. The Company believes it has adequately provided for uncertain taxissues not yet resolved with federal, state and foreign tax authorities.Although not probable, the most adverse resolution of these issues could resultin additional charges to earnings in future periods. Based upon a considerationof all relevant facts and circumstances, the company does not believe theultimate resolution of uncertain tax issues for all open tax periods will havea materially adverse effect upon its results of operations or financialcondition. As of September 30, 2007 and 2006 the Company had income taxreserves of $5.4 million and $5.6 million, respectively, included in IncomeTaxes Payable.

 

Asindicated in the table above, in 2007, 2006 and 2005 the Company was able toreverse $0.9 million, $1.1 million and $2.8 million, respectively, of taxreserves established in previous years due to the resolution of uncertain taxissues.

 

TheCompany made income tax payments, net of refunds, totaling $26.2 million, $11.6million and $6.9 million in 2007, 2006 and 2005, respectively.

 

Income before incometaxes includes the following components:

 
| **Years ended September 30,** | ** ** | **2007**                | ** ** | **2006** | ** ** | **2005** | ** ** |
|----------------------------------------------|------------|-------------------------|------------|----------|------------|----------|------------|
| ** **                                   | ** ** | **(in thousands)** | ** ** |
|                                         |       |                    |       |     |       |     |       |
| United States                                |       | $                       | 33,412     |     | $          | 17,346   |       | $ | (1,151 | ) |
| Foreign                                      |       | 31,836                  |       | 18,983   |       | 13,232   |       |
| Total                                        |       | $                       | 65,248     |     | $          | 36,329   |       | $ | 12,081 |   |

 

49

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Management evaluates theCompany’s capital requirements in its foreign subsidiaries on an annual basisto determine what level of capital is needed for the long-term operations ofthe business. U.S. taxes are provided on the amount of capital that is determinedto be in excess of the long-term requirements of the business and is,therefore, available for distribution. In 2007, it was determined that 7million British Pounds ($14.4 million) in the U.K. business was excess capitaland a dividend of that amount was paid to Cubic Corp. by the U.K. subsidiary in2007. U.S. taxes provided on this excess capital amounted to $2.6 million in2007. The remainder of the capital in the Company’s European operations isconsidered indefinitely reinvested; therefore, no additional amount for taxesdue upon repatriation has been provided.

 

Undistributed earnings ofall the Company’s foreign subsidiaries amounted to approximately $44.5 millionat September 30, 2007. Those earnings are considered to be indefinitelyreinvested, and accordingly, no provision for U.S. federal and state incometaxes has been provided thereon. Upon distribution of those earnings in theform of dividends or otherwise, the Company would be subject to both U.S.income taxes and withholding taxes payable to the foreign countries, but wouldalso be able to offset unrecognized foreign tax credit carryforwards.Determination of the total amount of unrecognized deferred U.S. income taxliability is not practicable because of the complexities associated with itshypothetical calculation.

 

NOTE 8—PENSION, PROFITSHARING AND OTHER RETIREMENT PLANS

 

The Company has profitsharing and other defined contribution retirement plans that provide benefitsfor most employees in the U.S. An employee is eligible to participate in theseplans after six months to one year of service, and may make additionalcontributions to the plans from their date of hire. These plans provide forfull vesting of benefits over five years. More than half of the Companycontributions to these plans are discretionary with the Board of Directors.Company contributions to the plans aggregated $13.6 million, $11.6 million and$11.5 million in 2007, 2006 and 2005, respectively. Beginning in January 2007,the Company replaced the defined benefit pension plan accruals for U.S.employees covered by that plan with a company match of employees’ contributionsup to 3% of their qualified pay, under the existing defined contribution 401(k)plan.

 

Approximately one-half ofthe Company’s non-union employees in the U.S. are covered by a noncontributorydefined benefit pension plan. The Company amended the plan to freeze planbenefits as of December 31, 2006 (“curtailment”). The effect of the curtailmentis that no new benefits will be accrued after that date. The financial impactof this curtailment is reflected in the following disclosures. Approximatelyone-half of the Company’s European employees are covered by a contributorydefined benefit pension plan. The Company’s funding policy provides thatcontributions will be at least equal to the minimum amounts mandated bystatutory requirements. We use September 30 as the measurement date for theseplans.

 

On September 30, 2007,the Company adopted the recognition and disclosure provisions of SFAS 158,which require it to recognize assets for any pension plans that are overfundedand liabilities for any underfunded plans as of September 30, 2007, with acorresponding noncash adjustment to accumulated other comprehensive income, netof tax, in shareholders’ equity. The funded status is measured as thedifference between the fair value of the plan’s assets and the projectedbenefit obligation (PBO) of the plan. The adjustment to shareholders’ equityrepresents the net unrecognized actuarial losses which were previously nettedagainst the plan’s funded status on the consolidated balance sheet inaccordance with SFAS 87. The adjustment also includes the elimination of theminimum pension liability and intangible asset that had been recorded prior toits adoption.

 

50

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

 

The incremental impact ofadopting the provisions of SFAS 158 on the consolidated balance sheet atSeptember 30, 2007 is presented in the following table. The adoption of SFAS158 had no effect on the statements of income or cash flows for the three yearsin the period ended September 30, 2007, and will not affect the Company’soperating results in future periods. Had the Company not been required to adoptSFAS 158 at September 30, 2007, it would have recognized an additional minimumpension liability pursuant to the provisions of SFAS 87. The effect ofrecognizing the additional minimum liability is included in the table below inthe column labeled “Before adoption of SFAS 158.”

 
| ** **                              | ** ** | **Before adoption of** | ** ** | **Adjustments**                  | ** ** | **After adoption of** | ** ** |
|-----------------------------------------|------------|----------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                              | ** ** | **SFAS 158**                | ** ** | **September 30, 2007** | ** ** | **SFAS 158**               | ** ** |
| ** **                              | ** ** | **(in thousands)**          | ** ** |
|                                    |       |                             |       |                             |       |                            |       |
| Accrued pension  liability              |       | $                                | 10,246     |                             | $          | (8,716                          | )          | $ | 1,530 |   |
| Deferred income  taxes                  |       | 21,738                           |       | (3,051                           | )          | 18,687                          |       |
| Accumulated  other comprehensive income |       | 25,519                           |       | 5,665                            |       | 31,184                          |       |
|                                         |            |                                  |            |                                  |            |                                 |            |  |  |  |

 

51

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

 
| **September 30,**                                  | ** ** | **2007**                | ** ** | **2006** | ** ** |
|---------------------------------------------------------|------------|-------------------------|------------|----------|------------|
| ** **                                              | ** ** | **(in thousands)** | ** ** |
| **Change  in benefit obligations:**                     |       |                    |       |     |       |
| Net benefit  obligation at the beginning of the year    |       | $                       | 168,500    |     | $          | 158,008 |   |
| Service cost                                            |       | 5,056                   |       | 8,041    |       |
| Interest cost                                           |       | 9,580                   |       | 8,930    |       |
| Actuarial gain                                          |       | (21,405                 | )          | (506     | )          |
| Curtailment                                             |       | —                  |       | (7,416   | )          |
| Participant  contributions                              |       | 1,185                   |       | 1,081    |       |
| Gross benefits  paid                                    |       | (4,585                  | )          | (3,285   | )          |
| Foreign currency  exchange rate changes                 |       | 5,744                   |       | 3,647    |       |
| Net benefit  obligation at the end of the year          |       | 164,075                 |       | 168,500  |       |
|                                                    |       |                    |       |     |       |
| **Change  in plan assets:**                             |       |                    |       |     |       |
| Fair value of  plan assets at the beginning of the year |       | 136,345                 |       | 116,906  |       |
| Actual return on  plan assets                           |       | 19,209                  |       | 13,125   |       |
| Employer contributions                                  |       | 6,372                   |       | 6,506    |       |
| Participant  contributions                              |       | 1,185                   |       | 1,081    |       |
| Gross benefits  paid                                    |       | (4,584                  | )          | (3,285   | )          |
| Administrative  expenses                                |       | (693                    | )          | (566     | )          |
| Foreign currency  exchange rate changes                 |       | 4,711                   |       | 2,578    |       |
| Fair value of  plan assets at the end of the year       |       | 162,545                 |       | 136,345  |       |
|                                                    |       |                    |       |     |       |
| Unfunded status  of the plans                           |       | (1,530                  | )          | (32,155  | )          |
| Unrecognized net  actuarial (gain) loss                 |       | (7,612                  | )          | 21,308   |       |
| Unrecognized  prior service cost                        |       | —                  |       | 7        |       |
| Net amount  recognized                                  |       | $                       | (9,142     | )        | $          | (10,840 | ) |

 
| **September  30,**                                                                            | ** ** | **2007**            | ** ** | **2006** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|---------------------|------------|----------|------------|
| ** **                                                                                    | ** ** | **(in  thousands)** | ** ** |
| **Amounts  recognized in the Consolidated Balance Sheets:**                                   |       |                |       |     |       |
| Accrued pension  liability                                                                    |       | $                   | (1,530     | )        | $          | (24,130 | ) |
| Intangible asset                                                                              |       | —              |       | 7        |       |
| Accumulated  other comprehensive loss related to minimum pension liability - pretax           |       | —              |       | 13,283   |       |
| Accumulated  other comprehensive income related to unrecognized net actuarial gains -  pretax |       | (7,612              | )          | —   |       |
| Net amount  recognized                                                                        |       | $                   | (9,142     | )        | $          | (10,840 | ) |
|                                                                                          |       |                |       |     |       |
| **Amounts  recognized in Accumulated OCI**                                                    |       |                |       |     |       |
| Liability  adjustment to OCI                                                                  |       | $                   | 7,612      |     | $          | (13,283 | ) |
| Deferred tax  asset (liability)                                                               |       | (2,665              | )          | 4,650    |       |
| Accumulated  other comprehensive income (loss)                                                |       | $                   | 4,947      |     | $          | (8,633 | ) |

 

52

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At September 30, 2007,prior to adoption of SFAS 158, the consolidated balance sheet included a pretaxadditional minimum pension liability of $1.1 million related to one of ourpension plans. At September 30, 2006, the comparable amount was $13.3 million.These liabilities were calculated on a plan-by-plan basis, and were required ifthe accumulated benefit obligation (ABO) of the plan exceeded the fair value ofthe plan assets and the plan’s accrued pension liabilities. This previouslyrecorded minimum pension liability was eliminated upon adoption of SFAS 158.The ABO for all defined benefit pension plans was approximately $152.6 millionat September 30, 2007.

 

For the defined benefitpension plan in which the ABO was in excess of the fair value of plan assets,the PBO, ABO and fair value of plan assets were as follows:

 
| **September 30,**          | ** ** | **2007**                | ** ** | **2006** | ** ** |
|---------------------------------|------------|-------------------------|------------|----------|------------|
| ** **                      | ** ** | **(in thousands)** | ** ** |
|                            | ** ** | ** **              | ** ** |
| Projected  benefit obligation   |       | $                       | 102,162    |     | $          | 102,595 |   |
| Accumulated  benefit obligation |       | 102,162                 |       | 102,454  |       |
| Fair value of  plan assets      |       | 101,816                 |       | 89,164   |       |
|                                 |            |                         |            |          |            |  |  |

 

The components of netperiodic pension cost were as follows:

 
| **Years ended September 30,** | ** ** | **2007**                | ** ** | **2006** | ** ** | **2005** | ** ** |
|----------------------------------------------|------------|-------------------------|------------|----------|------------|----------|------------|
| ** **                                   | ** ** | **(in thousands)** | ** ** |
| ** **                                   | ** ** |                    | ** ** |
| Service cost                                 |       | $                       | 5,056      |     | $          | 8,041    |       | $ | 7,347 |   |
| Interest cost                                |       | 9,581                   |       | 8,930    |       | 7,902    |       |
| Expected return  on plan assets              |       | (11,323                 | )          | (9,687   | )          | (8,216   | )          |
| Amortization of:                             |       |                    |       |     |       |     |       |
| Prior service  cost                          |       | 7                       |       | 27       |       | 26       |       |
| Actuarial loss                               |       | 458                     |       | 2,393    |       | 1,565    |       |
| Curtailment  charge                          |       | —                  |       | 131      |       | —   |       |
| Administrative  expenses                     |       | 114                     |       | 127      |       | 99       |       |
| Net pension cost                             |       | $                       | 3,893      |     | $          | 9,962    |       | $ | 8,723 |   |

 
| **Years  ended September 30,**                                                                               | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|--------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                                                                                         |       |     |       |     |       |     |       |
| Weighted-average  assumptions used to determine benefit obligation at September 30:                          |       |     |       |     |       |     |       |
| Discount rate                                                                                                |       | 6.2      | %          | 5.6      | %          | 5.5      | %          |
| Rate of  compensation increase                                                                               |       | 4.4      | %          | 4.5      | %          | 4.5      | %          |
| Weighted-average  assumptions used to determine net periodic benefit cost for the years ended  September 30: |       |     |       |     |       |     |       |
| Discount rate                                                                                                |       | 5.6      | %          | 5.4      | %          | 6.0      | %          |
| Expected return  on plan assets                                                                              |       | 8.1      | %          | 8.2      | %          | 8.2      | %          |
| Rate of  compensation increase                                                                               |       | 4.5      | %          | 4.5      | %          | 4.1      | %          |

 

53

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

 
| ** **         | ** ** | **2007** | ** ** | **2006** | ** ** |
|--------------------|------------|----------|------------|----------|------------|
| Equity  securities |       | 74       | %          |     | 73         | % |   |
| Debt securities    |       | 21       | %          |     | 22         | % |   |
| Real estate        |       | 4        | %          |     | 4          | % |   |
| Other              |       | 1        | %          |     | 1          | % |   |
| Total              |       | 100      | %          |     | 100        | % |   |

 

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

 

TheCompany does not involve itself with the day-to-day operations and selectionprocess of individual securities and investments, and, accordingly, hasretained the professional services of investment management organizations tofulfill 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, 2007:

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

 

The pension plans held nopositions in Cubic Corporation common stock as of September 30, 2007 and 2006.

 

The Company expects to contribute approximately $3.5 million to itspension plans in 2008.

 

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

 
| 2008      |   | $      | 4,699  |   |
|-----------|--------|--------|--------|--------|
| 2009      |   | 5,162  |   |
| 2010      |   | 5,613  |   |
| 2011      |   | 6,024  |   |
| 2012      |   | 6,439  |   |
| 2013-2017 |   | 38,724 |   |

 

54

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NOTE 9—LEGAL MATTERS

 

In 1991,the government of Iran commenced an arbitration proceeding against the Companyseeking $12.9 million for reimbursement of payments made for equipment that wasto comprise an 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, thearbitral tribunal awarded the government of Iran $2.8 million, plus simpleinterest at the rate of 12% per annum from September 21, 1991 through May 5,1997. In December 1998, the United States District Court granted a motion bythe government of Iran confirming the arbitral award but denied Iran’s requestfor additional interest and costs. Both parties have appealed. In October 2004,the 9th Circuit Court of Appeals issued a decision in the case oftwo interveners who are attempting to claim an attachment on the amount thatwas awarded to Iran in the original arbitration. The Court denied one of theintervener’s liens but confirmed the second one’s lien. Iran asked the U.S.Supreme Court to review the 9th Circuit decision and to void theinitial judgment against it. In 2006, the Supreme Court returned the case tothe 9th Circuit for reconsideration, suggesting that the claimedlien cannot be enforced. The Court of Appeal then ruled that the lien was validunder the Terrorism Risk Insurance Act. We believe that Iran will seek furtherreview from the Supreme Court; therefore, while the dispute between Iran andCubic is on hold in the 9th Circuit 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 9thCircuit case against Iran, and management believes that a license from the U.S.government would be required in any case to make payment to or on behalf ofIran. However, in light of the 9th Circuit Court’s decision in therelated intervener’s case, in 2004 the Company established a reserve of $6million for the estimated potential liability and will continue to accrueinterest on this amount until the ultimate outcome of the case is determined.

 

InJanuary 2005, a bus fare collection system customer in North America issued a “curenotice” to the Company, alleging that its performance was not in accord withthe contract. After unsuccessful negotiations with the customer, in March 2005,the Company filed for a temporary restraining order requesting that thecustomer be restrained from further interfering with the Company’s performanceand 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 defending against theallegations. Based on the advice of counsel, management believes the Companyhad substantially completed the contract prior to termination and that theremaining contract value is due and that the Company will prevail at trial;therefore, no liability has been recorded for the former customer’s claim as ofSeptember 30, 2007. However, due to the uncertainty of collecting theoutstanding receivable balance an allowance for doubtful accounts of $4.2million was established and all costs incurred in the performance of thecontract and costs incurred outside the scope of the contract were expensed inthe year ended September 30, 2005.

 

55

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In June2005, a company that Cubic had an alleged agreement with, to potentially bid ona portion of automated fare collection contracts, filed a court claim for breachof contract, fraud, negligent misrepresentation, theft of trade secrets, andother related allegations. The claim seeks $15.0 million in compensatorydamages, punitive damages, disgorgement of profits and a permanent injunction.The claim is now in arbitration. Based on information currently available,management believes there is no merit to the claim and that it will prevail inthis matter. Therefore, no liability has been recorded as of September 30,2007.

 

From time-to-time, agencies of the U.S. andforeign governments may investigate whether the Company’s operations are beingconducted in accordance with applicable regulatory requirements. Suchinvestigations, whether relating to government contracts or conducted for otherreasons, could result in administrative, civil or criminal liabilities,including repayments, fines or penalties being imposed upon the Company, orcould lead to suspension or debarment from future government contracting. Governmentinvestigations often take years to complete and most result in no adverseaction against the Company.

 

The Company is not a party to anyother material pending proceedings and management considers all other mattersto be ordinary proceedings incidental to the business. Management believes theoutcome of these proceedings and the proceedings described above will not havea materially adverse effect on the Company’s financial position.

 

NOTE 10—BUSINESS SEGMENTINFORMATION

 

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

 

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

 

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

 

The Company evaluatesperformance and allocates resources based on total segment operating profit orloss. The accounting policies of the reportable segments are the same as thosedescribed in the summary of significant accounting policies. Intersegment salesand transfers are immaterial.

 

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

 

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

 

56

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Business segmentfinancial data is as follows:

 
| **Years ended September 30,** | ** ** | **2007**               | ** ** | **2006** | ** ** | **2005** | ** ** |
|----------------------------------------------|------------|------------------------|------------|----------|------------|----------|------------|
| ** **                                   | ** ** | **(in millions)** | ** ** |
| **Sales:**                                   |       |                   |       |     |       |     |       |
| Transportation  systems                      |       | $                      | 236.6      |     | $          | 243.9    |       | $ | 245.8 |   |
| Defense                                      |       | 641.1                  |       | 562.8    |       | 543.4    |       |
| Other                                        |       | 12.2                   |       | 14.7     |       | 15.2     |       |
| Total sales                                  |       | $                      | 889.9      |     | $          | 821.4    |       | $ | 804.4 |   |
|                                         |       |                   |       |     |       |     |       |
| **Operating  income:**                       |       |                   |       |     |       |     |       |
| Transportation  systems                      |       | $                      | 20.1       |     | $          | 2.8      |       | $ | (13.8 | ) |
| Defense                                      |       | 44.2                   |       | 31.4     |       | 30.1     |       |
| Unallocated  corporate expenses and other    |       | (2.2                   | )          | (3.3     | )          | (3.2     | )          |
| Total operating  income                      |       | $                      | 62.1       |     | $          | 30.9     |       | $ | 13.1 |   |
|                                         |       |                   |       |     |       |     |       |
| **Assets:**                                  |       |                   |       |     |       |     |       |
| Transportation  systems                      |       | $                      | 170.6      |     | $          | 207.8    |       | $ | 202.6 |   |
| Defense                                      |       | 293.1                  |       | 255.1    |       | 249.7    |       |
| Corporate and  other                         |       | 128.9                  |       | 85.2     |       | 95.0     |       |
| Total assets                                 |       | $                      | 592.6      |     | $          | 548.1    |       | $ | 547.3 |   |
|                                         |       |                   |       |     |       |     |       |
| **Depreciation  and amortization:**          |       |                   |       |     |       |     |       |
| Transportation  systems                      |       | $                      | 2.2        |     | $          | 2.6      |       | $ | 3.2 |   |
| Defense                                      |       | 6.1                    |       | 5.3      |       | 4.9      |       |
| Corporate and  other                         |       | 0.5                    |       | 0.6      |       | 0.5      |       |
| Total  depreciation and amortization         |       | $                      | 8.8        |     | $          | 8.5      |       | $ | 8.6 |   |
|                                         |       |                   |       |     |       |     |       |
| **Expenditures  for long-lived assets:**     |       |                   |       |     |       |     |       |
| Transportation  systems                      |       | $                      | 1.8        |     | $          | 0.9      |       | $ | 3.2 |   |
| Defense                                      |       | 4.3                    |       | 8.5      |       | 4.5      |       |
| Corporate and  other                         |       | —                 |       | 0.4      |       | 0.6      |       |
| Total expenditures  for long-lived assets    |       | $                      | 6.1        |     | $          | 9.8      |       | $ | 8.3 |   |

 

57

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| **Years ended September 30,** | ** ** | **2007**               | ** ** | **2006** | ** ** | **2005** | ** ** |
|----------------------------------------------|------------|------------------------|------------|----------|------------|----------|------------|
| ** **                                   | ** ** | **(in millions)** | ** ** |
| **Geographic  Information:**                 |       |                   |       |     |       |     |       |
| Sales (a):                                   |       |                   |       |     |       |     |       |
| United States                                |       | $                      | 606.6      |     | $          | 566.8    |       | $ | 531.5 |   |
| United Kingdom                               |       | 153.1                  |       | 120.2    |       | 119.9    |       |
| Canada                                       |       | 26.5                   |       | 28.6     |       | 44.4     |       |
| Far East                                     |       | 43.4                   |       | 26.1     |       | 23.6     |       |
| Other                                        |       | 60.3                   |       | 79.7     |       | 85.0     |       |
| Total sales                                  |       | $                      | 889.9      |     | $          | 821.4    |       | $ | 804.4 |   |

 

----

(a) Sales are attributed to countries or regions basedon the location of customers.

 
| Long-lived  assets, net:      |   |   |   |   |   |   |   |
|-------------------------------|--------|--------|--------|--------|--------|--------|--------|
| United States                 |   | $      | 48.0   |   | $      | 48.3   |   | $ | 45.2 |   |
| United Kingdom                |   | 14.1   |   | 12.5   |   | 12.9   |   |
| Other foreign  countries      |   | 2.0    |   | 1.8    |   | 2.7    |   |
| Total long-lived  assets, net |   | $      | 64.1   |   | $      | 62.6   |   | $ | 60.8 |   |

 

Defense segment salesinclude $484.4 million, $427.2 million and $426.9 million in 2007, 2006 and2005, respectively, of sales to U.S. Government agencies. No other singlecustomer accounts for 10% or more of the Company’s revenue.

 

NOTE 11—SUMMARY OFQUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

 

The following is asummary of the quarterly results of operations for the years ended September30, 2007 and 2006:

 
| ** **            | ** ** | **Quarter Ended**                                             | ** ** |
|-----------------------|------------|--------------------------------------------------------------------|------------|
| ** **            | ** ** | **December 31**                                               | ** ** | **March 31** | ** ** | **June 30** | ** ** | **September 30** | ** ** |
| ** **            | ** ** | **(in thousands, except per share data)** | ** ** |
| Fiscal 2007           |       |                                                               |       |   |   |   |   |   |   |
| Net sales             |       | $                                                                  | 202,935    |   | $ | 230,041 |   | $ | 233,749 |   | $ | 223,145 |   |
| Operating income      |       | 11,691                                                             |       | 17,799 |   | 16,560 |   | 16,048 |   |
| Net income            |       | 8,325                                                              |       | 11,211 |   | 11,177 |   | 10,873 |   |
| Net income per  share |       | 0.31                                                               |       | 0.42 |   | 0.42 |   | 0.41 |   |
|                  |       |                                                               |       |   |   |   |   |   |   |
| 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 |   |

 

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**REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

 

TheBoard of Directors and Stockholders of Cubic Corporation

 

Wehave audited the accompanying consolidated balance sheets of Cubic Corporationas of September 30, 2007 and 2006, and the related consolidated statements ofincome, changes in shareholders’ equity and cash flows for each of the threeyears in the period ended September 30, 2007. These financial statements arethe responsibility of the Company’s management. Our responsibility is toexpress an opinion on these financial statements based on our audits.

 

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

 

Inour opinion, the financial statements referred to above present fairly, in allmaterial respects, the consolidated financial position of Cubic Corporation atSeptember 30, 2007 and 2006, and the consolidated results of its operations andits cash flows for each of the three years in the period ended September 30,2007, in conformity with U.S. generally accepted accounting principles.

 

Asdisclosed in Note 8 in the notes to the consolidated financial statements, theCompany adopted Statement of Financial Accounting Standards (SFAS) No. 158, *Employers Accounting for Defined Benefit Pensions and OtherPostretirement Plans*, an amendment to SFAS No. 87, 88, 106, and132(R) during the year ended September 30, 2007.

 

Wealso have audited, in accordance with the standards of the Public CompanyAccounting Oversight Board (United States), the effectiveness of CubicCorporation’s internal control over financial reporting as of September 30,2007, based on criteria established in Internal Control-Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commissionand our report dated November 30, 2007 expressed an unqualified opinionthereon.

 

/s/    ERNST& YOUNG LLP

 

SanDiego, CA

November30, 2007

 

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**Item 9.****    DISAGREEMENTS ON ACCOUNTINGAND FINANCIAL DISCLOSURE**.

 

None.

 

**Item 9a. CONTROLS ANDPROCEDURES**.

 

***Evaluation of Disclosure Controls and Procedures*** – The Company’s managementconducted an evaluation, under the supervision and with the participation ofthe Company’s Chief Executive Officer and Chief Financial Officer, of theeffectiveness of the design and operation of the Company’s disclosure controlsand procedures as of September 30, 2007. Based on this evaluation, the Company’s management, including the Chief Executive Officer andChief Financial Officer, concludedthat the Company’s disclosure controls and procedures are effective inproviding reasonable assurance that information required to be disclosed in thereports the Company files and submits under the Securities Exchange Act of 1934is recorded, processed, summarized and reported as and when required.

 

In designing and evaluating the Company’s disclosure controls andprocedures, the Company’s management recognizes that any controls, no matterhow well designed and operated, can provide only reasonable assurance ofachieving the desired control objectives.

 

***Management’sReport on Internal Control over Financial Reporting***

 

Management is responsible for establishingand maintaining adequate internal control over financial reporting for theCompany. In order to evaluate the effectiveness of internal control overfinancial reporting, as required by Section 404 of the Sarbanes-Oxley Act,management has conducted an assessment, including testing, using the criteriain Internal Control – Integrated Framework, issued by the Committee ofSponsoring Organizations of the Treadway Commission (COSO). The Company’ssystem of internal control over financial reporting is designed to providereasonable assurance regarding the reliability of financial reporting and thepreparation of financial statements for external purposes in accordance withgenerally accepted accounting principles. Because of its inherent limitations,internal control over financial reporting may not prevent or detectmisstatements. Also, projections of any evaluation of effectiveness to futureperiods are subject to the risk that controls may become inadequate because ofchanges in conditions, or that the degree of compliance with the policies orprocedures may deteriorate.

 

Basedon its assessment, management has concluded that the Company maintainedeffective internal control over financial reporting as of September 30, 2007,based on criteria in Internal Control – Integrated Framework, issued by theCOSO. Management’s assessment of the effectiveness of the Company’s internalcontrol over financial reporting as of September 30, 2007, has been audited byErnst & Young LLP, an independent registered public accounting firm, asstated in their report which follows.

 

60

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**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM**

 

TheBoard of Directors and Stockholders of Cubic Corporation

 

Wehave audited Cubic Corporation’s internal control over financial reporting asof September 30, 2007, based on criteriaestablished in Internal Control—Integrated Framework issued by the Committee ofSponsoring Organizations of the Treadway Commission (the COSO criteria).Cubic Corporation’s management is responsible for maintaining effectiveinternal control over financial reporting, and for its assessment of theeffectiveness of internal control over financial reporting included in theaccompanying Management’s Report on Internal Control over Financial Reporting. Ourresponsibility is to express an opinion on the company’s internal control overfinancial reporting based on our audit.

 

Weconducted our audit in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that weplan and perform the audit to obtain reasonable assurance about whethereffective internal control over financial reporting was maintained in allmaterial respects. Our audit included obtaining an understanding of internalcontrol over financial reporting, assessing the risk that a material weaknessexists, testing and evaluating the design and operating effectiveness ofinternal control based on the assessed risk, and performing such otherprocedures as we considered necessary in the circumstances. We believe that ouraudit provides a reasonable basis for our opinion.

 

Acompany’s internal control over financial reporting is a process designed toprovide reasonable assurance regarding the reliability of financial reportingand the preparation of financial statements for external purposes in accordancewith generally accepted accounting principles. A company’s internal controlover financial reporting includes those policies and procedures that (1)pertain to the maintenance of records that, in reasonable detail, accuratelyand fairly reflect the transactions and dispositions of the assets of thecompany; (2) provide reasonable assurance that transactions are recorded asnecessary to permit preparation of financial statements in accordance withgenerally accepted accounting principles, and that receipts and expenditures ofthe company are being made only in accordance with authorizations of managementand directors of the company; and (3) provide reasonable assurance regardingprevention or timely detection of unauthorized acquisition, use, or dispositionof the company’s assets that could have a material effect on the financialstatements.

 

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 may deteriorate.

 

In our opinion, Cubic Corporation maintained,in all material respects, effective internal control over financial reportingas of September 30, 2007, based on the COSO criteria.

 

Wealso have audited, in accordance with the standards of the Public CompanyAccounting Oversight Board (United States), the consolidated balance sheets ofCubic Corporation as of September 30, 2007 and 2006, and the related statementsof income, shareholders’ equity, and cash flows for each of the three years inthe period ended September 30, 2007 of Cubic Corporation and our report datedNovember 30, 2007 expressed an unqualified opinion thereon.

 

/s/    ERNST& YOUNG LLP

 

SanDiego, California

November30, 2007

 

61

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***Changes in Internal Controls Over Financial Reporting*** – There were no changes in the Company’sinternal control over financial reporting that occurred during the fourthfiscal quarter of 2007 that have materially affected, or are reasonably likelyto materially affect the Company’s internal control over financial reporting.

 

**PART III**

 

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

 

Certain informationregarding directors and executive officers 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.

 

The Company has adopted acode of ethics that applies to its principle executive officer, principlefinancial officer, and its principle accounting officer. Such code of ethicsappears on our web site at: http://www.cubic.com/corp1/invest/governance.html.

 

**Item 11. EXECUTIVECOMPENSATION**.

 

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

 

Information regardingsecurity ownership of certain beneficial owners and management 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.

 

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

 

Information regardingcertain relationships and related transactions is incorporated herein byreference from our definitive Proxy Statement, which will be filed no laterthan 30 days prior to the date of the Annual Meeting of Shareholders.

 

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

 

Information regardingprincipal accountant fees and services is incorporated herein by reference fromour definitive Proxy Statement, which will be filed no later than 30 days priorto the date of the Annual Meeting of Shareholders.

 

62

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**PART IV**

 

**Item 15. EXHIBITS, FINANCIALSTATEMENT SCHEDULES**

 

(a)           Documents filed as partof this Report:

 

(1)           The followingconsolidated financial statements of Cubic Corporation, as referenced in Item8:

 

Consolidated BalanceSheets

September 30, 2007 and2006

 

Consolidated Statementsof Income

Years ended September 30,2007, 2006 and 2005

 

Consolidated Statementsof Changes in Shareholders’ Equity

Years ended September 30,2007, 2006 and 2005

 

Consolidated Statementsof Cash Flows

Years ended September 30,2007, 2006 and 2005

 

Notes to ConsolidatedFinancial Statements

September 30, 2007

 

(2)           The followingconsolidated financial statement schedules of Cubic Corporation andsubsidiaries, as referenced in Item 15(d):

 

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

 

(b)           Exhibits:

 

List of Subsidiaries

 
| 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   |   | Amended Transition  Protection Plan attached hereto as 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 StatementSchedules

 

None

 

63

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**SIGNATURES**

 

Pursuant to therequirements of Sections 13 or 15(d) of the Securities Exchange Act of 1934,the Registrant has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized:

 
| (Registrant) |     | CUBIC  CORPORATION |
|--------------|----------|--------------------|
|         |     |               |
| *12/4/07*    | * * |               | /s/  Walter J. Zable |   |
| Date         |     |               | WALTER  J. ZABLE, President |

 

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

 

 
| *12/4/07* | * * | /s/ Walter J. Zable                 |     | *12/4/07* | * * | /s/ Robert S. Sullivan               |   |   |
|-----------|----------|-------------------------------------|----------|-----------|----------|--------------------------------------|--------|--------|
| Date      |     | WALTER J. ZABLE,                    |     | Date      |     | ROBERT S. SULLIVAN,                  |   |   |
|      |     | President, Chief  Executive Officer |     |      |     | Director                             |   |   |
|      |     | and Chairman of the  Board of       |     |      |     |                                 |   |   |
|      |     | Directors                           |     | *12/4/07* | * * | /s/ Robert D. Weaver                 |   |   |
|      |     |                                |     | Date      |     | ROBERT D. WEAVER,                    |   |   |
| *12/4/07* |     | /s/ Walter C. Zable                 |     |      |     | Director                             |   |   |
| Date      | * * | WALTER C. ZABLE,                    |     |      |     |                                 |   |   |
|      |     | Vice President and Vice  Chairman   |     | *12/4/07* | * * | /s/ William W. Boyle                 |   |   |
|      |     | of the Board of  Directors          |     | Date      |     | WILLIAM W. BOYLE,                    |   |   |
|      |     |                                |     |      |     | Director, Senior Vice  President and |   |
| *12/4/07* |     | /s/ Raymond L. deKozan              |     |      |     | Chief Financial Officer              |   |   |
| Date      |     | RAYMOND L. deKOZAN,                 |     |      |     |                                 |   |   |
|      | * * | Director, Senior Group  Vice        |     | *12/4/07* | * * | /s/ Mark A. Harrison                 |   |   |
|      | * * | President                           |     | Date      |     | MARK A. HARRISON,                    |   |   |
|      | * * |                                |     |      |     | Vice President and  Corporate        |   |   |
| *12/4/07* | * * | /s/ Raymond E. Peet                 |     |      |     | Controller (Principal  Accounting    |   |   |
| Date      | * * | RAYMOND E. PEET,                    |     |      |     | Officer)                             |   |   |
|      | * * |                                | Director |      |     |                                 |   |   |   |
|           |          |                                     |          |           |          |                                      |        |        |  |

 

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