10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

ANNUAL REPORT

Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Fiscal Year Ended September 30, 2005

1-8931

Commission File Number

CUBIC CORPORATION

Exact Name of Registrant as Specified in its Charter

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

9333 Balboa Avenue

San Diego, California 92123

Telephone (858) 277-6780

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

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

o Yes   ý No

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

o Yes   ý No

Indicate by check mark whether the Registrant (1) has filed all 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 ý   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 ý   No o

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

Yes ý   No o

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

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

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

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

PART I

Item 1.    BUSINESS.

GENERAL

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

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

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

Automated revenue collection systems, including contactless smart cards, passenger gates, central computer systems and ticket vending machines for mass transit networks, including rail systems, buses, and parking applications.

We also perform a variety of services, such as computer simulation training, distributed interactive simulation and development of military training doctrine, as well as field operations and maintenance. We manufacture replacement parts for the products we produce.  In addition, we operate a corrugated paper converting facility through our subsidiary, Consolidated Converting Company.

In 2005, our defense segment continued the growth pattern of recent years through “organic” sales growth of 20%. While we made no defense related acquisitions in 2005, the strategic acquisition made in September 2003 and key contract wins continued to fuel growth in our defense training business. In addition, our government services business continued its expansion, growing by 27%. Our defense communications and electronics business unit is in a transition period from production of older systems to next-generation products and experienced a loss in 2005 on lower sales with higher research and development content. Transportation systems sales have leveled off in recent years primarily because of the completion of the initial phase of the fare collection system in London in 2003. Although the business has expanded in other regions, we experienced significant cost growth in the completion of several fare collection contracts this year, resulting in an operating loss in transportation systems for the year.

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

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

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BUSINESS SEGMENTS

Information regarding the amounts of revenue, operating profit and loss and identifiable assets attributable to each of our business segments, is set forth in Note 10 to the Consolidated Financial Statements for the year ended September 30, 2005. Additional information regarding the amounts of revenue and operating profit and loss attributable to major classes of products and services is set forth in Management’s Discussion and Analysis which follows at Item 7.

DEFENSE

Cubic’s defense business segment operates as the Cubic Defense Applications (CDA) group consisting of three market-focused business units: Training Systems, Mission Support, and Communications & Electronics.  Our products include customized military range instrumentation systems, tactical engagement simulation systems, firearm simulation systems, communications and surveillance systems, surveillance receivers, power amplifiers, and avionics systems.  Our services 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 to various U.S. government departments and agencies and foreign governments.  In addition, we frequently contract or team with other leading defense suppliers. In addition to the three business units, we have a new company formed in a joint venture with Rafael Armament Development Authority Ltd., an Israeli company, to produce certain Rafael defense systems in the United States for Israel and for U.S. customers.

Training Systems

Our Training Systems Business Unit (TSBU) is a pioneer and market leader in the design and production of instrumented training systems for military customers.  These systems 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 System technology) and analysis of behavior and event data for determination of combat effectiveness and lessons learned.  As such, the systems generally have a high degree of communications and software sophistication.

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

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

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

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

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

Mission Support (Government Services)

CDA’s Mission Support Business Unit (MSBU), along with the separate Force Modernization Division (FMD), is a leading provider of tactical knowledge-based services to the U.S. Government and allied nations, with an emphasis on military training.  Our mission support business consists of approximately 3,300 people at more than 90 locations throughout the world.  Our personnel serve with clients in their actual environments and prepare forces through comprehensive training, exercises, education, and operational support to meet the full scope of their missions, from large scale combat operations, to special operations, peacekeeping, consequence management, and humanitarian assistance operations worldwide.  We also plan, prepare, execute and document realistic and focused mission rehearsal exercises (including live and computer-based) as final preparation of forces prior to their deployment to mission areas.  In addition, we provide high level consultation and advisory services to the governments and militaries of allied nations.  U.S. government service contracts are typically awarded on a competitive basis with options for multiple years.  In this competitive market, MSBU and FMD are viewed as premier service providers and formidable competitors.  We typically compete as prime contractors to the government, but also team with other companies depending on the skills required.  Much of our early work centered on battle command training and simulation, in which military commanders are taught to make correct decisions in battle situations.  More recently, the business base has broadened to include integrated live, virtual, and constructive training support, distance learning, knowledge management, weapons effects modeling, intelligence analysis, homeland security training and exercises, and military force modernization.

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

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

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

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

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

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

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

FMD’s principal business is providing specialized teams of military experts to advise the governments and militaries of the nations of the former Warsaw Pact and Soviet Union in the transformation of their militaries to a NATO environment.  These very broad force modernization contracts entail both sweeping vision and minute detail, involving both the nations’ strategic foundation and the detailed planning of all aspects of reform. FMD also operates battle simulation centers for select countries.

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

Communications & Electronics

Our Communications and Electronics Business Unit (CEBU) is a supplier of secure data links, intelligence receivers, high power RF amplifiers and search and rescue avionics systems to the U.S. military, other agencies and allied nations.  CEBU’s products support the strong military trend toward network-centric warfare and modernization initiatives.  The unit has long supplied the air/ground secure data link for the U.S. Army/Air Force Joint STARS system and supplies the principal datalink for the United Kingdom’s ASTOR program.  Capitalizing on a multiyear internal R&D program, CEBU won a competitive contract in fiscal 2003 to develop and produce 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 legacy and new military platforms, such as UAV, which require high performance in a small package.

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

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

Raw Materials:

The principal raw materials used by the defense segment are sheet aluminum and steel, copper electrical wire, and composite products.  A significant portion of the segment’s end products are composed of purchased electronic components and subcontracted parts and supplies. These items are primarily procured from commercial sources.  In general, supplies of raw materials and purchased parts are adequate to meet the requirements of the segment.

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Backlog:

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

Competition:

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

Competition also exists among projects for funding in the defense budget.  While the U.S. defense budget has seen above average increases in recent years, long-term growth will only occur in those segments which offer very high payoff and are consistent with warfighting priorities and growing fiscal restraints.  The U.S. defense market today can be characterized as highly dynamic, with priorities and funding shifting in reaction to, or anticipation of, world events much more rapidly than during the Cold War or since.  Overarching military priorities include lighter, faster, more lethal forces with the ability and training to rapidly adapt to new situations based on superior knowledge of the battle environment.  Superior knowledge is enabled by systems which rapidly collect, process and disseminate the right information to the right place at the right time, resulting in what DoD calls network-centric warfare.  We believe Cubic’s training systems, training support and intelligence, surveillance and reconnaissance capabilities are well matched to these sustainable defense priorities.

TRANSPORTATION SYSTEMS

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

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

These programs provide a solid base of current business and the potential for additional future business as the systems are expanded.  In 1998, Transaction Systems Limited (TranSys), a joint venture company in which Cubic has a 37.5% ownership, was awarded a contract called “PRESTIGE” to outsource the London Transport fare collection services.  This 17-year contract, now in its eighth year, is the largest automated fare collection contract ever awarded.  Our share of the work, including all contract change orders to date, exceeds $900 million over the 17-year life of the contract.

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Industry Overview

Transport agencies, particularly those based in the U.S., rely heavily on federal, state and local government for subsidies in capital investments, including new procurements and/or upgrades of automated fare collection systems.  The average lifecycle for fare collection systems is 12 to 15 years.  Procurements tend to follow a long and strict competitive bid process where the lowest price bid typically wins.

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

Advances in communications, networking and security technologies are enabling interoperability of multiple modes of transportation within a single networked system as well as interoperability of multiple operators within a single networked system.  As such, there is a growing trend for regional ticketing systems, usually built around a large transit agency and including neighboring operators, all sharing a common regional smart card.  There is an emerging trend for other applications to be added to these regional systems to expand the utility of the smart card, offering higher value and incentives to the end users and lowering costs and creating new revenue streams for the regional system operators.  As a result, these regional systems have created opportunities for new levels of systems support and services including call center support, smart card production and distribution, financial clearing and settlement and multi-application support.  In some cases, operators are choosing to outsource the capital development, ongoing operations and commercialization of these regional ticketing systems. This growing new market provides the opportunity to establish lasting relationships and grow revenues and profits over the long-term.

Raw Materials:

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

Backlog:

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

Competition:

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

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OTHER OPERATIONS

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

Raw Materials:

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

Backlog:

Consolidated Converting Company had little sales backlog at September 30, 2005 and 2004. The business does not track sales backlog due to the short-term conversion of customer orders into sales and the absence of long-term contracts.

Competition:

This business competes with concerns of varying size, including some very large companies. It is not possible to predict the extent of the competition which present or future activities will encounter, particularly since the market for this subsidiary’s products is subject to rapidly changing competitive conditions.

BUSINESS STRATEGY

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

Leverage Long-Term Relationships

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

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

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

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prepaid transit benefits to the system.  We are currently rolling out the SmarTrip system to 1,600 WMATA buses, to over 2,000 buses throughout the Baltimore and Northern Virginia region and to the regional rail system.  We are also supplying a point-of-sale distribution network and upgrading the central computer system to offer region-wide services and to interface to a third party operated customer service center. Similarly, we are regionalizing integrated fare collection systems in London, New York and Southern California.

Maintain a Diversified Business Mix

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

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

Pursue Strategic Acquisitions

Through selective strategic acquisitions we seek to expand our customer base, broaden our technical solutions, gain staffing resources and leverage our entry into related new markets. In our defense segment we recently acquired a virtual training technology company that broadened our presence in the training market and expanded our relationship with one of our key U.S. Army customers.  In our transportation segment, we recently acquired two small parking product companies.  The strategic benefit of these acquisitions was to secure a presence in the Canadian marketplace where we see future fare collection system opportunities, such as Toronto, and to expand fare collection solutions for our core customers who want to offer smart card enabled on-street and off-street parking solutions.

OTHER MATTERS

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

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

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

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

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

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Our domestic products and services are sold almost entirely by our employees.  Overseas sales are made either directly or through representatives or agents.

Typically our long-term contracts provide for progress or advance payments by our customers, which provide assistance in financing the working capital requirements on those contracts.

RISK FACTORS

The following are some of the factors we believe could cause our actual results to differ materially from expected and historical results.  Additional risks and uncertainties not presently known to us, or that we currently see as immaterial, may also harm our business.  If any of the risks or uncertainties described below or any such additional risks and uncertainties actually occur, our business, results of operations or financial condition could be materially and adversely affected.

We depend on government contracts for substantially all of our revenues and the loss of government contracts or a delay or decline in funding of existing or future government contracts could adversely affect our sales and cash flows and our ability to fund our growth.

Our revenues from contracts, directly or indirectly, with foreign and United States, state, regional and local governmental agencies represented more than 95% of our total revenues in fiscal year 2005.  Although these various government agencies are subject to common budgetary pressures and other factors, many of our various government customers exercise independent purchasing decisions.  Because of the concentration of business with governmental agencies, we are vulnerable to adverse changes in our revenues, income and cash flows if a significant number of our government contracts or subcontracts or prospects are delayed or canceled for budgetary or other reasons.

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

•re-allocation of government resources as the result of actual or threatened terrorism or hostile activities;

•budget constraints affecting government spending generally, or specific departments or agencies such as U.S. or foreign defense and transit agencies and regional transit agencies, and changes in fiscal policies or a reduction of available funding;

•changes in government programs or requirements or their timing;

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

•the adoption of new laws or regulations pertaining to government procurement;

•government appropriations delays or shutdowns;

•suspension or prohibition from contracting with the government or any significant agency with which we conduct business;

•impairment of our reputation or relationships with any significant government agency with which we conduct business;

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

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

Government spending priorities may change in a manner adverse to our businesses.

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

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

Even though our contract periods of performance for a program may exceed one year, Congress must usually approve funds for a given program each fiscal year and may significantly reduce funding of a program in a particular year.  Significant reductions in these appropriations or the amount of new defense contracts awarded may affect our ability to complete contracts, obtain new work and grow our business.  Congress does not always enact spending bills by the beginning of the new fiscal year.  Such delays leave the affected agencies under-funded which delays their ability to contract.  Future delays and uncertainties in funding could impose additional business risks on us.

Our contracts with government agencies may be terminated or modified prior to completion, which could adversely affect our business.

Government contracts typically contain provisions and are subject to laws and regulations that give the government agencies rights and remedies not typically found in commercial contracts, including providing the government agency with the ability to unilaterally:

•terminate our existing contracts;

•reduce the value of our existing contracts;

•modify some of the terms and conditions in our existing contracts;

•suspend or permanently prohibit us from doing business with the government or with any specific government agency;

•control and potentially prohibit the export of our products;

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

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

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

Most U.S. government agencies can terminate their contracts with us for convenience, and in that event we generally may recover only our incurred or committed costs, settlement expenses and profit on the work completed prior to termination.  If an agency terminates a contract with us for default, we are denied any recovery and may be liable for excess costs incurred by the agency in procuring undelivered items from an alternative source.  We may receive show-cause or cure notices under contracts that, if not addressed to the agency’s satisfaction, could give the agency the right to terminate those contracts for default or to cease procuring our services under those contracts.

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

Failure to retain existing contracts or win new contracts under competitive bidding processes may adversely affect our revenue.

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

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

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

•the need to compete to retain existing contracts that have in the past been awarded to us on a sole-source basis;

•the expense and delay that may arise if our competitors protest or challenge new contract awards;

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

•the substantial cost and managerial time and effort, including design, development and marketing activities, necessary to prepare bids and proposals for contracts that may not be awarded to us;

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

•the need to locate and contract with teaming partners and subcontractors; and

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

We may not be afforded the opportunity in the future to bid on contracts that are held by other companies and are scheduled to expire if the agency decides to extend the existing contract.  If we are unable to win particular contracts that are awarded through the competitive bidding process, we may not be able to operate in the market for services that are provided under those contracts for a number of years.  If we win a contract, and upon expiration, if the customer requires further services of the type provided by the contract, there is frequently a competitive rebidding process and there can be no assurance that we will win any particular bid, or that we will be able to replace business lost upon expiration or completion of a contract.

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

If we are unable to consistently retain existing contracts or win new contract awards, our business prospects, financial condition and results of operations will be adversely affected.

Government audits of our contracts could result in a material charge to our earnings and have a negative effect on our cash position following an audit adjustment.

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

Our international business exposes us to additional risks, including exchange rate fluctuations, foreign tax and legal regulations and political or economic instability that could harm our operating results.

Our international operations, including our contract for the London Transport fare collection system, subject us to risks associated with operating in and selling products or services in foreign countries, including:

•devaluations and fluctuations in currency exchange rates;

•changes in foreign laws that adversely affect our ability to sell our products or services or our ability to repatriate profits to the United States;

•increases or impositions of withholding and other taxes on remittances and other payments by foreign subsidiaries or joint ventures to us;

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

•costs of compliance with local laws, including labor laws;

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

•unfamiliar and unknown business practices and customs;

•domestic and foreign government policies, including requirements to expend a portion of program funds locally and governmental industrial cooperation requirements;

•the complexity and necessity of using foreign representatives and consultants;

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

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

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

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

Our foreign subsidiaries and joint ventures generally conduct business in foreign currencies and enter into contracts and make purchase commitments that are denominated in foreign currencies.   Accordingly, we are exposed to fluctuations in exchange rates, which could have a significant impact on our results of operations.  We have no control over the factors that generally affect this risk, such as economic, financial and political events and the supply of and demand for applicable currencies.  While we use foreign exchange forward and option contracts to hedge significant contract sales and purchase commitments that are denominated in foreign currencies, our hedging strategy may not prevent us from incurring losses due to exchange fluctuations.

Our operating margins may decline under our fixed-price contracts if we fail to estimate accurately the time and resources necessary to satisfy our obligations.

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

We may be liable for civil or criminal penalties under a variety of complex laws and regulations, and changes in governmental regulations could adversely affect our business and financial position.

Our businesses must comply with and are affected by various government regulations that impact our operating costs, profit margins and our internal organization and operation of our businesses. These regulations affect how we do business and, in some instances, impose added costs.  Any changes in applicable laws could adversely affect our financial performance.  Any material failure to comply with applicable laws could result in contract termination, price or fee reductions or suspension or debarment from contracting.  The more significant regulations include:

•the Federal Acquisition Regulations and all department and agency supplements, which comprehensively regulate the formation, administration and performance of U.S. government contracts;

•the Truth in Negotiations Act and implementing regulations, which require certification and disclosure of all cost and pricing data in connection with contract negotiations;

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

•regulations of most state and regional agencies and foreign governments similar to those described above;

•the Sarbanes-Oxley Act of 2002; and

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

Our failure to identify, attract and retain qualified technical and management personnel could adversely affect our existing businesses.

We may not be able to attract and retain the highly qualified technical personnel, including engineers, computer programmers, and personnel with security clearances required for classified work, or management personnel to supervise such activities that are necessary for maintaining and growing our existing businesses.

We may incur significant costs in protecting our intellectual property which could adversely affect our profit margins. Our inability to protect our patents and proprietary rights could adversely affect our businesses’ prospects and competitive positions.

We seek to protect proprietary technology and inventions through patents and other proprietary-right protection.  The laws of some foreign countries do not protect proprietary rights to the same extent as the laws of the United States.  If we are unable to obtain or maintain these protections, we may not be able to prevent third parties from using our proprietary rights. In addition, we may incur significant expense both in protecting our intellectual property and in defending or assessing claims with respect to intellectual property owned by others.

We also rely on trade secrets, proprietary know-how and continuing technological innovation to remain competitive.  We have taken measures to protect our trade secrets and know-how, including the use of confidentiality agreements with our employees, consultants and advisors.  These agreements may be breached and remedies for a breach may not be sufficient to compensate us for damages incurred.  We generally control and limit access to our product documentation and other proprietary information.  Other parties may independently develop our know-how or otherwise obtain access to our technology.

We compete primarily for government contracts against many companies that are larger, better financed and better known than us.  If we are unable to compete effectively, our business and prospects will be adversely affected.

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

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

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

We may incur future obligations that would subject us to additional covenants that affect our financial and operational flexibility or subject us to different events of default.

Our revenues could be less than expected if we are not able to deliver services or products as scheduled due to disruptions in supply.

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

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product cost structure.

Failure to perform by one of our subcontractors could materially and adversely affect our prime contract performance and our ability to obtain future business.

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

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

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

•we may need to divert management resources to integration, which may adversely affect our ability to pursue other more profitable activities;

•integration may be difficult as a result of the necessity of coordinating geographically separated organizations, integrating personnel with disparate business backgrounds and combining different corporate cultures;

•we may not eliminate redundant costs in selecting acquisition candidates; and

•one or more of our acquisition candidates may also have unexpected liabilities or adverse operating issues that we fail to discover through our due diligence procedures prior to the acquisition.

Our results of operations have historically fluctuated and may continue to fluctuate significantly in the future, which could adversely affect the market price of our common stock.

Our revenues are affected by factors such as the unpredictability of contract awards due to the long procurement process for most of our products and services, the potential fluctuation of governmental agency budgets, the time it takes for the new markets we target to develop and for us to develop and provide products and services for those markets, competition and general economic conditions.  Our contract type/product mix and unit volume, our ability to keep expenses within budget, and our pricing affect our operating margins. Significant growth in costs to complete our contracts, such as we experienced in our transportation systems business in 2005, may adversely affect our results of operations in future periods. These factors and other risk factors described herein may adversely affect our results of operations and cause our financial results to fluctuate significantly on a quarterly or annual basis.  Consequently, we do not believe that comparison of our results of operations from period to period is necessarily meaningful or predictive of our likely future results of operations. In some future financial period our operating results may be below the expectations of public market analysts or investors.  If so, the market price of our securities may decline significantly.

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CAUTIONARY STATEMENT ABOUT FORWARD-LOOKING INFORMATION

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

Because the risk factors referred to above could cause actual results or outcomes to differ materially from those expressed in any forward-looking statements made by us or on our behalf, you should not place undue reliance on any forward-looking statements.  In addition, past financial and/or operating performance is not necessarily a reliable indicator of future performance and you should not use our 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 to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time, and it is not possible for us to predict which factors will arise. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

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Item 2.    PROPERTIES.

We conduct our operations in approximately 1.6 million square feet of both owned and leased properties located in the United States and foreign countries.  We own approximately 75% of the square footage, including 540,000 square feet located in San Diego, California and 468,000 square feet located in Orlando, Florida.  All owned and leased properties are considered in good condition and, with the exception of the Orlando facility, adequately utilized.  We are currently using or leasing approximately 270,000 square feet of the Orlando facility and have hired a property management firm to assist us in leasing the excess space to third parties. The following table identifies significant properties by business segment:

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

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Item 3.    LEGAL PROCEEDINGS.

In 1991, the government of Iran commenced an arbitration proceeding against the Company seeking $12.9 million for reimbursement of payments made for equipment that was to comprise an Air Combat Maneuvering Range pursuant to a sales contract and an installation contract executed in 1977, and an additional $15 million for unspecified damages. The Company contested the action and brought a counterclaim for compensatory damages of $10.4 million.  In May 1997, the arbitral tribunal awarded the government of Iran $2.8 million, plus simple interest at the rate of 12% per annum from September 21, 1991 through May 5, 1997. In December 1998, the United States District Court granted a motion by the government of Iran confirming the arbitral award but denied Iran’s request for additional interest and costs. Both parties have appealed. In October 2004, the 9^th Circuit Court of Appeals issued a decision in the case of two interveners who are attempting to claim an attachment on the amount that was awarded to Iran in the original arbitration. The Court denied one of the intervener’s liens but confirmed the second one’s lien. Iran has asked the U.S. Supreme Court to review the 9^th Circuit decision. Pending any such review, the matter is on hold in the 9^th Circuit and the obligation upon Cubic to pay is stayed. Under current United States law and policy, any payment to the Revolutionary Government of Iran must first be licensed by the U.S. government. The Company is unaware of the likelihood of the U.S. government granting such a license. The Company is continuing to pursue its appeal in the 9^th Circuit 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 of Iran. However, in light of the 9^th Circuit Court’s decision in the related intervener’s case, in 2004 the Company established a reserve of $6 million for the estimated potential liability and will continue to accrue interest on this amount until the ultimate outcome of the case is determined.

In January 2005, a bus fare collection system customer in North America issued a “cure notice” to the Company, alleging that its performance was not in accord with the contract. After unsuccessful negotiations with the customer, in March 2005, the Company filed for a temporary restraining order requesting that the customer be restrained from further interfering with the Company’s performance and from issuing a termination notice. The next business day, the customer issued a letter terminating the contract for default. In April 2005, the customer filed a claim for breach of contract, seeking damages for “all actual, consequential and liquidated damages sustained” as well as attorney’s fees. The contract limits liability to the contract value of $8.2 million, but the customer appears to be attempting to avoid that limitation. In May 2005, the Company filed an answer and general denial and subsequently filed a verified petition alleging breach of contract and other substantive claims, claiming the amount owed under the contract of $4.2 million, plus interest and attorney’s fees. Management believes that both the customer’s default notice and claim for damages are unsupported and the Company is vigorously defending against the allegations. Based on the advice of counsel, management believes the Company had substantially completed the contract prior to termination and that the remaining contract value is due and that the Company will prevail at trial; however, due to the uncertainty of collecting the outstanding receivable balance an allowance for doubtful accounts of $4.2 million was established and all costs incurred in the performance of the contract and costs incurred outside the scope of the contract were expensed in the year ended September 30, 2005.

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

The Company is not a party to any other pending proceedings, other than ordinary litigation incidental to the business. Management believes the outcome of these proceedings and the proceedings described above will not have a materially adverse effect on the Company’s financial position.

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Item 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

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

PART II

Item 5.    MARKET FOR THE REGISTRANT’S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS.

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

MARKET AND DIVIDEND INFORMATION

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

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

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

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Item 6. SELECTED FINANCIAL DATA.

FINANCIAL HIGHLIGHTS AND SUMMARY OF CONSOLIDATED OPERATIONS

(amounts in thousands, except per share data)

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

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

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

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

Cubic Defense Applications is a diversified supplier of constructive, live and virtual military training systems, services and communication systems and products to the U.S. Department of Defense, other government agencies and allied nations. We design instrumented range systems for fighter aircraft, armored vehicles and infantry force-on-force live training; weapons effects simulations; laser-based tactical and communication systems; and precision gunnery solutions.  Our services are focused on training mission support, computer simulation training, distributed interactive simulation, development of military training doctrine, force modernization services for NATO entrants and field operations and maintenance. Our communications products are aimed at intelligence, surveillance, and search and rescue markets.

Cubic Transportation Systems develops and delivers innovative fare collection systems for public transit authorities worldwide.  We provide hardware, software and multiagency, multimodal transportation integration technologies and services that allow the agencies to efficiently collect fares, manage their operations, reduce shrinkage and make using public transit a more convenient and attractive option for commuters.

Consolidated Overview

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

Operating income fell to $13.1 million in 2005 compared to $54.2 million in 2004, representing a 76% decrease. Operating income in 2004 increased by 13% over 2003 operating income of $48.0 million. The primary cause of the decrease in operating income in 2005 was an operating loss of $13.8 million incurred in the transportation systems segment, compared to operating income for the segment of $28.2 million in 2004. Defense operating income decreased from $34.5 million in 2004 to $30.1 million in 2005 primarily due to a change in sales from mature to newer systems with significant research and development content. Operating income was also impacted in 2005 by the costs of initial year compliance with Section 404 of the Sarbanes-Oxley Act of 2002. These costs, which are included in corporate and other costs in our segment reporting, amounted to $1.4 million and included consultants, software and additional audit fees. In 2004, both segments posted operating income improvements over 2003, with the bigger increase coming from the defense segment. Operating income in 2004 was impacted by a $6 million provision for a legal matter that arose from a contract with the government of Iran in 1977. Although this was a defense related contract, we did not include this provision in the defense segment due to the remote connection of this matter to our current defense operations, since the events in question occurred more than 25 years ago. See the segment discussions following for further details of segment operating results.

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

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

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

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

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

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

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

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

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

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We are continuing to evaluate the impact of tax legislation enacted in 2004 that provides incentives for repatriation of capital to the U.S. We must determine if it will be beneficial to take advantage of the provisions of the legislation by reinvesting some amount of capital in the United States in fiscal 2006. We believe that if the decision is made to reinvest a portion of this capital in the U.S., the related tax liability will not have a material impact on Cubic’s results of operations or financial position.

Defense Segment

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

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

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

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

The operating loss in communications and electronics in 2005 was primarily due to cost growth totaling nearly $5 million on two contracts, one a program involving a new intelligence application of our data link and receiver technology and the other the CDLS contract mentioned above. In addition, approximately $2 million in overstocked or obsolete communications products inventory was written down in value to zero. This inventory valuation adjustment was due primarily to the transition of this product line from building predominately surveillance receivers to building power amplifiers. In addition, the decrease in sales of legacy data link and avionics products reduced operating income by more than $6 million. With the transition to the new communications and electronics products now complete, we are optimistic that this business unit can return to profitability in fiscal 2006.

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

Training systems operating income increased in 2005, compared to 2004, because of higher sales from ground combat training and MILES contracts. However, operating income as a percentage of sales decreased slightly because a portion of the sales growth came from ground combat training ranges in Canada, Australia and the Middle East that have low profit margins. In addition, two new contracts for laser engagement and combat training systems were in the early stages of completion in 2005, with little or no profit recognized until they are further along toward completion. Operating income in training systems increased in 2004 over 2003 because of the acquisition of SSD late in 2003. SSD added $2.3 million to training systems operating income in 2004. Higher operating income from ground combat training systems in 2004 offset the profit impact of lower sales volume from air combat training systems and MILES products.

Government services operating income in 2005 increased over 2004 due to higher sales volume and improved operating performance. Operating income as a percentage of sales increased from 6.5% in 2004 to nearly 7.5% in 2005, as SG&A expenses did not increase in proportion to the sales increase, thereby improving the profit margin. Government services operating income improved in 2004 compared to 2003 primarily because of higher sales volume, but also because of improved performance from operations and maintenance (O&M) contracts. The O&M business recorded a loss in 2003 on one particular contract which had experienced cost growth that year.

Transportation Systems Segment

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

24

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

Transportation systems incurred an operating loss in 2005 of $13.8 million, compared to operating income in 2004 of $28.2 million. Projected costs to complete fare collection systems in five cities increased by $27.9 million more than we had estimated last year; therefore, a loss of that amount was recorded on these contracts during the year. The primary cause of the cost growth was an increase in engineering hours incurred to complete the projects. We made progress toward completion of these projects during the year, and a significant amount of the equipment has been installed; however, the costs of accomplishing this were higher than we were previously able to anticipate. The new cost estimates are our best estimates of the most likely costs to complete these contracts, three of which are substantially complete and two of which should be substantially complete by mid-2006. Remaining tasks on the contracts are now on schedule for completion in 2006 and we expect the transportation systems segment to return to profitability in fiscal 2006.

Unrelated to these contracts, in the second quarter we provided an allowance of $4.2 million for doubtful collection of an accounts receivable balance with a customer that terminated its contract with us. This provision is included in SG&A expenses in the consolidated statement of income. We believe that we have substantially performed the requirements of the contract such that this payment is due to us and we believe the termination attempt by this customer is unwarranted. We also incurred an operating loss of $4.5 million from the parking company we acquired last year. This was the result of cost growth on two contracts as well a lack of sufficient sales volume to absorb the overhead costs of the business. A restructuring plan has been developed and will be implemented by the end of the first quarter of fiscal year 2006. Costs of the restructuring and additional unabsorbed overhead expenses will result in a loss from the parking company in the first quarter of 2006.

Transportation Systems operating income of $28.2 million in 2004 increased 16% from the 2003 level of $24.4 million. The increased operating income in 2004 compared to 2003 resulted from higher sales and improved operating performance on service contracts in Europe and from a contract in the Far East. Higher profits from the PRESTIGE contract in 2004 were offset by costs associated with claim settlement proceedings.

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Backlog

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

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

The difference between total backlog and funded backlog represents options under multiyear service contracts. Funding for these contracts comes from annual operating budgets of the U.S. government and the options are normally exercised annually. Options for the purchase of additional systems or equipment are not included in backlog until exercised.

New Accounting Standards

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

Liquidity and Capital Resources

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

A portion of the transportation systems positive cash flows in 2005 came from an $18 million claim settlement received in October 2004 related to the PRESTIGE project, with the remainder coming from normal contractual payments. We expect transportation systems cash flows to continue to be positive in fiscal 2006, as contract milestones are reached, triggering customer payments that have been deferred due to the contract performance issues described in the transportations systems discussion above. Growth in accounts receivable due to these deferred milestone payments accounted for the majority of the increase

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in accounts receivable and the negative cash flows in 2004. In fiscal 2003, $55 million in negative cash flows came from the PRESTIGE project; however, this contract generated positive cash flows in both 2004 and 2005, in addition to the claim settlement mentioned above.

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

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

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

In 2004 we obtained a mortgage on our facility in the U.K. and used the proceeds to repay $6 million of short-term borrowings made in fiscal 2003 in the U.K.  We borrowed $9 million in New Zealand in 2004 on a short-term basis to fund working capital growth in our defense subsidiary in that country and borrowed $16 million in the U.S. on a short-term basis to fund domestic working capital requirements. Other financing activities included scheduled debt payments of $2 million in 2004 and $1 million in 2003, and the payment of $4 million in dividends to shareholders in both 2004 and 2003.

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

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

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

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

27

financial ratio calculation.  Our total debt to capital ratio at September 30, 2005 was 20%, which is at a conservative level and well below industry averages.

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

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

Critical Accounting Policies, Estimates and Judgments

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

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

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

Revenue Recognition

Most of our business is derived from long-term development, production and system integration contracts which we account for consistent with the American Institute of Certified Public Accountants’ (AICPA) audit and accounting guide, Audits of Federal Government Contractors, and the AICPA’s Statement of Position No. 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts. We consider the nature of these contracts, and the types of products and services provided, when we determine the proper accounting for a particular contract. Generally, we record revenue for long-term fixed price contracts on a percentage of completion basis using the cost-to-cost method to measure progress toward completion. Most of our long-term fixed-price contracts require us to deliver minimal quantities over a long period of time or to perform a substantial level of development effort in relation to the total value of the contract. Under the cost-to-cost method of accounting, we recognize revenue based on a ratio of the costs incurred to the estimated total costs at completion. Amounts representing contract change orders, claims or other items are included in the contract value only when they can be reliably estimated and realization is considered probable. Provisions are made on a current basis to fully recognize any anticipated losses on contracts.

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We record sales under cost-reimbursement-type contracts as we incur the costs. Incentives or penalties and awards applicable to performance on contracts are considered in estimating sales and profits, and are recorded when there is sufficient information to assess anticipated contract performance. Incentive provisions that increase or decrease earnings based solely on a single significant event are not recognized until the event occurs. We have accounting policies in place to address these and other complex issues in accounting for long-term contracts.

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

Income Taxes

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

Ta x 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 outsid e the United States for the foreseeable future. These undistributed earnings totaled approximately $70 million at September 30, 2005.

Valuation of Goodwill

We evaluate our recorded goodwill balances for potential impairment annually by comparing the fair value of each reporting unit to its carrying value, including recorded goodwill. We have 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 fair value of goodwill to its carrying value, and any impairment determined would be recorded in the current period. To date there has been no impairment of our recorded goodwill. Goodwill balances by reporting unit are as follows:

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

Determining the fair value of a reporting unit for purposes of the goodwill impairment test is judgmental in nature and often involves the use of significant estimates and assumptions. These estimates and assumptions could have a significant impact on whether or not an impairment charge is recognized and also the magnitude of any such charge. We currently perform internal valuation analysis and consider other market information that is publicly available. Estimates of fair value are primarily determined using discounted cash flows and comparisons with recent transactions. These approaches use significant estimates and

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

Pension Costs

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

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

•Discount rates

•Inflation

•                  Salary growth

•Expected return on plan assets

•Retirement rates

•Mortality rates

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

Item 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Interest Rate Risk

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

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

Foreign Currency Exchange Risk

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

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many foreign currencies.  We have a policy to hedge those commitments greater than $20,000 by using foreign currency exchange forward and option contracts that are denominated in currencies other than the functional currency of the subsidiary responsible for the commitment, typically the British pound, Canadian dollar, euro, New Zealand dollar and Australian dollar.  These contracts are designed to be effective hedges regardless of the direction or magnitude of any foreign currency exchange rate change, because they result in an equal and opposite income or cost stream that offsets the change in the value of the underlying commitment.  See Note 1 to the Consolidated Financial Statements for more information on our foreign currency translation and transaction accounting policies.  We also use balance sheet hedges to mitigate foreign exchange risk.  This strategy involves incurring British pound denominated debt (See Interest Rate Risk above) and having the option of paying off the debt using U.S. dollar or British pound funds. We do not believe that we are significantly exposed to foreign currency exchange rate risk at this point in time.

Investments in our foreign subsidiaries in the U.K., Australia, New Zealand, and Canada are not hedged because we consider them to be invested indefinitely.  In addition, we generally have control over the timing and amount of earnings repatriation and expect to use this control to mitigate foreign currency exchange risk.

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Item 8.    FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA.

CUBIC CORPORATION

CONSOLIDATED BALANCE SHEETS

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

See accompanying notes.

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

See accompanying notes.

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CUBIC CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

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

See accompanying notes.

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CUBIC CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

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

See accompanying notes.

35

CUBIC CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

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

See accompanying notes.

36

CUBIC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2005

NOTE 1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

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

Cash Equivalents:  The Company considers highly liquid investments with maturity of three months or less when purchased to be cash equivalents.

Concentration of Credit Risk:  The Company has established guidelines pursuant to which its cash and cash equivalents are diversified among various money market instruments and investment funds. These guidelines emphasize the preservation of capital by requiring minimum credit ratings assigned by established credit organizations.  Diversification is achieved by specifying maximum investments in each instrument type and issuer. The majority of these investments are not on deposit in federally insured accounts.

Fair Value of Financial Instruments:  Financial instruments, including cash equivalents, accounts receivable, accounts payable and accrued liabilities, are carried at cost, which management believes approximates the fair value because of the short-term maturity of these instruments.  The fair value of long-term debt is based upon quoted market prices for the same or similar debt instruments and approximates the carrying value of the debt.  Receivables consist primarily of amounts due from U.S. and foreign governments for defense products and local government agencies for transportation systems.  Due to the nature of its customers, the Company generally does not require collateral.  The Company has limited exposure to credit risk as the Company has historically collected substantially all of its receivables from government agencies.  The Company generally requires no allowance for doubtful accounts for these customers unless specific contractual circumstances warrant it.

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

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

37

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

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

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

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

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

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

38

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

Revenue Recognition:  Sales and profits under the Company’s long-term fixed-price contracts, which generally require a significant amount of development effort in relation to total contract value, are recognized using the cost-to-cost percentage of completion method of accounting. Sales and profits are recorded based on the ratio of costs incurred to estimated total costs at completion. In the early stages of contract performance, profit is not recognized until progress is demonstrated or contract milestones are reached.

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

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

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

Provisions are made on a current basis to fully recognize any anticipated losses on contracts.  Cash received prior to revenue recognition is classified as customer advances on the balance sheet.

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

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

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

39

commitments that are denominated in currencies other than the functional currency of the subsidiary responsible for the commitment and to hedge net advances to foreign subsidiaries.  The purpose of the Company’s foreign currency hedging activities is to fix the dollar value of specific commitments and payments to foreign vendors, and the value of foreign currency denominated receipts from customers. At September 30, 2005, the Company had foreign exchange contracts with a notional value of $147.3 million outstanding.

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

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

Use of Estimates:  The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Significant estimates include the estimated total costs at completion of the Company’s long-term contracts, and the estimated rates of return and discount rates related to the Company’s defined benefit pension plans. Actual results could differ from those estimates.

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

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

40

NOTE 2—INVESTMENTS IN JOINT VENTURES

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

The Company analyzed this joint venture under the provisions of FIN 46 “Consolidation of Variable Interest Entities,” and concluded that it is the primary beneficiary of the arrangement. Therefore, the joint venture was consolidated in the Company’s financial statements beginning in the quarter ended March 31, 2005. Minority interest in the net loss from this business is reflected in the consolidated income statements and minority interest in the net assets of the joint venture is included in the consolidated balance sheets.

The Company owns 37.5% of the common stock of Transaction Systems Limited (TranSys), an unconsolidated joint venture company in the United Kingdom. This joint venture company was formed to bid on a contract called “PRESTIGE” (Procurement of Revenue Services, Ticketing, Information, Gates and Electronics), the purpose of which is to outsource most of the functions of the London Transport (LT) fare collection system for a period of seventeen years. In August 1998, TranSys was awarded the contract and began operations. Cubic and the other parties to the joint venture participate in the PRESTIGE contract solely through subcontracts from TranSys. All of the work to be performed by TranSys is subcontracted to the joint venture partners and the joint venture provides for the pass-through of virtually all revenues from London Transport to the joint venture partners. As a result, TranSys has operated on a break-even basis and is expected to continue to do so. If TranSys were to eventually generate a net income or loss, the joint venture partners would share in this income or loss in accordance with their percentage ownership in the joint venture. The Company’s investment in the joint venture is immaterial.

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

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

41

Summarized unaudited financial information for this unconsolidated joint venture is as follows:

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

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

NOTE 3—ACCOUNTS RECEIVABLE

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

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

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

42

products or furnishing of services, with an immaterial amount subject to retainage provisions of the contracts. As identified above, a portion of the amount not billed under commercial contracts is not expected to be collected within one year from September 30, 2005, and therefore, has been classified as a noncurrent asset.  This amount relates primarily to the contract with TranSys for the PRESTIGE system in London.  The customer has been paying the Company in accordance with the terms of the contract and it is expected that all amounts due under the contract will ultimately be collected.  It is anticipated that substantially all of the unbilled portion of receivables identified as current assets will be billed and collected under progress billing provisions of the contracts or upon completion of performance tests and/or acceptance by the customers during fiscal 2006.

NOTE 4—INVENTORIES

Inventories are classified as follows:

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

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

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NOTE 5—FINANCING ARRANGEMENTS

Long-term debt consists of the following:

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

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

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

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

44

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

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

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

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

The Company’s self-insurance arrangements are limited to certain workers’ compensation plans, automobile liability, and product liability claims primarily related to a business the Company sold in 1993. Under these arrangements, the Company self-insures only up to the amount of a specified deductible for each claim.  Self-insurance liabilities included in other current liabilities on the balance sheet amounted to $3.1 million and $2.9 million as of September 30, 2005 and 2004, respectively.

NOTE 6—COMMITMENTS

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

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

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

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NOTE 7—INCOME TAXES

Significant components of the provision for income taxes are as follows:

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

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

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

47

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

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

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

As indicated in the table above, in 2005 the Company was able to reverse $2.8 million of tax reserves established in previous years. This was due to the resolution of an uncertain foreign tax issue and an uncertain domestic state issue during, or subsequent to, the quarter ended September 30, 2005.

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

Income before income taxes includes the following components:

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

48

Undistributed earnings of the Company’s foreign subsidiaries amounted to approximately $70.0 million at September 30, 2005. Those earnings are considered to be indefinitely reinvested, and accordingly, no provision for U.S. federal and state income taxes has been provided thereon. Upon distribution of those earnings in the form of dividends or otherwise, the Company would be subject to both U.S. income taxes and withholding taxes payable to the foreign countries, but would also be able to offset unrecognized foreign tax credit carryforwards. Determination of the amount of unrecognized deferred U.S. income tax liability is not practicable because of the complexities associated with its hypothetical calculation; however, the Company does not believe the amount would be material.

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

NOTE 8—PENSION, PROFIT SHARING AND OTHER RETIREMENT PLANS

The Company has profit sharing and other defined contribution retirement plans that provide benefits for most employees in the U.S. An employee is eligible to participate in these plans after six months to one year of service, and may make additional contributions to the plans from their date of hire. These plans provide for full vesting of benefits over five years. A substantial portion of Company contributions to these plans is discretionary with the Board of Directors. Company contributions to the plans aggregated $11.5 million, $9.9 million and $9.4 million in 2005, 2004 and 2003, respectively.

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

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

49

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

Components of net periodic benefit cost:

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

50

Assumptions:

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

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

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

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

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

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

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

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

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Estimated future benefit payments

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

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

NOTE 9—LEGAL MATTERS

In 1991, the government of Iran commenced an arbitration proceeding against the Company seeking $12.9 million for reimbursement of payments made for equipment that was to comprise an Air Combat Maneuvering Range pursuant to a sales contract and an installation contract executed in 1977, and an additional $15 million for unspecified damages. The Company contested the action and brought a counterclaim for compensatory damages of $10.4 million.  In May 1997, the arbitral tribunal awarded the government of Iran $2.8 million, plus simple interest at the rate of 12% per annum from September 21, 1991 through May 5, 1997. In December 1998, the United States District Court granted a motion by the government of Iran confirming the arbitral award but denied Iran’s request for additional interest and costs. Both parties have appealed. In October 2004, the 9^th Circuit Court of Appeals issued a decision in the case of two interveners who are attempting to claim an attachment on the amount that was awarded to Iran in the original arbitration. The Court denied one of the intervener’s liens but confirmed the second one’s lien. Iran has asked the U.S. Supreme Court to review the 9^th Circuit decision. Pending any such review, the matter is on hold in the 9^th Circuit and the obligation upon Cubic to pay is stayed. Under current United States law and policy, any payment to the Revolutionary Government of Iran must first be licensed by the U.S. government. The Company is unaware of the likelihood of the U.S. government granting such a license. The Company is continuing to pursue its appeal in the 9^th Circuit 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 of Iran. However, in light of the 9^th Circuit Court’s decision in the intervener’s case, in 2004 the Company established a reserve of $6 million for the estimated potential liability and will continue to accrue interest on this amount until the ultimate outcome of the case is determined.

In January 2005, a bus fare collection system customer in North America issued a “cure notice” to the Company, alleging that its performance was not in accord with the contract. After unsuccessful negotiations with the customer, in March 2005, the Company filed for a temporary restraining order requesting that the customer be restrained from further interfering with the Company’s performance and from issuing a termination notice. The next business day, the customer issued a letter terminating the contract for default. In April 2005, the customer filed a claim for breach of contract, seeking damages for “all actual, consequential and liquidated damages sustained” as well as attorney’s fees. The contract limits liability to the contract value of $8.2 million, but the customer appears to be attempting to avoid that limitation. In May 2005, the Company filed an answer and general denial and subsequently filed a verified petition alleging breach of contract and other substantive claims, claiming the amount owed under the contract of $4.2 million, plus interest and attorney’s fees. Management believes that both the customer’s default notice and claim for damages are unsupported and the Company is vigorously defending against the allegations. Based on the advice of counsel, management believes the Company had

52

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

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

The Company is not a party to any other pending proceedings, other than ordinary litigation incidental to the business. Management believes the outcome of these proceedings and the proceedings described above will not have a materially adverse effect on the Company’s financial position.

NOTE 10—BUSINESS SEGMENT INFORMATION

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

The Company has two primary business segments: transportation systems and defense. The transportation systems segment designs, produces, installs and services electronic revenue collection systems for mass transit projects, including railways and buses. The defense segment performs work under U.S. and foreign government contracts relating to electronic defense systems and equipment, computer simulation training, development of training doctrine, and field operations and maintenance. Products include customized range instrumentation and training systems, simulators, communications and surveillance systems, avionics systems, power amplifiers and receivers.

Measurement of segment profit or loss and segment assets:

The Company evaluates performance and allocates resources based on total segment operating profit or loss. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies. Intersegment sales and transfers are immaterial.

Factors management used to identify the Company’s reportable segments:

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

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Business segment financial data is as follows:

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

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

54

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

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

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

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

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

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders of Cubic Corporation

We have audited the accompanying consolidated balance sheets of Cubic Corporation as of September 30, 2005 and 2004, and the related consolidated statements of income, changes in shareholders’ equity and cash flows for each of the three years in the period ended September 30, 2005. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Cubic Corporation at September 30, 2005 and 2004, and the consolidated results of its operations and its cash flows for each of the three years in the period ended September 30, 2005, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Cubic Corporation’s internal control over financial reporting as of September 30, 2005, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated December 5, 2005 expressed an unqualified opinion thereon.

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

56

Item 9.    DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

None.

Item 9a. CONTROLS AND PROCEDURES.

Evaluation of Disclosure Controls and Procedures – The Company’s management conducted an evaluation, under the supervision and with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of September 30, 2005. Based on this evaluation, the Company’s management, including the Chief Executive Officer and Chief Financial Officer, concluded that the Company’s disclosure controls and procedures are effective in providing reasonable assurance that information required to be disclosed in the reports the Company files and submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported as and when required.

In designing and evaluating the Company’s disclosure controls and procedures, the Company’s management recognizes that any controls, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.

Management’s Report on Internal Control over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. In order to evaluate the effectiveness of internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act, management has conducted an assessment, including testing, using the criteria in Internal Control – Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s system of internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Based on its assessment, management has concluded that the Company maintained effective internal control over financial reporting as of September 30, 2005, based on criteria in Internal Control – Integrated Framework, issued by the COSO. Management’s assessment of the effectiveness of the Company’s internal control over financial reporting as of September 30, 2005, has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in their report which follows.

57

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders of Cubic Corporation

We have audited management’s assessment, included in the accompanying Management’s Report on Internal Controls Over Financial Reporting, that Cubic Corporation maintained effective internal control over financial reporting as of September 30, 2005, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Cubic Corporation’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

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

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the 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, management’s assessment that Cubic Corporation maintained effective internal control over financial reporting as of September 30, 2005, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, Cubic Corporation maintained, in all material respects, effective internal control over financial reporting as of September 30, 2005, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Cubic Corporation as of September 30, 2005 and 2004, and the related statements of income, stockholders’ equity, and cash flows for each of the three years in the period ended September 30, 2005 of Cubic Corporation and our report dated December 5, 2005 expressed an unqualified opinion thereon.

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

58

Changes in Internal Controls Over Financial Reporting – There were no changes in the Company’s internal control over financial reporting that occurred during the fourth fiscal quarter of 2005 that have materially affected, or are reasonably likely to materially affect the Company’s internal control over financial reporting.

PART III

Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

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

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

Item 11. EXECUTIVE COMPENSATION.

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

Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

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

Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

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

Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.

Information regarding principal accountant fees and services is incorporated herein by reference from our definitive Proxy Statement, which will be filed no later than 30 days prior to the date of the Annual Meeting of Shareholders.

59

PART IV

Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.

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

60

SIGNATURES

Pursuant to the requirements 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 the undersigned, thereunto duly authorized:

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

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

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

61

EX-10.1

Exhibit 10.1

CUBIC CORPORATION

2005 EQUITY INCENTIVE PLAN

APPROVED BY THE BOARD ON:  NOVEMBER 29, 2005

APPROVED BY THE STOCKHOLDERS:  [FEBRUARY 21, 2006]

TERMINATION DATE:  NOVEMBER 29, 2015

1.GENERAL.

(a)Successor and Continuation of Prior Plan.  This Cubic Corporation 2005 Equity Incentive Plan (the “Plan”) is intended as the successor to and continuation of the Cubic Corporation 1998 Stock Option Plan(the “Prior Plan”).  Following the Effective Date of this Plan, no additional stock awards shall be granted under the Prior Plan.  Any shares remaining available for issuance pursuant to the exercise of options or settlement of stock awards under the Prior Plan shall be added to the share reserve of this Plan and available for issuance pursuant to Stock Awards granted hereunder.  All outstanding stock awards granted under the Prior Plan shall remain subject to the terms of the Prior Plan, except that the Board may elect to extend one or more of the features of the Plan to stock awards granted under the Prior Plan.  Any shares subject to outstanding stock awards granted under the Prior Plan that expire or terminate for any reason prior to exercise or settlement shall be added to the share reserve of this Plan and become available for issuance pursuant to Stock Awards granted hereunder.  All Stock Awards granted subsequent to the Effective Date of this Plan shall be subject to the terms of this Plan.

(b)Eligible Stock Award Recipients.  The persons eligible to receive Awards are Employees, Directors and Consultants.

(c)Available Stock Awards.  The Plan provides for the grant of the following Stock Awards: (i) Incentive Stock Options, (ii) Nonstatutory Stock Options, (iii) Stock Purchase Awards, (iv) Restricted Stock Awards, (v) Stock Appreciation Rights, (vi) Restricted Stock Unit Awards, and (vii) Other Stock Awards.

(d)General Purpose.  The Company, by means of the Plan, seeks to secure and retain the services of the group of persons eligible to receive Awards as set forth in Section 1(a), to provide incentives for such persons to exert maximum efforts for the success of the Company and any Affiliate and to provide a means by which such eligible recipients may be given an opportunity to benefit from increases in value of the Common Stock through the granting of Awards.

2.DEFINITIONS.

As used in the Plan, the following definitions shall apply to the capitalized terms indicated below:

(a)“Affiliate” means, at the time of determination, any “parent” or “subsidiary” as such terms are defined in Rule 405 of the Securities Act.  The Board shall have the authority to

determine the time or times at which “parent” or “subsidiary” status is determined within the foregoing definition.

(b)“Award” means a Stock Award or a Performance Cash Award.

(c)“Board” means the Board of Directors of the Company.

(d)“Capitalization Adjustment” has the meaning ascribed to that term in Section 11(a).

(i)“Cause” means with respect to a Participant, the occurrence of any of the following:  (i) such Participant’s conviction (which has become final) or entry of a plea of guilty or nolo contendere regarding an act that would be deemed a felony under California or Federal criminal statutes (or any comparable criminal laws of any jurisdiction in which the Participant is permanently employed by the Company or an Affiliate) and that is injurious to the Company; (ii) the Participant’s gross negligence or breach of fiduciary duty to the Company involving personal profit, personal dishonesty or recklessness, (iii) the Participant’s material breach of any agreement with the Company, including a material violation of Company policies and procedures or of any statutory duty owed to the Company; (iv)  such Participant’s unauthorized use or disclosure of the Company’s confidential information or trade secrets; or (v) such Participant’s gross misconduct. The determination that a termination of the Participant’s Continuous Service is either for Cause or without Cause shall be made by the Company in its sole discretion.  Any determination by the Company that the Continuous Service of a Participant was terminated by reason of dismissal without Cause for the purposes of outstanding Awards held by such Participant shall have no effect upon any determination of the rights or obligations of the Company or such Participant for any other purpose.

(e)“Change in Control” means the occurrence, in a single transaction or in a series of related transactions, of any one or more of the following events:

(i)any Exchange Act Person becomes the Owner, directly or indirectly, of securities of the Company representing more than 50% of the combined voting power of the Company’s then outstanding securities other than by virtue of a merger, consolidation or similar transaction.  Notwithstanding the foregoing, a Change in Control shall not be deemed to occur (A) on account of the acquisition of securities of the Company by an investor, any affiliate thereof or any other Exchange Act Person from the Company in a transaction or series of related transactions the primary purpose of which is to obtain financing for the Company through the issuance of equity securities or (B) solely because the level of Ownership held by any Exchange Act Person (the “Subject Person”) exceeds the designated percentage threshold of the outstanding voting securities as a result of a repurchase or other acquisition of voting securities by the Company reducing the number of shares outstanding, provided that if a Change in Control would occur (but for the operation of this sentence) as a result of the acquisition of voting securities by the Company, and after such share acquisition, the Subject Person becomes the Owner of any additional voting securities that, assuming the repurchase or other acquisition had not occurred, increases the percentage of the then outstanding voting securities Owned by the Subject Person over the designated percentage threshold, then a Change in Control shall be deemed to occur;

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(ii)there is consummated a merger, consolidation or similar transaction involving (directly or indirectly) the Company and, immediately after the consummation of such merger, consolidation or similar transaction, the stockholders of the Company immediately prior thereto, as such, do not Own, directly or indirectly, either (A) outstanding voting securities representing more than 50% of the combined outstanding voting power of the surviving Entity in such merger, consolidation or similar transaction or (B) more than 50% of the combined outstanding voting power of the parent of the surviving Entity in such merger, consolidation or similar transaction;

(iii)the stockholders of the Company approve or the Board approves a plan of complete dissolution or liquidation of the Company, or a complete dissolution or liquidation of the Company shall otherwise occur;

(iv)there is consummated a sale, lease, exclusive license or other disposition of all or substantially all of the consolidated assets of the Company and its Subsidiaries, other than a sale, lease, license or other disposition of all or substantially all of the consolidated assets of the Company and its Subsidiaries to an Entity, more than 50% of the combined voting power of the voting securities of which are Owned by stockholders of the Company in substantially the same proportions as their Ownership of the outstanding voting securities of the Company immediately prior to such sale, lease, license or other disposition; or

(v)individuals who, on the date this Plan is adopted by the Board, are members of the Board (the “Incumbent Board”) cease for any reason to constitute at least a majority of the members of the Board; provided, however, that if the appointment or election (or nomination for election) of any new Board member was approved or recommended by a majority vote of the members of the Incumbent Board then still in office, such new member shall, for purposes of this Plan, be considered as a member of the Incumbent Board.

The term Change in Control shall not include a sale of assets, merger or other transaction effected exclusively for the purpose of changing the domicile of the Company.

Notwithstanding the foregoing or any other provision of this Plan, the definition of Change in Control (or any analogous term) in an individual written agreement between the Company or any Affiliate and the Participant shall supersede the foregoing definition with respect to Awards subject to such agreement; provided, however, that if no definition of Change in Control or any analogous term is set forth in such an individual written agreement, the foregoing definition shall apply.

(f)“Code” means the Internal Revenue Code of 1986, as amended.

(g)“Committee” means a committee of one or more Directors to whom authority has been delegated by the Board in accordance with Section 3(c).

(h)“Common Stock” means the common stock of the Company.

(i)“Company” means Cubic Corporation, a Delaware corporation.

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(j)“Consultant” means any person, including an advisor, who is (i) engaged by the Company or an Affiliate to render consulting or advisory services and is compensated for such services, or (ii) serving as a member of the board of directors of an Affiliate and is compensated for such services.  However, service solely as a Director, or payment of a fee for such service, shall not cause a Director to be considered a “Consultant” for purposes of the Plan.

(k)“Continuous Service” means that the Participant’s service with the Company or an Affiliate, whether as an Employee, Director or Consultant, is not interrupted or terminated.  A change in the capacity in which the Participant renders service to the Company or an Affiliate as an Employee, Consultant or Director or a change in the entity for which the Participant renders such service, provided that there is no interruption or termination of the Participant’s service with the Company or an Affiliate, shall not terminate a Participant’s Continuous Service.  For example, a change in status from an employee of the Company to a consultant to an Affiliate or to a Director shall not constitute an interruption of Continuous Service.  To the extent permitted by law, the Board or the chief executive officer of the Company, in that party’s sole discretion, may determine whether Continuous Service shall be considered interrupted in the case of any leave of absence approved by that party, including sick leave, military leave or any other personal leave.  Notwithstanding the foregoing, a leave of absence shall be treated as Continuous Service for purposes of vesting in a Stock Award only to such extent as may be provided in the Company’s leave of absence policy, in the written terms of any leave of absence agreement or policy applicable to the Participant, or as otherwise required by law.

(l)“Corporate Transaction” means the occurrence, in a single transaction or in a series of related transactions, of any one or more of the following events:

(i)a saleor other disposition of all or substantially all, as determined by the Board in its sole discretion, of the consolidated assets of the Company and its Subsidiaries;

(ii)a sale or other disposition of at least 90% of the outstanding securities of the Company;

(iii)the consummation of a merger, consolidation or similar transaction following which the Company is not the surviving corporation; or

(iv)the consummation of a merger, consolidation or similar transaction following which the Company is the surviving corporation but the shares of Common Stock outstanding immediately preceding the merger, consolidation or similar transaction are converted or exchanged by virtue of the merger, consolidation or similar transaction into other property, whether in the form of securities, cash or otherwise.

(m)“Covered Employee” shall have the meaning provided in Section 162(m)(3) of the Code and the regulations promulgated thereunder.

(n)“Director” means a member of the Board.

(o)“Disability” means the permanent and total disability of a person within the meaning of Section 22(e)(3) of the Code.

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(p)“Effective Date” means the effective date of this Plan document, which is the date that this Plan is first approved by the Company’s stockholders.

(q)“Employee” means any person employed by the Company or an Affiliate.  However, service solely as a Director, or payment of a fee for such services, shall not cause a Director to be considered an “Employee” for purposes of the Plan.

(r)“Entity” means a corporation, partnership, limited liability company or other entity.

(s)“Exchange Act” means the Securities Exchange Act of 1934, as amended.

(t)“Exchange Act Person” means any natural person, Entity or “group” (within the meaning of Section 13(d) or 14(d) of the Exchange Act), except that “Exchange Act Person” shall not include (i) the Company or any Subsidiary of the Company, (ii) any employee benefit plan of the Company or any Subsidiary of the Company or any trustee or other fiduciary holding securities under an employee benefit plan of the Company or any Subsidiary of the Company, (iii) an underwriter temporarily holding securities pursuant to an offering of such securities, (iv) an Entity Owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their Ownership of stock of the Company; or (v) any natural person, Entity or “group” (within the meaning of Section 13(d) or 14(d) of the Exchange Act) that, as of the Effective Date of the Plan as set forth in Section 13, is the Owner, directly or indirectly, of securities of the Company representing more than 50% of the combined voting power of the Company’s then outstanding securities.

(u)“Fair Market Value” means, as of any date, the value of the Common Stock determined as follows:

(i)If the Common Stock is listed on any established stock exchange or traded on the Nasdaq National Market or the Nasdaq SmallCap Market, the Fair Market Value of a share of Common Stock shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such exchange or market (or the exchange or market with the greatest volume of trading in the Common Stock) on the date of determination, as reported in The Wall Street Journalor such other source as the Board deems reliable.  Unless otherwise provided by the Board, if there is no closing sales price (or closing bid if no sales were reported) for the Common Stock on the date of determination, then the Fair Market Value shall be the closing selling price (or closing bid if no sales were reported) on the last preceding date for which such quotation exists.

(ii)In the absence of such markets for the Common Stock, the Fair Market Value shall be determined by the Board in good faith.

(v)“Incentive Stock Option” means an Option intended to qualify as an “incentive stock option” within the meaning of Section 422 of the Code and the regulations promulgated thereunder.

(w)“Non-Employee Director” means a Director who either (i) is not a current employee or officer of the Company or an Affiliate, does not receive compensation, either

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directly or indirectly, from the Company or an Affiliate for services rendered as a consultant or in any capacity other than as a Director (except for an amount as to which disclosure would not be required under Item 404(a) of Regulation S-K promulgated pursuant to the Securities Act (“Regulation S-K”)), does not possess an interest in any other transaction for which disclosure would be required under Item 404(a) of Regulation S-K, and is not engaged in a business relationship for which disclosure would be required pursuant to Item 404(b) of Regulation S-K; or (ii) is otherwise considered a “non-employee director” for purposes of Rule 16b-3.

(x)“Nonstatutory Stock Option” means any Option other than an Incentive Stock Option.

(y)“Officer” means a person who is an officer of the Company within the meaning of Section 16 of the Exchange Act and the rules and regulations promulgated thereunder.

(z)“Option” means an Incentive Stock Option or a Nonstatutory Stock Option to purchase shares of Common Stock granted pursuant to the Plan.

(aa)“Option Agreement” means a written agreement between the Company and an Optionholder evidencing the terms and conditions of an Option grant.  Each Option Agreement shall be subject to the terms and conditions of the Plan.

(bb)“Optionholder” means a person to whom an Option is granted pursuant to the Plan or, if permitted under the terms of this Plan, such other person who holds an outstanding Option.

(cc)“Other Stock Award” means an award based in whole or in part by reference to the Common Stock which is granted pursuant to the terms and conditions of Section 7(e).

(dd)“Other Stock Award Agreement” means a written agreement between the Company and a holder of an Other Stock Award evidencing the terms and conditions of an Other Stock Award grant.  Each Other Stock Award Agreement shall be subject to the terms and conditions of the Plan.

(ee)“Outside Director” means a Director who either (i) is not a current employee of the Company or an “affiliated corporation” (within the meaning of Treasury Regulations promulgated under Section 162(m) of the Code), is not a former employee of the Company or an “affiliated corporation” who receives compensation for prior services (other than benefits under a tax-qualified retirement plan) during the taxable year, has not been an officer of the Company or an “affiliated corporation,” and does not receive remuneration from the Company or an “affiliated corporation,” either directly or indirectly, in any capacity other than as a Director, or (ii) is otherwise considered an “outside director” for purposes of Section 162(m) of the Code.

(ff)“Own,” “Owned,” “Owner,” “Ownership”  A person or Entity shall be deemed to “Own,” to have “Owned,” to be the “Owner” of, or to have acquired “Ownership” of securities if such person or Entity, directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise, has or shares voting power, which includes the power to vote or to direct the voting, with respect to such securities.

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(gg)“Participant” means a person to whom an Award is granted pursuant to the Plan or, if applicable, such other person who holds an outstanding Stock Award.

(hh)“Performance Cash Award” means an award of cash granted pursuant to the terms and conditions of Section 7(e)(ii).

(ii)“Performance Criteria” means the one or more criteria that the Board shall select for purposes of establishing the Performance Goals for a Performance Period.  The Performance Criteria that shall be used to establish such Performance Goals may be based on any one of, or combination of, the following: (i) earnings per share; (ii) earnings before interest, taxes and depreciation; (iii) earnings before interest, taxes, depreciation and amortization; (iv) total stockholder return; (v) return on equity; (vi) return on assets, investment, or capital employed; (vii) operating margin; (viii) gross margin; (ix) operating income; (x) net income (before or after taxes); (xi) net operating income; (xii) net operating income after tax; (xiii) pre-tax profit; (xiv) operating cash flow; (xv) sales or revenue targets; (xvi) increases in revenue or product revenue; (xvii) expenses and cost reduction goals; (xviii) improvement in or attainment of working capital levels; (xix) economic value added (or an equivalent metric); (xx) market share; (xxi) cash flow; (xxii) cash flow per share; (xxiii) share price performance; (xxiv) debt reduction; (xxv) implementation or completion of projects or processes; (xxvi) customer satisfaction; (xxvii); stockholders’ equity; and (xxviii) other measures of performance selected by the Board.  Partial achievement of the specified criteria may result in the payment or vesting corresponding to the degree of achievement as specified in the Stock Award Agreement or the written terms of a Performance Cash Award.  The Board shall, in its sole discretion, define the manner of calculating the Performance Criteria it selects to use for such Performance Period.

(jj)“Performance Goals” means, for a Performance Period, the one or more goals established by the Board for the Performance Period based upon the Performance Criteria.  Performance Goals may be based on a Company-wide basis, with respect to one or more business units, divisions, Affiliates, or business segments, and in either absolute terms or relative to the performance of one or more comparable companies or a relevant index.  At the time of the grant of any Award, the Board is authorized to determine whether, when calculating the attainment of Performance Goals for a Performance Period: (i) to exclude restructuring and/or other nonrecurring charges; (ii) to exclude exchange rate effects, as applicable, for non-U.S. dollar denominated net sales and operating earnings; (iii) to exclude the effects of changes to generally accepted accounting standards required by the Financial Accounting Standards Board; (iv) to exclude the effects of any statutory adjustments to corporate tax rates; and (v) to exclude the effects of any “extraordinary items” as determined under generally accepted accounting principles.  In addition, the Board retains the discretion to reduce or eliminate the compensation or economic benefit due upon attainment of Performance Goals.

(kk)“Performance Period” means the period of time selected by the Board over which the attainment of one or more Performance Goals will be measured for the purpose of determining a Participant’s right to and the payment of a Stock Award or a Performance Cash Award.  Performance Periods may be of varying and overlapping duration, at the sole discretion of the Board.

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(ll)“Performance Stock Award” means a Stock Award granted under the terms and conditions of Section 7(e)(i).

(mm)“Restricted Stock Award” means an award of shares of Common Stock which is granted pursuant to the terms and conditions of Section 7(b).

(nn)“Restricted Stock Award Agreement” means a written agreement between the Company and a holder of a Restricted Stock Award evidencing the terms and conditions of a Restricted Stock Award grant.  Each Restricted Stock Award Agreement shall be subject to the terms and conditions of the Plan.

(oo)“Restricted Stock Unit Award” means a right to receive shares of Common Stock which is granted pursuant to the terms and conditions of Section 7(c).

(pp)“Restricted Stock Unit Award Agreement” means a written agreement between the Company and a holder of a Restricted Stock Unit Award evidencing the terms and conditions of a Restricted Stock Unit Award grant.  Each Restricted Stock Unit Award Agreement shall be subject to the terms and conditions of the Plan.

(qq)“Retirement” means, with respect to a Participant, the termination of the Participant’s employment (other than for Cause) at any time following the Participant’s attainment of age 55 and completion of 5 years of Continuous Service with the Company.

(rr)“Rule 16b-3” means Rule 16b-3 promulgated under the Exchange Act or any successor to Rule 16b-3, as in effect from time to time.

(ss)“Securities Act” means the Securities Act of 1933, as amended.

(tt)“Stock Appreciation Right” means a right to receive the appreciation on Common Stock that is granted pursuant to the terms and conditions of Section 7(d).

(uu)“Stock Appreciation Right Agreement” means a written agreement between the Company and a holder of a Stock Appreciation Right evidencing the terms and conditions of a Stock Appreciation Right grant.  Each Stock Appreciation Right Agreement shall be subject to the terms and conditions of the Plan.

(vv)“Stock Award” means any right granted under the Plan, including an Incentive Stock Option, a Nonstatutory Stock Option, a Stock Purchase Award, a Restricted Stock Award, a Stock Appreciation Right, a Restricted Stock Unit Award, a Performance Stock Award or any Other Stock Award.

(ww)“Stock Award Agreement” means a written agreement between the Company and a Participant evidencing the terms and conditions of a Stock Award grant.  Each Stock Award Agreement shall be subject to the terms and conditions of the Plan.

(xx)“Stock Purchase Award” means an award of shares of Common Stock which is granted pursuant to the terms and conditions of Section 7(a).

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(yy)“Stock Purchase Award Agreement” means a written agreement between the Company and a holder of a Stock Purchase Award evidencing the terms and conditions of a Stock Purchase Award grant.  Each Stock Purchase Award Agreement shall be subject to the terms and conditions of the Plan.

(zz)“Subsidiary” means, with respect to the Company, (i) any corporation of which more than 50% of the outstanding capital stock having ordinary voting power to elect a majority of the board of directors of such corporation (irrespective of whether, at the time, stock of any other class or classes of such corporation shall have or might have voting power by reason of the happening of any contingency) is at the time, directly or indirectly, Owned by the Company, and (ii) any partnership in which the Company has a direct or indirect interest (whether in the form of voting or participation in profits or capital contribution) of more than 50%.

(aaa)“Ten Percent Stockholder” means a person who Owns (or is deemed to Own pursuant to Section 424(d) of the Code) stock possessing more than 10% of the total combined voting power of all classes of stock of the Company or any Affiliate.

3.ADMINISTRATION.

(a)Administration by Board.  The Board shall administer the Plan unless and until the Board delegates administration of the Plan to a Committee or Committees, as provided in Section 3(c).

(b)Powers of Board.  The Board shall have the power, subject to, and within the limitations of, the express provisions of the Plan:

(i)To determine from time to time (A) which of the persons eligible under the Plan shall be granted Awards; (B) when and how each Award shall be granted; (C) what type or combination of types of Award shall be granted; (D) the provisions of each Award granted (which need not be identical), including the time or times when a person shall be permitted to receive cash or Common Stock pursuant to a Stock Award and the Performance Criteria upon which Performance Goals will be based; and (E) the number of shares of Common Stock with respect to which a Stock Award shall be granted to each such person.

(ii)To construe and interpret the Plan and Awards granted under it, and to establish, amend and revoke rules and regulations for its administration.  The Board, in the exercise of this power, may correct any defect, omission or inconsistency in the Plan or in any Stock Award Agreement or in the written terms of a Performance Cash Award, in a manner and to the extent it shall deem necessary or expedient to make the Plan or Award fully effective.

(iii)To settle all controversies regarding the Plan and Awards granted under it.

(iv)To accelerate the time at which a Stock Award may first be exercised or the time during which an Award or any part thereof will vest in accordance with the Plan, notwithstanding the provisions in the Award stating the time at which it may first be exercised or the time during which it will vest.

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(v)To suspend or terminate the Plan at any time.  Suspension or termination of the Plan shall not impair rights and obligations under any Stock Award granted while the Plan is in effect except with the written consent of the affected Participant.

(vi)To amend the Plan, subject to the limitations, if any, of applicable law. However, except as provided in Section 11(a) relating to Capitalization Adjustments, no amendment shall be effective unless approved by the stockholders of the Company to the extent stockholder approval is necessary to satisfy applicable law or applicable exchange listing requirements.  Rights under any Award granted before amendment of the Plan shall not be impaired by any amendment of the Plan unless (i) the Company requests the consent of the affected Participant, and (ii) such Participant consents in writing.

(vii)To submit any amendment to the Plan for stockholder approval, including, but not limited to, amendments to the Plan intended to satisfy the requirements of Section 162(m) of the Code and the regulations thereunder regarding the exclusion of performance-based compensation from the limit on corporate deductibility of compensation paid to Covered Employees.

(viii)To amend the Plan in any respect the Board deems necessary or advisable to provide eligible Employees with the maximum benefits provided or to be provided under the provisions of the Code and the regulations promulgated thereunder relating to Incentive Stock Options or to bring the Plan or Incentive Stock Options granted under it into compliance therewith.

(ix)To amend the terms of any one or more Awards or stock awards granted under the Prior Plan, including, but not limited to, amendments to provide terms more favorable than previously provided in the Award Agreement, subject to any specified limits in the Plan that are not subject to Board discretion; provided, however, that the rights under any Award shall not be impaired by any such amendment unless (i) the Company requests the consent of the affected Participant, and (ii) such Participant consents in writing.

(x)Generally, to exercise such powers and to perform such acts as the Board deems necessary or expedient to promote the best interests of the Company and that are not in conflict with the provisions of the Plan or Awards.

(xi)To adopt such procedures and sub-plans as are necessary or appropriate to permit participation in the Plan by Employees, Directors or Consultants who are foreign nationals or employed outside the United States.

(xii)To effect, at any time and from time to time, with the consent of any adversely affected Optionholder, (1) the reduction of the exercise price of any outstanding Option under the Plan, (2) the cancellation of any outstanding Option under the Plan and the grant in substitution therefor of (A) a new Option under the Plan or another equity plan of the Company covering the same or a different number of shares of Common Stock, (B) a Restricted Stock Award (including a stock bonus), (C) a Stock Appreciation Right, (D) Restricted Stock Unit, (E) an Other Stock Award, (F) cash and/or (G) other valuable consideration (as determined

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by the Board, in its sole discretion), or (3) any other action that is treated as a repricing under generally accepted accounting principles.

(c)Delegation to Committee.

(i)General.  The Board may delegate some or all of the administration of the Plan to a Committee or Committees.  If administration of the Plan is delegated to a Committee, the Committee shall have, in connection with the administration of the Plan, the powers theretofore possessed by the Board that have been delegated to the Committee, including the power to delegate to a subcommittee of the Committee any of the administrative powers the Committee is authorized to exercise (and references in this Plan to the Board shall thereafter be to the Committee or subcommittee), subject, however, to such resolutions, not inconsistent with the provisions of the Plan, as may be adopted from time to time by the Board.  The Board may retain the authority to concurrently administer the Plan with the Committee and may, at any time, revest in the Board some or all of the powers previously delegated.

(ii)Section 162(m) and Rule 16b-3 Compliance.  In the sole discretion of the Board, the Committee may consist solely of two or more Outside Directors, in accordance with Section 162(m) of the Code, or solely of two or more Non-Employee Directors, in accordance with Rule 16b-3.  In addition, the Board or the Committee, in its sole discretion, may (A) delegate to a Committee of Directors who need not be Outside Directors the authority to grant Awards to eligible persons who are either (I) not then Covered Employees and are not expected to be Covered Employees at the time of recognition of income resulting from such Stock Award, or (II) not persons with respect to whom the Company wishes to comply with Section 162(m) of the Code, or (B) delegate to a Committee of Directors who need not be Non-Employee Directors the authority to grant Stock Awards to eligible persons who are not then subject to Section 16 of the Exchange Act.

(d)Effect of Board’s Decision. All determinations, interpretations and constructions made by the Board in good faith shall not be subject to review by any person and shall be final, binding and conclusive on all persons.

(e)Arbitration.   Any dispute or claim concerning any Awards granted (or not granted) pursuant to the Plan or any disputes or claims relating to or arising out of the Plan shall be fully, finally and exclusively resolved by binding and confidential arbitration conducted by a single arbitrator who is a lawyer with at least 20 years Business law experience, pursuant to the Commercial Arbitration Rules of the American Arbitration Associationin San Diego, California. The Company shall pay all arbitration fees.  In addition to any other relief, the arbitrator may award to the prevailing party recovery of its attorneys’ fees and costs.  By accepting an Award, Participants and the Company waive their respective rights to have any such disputes or claims tried by a judge or jury.

4.SHARES SUBJECT TO THE PLAN.

(a)Share Reserve.  Subject to the provisions of Section 11(a) relating to Capitalization Adjustments, the number of shares of Common Stock that may be issued pursuant to Stock Awards shall not exceed, in the aggregate, four million five hundred thousand

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(4,500,000) shares of Common Stock.  Such number of shares reserved shall be approved by the stockholders at a Special Meeting to be called by the Board of Directors as part of the approval of this Plan.  Shares may also be issued in connection with a merger or acquisition as permitted by NASD Rule 4350(i)(1)(A)(iii) or, if applicable, NYSE Listed Company Manual Section 303A.08, or AMEX Company Guide Section 711 and such issuance shall not reduce the number of shares available for issuance under the Plan.

(b)Reversion of Shares to the Share Reserve.  If any (i) Stock Award shall for any reason expire or otherwise terminate, in whole or in part, without having been exercised in full, (ii) shares of Common Stock issued to a Participant pursuant to a Stock Award (including the Stock Awards transferred from the Prior Plan on the Effective Date of this Plan) are forfeited to or repurchased by the Company, including any repurchase or forfeiture caused by the failure to meet a contingency or condition required for the vesting of such shares, or (iii) Stock Award is settled in cash, then the shares of Common Stock not issued under such Stock Award, or forfeited to or repurchased by the Company, shall revert to and again become available for issuance under the Plan.  If any shares subject to a Stock Award are not delivered to a Participant because the Stock Award is exercised through a reduction of shares subject to the Stock Award (i.e., “net exercised”) or an appreciation distribution in respect of a Stock Appreciation Right is paid in shares of Common Stock, the number of subject to the Stock Award that are not delivered to the Participant shall remain available for subsequent issuance under the Plan.  If any shares subject to a Stock Award are not delivered to a Participant because such shares are withheld in satisfaction of the withholding of taxes incurred in connection with the exercise of an Option, Stock Appreciation Right, or the issuance of shares under a Stock Purchase Award, Restricted Stock Award, Restricted Stock Unit Award, or Other Stock Award, the number of shares that are not delivered to the Participant shall remain available for subsequent issuance under the Plan.  If the exercise price of any Stock Award is satisfied by tendering shares of Common Stock held by the Participant (either by actual delivery or attestation), then the number of shares so tendered shall remain available for subsequent issuance under the Plan.

(c)Incentive Stock Option Limit.  Notwithstanding anything to the contrary in this Section 4(b), subject to the provisions of Section 11(a) relating to Capitalization Adjustments the aggregate maximum number of shares of Common Stock that may be issued pursuant to the exercise of Incentive Stock Options shall be four million five hundred thousand (4,500,000) shares of Common Stock.

(d)Source of Shares.  The stock issuable under the Plan shall be shares of authorized but unissued or reacquired Common Stock, including shares repurchased by the Company.

5.ELIGIBILITY.

(a)Eligibility for Specific Stock Awards.  Incentive Stock Options may be granted only to Employees.  Stock Awards other than Incentive Stock Options may be granted to Employees, Directors and Consultants.

(b)Ten Percent Stockholders.  A Ten Percent Stockholder shall not be granted an Incentive Stock Option unless the exercise price of such Option is at least 110% of the Fair

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Market Value of the Common Stock on the date of grant and the Option is not exercisable after the expiration of five years from the date of grant.

(c)Section 162(m) Limitation on Annual Grants.  Subject to the provisions of Section 11(a) relating to Capitalization Adjustments, at such time as the Company may be subject to the applicable provisions of Section 162(m) of the Code, no Employee shall be eligible to be granted during any calendar year Stock Awards whose value is determined by reference to an increase over an exercise or strike price of at least 100% of the Fair Market Value of the Common Stock on the date the Stock Award is granted covering more than four million (4,000,000) shares of Common Stock.

(d)Consultants.  A Consultant shall not be eligible for the grant of a Stock Award if, at the time of grant, a Form S-8 Registration Statement under the Securities Act (“Form S-8”) is not available to register either the offer or the sale of the Company’s securities to such Consultant because of the nature of the services that the Consultant is providing to the Company, because the Consultant is not a natural person, or because of any other rule governing the use of Form S-8.

6.OPTION PROVISIONS.

Each Option shall be in such form and shall contain such terms and conditions as the Board shall deem appropriate.  All Options shall be separately designated Incentive Stock Options or Nonstatutory Stock Options at the time of grant, and, if certificates are issued, a separate certificate or certificates shall be issued for shares of Common Stock purchased on exercise of each type of Option. If an Option is not specifically designated as an Incentive Stock Option, then the Option shall be a Nonstatutory Stock Option. The provisions of separate Options need not be identical; provided, however, that each Option Agreement shall include (through incorporation of provisions hereof by reference in the Option Agreement or otherwise) the substance of each of the following provisions:

(a)Term.  Subject to the provisions of Section 5(b), no Option shall be exercisable after the expiration of 10 years from the date of its grant or such shorter period specified in the Option Agreement.

(b)Exercise Price of an Incentive Stock Option.  Subject to the provisions of Section 5(b) regarding Ten Percent Stockholders, the exercise price of each Incentive Stock Option shall be not less than 100% of the Fair Market Value of the Common Stock subject to the Option on the date the Option is granted.  Notwithstanding the foregoing, an Incentive Stock Option may be granted with an exercise price lower than that set forth in the preceding sentence if such Option is granted pursuant to an assumption or substitution for another option in a manner consistent with the provisions of Section 424(a) of the Code.

(c)Exercise Price of a Nonstatutory Stock Option.  The exercise price of each Nonstatutory Stock Option shall be not less than 100% of the Fair Market Value of the Common Stock subject to the Option on the date the Option is granted. Notwithstanding the foregoing, a Nonstatutory Stock Option may be granted with an exercise price lower than 100% of the Fair Market Value of the Common Stock if such Option is granted pursuant to an assumption or

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substitution for another option in a manner consistent with the provisions of Section 424(a) of the Code.

(d)Consideration.  The purchase price of Common Stock acquired pursuant to the exercise of an Option shall be paid, to the extent permitted by applicable law and as determined by the Board in its sole discretion, by any combination of the methods of payment set forth below.  The Board shall have the authority to grant Options that do not permit all of the following methods of payment (or otherwise restrict the ability to use certain methods) and to grant Options that require the consent of the Company to utilize a particular method of payment.  The methods of payment permitted by this Section 6(d) are:

(i)by cash or check;

(ii)bank draft or money order payable to the Company;

(iii)pursuant to a program developed under Regulation T as promulgated by the Federal Reserve Board that, prior to the issuance of Common Stock, results in either the receipt of cash (or check) by the Company or the receipt of irrevocable instructions to pay the aggregate exercise price to the Company from the sales proceeds;

(iv)by delivery to the Company (either by actual delivery or attestation) of shares of Common Stock;

(v)by a “net exercise” arrangement pursuant to which the Company will reduce the number of shares of Common Stock issued upon exercise by the largest whole number of shares with a Fair Market Value that does not exceed the aggregate exercise price; provided, however, that the Company shall accept a cash or other payment from the Participant to the extent of any remaining balance of the aggregate exercise price not satisfied by such reduction in the number of whole shares to be issued; provided, further, that shares of Common Stock will no longer be outstanding under an Option and will not be exercisable thereafter to the extent that (A) shares are used to pay the exercise price pursuant to the “net exercise,” (B) shares are delivered to the Participant as a result of such exercise, and (C) shares are withheld to satisfy tax withholding obligations;  or

(vi)in any other form of legal consideration that may be acceptable to the Board.

(e)Transferability of Options.  The Board may, in its sole discretion, impose such limitations on the transferability of Options as the Board shall determine.  In the absence of such a determination by the Board to the contrary, the following restrictions on the transferability of Options shall apply:

(i)Restrictions on Transfer.  An Option shall not be transferable except by will or by the laws of descent and distribution and shall be exercisable during the lifetime of the Optionholder only by the Optionholder; provided, however, that the Board may, in its sole discretion, permit transfer of the Option in a manner consistent with applicable tax and securities laws upon the Optionholder’s request.

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(ii)Domestic Relations Orders.  Notwithstanding the foregoing, an Option may be transferred pursuant to a domestic relations order.

(iii)Beneficiary Designation.  Notwithstanding the foregoing, the Optionholder may, by delivering written notice to the Company, in a form provided by or otherwise satisfactory to the Company, designate a third party who, in the event of the death of the Optionholder, shall thereafter be entitled to exercise the Option.

(f)Vesting Generally.  The total number of shares of Common Stock subject to an Option may vest and therefore become exercisable in periodic installments that may or may not be equal.  The Option may be subject to such other terms and conditions on the time or times when it may or may not be exercised (which may be based on the satisfaction of Performance Goals or other criteria) as the Board may deem appropriate.  The vesting provisions of individual Options may vary.  The provisions of this Section 6(f) are subject to any Option provisions governing the minimum number of shares of Common Stock as to which an Option may be exercised.

(g)Termination of Continuous Service.  In the event that an Optionholder’s Continuous Service terminates (other than for Cause or Retirement or upon the Optionholder’s death or Disability), the Optionholder may exercise his or her Option (to the extent that the Optionholder was entitled to exercise such Option as of the date of termination of Continuous Service) but only within such period of time ending on the earlier of (i) the date 3 months following the termination of the Optionholder’s Continuous Service (or such longer or shorter period specified in the Option Agreement), or (ii) the expiration of the term of the Option as set forth in the Option Agreement.  If, after termination of Continuous Service, the Optionholder does not exercise his or her Option within the time specified herein or in the Option Agreement (as applicable), the Option shall terminate.

(h)Extension of Termination Date.  An Optionholder’s Option Agreement may provide that if the exercise of the Option following the termination of the Optionholder’s Continuous Service (other than for Cause or Retirement or upon the Optionholder’s death or Disability) would be prohibited at any time solely because the issuance of shares of Common Stock would violate the registration requirements under the Securities Act, then the Option shall terminate on the earlier of (i) the expiration of a period of 3 months after the termination of the Optionholder’s Continuous Service during which the exercise of the Option would not be in violation of such registration requirements, or (ii) the expiration of the term of the Option as set forth in the Option Agreement.

(i)Disability of Optionholder.  In the event that an Optionholder’s Continuous Service terminates as a result of the Optionholder’s Disability, the Optionholder may exercise his or her Option (to the extent that the Optionholder was entitled to exercise such Option as of the date of termination of Continuous Service), but only within such period of time ending on the earlier of (i) the date 12 months following such termination of Continuous Service (or such longer or shorter period specified in the Option Agreement), or (ii) the expiration of the term of the Option as set forth in the Option Agreement.  If, after termination of Continuous Service, the Optionholder does not exercise his or her Option within the time specified herein or in the Option Agreement (as applicable), the Option shall terminate.

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(j)Death of Optionholder.  In the event that (i) an Optionholder’s Continuous Service terminates as a result of the Optionholder’s death, or (ii) the Optionholder dies within the period (if any) specified in the Option Agreement after the termination of the Optionholder’s Continuous Service for a reason other than death, then the Option may be exercised (to the extent the Optionholder was entitled to exercise such Option as of the date of death) by the Optionholder’s estate, by a person who acquired the right to exercise the Option by bequest or inheritance or by a person designated to exercise the option upon the Optionholder’s death, but only within the period ending on the earlier of (i) the date 18 months following the date of death (or such longer or shorter period specified in the Option Agreement), or (ii) the expiration of the term of such Option as set forth in the Option Agreement.  If, after the Optionholder’s death, the Option is not exercised within the time specified herein or in the Option Agreement (as applicable), the Option shall terminate.

(k)Retirement of Optionholder.  In the event that an Optionholder’s Continuous Service terminates as a result of the Optionholder’s Retirement, the Optionholder may exercise his or her Option (to the extent that the Optionholder was entitled to exercise such Option as of the date of termination of Continuous Service), but only within such period of time ending on the earlier of (i) the date 12 months following such termination of Continuous Service (or such longer or shorter period specified in the Option Agreement), or (ii) the expiration of the term of the Option as set forth in the Option Agreement.  If, after termination of Continuous Service, the Optionholder does not exercise his or her Option within the time specified herein or in the Option Agreement (as applicable), the Option shall terminate.

(l)Termination for Cause.  Except as explicitly provided otherwise in an Optionholder’s Option Agreement, in the event that an Optionholder’s Continuous Service is terminated for Cause, the Option shall terminate upon the termination date of such Optionholder’s Continuous Service, and the Optionholder shall be prohibited from exercising his or her Option from and after the time of such termination of Continuous Service.

7.PROVISIONS OF STOCK AWARDS OTHER THAN OPTIONS.

(a)Stock Purchase Awards.  Each Stock Purchase Award Agreement shall be in such form and shall contain such terms and conditions as the Board shall deem appropriate.  To the extent consistent with the Company’s Bylaws, at the Board’s election, shares of Common Stock may be (x) held in book entry form subject to the Company’s instructions until any restrictions relating to the Stock Purchase Award lapse; or (y) evidenced by a certificate, which certificate shall be held in such form and manner as determined by the Board.  The terms and conditions of Stock Purchase Award Agreements may change from time to time, and the terms and conditions of separate Stock Purchase Award Agreements need not be identical, provided, however, that each Stock Purchase Award Agreement shall include (through incorporation of the provisions hereof by reference in the Agreement or otherwise) the substance of each of the following provisions:

(i)Purchase Price.  At the time of the grant of a Stock Purchase Award, the Board will determine the price to be paid by the Participant for each share subject to the Stock Purchase Award.  To the extent required by applicable law, the price to be paid by the Participant

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for each share of the Stock Purchase Award will not be less than the par value of a share of Common Stock.

(ii)Consideration.  At the time of the grant of a Stock Purchase Award, the Board will determine the consideration permissible for the payment of the purchase price of the Stock Purchase Award.  The purchase price of Common Stock acquired pursuant to the Stock Purchase Award shall be paid either: (A) in cash or by check at the time of purchase, (B) by past services actually rendered to the Company or an Affiliate, or (C) in any other form of legal consideration that may be acceptable to the Board in its sole discretion and permissible under applicable law.

(iii)Vesting. Shares of Common Stock acquired under a Stock Purchase Award may be subject to a share repurchase right or option in favor of the Company in accordance with a vesting schedule to be determined by the Board.

(iv)Termination of Participant’s Continuous Service. In the event that a Participant’s Continuous Service terminates, the Company shall have the right, but not the obligation, to repurchase or otherwise reacquire, any or all of the shares of Common Stock held by the Participant that have not vested as of the date of termination under the terms of the Stock Purchase Award Agreement.  At the Board’s election, the price paid for all shares of Common Stock so repurchased or reacquired by the Company may be at the lesser of: (A) the Fair Market Value on the relevant date, or (B) the Participant’s original cost for such shares.  The Company shall not be required to exercise its repurchase or reacquisition option until at least six (6) months (or such longer or shorter period of time necessary to avoid a charge to earnings for financial accounting purposes) have elapsed following the Participant’s purchase of the shares of Common Stock acquired pursuant to the Stock Purchase Award unless otherwise determined by the Board or provided in the Stock Purchase Award Agreement.

(v)Transferability. Rights to purchase or receive shares of Common Stock granted under a Stock Purchase Award shall be transferable by the Participant only upon such terms and conditions as are set forth in the Stock Purchase Award Agreement, as the Board shall determine in its sole discretion, and so long as Common Stock awarded under the Stock Purchase Award remains subject to the terms of the Stock Purchase Award Agreement.

(b)Restricted Stock Awards.  Each Restricted Stock Award Agreement shall be in such form and shall contain such terms and conditions as the Board shall deem appropriate.  To the extent consistent with the Company’s Bylaws, at the Board’s election, shares of Common Stock may be (x) held in book entry form subject to the Company’s instructions until any restrictions relating to the Restricted Stock Award lapse; or (y) evidenced by a certificate, which certificate shall be held in such form and manner as determined by the Board.  The terms and conditions of Restricted Stock Award Agreements may change from time to time, and the terms and conditions of separate Restricted Stock Award Agreements need not be identical, provided, however, that each Restricted Stock Award Agreement shall include (through incorporation of provisions hereof by reference in the agreement or otherwise) the substance of each of the following provisions:

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(i)Consideration.  A Restricted Stock Award may be awarded in consideration for (A) past services actually rendered to the Company or an Affiliate, or (B) any other form of legal consideration that may be acceptable to the Board in its sole discretion and permissible under applicable law.

(ii)Vesting.  Shares of Common Stock awarded under the Restricted Stock Award Agreement may be subject to forfeiture to the Company in accordance with a vesting schedule to be determined by the Board.

(iii)Termination of Participant’s Continuous Service.  In the event a Participant’s Continuous Service terminates, the Company may receive via a forfeiture condition, any or all of the shares of Common Stock held by the Participant which have not vested as of the date of termination of Continuous Service under the terms of the Restricted Stock Award Agreement.

(iv)Transferability.  Rights to acquire shares of Common Stock under the Restricted Stock Award Agreement shall be transferable by the Participant only upon such terms and conditions as are set forth in the Restricted Stock Award Agreement, as the Board shall determine in its sole discretion, so long as Common Stock awarded under the Restricted Stock Award Agreement remains subject to the terms of the Restricted Stock Award Agreement.

(c)Restricted Stock Unit Awards.  Each Restricted Stock Unit Award Agreement shall be in such form and shall contain such terms and conditions as the Board shall deem appropriate.  The terms and conditions of Restricted Stock Unit Award Agreements may change from time to time, and the terms and conditions of separate Restricted Stock Unit Award Agreements need not be identical, provided, however, that each Restricted Stock Unit Award Agreement shall include (through incorporation of the provisions hereof by reference in the Agreement or otherwise) the substance of each of the following provisions:

(i)Consideration.  At the time of grant of a Restricted Stock Unit Award, the Board will determine the consideration, if any, to be paid by the Participant upon delivery of each share of Common Stock subject to the Restricted Stock Unit Award. The consideration to be paid (if any) by the Participant for each share of Common Stock subject to a Restricted Stock Unit Award may be paid in any form of legal consideration that may be acceptable to the Board in its sole discretion and permissible under applicable law.

(ii)Vesting.  At the time of the grant of a Restricted Stock Unit Award, the Board may impose such restrictions or conditions to the vesting of the Restricted Stock Unit Award as it, in its sole discretion, deems appropriate.

(iii)Payment.  A Restricted Stock Unit Award may be settled by the delivery of shares of Common Stock, their cash equivalent, any combination thereof or in any other form of consideration, as determined by the Board and contained in the Restricted Stock Unit Award Agreement.

(iv)Additional Restrictions.  At the time of the grant of a Restricted Stock Unit Award, the Board, as it deems appropriate, may impose such restrictions or conditions that

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delay the delivery of the shares of Common Stock (or their cash equivalent) subject to a Restricted Stock Unit Award to a time after the vesting of such Restricted Stock Unit Award.

(v)Dividend Equivalents.  Dividend equivalents may be credited in respect of shares of Common Stock covered by a Restricted Stock Unit Award, as determined by the Board and contained in the Restricted Stock Unit Award Agreement.  At the sole discretion of the Board, such dividend equivalents may be converted into additional shares of Common Stock covered by the Restricted Stock Unit Award in such manner as determined by the Board.  Any additional shares covered by the Restricted Stock Unit Award credited by reason of such dividend equivalents will be subject to all the terms and conditions of the underlying Restricted Stock Unit Award Agreement to which they relate.

(vi)Termination of Participant’s Continuous Service.  Except as otherwise provided in the applicable Restricted Stock Unit Award Agreement, such portion of the Restricted Stock Unit Award that has not vested will be forfeited upon the Participant’s termination of Continuous Service.

(vii)Compliance with Section 409A of the Code.   Notwithstanding anything to the contrary set forth herein, any Restricted Stock Unit Award granted under the Plan that is not exempt from the requirements of Section 409A of the Code shall contain such provisions so that such Restricted Stock Unit Award will comply with the requirements of Section 409A of the Code.  Such restrictions, if any, shall be determined by the Board and contained in the Restricted Stock Unit Award Agreement evidencing such Restricted Stock Unit Award.  For example, such restrictions may include, without limitation, a requirement that any Common Stock that is to be issued in a year following the year in which the Restricted Stock Unit Award vests must be issued in accordance with a fixed pre-determined schedule.

(d)Stock Appreciation Rights.  Each Stock Appreciation Right Agreement shall be in such form and shall contain such terms and conditions as the Board shall deem appropriate.  Stock Appreciation Rights may be granted as stand-alone Stock Awards or in tandem with other Stock Awards.  The terms and conditions of Stock Appreciation Right Agreements may change from time to time, and the terms and conditions of separate Stock Appreciation Right Agreements need not be identical; provided, however, that each Stock Appreciation Right Agreement shall include (through incorporation of the provisions hereof by reference in the Agreement or otherwise) the substance of each of the following provisions:

(i)Term.  No Stock Appreciation Right shall be exercisable after the expiration of 10 years from the date of its grant or such shorter period specified in the Stock Appreciation Right Agreement.

(ii)Strike Price. Each Stock Appreciation Right will be denominated in shares of Common Stock equivalents.  The strike price of each Stock Appreciation Right granted as a stand-alone or tandem Stock Award shall not be less than 100% of the Fair Market Value of the Common Stock equivalents subject to the Stock Appreciation Right on the date of grant.

(iii)Calculation of Appreciation.  The appreciation distribution payable on the exercise of a Stock Appreciation Right will be not greater than an amount equal to the excess

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of (A) the aggregate Fair Market Value (on the date of the exercise of the Stock Appreciation Right) of a number of shares of Common Stock equal to the number of share of Common Stock equivalents in which the Participant is vested under such Stock Appreciation Right, and with respect to which the Participant is exercising the Stock Appreciation Right on such date, over (B) the strike price that will be determined by the Board at the time of grant of the Stock Appreciation Right.

(iv)Vesting.  At the time of the grant of a Stock Appreciation Right, the Board may impose such restrictions or conditions to the vesting of such Stock Appreciation Right as it, in its sole discretion, deems appropriate.

(v)Exercise.  To exercise any outstanding Stock Appreciation Right, the Participant must provide written notice of exercise to the Company in compliance with the provisions of the Stock Appreciation Right Agreement evidencing such Stock Appreciation Right.

(vi)Payment.  The appreciation distribution in respect to a Stock Appreciation Right may be paid in Common Stock, in cash, in any combination of the two or in any other form of consideration, as determined by the Board and contained in the Stock Appreciation Right Agreement evidencing such Stock Appreciation Right.

(vii)Termination of Continuous Service.  In the event that a Participant’s Continuous Service terminates (other than for Cause or Retirement), the Participant may exercise his or her Stock Appreciation Right (to the extent that the Participant was entitled to exercise such Stock Appreciation Right as of the date of termination) but only within such period of time ending on the earlier of (A) the date three (3) months following the termination of the Participant’s Continuous Service (or such longer or shorter period specified in the Stock Appreciation Right Agreement), or (B) the expiration of the term of the Stock Appreciation Right as set forth in the Stock Appreciation Right Agreement.  If, after termination, the Participant does not exercise his or her Stock Appreciation Right within the time specified herein or in the Stock Appreciation Right Agreement (as applicable), the Stock Appreciation Right shall terminate.

(viii)Disability.  In the event that a the Participant’s Continuous Service terminates as a result of his or her Disability, such Participant may exercise his or her Stock Appreciation Right (to the extent that he or she was entitled to exercise such Stock Appreciation Right as of the date of termination of Continuous Service), but only within such period of time ending on the earlier of (i) the date 12 months following such termination of Continuous Service (or such longer or shorter period specified in the Stock Appreciation Right Agreement), or (ii) the expiration of the term of the Stock Appreciation Right as set forth in the Stock Appreciation Right Agreement.  If, after termination of Continuous Service, the Stock Appreciation Right holder does not exercise his or her Stock Appreciation Right within the time specified herein or in the Stock Appreciation Right Agreement (as applicable), the Stock Appreciation Right shall terminate.

(ix)Death of Participant.  In the event that (i) a Participant’s Continuous Service terminates as a result of his or her death, or (ii) the Participant dies within the period (if

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any) specified in the Stock Appreciation Right Agreement after the termination of the Participant’s Continuous Service for a reason other than death, then the Stock Appreciation Right may be exercised (to the extent the Participant was entitled to exercise such Stock Appreciation Right as of the date of death) by the Participant’s estate, by a person who acquired the right to exercise the Stock Appreciation Right by bequest or inheritance or by a person designated to exercise the Stock Appreciation Right upon the Participant’s death, but only within the period ending on the earlier of (i) the date 18 months following the date of death (or such longer or shorter period specified in the Stock Appreciation Right Agreement), or (ii) the expiration of the term of such Stock Appreciation Right as set forth in the Stock Appreciation Right Agreement.  If, after the Participant’s death, the Stock Appreciation Right is not exercised within the time specified herein or in the Stock Appreciation Right Agreement (as applicable), the Stock Appreciation Right shall terminate.

(x)Retirement of Participant.  In the event that an Participant’s Continuous Service terminates as a result of his or her Retirement, he or she may exercise his or her Stock Appreciation Right (to the extent that he or she was entitled to exercise such Stock Appreciation Right as of the date of termination of Continuous Service), but only within such period of time ending on the earlier of (i) the date 12 months following such termination of Continuous Service (or such longer or shorter period specified in the Stock Appreciation Right Agreement), or (ii) the expiration of the term of the Stock Appreciation Right as set forth in the Stock Appreciation Right Agreement.  If, after termination of Continuous Service, the Participant does not exercise his or her Stock Appreciation Right within the time specified herein or in the Stock Appreciation Right Agreement (as applicable), the Stock Appreciation Right shall terminate.

(xi)Termination for Cause.  Except as explicitly provided otherwise in an Participant’s Stock Appreciation Right Agreement, in the event that a Participant’s Continuous Service is terminated for Cause, the Stock Appreciation Right shall terminate upon the termination date of such Participant’s Continuous Service, and the Participant shall be prohibited from exercising his or her Stock Appreciation Right from and after the time of such termination of Continuous Service.

(xii)Compliance with Section 409A of the Code.   Notwithstanding anything to the contrary set forth herein, any Stock Appreciation Rights granted under the Plan that are not exempt from the requirements of Section 409A of the Code shall contain such provisions so that such Stock Appreciation Rights will comply with the requirements of Section 409A of the Code.  Such restrictions, if any, shall be determined by the Board and contained in the Stock Appreciation Right Agreement evidencing such Stock Appreciation Right.  For example, such restrictions may include, without limitation, a requirement that a Stock Appreciation Right that is to be paid wholly or partly in cash must be exercised and paid in accordance with a fixed pre-determined schedule.

(e)Performance Awards.

(i)Performance Stock Awards.  A Performance Stock Award is a Stock Award that may be granted, may vest, or may be exercised based upon the attainment during a Performance Period of certain Performance Goals.  A Performance Stock Award may, but need not, require the completion of a specified period of Continuous Service. The length of any

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Performance Period, the Performance Goals to be achieved during the Performance Period, and the measure of whether and to what degree such Performance Goals have been attained shall be conclusively determined by the Committee in its sole discretion.  The maximum benefit to be received by any Participant in any calendar year attributable to Stock Awards described in this Section 7(e) shall not exceed the value of four million (4,000,000) shares of Common Stock.

(ii)Performance Cash Awards.  A Performance Cash Award is a cash award that may be granted upon the attainment during a Performance Period of certain Performance Goals.  A Performance Cash Award may also require the completion of a specified period of Continuous Service.  The length of any Performance Period, the Performance Goals to be achieved during the Performance Period, and the measure of whether and to what degree such Performance Goals have been attained shall be conclusively determined by the Committee in its sole discretion.  The maximum benefit to be received by any Participant in any calendar year attributable to cash awards described in this Section 7(e) shall not exceed one million six hundred thousand dollars ($1,600,000).

(f)Other Stock Awards.  Other forms of Stock Awards valued in whole or in part by reference to, or otherwise based on, Common Stock may be granted either alone or in addition to Stock Awards provided for under Section 6 and the preceding provisions of this Section 7.  Subject to the provisions of the Plan, the Board shall have sole and complete authority to determine the persons to whom and the time or times at which such Other Stock Awards will be granted, the number of shares of Common Stock (or the cash equivalent thereof) to be granted pursuant to such Other Stock Awards and all other terms and conditions of such Other Stock Awards.

8.COVENANTS OF THE COMPANY.

(a)Availability of Shares.  During the terms of the Stock Awards, the Company shall keep available at all times the number of shares of Common Stock required to satisfy such Stock Awards.

(b)Securities Law Compliance.  The Company shall seek to obtain from each regulatory commission or agency having jurisdiction over the Plan such authority as may be required to grant Stock Awards and to issue and sell shares of Common Stock upon exercise of the Stock Awards; provided, however, that this undertaking shall not require the Company to register under the Securities Act the Plan, any Stock Award or any Common Stock issued or issuable pursuant to any such Stock Award.  If, after reasonable efforts, the Company is unable to obtain from any such regulatory commission or agency the authority that counsel for the Company deems necessary for the lawful issuance and sale of Common Stock under the Plan, the Company shall be relieved from any liability for failure to issue and sell Common Stock upon exercise of such Stock Awards unless and until such authority is obtained.

9.USE OF PROCEEDS FROM SALES OF COMMON STOCK.

Proceeds from the sale of shares of Common Stock pursuant to Stock Awards shall constitute general funds of the Company.

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10.MISCELLANEOUS.

(a)Corporate Action Constituting Grant of Stock Awards.  Corporate action constituting an offer by the Company of Common Stock to any Participant under the terms of a Stock Award shall only be deemed completed as of the date of such corporate action, unless otherwise determined by the Board, regardless of when the instrument, certificate, or letter evidencing the Stock Award is actually received or accepted by the Participant.

(b)Stockholder Rights.  No Participant shall be deemed to be the holder of, or to have any of the rights of a holder with respect to, any shares of Common Stock subject to any Stock Award unless and until such Participant has satisfied all requirements for exercise of the Stock Award pursuant to its terms.

(c)No Employment or Other Service Rights.  Nothing in the Plan, any Award Agreement or other instrument executed thereunder or in connection with any Award granted pursuant to the Plan shall confer upon any Participant any right to continue to serve the Company or an Affiliate in the capacity in effect at the time the Award was granted or shall affect the right of the Company or an Affiliate to terminate (i) the employment of an Employee with or without notice and with or without cause, (ii) the service of a Consultant pursuant to the terms of such Consultant’s agreement with the Company or an Affiliate, or (iii) the service of a Director of the Company or an Affiliate.

(d)Incentive Stock Option $100,000 Limitation.  To the extent that the aggregate Fair Market Value (determined at the time of grant) of Common Stock with respect to which Incentive Stock Options are exercisable for the first time by any Optionholder during any calendar year (under all plans of the Company and any Affiliates) exceeds $100,000, the Options or portions thereof that exceed such limit (according to the order in which they were granted) shall be treated as Nonstatutory Stock Options, notwithstanding any contrary provision of the applicable Option Agreement(s).

(e)Investment Assurances.  The Company may require a Participant, as a condition of exercising or acquiring Common Stock under any Stock Award, (i) to give written assurances satisfactory to the Company as to the Participant’s knowledge and experience in financial and business matters and/or to employ a purchaser representative reasonably satisfactory to the Company who is knowledgeable and experienced in financial and business matters and that he or she is capable of evaluating, alone or together with the purchaser representative, the merits and risks of exercising the Stock Award; and (ii) to give written assurances satisfactory to the Company stating that the Participant is acquiring Common Stock subject to the Stock Award for the Participant’s own account and not with any present intention of selling or otherwise distributing the Common Stock.  The foregoing requirements, and any assurances given pursuant to such requirements, shall be inoperative if (x) the issuance of the shares upon the exercise or acquisition of Common Stock under the Stock Award has been registered under a then currently effective registration statement under the Securities Act, or (y) as to any particular requirement, a determination is made by counsel for the Company that such requirement need not be met in the circumstances under the then applicable securities laws.  The Company may, upon advice of counsel to the Company, place legends on stock certificates issued under the Plan as such

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counsel deems necessary or appropriate in order to comply with applicable securities laws, including, but not limited to, legends restricting the transfer of the Common Stock.

(f)Withholding Obligations.  The Company may, in its sole discretion, satisfy any federal, state or local tax withholding obligation relating to an Award by any of the following means (in addition to the Company’s right to withhold from any payment to the Participant by the Company) or by a combination of such means: (i) causing the Participant to tender a cash payment; (ii)  withholding shares of Common Stock from the shares of Common Stock issued or otherwise issuable to the Participant in connection with a Stock Award; or (iii) by such other method as may be set forth in the Award Agreement.

(g)Electronic Delivery.  Any reference herein to a “written” agreement or document shall include any agreement or document delivered electronically or posted on the Company’s intranet.

11.ADJUSTMENTS UPON CHANGES IN COMMON STOCK; OTHER CORPORATE EVENTS.

(a)Capitalization Adjustments.  If any change is made in, or other events occur with respect to, the Common Stock subject to the Plan or subject to any Stock Award after the Effective Date without the receipt of consideration by the Company (through merger, consolidation, reorganization, recapitalization, reincorporation, stock dividend, dividend in property other than cash, stock split, liquidating dividend, combination of shares, exchange of shares, change in corporate structure or other transaction not involving the receipt of consideration by the Company (each a “Capitalization Adjustment”)), the Board shall appropriately adjust: (i) the class(es) and maximum number of securities subject to the Plan pursuant to Section 4(a), (ii) the class(es) and maximum number of securities that may be issued pursuant to the exercise of Incentive Stock Options pursuant to Section 4(c), (iii) the class(es) and maximum number of securities that may be awarded to any person pursuant to Section 5(c) and 7(e)(i) , and (iv) the class(es) and number of securities and price per share of stock subject to outstanding Stock Awards.  The Board shall make such adjustments, and its determination shall be final, binding and conclusive.  (Notwithstanding the foregoing, the conversion of any convertible securities of the Company shall not be treated as a transaction “without receipt of consideration” by the Company.)

(b)Dissolution or Liquidation.  In the event of a dissolution or liquidation of the Company, all outstanding Stock Awards (other than Stock Awards consisting of vested and outstanding shares of Common Stock not subject to the Company’s right of repurchase) shall become fully vested, exercisable and/or no longer subject to repurchase or forfeiture (to the extent such Stock Awards have not previously expired or terminated) before the dissolution or liquidation is completed but contingent on its completion.

(c)Corporate Transaction.   The following provisions shall apply to Awards in the event of a Corporate Transaction unless otherwise provided in the instrument evidencing the Award or any other written agreement between the Company or any Affiliate and the holder of the Award or unless otherwise expressly provided by the Board at the time of grant of an Award.

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(i)Awards May Be Assumed.  In the event of a Corporate Transaction, any surviving corporation or acquiring corporation (or the surviving or acquiring corporation’s parent company) may assume or continue any or all Awards outstanding under the Plan or may substitute similar awards for Awards outstanding under the Plan (including but not limited to, awards to acquire the same consideration paid to the stockholders of the Company pursuant to the Corporate Transaction), and any reacquisition or repurchase rights held by the Company in respect of Common Stock issued pursuant to Awards may be assigned by the Company to the successor of the Company (or the successor’s parent company, if any), in connection with such Corporate Transaction.  A surviving corporation or acquiring corporation (or its parent) may choose to assume or continue only a portion of an Award or substitute a similar award for only a portion of an Award.  The terms of any assumption, continuation or substitution shall be set by the Board in accordance with the provisions of Section 3.

(ii)Awards Held by Current Participants.  In the event of a Corporate Transaction in which the surviving corporation or acquiring corporation (or its parent company) does not assume or continue such outstanding Awards or substitute similar awards for such outstanding Awards, then with respect to Awards that have not been assumed, continued or substituted and that are held by Participants whose Continuous Service has not terminated prior to the effective time of the Corporate Transaction (referred to as the “Current Participants”), the vesting of such Awards (and, if applicable, the time at which Stock Awards may be exercised) shall (contingent upon the effectiveness of the Corporate Transaction) be accelerated in full to a date prior to the effective time of such Corporate Transaction as the Board shall determine (or, if the Board shall not determine such a date, to the date that is five days prior to the effective time of the Corporate Transaction), and such Awards shall terminate if not exercised (if applicable) at or prior to the effective time of the Corporate Transaction, and any reacquisition or repurchase rights held by the Company with respect to such Awards shall lapse (contingent upon the effectiveness of the Corporate Transaction).

(iii)Awards Held by Persons other than Current Participants.  In the event of a Corporate Transaction in which the surviving corporation or acquiring corporation (or its parent company) does not assume or continue such outstanding Awards or substitute similar awards for such outstanding Awards, then with respect to Awards that have not been assumed, continued or substituted and that are held by persons other than Current Participants, the vesting of such Awards (and, if applicable, the time at which Stock Awards may be exercised) shall not be accelerated and such Awards (other than a Stock Award consisting of vested and outstanding shares of Common Stock not subject to the Company’s right of repurchase) shall terminate if not exercised (if applicable) prior to the effective time of the Corporate Transaction; provided, however, that any reacquisition or repurchase rights held by the Company with respect to such Awards shall not terminate and may continue to be exercised notwithstanding the Corporate Transaction.

(iv)Payment for Stock Awards in Lieu of Exercise.  Notwithstanding the foregoing, in the event an Award will terminate if not exercised prior to the effective time of a Corporate Transaction, the Board may provide, in its sole discretion, that the holder of such Award may not exercise such Stock Award but will receive a payment, in such form as may be determined by the Board, equal in value to the excess, if any, of (A) the value of the property the

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holder of the Stock Award would have received upon the exercise of the Award, over (B) any exercise price payable by such holder in connection with such exercise.

(d)Change in Control.  An Award may be subject to additional acceleration of vesting and exercisability upon or after a Change in Control as may be provided in the applicable Award agreement or as may be provided in any other written agreement between the Company or any Affiliate and the Participant, but in the absence of such provision, no such acceleration shall occur.

(e)Parachute Payments.

(i)Except as otherwise provided in a written agreement between the Company and a Participant, if the acceleration of the vesting and exercisability of Awards provided for in Sections 11(c) and 11(d), together with payments and other benefits of a Participant  (collectively, the “Payment”) (i) constitute a “parachute payment” within the meaning of Section 280G of the Code, or any comparable successor provisions, and (ii) but for this Section 11(e) would be subject to the excise tax imposed by Section 4999 of the Code, or any comparable successor provisions (the “Excise Tax”), then such Payment shall be either (1) provided to such Participant in full, or (2) provided to such Participant as to such lesser extent that would result in no portion of such Payment being subject to the Excise Tax, whichever of the foregoing amounts, when taking into account applicable federal, state, local and foreign income and employment taxes, the Excise Tax, and any other applicable taxes, results in the receipt by such Participant, on an after-tax basis, of the greatest amount of the Payment, notwithstanding that all or some portion of the Payment may be subject to the Excise Tax.

(ii)The Company shall appoint a nationally recognized independent accounting firm (the “Accountant”) to make the determinations required hereunder, which accounting firm shall not then be serving as accountant or auditor for the individual, entity or group that effected the Change in Control.  The Company shall bear all costs and expenses with respect to the determinations the Accountant may reasonably incur in connection with any calculations contemplated by this Section 11(e).

(iii)Unless the Company and such Participant otherwise agree in writing, any determination required under this Section 11(e) shall be made in writing in good faith by the Accountant.  If a reduction in the Payment is to be made as provided above, reductions shall occur in the following order unless the Participant elects in writing a different order (provided, however, that such election shall be subject to Company approval if made on or after the date that triggers the Payment or a portion thereof):(A) reduction of cash payments; (B) cancellation of accelerated vesting of Options and other Awards; and (C) reduction of other benefits paid to the Participant.  If acceleration of vesting of Awards is to be reduced, such acceleration of vesting shall be cancelled in the reverse order of date of grant of the Awards (i.e., the earliest granted Award cancelled last) unless the Participant elects in writing a different order for cancellation.

(iv)For purposes of making the calculations required by this Section 11(e), the Accountant may make reasonable assumptions and approximations concerning applicable taxes and may rely on reasonable, good faith interpretations concerning the application of the Code

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and other applicable legal authority.  The Company and the Participant shall furnish to the Accountant such information and documents as the Accountant may reasonably request in order to make such a determination.  The Company shall bear all costs that the Accountant may reasonably incur in connection with any calculations contemplated by this Section 11(e).

(v)If, notwithstanding any reduction described above, the Internal Revenue Service (the “IRS”) determines that the Participant is liable for the Excise Tax as a result of the Payment, then the Participant shall be obligated to pay back to the Company, within thirty (30) days after a final IRS determination or, in the event that the Participant challenges the final IRS determination, a final judicial determination, a portion of the Payment (the “Repayment Amount”).  The Repayment Amount with respect to the Payment shall be the smallest such amount, if any, as shall be required to be paid to the Company so that the Participant’s net after-tax proceeds with respect to the Payment (after taking into account the payment of the Excise Tax and all other applicable taxes imposed on the Payment) shall be maximized.  The Repayment Amount with respect to the Payment shall be zero if a Repayment Amount of more than zero would not result in the Participant’s net after-tax proceeds with respect to the Payment being maximized.  If the Excise Tax is not eliminated pursuant to this paragraph, the Optionholder shall pay the Excise Tax.

(vi)Notwithstanding any other provision of this Section 11(e), if (A) there is a reduction in the Payment as described above, (B) the IRS later determines that the Participant is liable for the Excise Tax, the payment of which would result in the maximization of the Participant’s net after-tax proceeds of the Payment (calculated as if the Payment had not previously been reduced), and (C) the Participant the Excise Tax, then the Company shall pay or otherwise provide to the Participant that portion of the Payment that was reduced pursuant to this Section 11(e) contemporaneously or as soon as administratively possible after the Optionholder pays the Excise Tax so that the Participant’s net after-tax proceeds with respect to the Payment are maximized.

(vii)If the Participant either (A) brings any action to enforce rights pursuant to this Section 11(e), or (B) defends any legal challenge to his or her rights under this Section 11(e), the Participant shall be entitled to recover attorneys’ fees and costs incurred in connection with such action, regardless of the outcome of such action; provided, however, that if such action is commenced by the Participant, the court finds that the action was brought in good faith.

12.TERMINATION OR SUSPENSION OF THE PLAN.

(a)Plan Term.  Unless sooner terminated by the Board pursuant to Section 3, the Plan shall automatically terminate on the day before the 10th anniversary of the date the Plan is adopted by the Board.  No Awards may be granted under the Plan while the Plan is suspended or after it is terminated.

(b)No Impairment of Rights.  Termination of the Plan shall not impair rights and obligations under any Award granted while the Plan is in effect except with the written consent of the affected Participant.

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13.EFFECTIVE DATE OF PLAN.

This Plan shall become effective on the Effective Date.

14.CHOICE OF LAW.

The law of the State of California shall govern all questions concerning the construction, validity and interpretation of this Plan, without regard to such state’s conflict of laws rules.

As Adopted By

The Board of Directors on November 29, 2005

The Shareholders on [February 21, 2006]

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EX-10.2

Exhibit 10.2

CUBIC CORPORATION

TRANSITION PROTECTION PLAN

SECTION 1.INTRODUCTION.

The Cubic Corporation Transition Protection Plan (the “Plan”) is hereby established effective November 29, 2005 (the “Effective Date”).

The Company considers it essential to the best interests of the Company and its shareholders to foster the continuous employment of the Company’s key management personnel.  The Board of Directors of the Company (the “Board”)  recognizes that the possibility of a Change in Control of the Company may occur and the uncertainty and questions that this possibility may raise among management could result in the departure of key executives,  the distraction of key executives from the management of the business, or the inability to hire new key executives, all to the detriment of the Company and its shareholders.

The Board has carefully considered the report of the Executive Compensation Committee and its independent advisors and has evaluated available alternative courses of action, including that of continuing the status quo.  After discussion, debate and evaluation, the Board has unanimously decided to adopt the Plan to reinforce and encourage the continued dedication of key executives to their duties without the distraction arising from the possibility of a Change in Control of the Company and to provide such key executives with the benefits stated herein that ensure that the expectations of the executives will be satisfied, and that are also competitive with those of similar companies.

The Plan will provide for the payment of severance benefits to certain eligible employees of the Company in the event that such employees are subject to qualifying employment terminations in connection with a Change in Control.

This Plan shall supersede any severance benefit plan, policy or practice previously maintained by the Company, other than an individually negotiated contract or agreement with the Company relating to severance or change in control benefits that is in effect on an employee’s termination date, in which case such employee’s severance benefit, if any, shall be governed by the terms of such individually negotiated employment contract or agreement and shall be governed by this Plan only to the extent that the reduction pursuant to Section 7(b) below does not entirely eliminate benefits under this Plan. Notwithstanding the foregoing, this Plan shall not supersede, but rather shall supplement the enhanced severance benefits (but not the Health Care Benefits) contained in the Company’s Severance Policy in effect as of the Effective Time.  This document also is the Summary Plan Description for the Plan.

SECTION 2.DEFINITIONS.

For purposes of the Plan, the following terms are defined as follows:

(a)“Affiliate” means any company controlled by, controlling or under common control with the Company.

(b)“Base Salary” means, with respect to a Participant, the average of the Participant’s annual base pay (excluding incentive pay, premium pay, commissions, overtime, bonuses and other forms of variable compensation) paid or payable for the five fiscal years (or such annualized shorter period as the Participant has been employed by the Company) immediately prior to the Change in Control or immediately prior to the Participant’s termination of employment, whichever is greater,without consideration of any reduction constituting a Constructive Termination.

(c)“Average Bonus” means, with respect to a Participant,  an amount equal to the average of the annual cash and long-term bonuses  (excluding Base Salary and excluding any commissions, expatriate premiums, fringe benefits (including without limitation car allowances), option grants, equity awards, employee benefits and other similar items of compensation) paid or payable by the Company to the Participant for the five fiscal years (or such annualized shorter period as the Participant has been employed by the Company) immediately prior to the Change in Control or immediately prior to the Participant’s termination of employment, whichever is greater.

(d)“Change in Control” shall be deemed to occur on the happening of any of the following events:

(i)Any acquisition of beneficial ownership (as defined in the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as defined in Rule 13d-3 of the Exchange Act of such number of shares of the Company’s equity securities by any individual, entity or group (within the meaning of Section 13(d)(3) of the Exchange Act) (a “Person”)  (other than Walter J. Zable or a trust established for himself, his spouse or issue) which enables such Person to elect a majority of the Company’s Board by cumulative voting, assuming 90% of outstanding shares vote;

(ii)Any sale of a Substantial Portion of the Property (as defined herein) of the Company.

(iii)As to an Participant who is an employee of a Subsidiary, any sale of a Substantial Portion of the Property or the sale or issuance of a majority of the stock of such Subsidiary by the Company to any party other than an Affiliate of the Company;

(iv)Approval by the stockholders of the Company of a complete liquidation or dissolution of the Company; or

(v)The consummation by the Company, directly or indirectly, in one or more steps, of a merger, consolidation, reorganization, or business combination or any act or event which results in a majority of the Company’s Board as existing immediately prior to such acts or events not continuing to serve as such.

(e)“Code” means the Internal Revenue Code of 1986, as amended.

(f)“Company” means Cubic Corporation and its Subsidiaries or, following a Change in Control, the surviving entity resulting from such transaction.

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(g)“Constructive Termination” means a voluntary termination of employment by a Participant after one of the following is undertaken without the Participant’s express written consent:

(i)a substantial reduction in the nature or scope of the Participant’s authority, duties, function or responsibilities (and not simply a change in title or reporting relationships) in effect immediately prior to the effective date of the Change in Control; provided, however, that it shall not be a “Constructive Termination” if, following the effective date of the Change in Control, either (a) the Company is retained as a separate legal entity or business unit and the Participant holds the same position in such legal entity or business unit as the Participant held before such effective date, or (b) the Participant holds a position with authority, duties, function orresponsibilities comparable (though not necessarily identical, in view of the relative sizes of the Company and the entity involved in the Change in Control) to those of the Participant prior to the effective date of the Change in Control;

(ii)a reduction in the Participant’s base salary (except for salary decreases generally applicable to the Company’s other similarly-situated employees);

(iii)anelimination of the Participant’s opportunity to achieve bonuses on a basis comparable to that provided prior to the Change in Control, or, if the Participant participates in the Company’s Management Annual Incentive Plan or the Company’s Management 3-Year Incentive Plan, then an amendment to either such plan that reduces the percentage of average annual salary used to determine Participant’s bonus under such plan or plans either: (x) by more than 50% or (y) by an amendment that is not generally applicable to the Company’s other similarly-situated employees;

(iv)an increase in the Participant’s one-way driving distance from the Participant’s principal personal residence to the principal office or business location at which the Participant is required to perform services of more than 20 miles, except for required travel for the Company’s business to an extent substantially consistent with Participant’s prior business travel obligations;

(v)a material breach by the Company of any provisions of the Plan or any enforceable written agreement between the Company and the Participant; or

(vi)any failure by the Company to obtain assumption of the Plan by any successor or assign of the Company.

Notwithstanding the foregoing, a voluntary termination shall not be deemed a Constructive Termination unless (x) the Participant provides the Company with written notice (the “Constructive Termination Notice”) that the Participant believes that an event described in this Section 2(g) has occurred, (y) the Constructive Termination Notice is given within three (3) months of the date the event occurred, and (z) the Company does not rescind or cure the conduct giving rise to the event described in this Section 2(g) within ten (10) days of receipt by the Company of the Constructive Termination Notice.

(h)“Covered Termination” means, with respect to a Participant, an Involuntary Termination Without Cause or a Constructive Termination, but only if such event occurs at any

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time within three (3) months before or twenty-four (24) months following the effective date of a Change in Control. Termination of employment of a Participant due to death or disability shall not constitute a Covered Termination unless a voluntary termination of employment by the Participant immediately prior to the Participant’s death or disability would have qualified as a Constructive Termination.

(i)“ERISA” means the Employee Retirement Income Security Act of 1974, as amended.

(j)“Involuntary Termination Without Cause” means, with respect to a Participant, an involuntary termination of employment by the Company other than for one of the following reasons:

(i)the willful and continued failure of the Participant to perform substantially the Participant’s duties to the Company as those duties exist on the date of the Change in Control (or the date of termination, if earlier), other than any failure resulting from circumstances outside the Participant’s control, or from incapacity of the Participant due to physical or mental illness or disability, or following the Participant’s delivery of a Constructive Termination Notice, after a written demand for substantial performance is delivered to the Participant, which demand specifically identifies the manner in which the Company believes that the Participant has not substantially performed the Participant’s duties satisfactorily, and provided that the Company demonstrates that such failure has a demonstrably harmful impact on the Company or its reputation, and provided further that the Participant has been given a period of at least 30 days to cure his failure in performance.  No act or failure to act shall be considered “willful” unless it is done, or omitted to be done, in bad faith or without reasonable belief that the action was in the best interests of the Company or the Subsidiary; or

(ii)the Participant’s gross negligence or breach of fiduciary duty to the Company involving personal profit, personal dishonesty or recklessness, or the Participant’s material breach of any agreement with the Company, including a material violation of Company policies and procedures, provided that such termination of employment occur within 12 months following the Company’s discovery of such event;

(iii)the Participant’s conviction (which has become final) or entry of a plea of guilty or nolo contendere regarding an act that would be deemed a felony under California or Federal criminal statutes (or any comparable criminal laws of any jurisdiction in which the Participant is permanently employed by the Company or a Subsidiary) that has a demonstrably harmful impact on the Company’s business or reputation, as determined in good faith by the Company’s Executive Compensation Committee, provided that such termination occur within 12 months following the Company’s discovery of such event.

(k)“Participant” means an individual who is employed by the Company as its Executive Chairman of the Board, Chief Executive Officer, as a senior vice president, or as a vice president (other than any individual who is a vice president on sales commission, as determined by the Company in its sole discretion) and such other key employees as may be recommended by the Company’s management and selected by the Company’s Executive Compensation Committee; provided, however, that if the Company’s Executive Compensation

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Committee shall make an affirmative determination that an employee serving in any such capacity shall not be a Participant, then such employee shall not be deemed a Participant.  Any key employee who is selected by the Company’s Executive Compensation Committee to be a Participant shall become a Participant immediately following such action.  The determination of whether an employee is a Participant shall be made by such Committee, in its sole discretion, and such determination shall be binding and conclusive on all persons.

(l)“Participation Notice” means the latest notice delivered by the Company to a Participant informing the employee that the employee is a Participant in the Plan, substantially in the form of Exhibit A hereto.

(m)“Plan Administrator” means the Board or any committee duly authorized by the Board to administer the Plan.  The Plan Administrator may, but is not required to be, the Compensation Committee of the Board.  The Board may at any time administer the Plan, in whole or in part, notwithstanding that the Board has previously appointed a committee to act as the Plan Administrator.

(n)“Subsidiary” or “Subsidiaries” means Cubic Defense Applications, Inc., Cubic Transportation Systems, Inc., Cubic Simulation Systems, Inc. and Cubic Applications, Inc. and any other entity that is designated by the Board.

(o)“Substantial Portion of the Property” means the sale of assets for an amount totaling at least 51% of the aggregate consolidated book value of the assets of the Company or a Subsidiary as set forth on the consolidated balance sheet of the Company or on the balance sheet of a Subsidiary for its most recent year end, as certified by its regular independent certified public accountants.

SECTION 3.ELIGIBILITY FOR BENEFITS.

(a)General Rules.  Subject to the provisions set forth in this Section and Section 6, in the event of a Covered Termination, the Company will provide the severance benefits described in Section 4 of the Plan to the affected Participant.  Promptly upon an employee becoming a Participant, the Company shall deliver to the Participant a Participation Notice.

(b)Exceptions to Benefit Entitlement.  An employee, including an employee who otherwise is a Participant, will not receive benefits under the Plan (or will receive reduced benefits under the Plan) in the following circumstances, as determined by the Company in its sole discretion:

(i)The employee has executed an individually negotiated employment contract or agreement with the Company relating to severance or change in control benefits that is in effect on his or her termination date, in which case such employee’s severance benefit, if any, shall be governed by the terms of such individually negotiated employment contract or agreement and shall be governed by this Plan only to the extent that the reduction pursuant to Section 6(b) below does not entirely eliminate benefits under this Plan.

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(ii)The employee voluntarily terminates employment with the Company in order to accept employment with another entity that is controlled (directly or indirectly) by the Company or is otherwise an affiliate of the Company.

(iii)The employee is offered immediate reemployment by a successor to the Company or by a purchaser of its assets, as the case may be, following a change in ownership of the Company or a sale of all or substantially all the assets of a division or business unit of the Company.  For purposes of the foregoing, “immediate reemployment” means that the employee’s employment with the successor to the Company or the purchaser of its assets, as the case may be, results in uninterrupted employment such that the employee does not suffer a lapse or reduction in pay or benefits (including coverage under this Plan) as a result of the change in ownership of the Company or the sale of its assets.

(iv)The employee does not confirm in writing that he or she shall be subject to the Company’s Confidentiality Agreement.

(c)Termination of Benefits.  A Participant’s right to receive the payment of benefits under this Plan shall terminate immediately if, at any time prior to or during the period for which the Participant is receiving benefits hereunder, the Participant, without the prior written approval of the Company:

(i)willfully breaches a material provision of the Participant’s proprietary information or confidentiality agreement with the Company, as referenced in Section 3(b)(iv);

(ii)owns, manages, operates, joins, controls or participates in the ownership, management, operation or control of, is employed by or connected in any manner with, any person, enterprise or entity which is engaged in any business competitive with that of the Company; provided, however, that such restriction will not apply to any passive investment representing an interest of less than five percent (5%) of an outstanding class of publicly-traded securities of any corporation or other entity or enterprise;

(iii)encourages or solicits any of the Company’s then current employees to leave the Company’s employ for any reason or interferes in any other manner with employment relationships at the time existing between the Company and its then current employees; or

(iv)induces any of the Company’s then current clients, customers, suppliers, vendors, distributors, licensors, licensees or other third party to terminate their existing business relationship with the Company or interferes in any other manner with any existing business relationship between the Company and any then current client, customer, supplier, vendor, distributor, licensor, licensee or other third party.

If a Participant is in doubt as to whether a proposed activity may be described in Section 3(c)(i) – (iv), then such Participant shall have the right to request an interpretation by the Company.  Such request shall be made by giving notice to the Company.  Unless notice that such activity is described in Section 3(c)(i)-(iv) is provided to the Participant within 45 days after the date of such Participant’s notice, then such activity shall not be deemed to be described in this Section 3(c)(i)-(iv).

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SECTION 4.AMOUNT OF BENEFITS.

(a)Cash Severance Benefits.  Each Participant who incurs a Covered Termination shall be entitled to receive a cash severance benefit equal to the number of months of Base Salary plus Average Bonus set forth in such Participant’s Participation Notice.  Any cash severance benefits provided under this Section 4(a) shall be paid pursuant to the provisions of Section 5.

(b)Accelerated Stock Award Vesting and Extended Exercisability of Stock Options.  If a Participant incurs a Covered Termination, then effective as of the date of the Participant’s Covered Termination (or, if such Covered Termination occurs prior to a Change in Control, then effective as of the date of such Change in Control), (i) the vesting and exercisability of all outstanding options to purchase the Company’s common stock that are held by the Participant on such date shall be accelerated in full, and (ii) any reacquisition or repurchase rights held by the Company in respect of common stock issued pursuant to any other stock award granted to the Participant by the Company shall lapse.

In addition, the post-termination of employment exercise period of any outstanding option held by the Participant on the date of his or her Covered Termination shall be extended, if necessary, such that the post-termination of employment exercise period shall not terminate prior to the later of (i) the date twelve (12) months after the effective date of the Covered Termination (or, if the stock option was held by the individual at the time he or she first became a Participant in this Plan and counsel for the Company has not advised the Company that such acceleration would not cause such option to be treated as covered by Section 409A of the Code or would not cause the Participant to become subject to the immediate taxation prior to the date of exercise, additional tax and interest under Section 409A of the Code, then the later of the 15^th day of the third month following the date at which, or December 31 of the calendar year in which, the stock option would otherwise have expired if the stock option had not been extended pursuant to this Section 4(b), based on the terms of the stock option at the original grant date) or (ii) the post-termination exercise period provided for in such option; provided, however, that such option shall not be exercisable after the expiration of its maximum term.

(c)Continued Medical Benefits.  If a Participant incurs a Covered Termination and the Participant was enrolled in a health, dental, or visionplan sponsored by the Company immediately prior to such Covered Termination, the Participant may be eligible to continue coverage under such health, dental, or vision plan (or to convert to an individual policy), at the time of the Participant’s termination of employment, under the Consolidated Omnibus Budget Reconciliation Act of 1985 (“COBRA”).  The Company will notify the Participant of any such right to continue such coverage at the time of termination pursuant to COBRA.  No provision of this Plan will affect the continuation coverage rules under COBRA, except that the Company’s payment, if any, of applicable insurance premiums will be credited as payment by the Participant for purposes of the Participant’s payment required under COBRA.  Therefore, the period during which a Participant may elect to continue the Company’s health, dental, or vision plan coverage at his or her own expense under COBRA, the length of time during which COBRA coverage will be made available to the Participant, and all other rights and obligations of the Participant under COBRA (except the obligation to pay insurance premiums that the Company pays, if any) will be applied in the same manner that such rules would apply in the absence of this Plan.

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If a Participant timely elects continued coverage under COBRA, the Company shall pay the full amount of the Participant’s COBRA premiums on behalf of the Participant for the Participant’s continued coverage under the Company’s health plans (including any dental care plans, but excluding any vision care plans maintained by the Company), including coverage for the Participant’s eligible dependents, during the lesser of: (i) the number of months of Base Salary and Average Bonus in respect of which the amount paid to the Participant under Section 4(a) was calculated (the “Severance Period”), or (ii) 18 months; provided, however, that no such premium payments shall be made following the Participant’s death or the effective date of the Participant’s coverage by a health plan of a subsequent employer, except as necessary to provide coverage under this Plan to the Participant’s surviving spouse.  Each Participant shall be required to notify the Company immediately if the Participant becomes covered by a health plan of a subsequent employer.  Upon the conclusion of such period of insurance premium payments made by the Company, the Participant will be responsible for the entire payment of premiums required under COBRA for the duration of the COBRA period.

For purposes of this Section 4(c), (i) references to COBRA shall be deemed to refer also to analogous provisions of state law and (ii) any applicable insurance premiums that are paid by the Company shall not include any amounts payable by the Participant under an Code Section 125 health care reimbursement plan, which amounts, if any, are the sole responsibility of the Participant.

(d)Other Employee Benefits.  During a Participant’s Severance Period, the Participant shall not be entitled to reimbursement for fringe benefits other than as provided in this Plan, nor shall the Participant be entitled to receive any payments or other compensation attributable to vacation periods that would have been earned had Participant’s employment continued during the Severance Period.  Executive’s participation in all tax-deferred or tax qualified retirement and cafeteria plans shall cease upon termination of employment.   All other employee benefits not described in this Section 4 shall terminate as of the Participant’s termination date (except to the extent that a conversion privilege may be available thereunder).

(e)Outplacement Services.  Upon a Covered Termination, the Company shall pay an appropriate executive out placement service up to the amount listed in such Participant’s Participation Notice for its services rendered to the Participant.

(f)Moving Expenses.  If within 24 months prior to the Change in Control a Participant had relocated his personal residence at the request of the Company, then upon such Participant’s Covered Termination the Company shall pay all costs and expenses of relocating the Participant, his or her household goods and his or her family to a location of the Participant’s choice, provided that the cost of such relocation shall not exceed the cost to relocate to the city in which his or her immediately previous residence was located, and provided further that such costs and expenses would otherwise be deductible under Code Section 217.  If the Participant had purchased a residence when he or she relocated, the Company shall also reimburse the Participant for the reasonable costs of sale of such new residence in accordance with the Company’s relocation policies in existence immediately before the Change in Control.  All such amounts shall be grossed up for federal and state income taxes.

(g)Additional Benefits.  Notwithstanding the foregoing, the Company may, in its sole discretion, provide benefits in addition to those pursuant to Sections 4(a), 4(b), 4(c), 4(d),

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4(e), and 4(f), to Participants or employees who are not Participants (“Non-Participants”) chosen by the Company, in its sole discretion; provided that the Company shall communicate in writing on behalf of the Board to such Participants or Non-Participants who become entitled to such benefits; and provided further that the provision of any such benefits to a Participant or a Non-Participant shall in no way obligate the Company to provide such benefits to any other Participant or to any other Non-Participant, even if similarly situated.  If benefits under the Plan are provided to a Non-Participant, references in the Plan to “Participant”(with the exception of Sections 4(a), 4(b), 4(c), 4(d), 4(e), and 4(f)) shall be deemed to refer to such Non- Participants.

SECTION 5.TIME AND FORM OF SEVERANCE PAYMENTS.

(a)General Rules.  Subject to Section 5(b), any cash severance benefit provided under Section 4(a) shall be paid in installments pursuant to the Company’s regularly scheduled payroll periods commencing as soon as practicable following the effective date of a Participant’s Covered Termination (or, if such Covered Termination occurs prior to a Change in Control, then commencing as soon as practicable following the effective date of the Change in Control) and shall be subject to all applicable withholding for federal, state and local taxes.  In the event of a Participant’s death prior to receiving all installment payments of his or her cash severance benefit under Section 4(a), any remaining installment payments shall be made to the Participant’s estate on the same payment schedule as would have occurred absent the Participant’s death.  In no event shall payment of any Plan benefit be made prior to the effective date of the Participant’s Covered Termination or prior to the effective date of the release described in Section 7(a).

(b)Application of Section 409A.  In the event that any cash severance benefit provided under Section 4(a) or continued medical benefit under Section 4(c) shall fail to satisfy the distribution requirement of Section 409A(a)(2)(A) of the Code as a result of the application of Section 409A(a)(2)(B)(i) of the Code, the payment of such benefit shall be accelerated to the minimum extent necessary so that the benefit is not subject to the provisions of Section 409A(a)(1) of the Code.  (The payment schedule as revised after the application of the preceding sentence shall be referred to as the “Revised Payment Schedule.”)  In the event the payment of benefits pursuant to the Revised Payment Schedule would be subject to Section 409A(a)(1) of the Code, the payment of such benefits shall not be paid pursuant to the Revised Payment Schedule and instead the payment of such benefits shall be delayed to the minimum extent necessary so that such benefits are not subject to the provisions of Section 409A(a)(1) of the Code.  The Board may attach conditions to or adjust the amounts paid pursuant to this Section 5(b) to preserve, as closely as possible, the economic consequences that would have applied in the absence of this Section 5(b); provided, however, that no such condition or adjustment shall result in the payments being subject to Section 409A(a)(1) of the Code.

SECTION 6.LIMITATIONS ON BENEFITS.

(a)Release.  In order to be eligible to receive benefits under the Plan, a Participant also must execute a general waiver and release in substantially the form attached hereto as Exhibit B and such release must become effective in accordance with its terms.  For purposes of the preceding sentence, with respect to any outstanding option held by the Participant, the receipt of benefits shall be deemed to be the exercise of such option pursuant to the extended exercisability of such option under Section 4(b), rather than the acceleration or extension of such

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option’s exercisability. The Company, in its sole discretion, may modify the form of the required release to comply with applicable law and shall determine the form of the required release, which may be incorporated into a termination agreement or other agreement with the Participant.

(b)Certain Reductions.  The Company, in its sole discretion, shall have the authority to reduce a Participant’s severance benefits, in whole or in part, by any other severance benefits, pay in lieu of notice, or other similar benefits payable to the Participant by the Company that become payable in connection with the Participant’s termination of employment pursuant to (i) any applicable legal requirement, including, without limitation, the Worker Adjustment and Retraining Notification Act (the “WARN Act”), (ii) a written employment or severance agreement with the Company, or (iii) any Company policy or practice providing for the Participant to remain on the payroll for a limited period of time after being given notice of the termination of the Participant’s employment.  The benefits provided under this Plan are intended to satisfy, in whole or in part, any and all statutory obligations and other contractual obligations of the Company that may arise out of a Participant’s termination of employment, and the Plan Administrator shall so construe and implement the terms of the Plan.  The Company’s decision to apply such reductions to the severance benefits of one Participant and the amount of such reductions shall in no way obligate the Company to apply the same reductions in the same amounts to the severance benefits of any other Participant, even if similarly situated.  In the Company’s sole discretion, such reductions may be applied on a retroactive basis, with severance benefits previously paid being recharacterized as payments pursuant to the Company’s statutory or other contractual obligations.

(c)Mitigation.  Except as otherwise specifically provided herein, a Participant shall not be required to mitigate damages or the amount of any payment provided under this Plan by seeking other employment or otherwise, nor shall the amount of any payment provided for under this Plan be reduced by any compensation earned by a Participant as a result of employment by another employer or any retirement benefits received by such Participant after the date of the Participant’s termination of employment with the Company.

(d)Non-Duplication of Benefits.  Except as otherwise specifically provided for herein, no Participant is eligible to receive benefits under this Plan or pursuant to other contractual obligations more than one time.  This Plan is designed to provide certain severance pay and change in control benefits to Participants pursuant to the terms and conditions set forth in this Plan.  The payments pursuant to this Plan are in addition to, and not in lieu of, any unpaid salary, bonuses or benefits to which a Participant may be entitled for the period ending with the Participant’s Covered Termination.

(e)Indebtedness of Participants.  If a Participant is indebted to the Company on the effective date of his or her Covered Termination, the Company reserves the right to offset any severance payments under the Plan by the amount of such indebtedness.

(f)Parachute Payments.   If any payment or benefit (including payments or benefits pursuant to this Plan) that a Participant would receive in connection with a Change in Control or otherwise (a “Payment”) (a) would constitute a “parachute payment” within the meaning of Section 280G of the Code, and (b) but for this sentence, would be subject to the excise tax imposed by Section 4999 of the Code (the “Excise Tax”), then the Company shall cause to be

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determined, before any amount of the Payment is paid to such Participant, which of the following two alternative forms of payment would maximize the Participant’s after-tax proceeds: (i) payment in full of the entire amount of the Payment including any amounts to be paid to the Participant pursuant to this Plan (a “Full Payment”), or (ii) payment of only a part of the Payment so that the Participant receive the largest payment possible without the imposition of the Excise Tax (a “Reduced Payment”), whichever amount results in the Participant’s receipt, on an after-tax basis, of the greater amount of the Payment notwithstanding that all or some portion of the Payment may be subject to the Excise Tax.  For purposes of determining whether to make a Full Payment or a Reduced Payment, the Company shall cause to be taken into account all applicable federal, state and local income and employment taxes and the Excise Tax (all computed at the highest applicable marginal rate, net of the maximum reduction in federal income taxes which could be obtained from a deduction of such state and local taxes).  If a Reduced Payment is made, (i) the Payment shall be paid only to the extent permitted under the Reduced Payment alternative, and the Participant shall have no rights to any additional payments and/or benefits constituting the Payment, and (ii) reduction in payments and/or benefits shall occur in the following order unless the Participant elects in writing a different order (provided, however, that such election shall be subject to Company approval if made on or after the date on which the event that triggers the Payment occurs): (1) reduction of cash payments; (2) cancellation of accelerated vesting of equity awards other than stock options; (3) cancellation of accelerated vesting of stock options; and (4) reduction of other benefits paid to the Participant.  In the event that acceleration of compensation from the Participant’s equity awards is to be reduced, such acceleration of vesting shall be canceled in the reverse order of the date of grant unless the Participant elects in writing a different order for cancellation.

The independent registered public accounting firm engaged by the Company for general audit purposes as of the day prior to the effective date of the Change in Control shall make all determinations required to be made under this Section.  If the independent registered public accounting firm so engaged by the Company is serving as accountant or auditor for the individual, entity or group effecting the Change in Control, the Company shall appoint a nationally recognized independent registered public accounting firm to make the determinations required hereunder.  The Company shall bear all expenses with respect to the determinations by such independent registered public accounting firm required to be made hereunder.

The independent registered public accounting firm engaged to make the determinations hereunder shall provide its calculations, together with detailed supporting documentation, to the Company and the Participant within fifteen (15) calendar days after the date on which the Participant’s right to a Payment is triggered (if requested at that time by the Company or Executive) or such other time as requested by the Company or the Participant.  If the independent registered public accounting firm determines that no Excise Tax is payable with respect to a Payment, either before or after the application of the Reduced Amount, it shall furnish the Company and the Participant with an opinion reasonably acceptable to the Participant that no Excise Tax will be imposed with respect to such Payment.  Any good faith determinations of the accounting firm made hereunder shall be final, binding and conclusive upon the Company and the Participant.

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SECTION 7.RIGHT TO INTERPRET PLAN; AMENDMENT AND TERMINATION.

(a)Exclusive Discretion.  The Plan Administrator shall have the exclusive discretion and authority to establish rules, forms, and procedures for the administration of the Plan and to construe and interpret the Plan and to decide any and all questions of fact, interpretation, definition, computation or administration arising in connection with the operation of the Plan, including, but not limited to, the eligibility to participate in the Plan and amount of benefits paid under the Plan.  The rules, interpretations, computations and other actions of the Plan Administrator shall be binding and conclusive on all persons.

(b)Amendment or Termination.  The term of this Plan shall be the period commencing on the Effective Date and ending on December 31, 2008, provided, however, that commencing on January 1, 2006, and on each January 1 thereafter (a “Renewal Date”), the term of this Agreement shall be extended so as to terminate three years from such Renewal Date if, and only if, at any time during the calendar year prior to the Renewal Date the Company’s Executive Compensation Committee (or its Board) resolves to extend the term for an additional year. Unless otherwise required by law, no approval of the shareholders of the Company shall be required for any amendment or termination including any amendment that increases the benefits provided under any option or other stock award.

(c)The Company’s Executive Compensation Committee may amend the Plan to reduce the benefits provided under Section 4 or may provide that a person who is a Participant shall no longer be a Participant; provided, however, that if the Company’s Executive Compensation Committee either amends the Plan to reduce the benefits provided under Section 4 or makes an affirmative determination that an employee shall no longer be a Participant, then such action shall become first effective on the 3^rd anniversary of such determination; provided that, within 30 days before or after such action, the Company gives the Participant notice of such event.  The determination of whether to reduce the benefits provided in Section 4 or whether an employee shall no longer be a Participant shall be made by the Company’s Executive Compensation Committee, in its sole discretion, and such determination shall be binding and conclusive on all persons.

(d)Regardless of whether such action would be deemed to impair a Participant’s rights under the Plan, the Company’s Executive Compensation Committee may amend the Plan in any way to comply with applicable legal requirements.  Except as expressly provided herein,  the Company’s Executive Compensation Committee may amend the Plan at any time; provided that no such amendment may impair the rights of a Participant without such Participant’s consent.

SECTION 8.NO IMPLIED EMPLOYMENT CONTRACT.

The Plan shall not be deemed (i) to give any employee or other person any right to be retained in the employ of the Company or (ii) to interfere with the right of the Company to discharge any employee or other person at any time, with or without cause, which right is hereby reserved.

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SECTION 9.LEGAL CONSTRUCTION.

This Plan shall be governed by and construed under the laws of the State of California (without regard to principles of conflict of laws), except to the extent preempted by ERISA.

SECTION 10.CLAIMS, INQUIRIES AND APPEALS.

(a)Applications for Benefits and Inquiries.  Any application for benefits, inquiries about the Plan or inquiries about present or future rights under the Plan must be submitted to the Plan Administrator in writing by an applicant (or his or her authorized representative).  The Plan Administrator is:

Cubic Corporation

Attn: Vice President, Human Resources

9333 Balboa Avenue

San Diego, California 92123

(b)Denial of Claims.  In the event that any application for benefits is denied in whole or in part, the Plan Administrator must provide the applicant with written or electronic notice of the denial of the application, and of the applicant’s right to review the denial.  Any electronic notice will comply with the regulations of the U.S. Department of Labor.  The notice of denial will be set forth in a manner designed to be understood by the applicant and will include the following:

(1)the specific reason or reasons for the denial;

(2)references to the specific Plan provisions upon which the denial is based;

(3)a description of any additional information or material that the Plan Administrator needs to complete the review and an explanation of why such information or material is necessary; and

(4)an explanation of the Plan’s review procedures and the time limits applicable to such procedures, including a statement of the applicant’s right to bring a civil action under Section 502(a) of ERISA following a denial on review of the claim, as described in Section 10(d) below.

This notice of denial will be given to the applicant within ninety (90) days after the Plan Administrator receives the application, unless special circumstances require an extension of time, in which case, the Plan Administrator has up to an additional ninety (90) days for processing the application.  If an extension of time for processing is required, written notice of the extension will be furnished to the applicant before the end of the initial ninety (90) day period.

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This notice of extension will describe the special circumstances necessitating the additional time and the date by which the Plan Administrator is to render its decision on the application.

(c)Request for a Review.  Any person (or that person’s authorized representative) for whom an application for benefits is denied, in whole or in part, may appeal the denial by submitting a request for a review to the Plan Administrator within sixty (60) days after the application is denied.  A request for a review shall be in writing and shall be addressed to:

Cubic Corporation

Attn: Vice President, Human Resources

9333 Balboa Avenue

San Diego, California 92123

A request for review must set forth all of the grounds on which it is based, all facts in support of the request and any other matters that the applicant feels are pertinent.  The applicant (or his or her representative) shall have the opportunity to submit (or the Plan Administrator may require the applicant to submit) written comments, documents, records, and other information relating to his or her claim.  The applicant (or his or her representative) shall be provided, upon request and free of charge, reasonable access to, and copies of, all documents, records and other information relevant to his or her claim.  The review shall take into account all comments, documents, records and other information submitted by the applicant (or his or her representative) relating to the claim, without regard to whether such information was submitted or considered in the initial benefit determination.

(d)Decision on Review.  The Plan Administrator will act on each request for review within sixty (60) days after receipt of the request, unless special circumstances require an extension of time (not to exceed an additional sixty (60) days), for processing the request for a review.  If an extension for review is required, written notice of the extension will be furnished to the applicant within the initial sixty (60) day period.  This notice of extension will describe the special circumstances necessitating the additional time and the date by which the Plan Administrator is to render its decision on the review.  The Plan Administrator will give prompt, written or electronic notice of its decision to the applicant. Any electronic notice will comply with the regulations of the U.S. Department of Labor.  In the event that the Plan Administrator confirms the denial of the application for benefits in whole or in part, the notice will set forth, in a manner calculated to be understood by the applicant, the following:

(1)the specific reason or reasons for the denial;

(2)references to the specific Plan provisions upon which the denial is based;

(3)a statement that the applicant is entitled to receive, upon request and free of charge, reasonable access to, and copies of, all documents, records and other information relevant to his or her claim; and

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(4)a statement of the applicant’s right to bring a civil action under Section 502(a) of ERISA.

(e)Rules and Procedures.  The Plan Administrator will establish rules and procedures, consistent with the Plan and with ERISA, as necessary and appropriate in carrying out its responsibilities in reviewing benefit claims.  The Plan Administrator may require an applicant who wishes to submit additional information in connection with an appeal from the denial of benefits to do so at the applicant’s own expense.

(f)Exhaustion of Remedies.  No legal action for benefits under the Plan may be brought until the applicant (i) has submitted a written application for benefits in accordance with the procedures described by Section 10(a) above, (ii) has been notified by the Plan Administrator that the application is denied, (iii) has filed a written request for a review of the application in accordance with the appeal procedure described in Section 10(c) above, and (iv) has been notified that the Plan Administrator has denied the appeal.  Notwithstanding the foregoing, if the Plan Administrator does not respond to an applicant’s claim or appeal within the relevant time limits specified in this Section 10, the applicant may proceed directly to arbitration pursuant to Section 11.

SECTION 11.ARBITRATION

(a)Any applicant’s claim remaining unresolved after exhaustion of the procedures in Section 10 (and to the extent permitted by law, any dispute concerning any breach or claimed breach of duty regarding the Plan) shall be settled solely by binding arbitration in San Diego, California, by a single arbitrator with at least 20 years of employment law experience, in accordance with the Employment Claims Rules of the American Arbitration Association.  No depositions may be taken. The arbitrator, in reviewing the decision of the Plan Administrator pursuant to Section 10, shall apply the standard of a reviewing court under ERISA, namely that such decision shall be affirmed unless the arbitrator finds it to be arbitrary and capricious.  Judgment on any award rendered by the arbitrator may be entered in any court having jurisdiction thereof.  Each party to any dispute regarding the Plan shall pay the fees and costs of presenting his, her or its case in arbitration.  All other costs of arbitration, including the costs of any transcript of the proceedings, administrative fees, and the arbitrator’s fees shall be borne by the Company.

(b)Except as otherwise specifically provided in this Plan, the provisions of this Section 11 shall be absolutely exclusive for any and all purposes and fully applicable to each and every dispute regarding the Plan, including any claim which, if pursued through any state or federal court or administrative proceeding, would arise at law, in equity or pursuant to statutory, regulatory or common law rules, regardless of whether such claim would arise in contract, tort or under any other legal or equitable theory or basis.  The arbitrator shall have jurisdiction and authority to award only Plan benefits and prejudgment interest; and apart from such benefits and interest, the arbitrator shall not have any authority or jurisdiction to make any award of any kind including, without limitation, compensatory damages, punitive damages, foreseeable or unforeseeable economic damages, damages for pain and suffering or emotional distress, adverse tax consequences or any other kind or form of damages.  The remedy, if any, awarded by such arbitrator shall be the sole and exclusive remedy for each and every claim which is subject to

15

arbitration pursuant to this Section 11.  Any limitations on the relief that can be awarded by the arbitrator are in no way intended (i) to create rights or claims that can be asserted outside arbitration or (ii) in any other way to reduce the exclusivity of arbitration as the sole dispute resolution mechanism with respect to this Plan.

(c)The Plan and the Company will be the necessary parties to any action or proceeding involving the Plan.  No person employed by the Company, no Eligible Employee or any other person having or claiming to have an interest in the Plan will be entitled to any notice or process, unless such person is a named party to the action or proceeding.  In any arbitration proceeding, all relevant statutes of limitation apply.  Any final judgment or decision that may be entered in any such action or proceeding will be binding and conclusive on all persons having or claiming to have any interest in the Plan.

SECTION 12.BASIS OF PAYMENTS TO AND FROM PLAN.

All benefits under the Plan shall be paid by the Company.  The Plan shall be unfunded, and benefits hereunder shall be paid only from the general assets of the Company.

SECTION 13.OTHER PLAN INFORMATION.

(a)Employer and Plan Identification Numbers.  The Employer Identification Number assigned to the Company (which is the “Plan Sponsor” as that term is used in ERISA) by the Internal Revenue Service is 77-0182779.  The Plan Number assigned to the Plan by the Plan Sponsor pursuant to the instructions of the Internal Revenue Service is 520.

(b)Ending Date for Plan’s Fiscal Year.  The date of the end of the fiscal year for the purpose of maintaining the Plan’s records is May 31.

(c)Agent for the Service of Legal Process.  The agent for the service of legal process with respect to the Plan is:

Cubic Corporation

Attn: Vice President, Human Resources

9333 Balboa Avenue

San Diego, California 92123

(d)Plan Sponsor and Administrator.  The “Plan Sponsor” and the “Plan Administrator” of the Plan is:

Cubic Corporation

Attn: Vice President, Human Resources

9333 Balboa Avenue

San Diego, California 92123

The Plan Sponsor’s and Plan Administrator’s telephone number is (858) 277-6780.  The Plan Administrator is the named fiduciary charged with the responsibility for administering the Plan.

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SECTION 14.STATEMENT OF ERISA RIGHTS.

Participants in this Plan (which is a welfare benefit plan sponsored by Cubic Corporation) are entitled to certain rights and protections under ERISA.  If you are a Participant, you are considered a participant in the Plan for the purposes of this Section 14 and, under ERISA, you are entitled to:

Receive Information About Your Plan and Benefits

(a)Examine, without charge, at the Plan Administrator’s office and at other specified locations, such as worksites, all documents governing the Plan and a copy of the latest annual report (Form 5500 Series), if applicable, filed by the Plan with the U.S. Department of Labor and available at the Public Disclosure Room of the Employee Benefits Security Administration;

(b)Obtain, upon written request to the Plan Administrator, copies of documents governing the operation of the Plan and copies of the latest annual report (Form 5500 Series), if applicable, and an updated (as necessary) Summary Plan Description.  The Administrator may make a reasonable charge for the copies; and

(c)Receive a summary of the Plan’s annual financial report, if applicable.  The Plan Administrator is required by law to furnish each participant with a copy of this summary annual report.

Prudent Actions By Plan Fiduciaries

In addition to creating rights for Plan participants, ERISA imposes duties upon the people who are responsible for the operation of the employee benefit plan.  The people who operate the Plan, called “fiduciaries” of the Plan, have a duty to do so prudently and in the interest of you and other Plan participants and beneficiaries.  No one, including your employer, your union or any other person, may fire you or otherwise discriminate against you in any way to prevent you from obtaining a Plan benefit or exercising your rights under ERISA.

Enforce Your Rights

If your claim for a Plan benefit is denied or ignored, in whole or in part, you have a right to know why this was done, to obtain copies of documents relating to the decision without charge, and to appeal any denial, all within certain time schedules.

Under ERISA, there are steps you can take to enforce the above rights.  For instance, if you request a copy of Plan documents or the latest annual report from the Plan, if applicable, and do not receive them within 30 days, you may file suit in a Federal court.  In such a case, the court may require the Plan Administrator to provide the materials and pay you up to $110 a day until you receive the materials, unless the materials were not sent because of reasons beyond the control of the Plan Administrator.

If you have a claim for benefits which is denied or ignored, in whole or in part, you may sue or exercise such other rights as are described in this Plan.

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If you are discriminated against for asserting your rights, you may seek assistance from the U.S. Department of Labor, or you may file suit in a Federal court.  The court will decide who should pay court costs and legal fees.  If you are successful, the court may order the person you have sued to pay these costs and fees.  If you lose, the court may order you to pay these costs and fees, for example, if it finds your claim is frivolous.

Assistance With Your Questions

If you have any questions about the Plan, you should contact the Plan Administrator.  If you have any questions about this statement or about your rights under ERISA, or if you need assistance in obtaining documents from the Plan Administrator, you should contact the nearest office of the Employee Benefits Security Administration, U.S. Department of Labor, listed in your telephone directory or the Division of Technical Assistance and Inquiries, Employee Benefits Security Administration, U.S. Department of Labor, 200 Constitution Avenue N.W., Washington, D.C. 20210.  You may also obtain certain publications about your rights and responsibilities under ERISA by calling the publications hotline of the Employee Benefits Security Administration.

SECTION 15.GENERAL PROVISIONS.

(a)Notices.  Any notice, demand or request required or permitted to be given by either the Company or a Participant pursuant to the terms of this Plan shall be in writing and shall be deemed given when delivered personally or deposited in the U.S. mail, First Class with postage prepaid, and addressed to the parties, in the case of the Company, at the address set forth in Section 10(a) and, in the case of a Participant, at the address as set forth in the Company’s employment file maintained for the Participant as previously furnished by the Participant or such other address as a party may request by notifying the other in writing.

(b)Transfer and Assignment.  The rights and obligations of a Participant under this Plan may not be transferred or assigned without the prior written consent of the Company.  This Plan shall be binding upon any surviving entity resulting from a Change in Control and upon any other person who is a successor by merger, acquisition, consolidation or otherwise to the business formerly carried on by the Company without regard to whether or not such person or entity actively assumes the obligations hereunder.

(c)Waiver.  Any Party’s failure to enforce any provision or provisions of this Plan shall not in any way be construed as a waiver of any such provision or provisions, nor prevent any Party from thereafter enforcing each and every other provision of this Plan.  The rights granted the Parties herein are cumulative and shall not constitute a waiver of any Party’s right to assert all other legal remedies available to it under the circumstances.

(d)Severability.  Should any provision of this Plan be declared or determined to be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired.

(e)Section Headings.  Section headings in this Plan are included for convenience of reference only and shall not be considered part of this Plan for any other purpose.

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SECTION 16.EXECUTION.

To record the adoption of the Plan as set forth herein, Cubic Corporation has caused its duly authorized officer to execute the same as of the Effective Date.

CUBIC CORPORATION

/s/ William W. Boyle

Senior Vice President,

Chief Financial Officer

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EXHIBIT A

CUBIC CORPORATION

TRANSITION PROTECTION PLAN
PARTICIPATION NOTICE

To:

Date:

Cubic Corporation (the “Company”) has adopted the Cubic Corporation Transition Protection Plan (the “Plan”).  The Company is providing you with this Participation Notice to inform you that, given your position at the Company, you qualify as a participant in the Plan. A copy of the Plan document, which also constitutes a summary plan description, is attached to this Participation Notice. The terms and conditions of your participation in the Plan are as set forth in the Plan, and in the event of any conflict between this Participation Notice and the Plan, the terms of the Plan shall prevail. Subject to the provisions of the Plan, the details of your Plan benefits, as described in Section 4 of the Plan, are as follows:

Cash Severance Benefit:                              months.

Continued Medical Benefits:                              months, or such earlier date as you shall secure subsequent employment that shall provide you with substantially similar medical benefits.

Outplacement Services:  Up to $              .

Please retain a copy of this Participation Notice, along with the Plan document, for your records.

CUBIC CORPORATION

By:

Its:

The undersigned Participant hereby acknowledges receipt of the foregoing Participation Notice and the Plan.

Print name

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EXHIBIT B

RELEASE AGREEMENT

I understand and agree completely to the terms set forth in the Cubic Corporation Transition Protection Plan (the “Plan”). I understand that this release and waiver (the “Release”), together with the Plan, constitutes the complete, final and exclusive embodiment of the entire agreement between the Company and me with regard to the subject matter hereof.  I am not relying on any promise or representation by the Company that is not expressly stated herein.

In consideration of benefits I will receive under the Plan, I hereby generally and completely release the Company and its directors, officers, employees, shareholders, members, partners, agents, attorneys, predecessors, successors, parent and subsidiary entities, insurers, affiliates, and assigns from any and all claims, liabilities and obligations, both known and unknown, that arise out of or are in any way related to events, acts, conduct, or omissions occurring prior to my signing this Release.  This Release includes, but is not limited to: (1) all claims arising out of or in any way related to my employment with the Company or the termination of that employment; (2) all claims related to my compensation or benefits from the Company, including, but not limited to, salary, bonuses, commissions, vacation pay, expense reimbursements, severance pay, fringe benefits, stock, stock options, or any other ownership interests in the Company; (3) all claims for breach of contract, wrongful termination, and breach of the implied covenant of good faith and fair dealing; (4) all tort claims, including, but not limited to, claims for fraud, defamation, emotional distress, and discharge in violation of public policy; and (5) all federal, state, and local statutory claims, including, but not limited to, claims for discrimination, harassment, retaliation, attorneys’ fees, or other claims arising under the federal Civil Rights Act of 1964 (as amended), the federal Americans with Disabilities Act of 1990, the federal Age Discrimination in Employment Act of 1967 (as amended) (“ADEA”), and the California Fair Employment and Housing Act (as amended).

If I am over the age of 40 years at the time of an Covered Termination (as that term is defined in the Plan), I acknowledge that I am knowingly and voluntarily waiving and releasing any rights I may have under the ADEA.  I also acknowledge that the consideration given under the Release for the waiver and release in the preceding paragraph hereof is in addition to anything of value to which I was already entitled.  I further acknowledge that I have been advised by this writing, as required by the ADEA, that:  (A) my waiver and release do not apply to any rights or claims that may arise on or after the date I execute this Release; (B) I should consult with an attorney prior to executing this Release; (C) I have twenty-one (21) days to consider this Release (although I may choose to voluntarily execute this Release earlier); (D) I have seven (7) days following my execution of this Release to revoke the Release; and (E) this Release shall not be effective until the date upon which the revocation period has expired, which shall be the eighth (8^th) day after I execute this Release.

If I am not over the age of 40 years at the time of an Covered Termination (as that term is defined in the Plan), I understand and agree that I will have ten days to consider and execute this release and that it shall be effective upon such execution.

1

I represent that I have not filed any claims against the Company, and agree that, except as such waiver may be prohibited by statute, I will not file any claim against the Company or seek any compensation for any claim other than the payments and benefits referenced herein.  I agree to indemnify and hold the Company harmless from and against any and all loss, cost, and expense, including, but not limited to court costs and attorney’s fees, arising from or in connection with any action which may be commenced, prosecuted, or threatened by me or for my benefit, upon my initiative, or with my aid or approval, contrary to the provisions of this Release.

I acknowledge that I have read and understand Section 1542 of the California Civil Code which reads as follows:  “A general release does not extend to claims which the creditor does not know or suspect to exist in his favor at the time of executing the release, which if known by him must have materially affected his settlement with the debtor.”  I hereby expressly waive and relinquish all rights and benefits under that section and any law of any jurisdiction of similar effect with respect to my release of any claims I may have against the Company, its affiliates, and the entities and persons specified above.

EMPLOYEE

Name:

Date:

2

EX-21.1

EXHIBIT 21.1

SUBSIDIARY CORPORATIONS OF CUBIC CORPORATION

PLACE OF INCORPORATION AND PERCENTAGE OWNED

	Place of	Percentage
Subsidiary	Incorporation	Owned
CONSOLIDATED CONVERTING CO.
Whittier, California	California	100	%
CUBIC APPLICATIONS, INC.
Lacey, Washington	California	100	%
CUBIC COMMUNICATIONS, INC.
San Diego, California	California	100	%
CUBIC DATA SYSTEMS, INC.
San Diego, California	California	90	%
CUBIC DE MEXICO
Tijuana, Mexico	Mexico	100	%
CUBIC DEFENSE APPLICATIONS, INC.
San Diego, California	California	100	%
CUBIC FOREIGN SALES, INC.	St. Thomas
San Diego, California	U.S. Virgin Islands	100	%
CUBIC HOLDINGS LTD.
Aukland, New Zealand	New Zealand	100	%
CUBIC LAND, INC.
San Diego, California	California	100	%
CUBIC ADVANCED TACTICAL SYSTEMS, LLC
Orlando, Florida	Delaware	50	%
CUBIC SIMULATION SYSTEMS, INC.
Orlando, Florida	Delaware	100	%
CUBIC TRANSPORTATION SYSTEMS, INC.
San Diego, California	California	100	%

	Place of	Percentage
Subsidiary	Incorporation	Owned
CUBIC TRANSPORTATION SYSTEMS LIMITED
London, England	England	100	%*
*(100% owned subsidiary of Cubic (U.K.) Limited)
CUBIC TRANSPORTATION SYSTEMS (AUSTRALIA) PTY LIMITED
New South Wales, Australia	Australia	100	%*
* (50% owned subsidiary of Cubic Corporation and
50% owned subsidiary of Cubic Transportation Systems, Inc.)
CUBIC (U.K.) LIMITED
London, England	England	100	%
CUBIC WORLDWIDE TECHNICAL SERVICES, INC.
San Diego, California	Delaware	100	%
OSCMAR INTERNATIONAL LIMITED
Auckland, New Zealand	New Zealand	100	%*
*(100% owned subsidiary of Cubic Holdings Ltd.)
TRAF-PARK
Vancouver, B.C., Canada	Canada	100	%

2

EX-23.1

EXHIBIT 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in the Registration Statements (Form S-8 No, 333-12749) pertaining to the Cubic Corporation Employees’ Profit-Sharing Plan, the Cubic Applications, Inc. 401(k) Retirement Plan and the Cubic Corporation 1998 Stock Option Plan of our reports dated December 5, 2005, with respect to the consolidated financial statements of Cubic Corporation, management’s assessment of the effectiveness of internal control over financial reporting, and the effectiveness of internal control over financial reporting of Cubic Corporation included in the Annual Report (Form 10-K) for the year ended September 30, 2005.

	/s/ Ernst & Young LLP
San Diego, California
December 8, 2005

EX-31.1

Exhibit 31.1

CERTIFICATION of CEO

I, Walter J. Zable, certify that:

1.I have reviewed this annual report on Form 10-K of Cubic Corporation;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of Cubic Corporation as of, and for, the periods presented in this report;

4.Cubic’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for Cubic Corporation and have:

a)designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to Cubic, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)designed such internal controls over financial reporting or caused such internal controls over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the financial statements for external purposes in accordance with generally accepted accounting principles;

c)evaluated the effectiveness of Cubic’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and

d)disclosed in this report any change in Cubic’s internal control over financial reporting that occurred during Cubic’s fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, Cubic’s internal control over financial reporting;

5.Cubic’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to Cubic’s auditors and the audit committee of Cubic’s board of directors:

a)all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect Cubic’s ability to record, process, summarize and report financial information; and

b)any fraud, whether or not material, that involves management or other employees who have a significant role in Cubic’s internal control over financial reporting.

December 12, 2005

/s/ Walter J. Zable

W. J. Zable

President and Chief Executive Officer

CERTIFICATION of CFO

I, William W. Boyle, certify that:

1.I have reviewed this annual report on Form 10-K of Cubic Corporation;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of Cubic Corporation as of, and for, the periods presented in this report;

4.Cubic’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for Cubic Corporation and have:

a)designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to Cubic, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)designed such internal controls over financial reporting or caused such internal controls over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the financial statements for external purposes in accordance with generally accepted accounting principles;

c)evaluated the effectiveness of Cubic’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and

d)disclosed in this report any change in Cubic’s internal control over financial reporting that occurred during Cubic’s fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, Cubic’s internal control over financial reporting;

5.Cubic’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to Cubic’s auditors and the audit committee of Cubic’s board of directors:

a)all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect Cubic’s ability to record, process, summarize and report financial information; and

b)any fraud, whether or not material, that involves management or other employees who have a significant role in Cubic’s internal control over financial reporting.

December 12, 2005

/s/ William W. Boyle

W. W. Boyle

Chief Financial Officer

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

Each of the undersigned, in his capacity as an officer of Cubic Corporation hereby certifies pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 that:

1.The annual report of Cubic Corporation (the “Registrant”) on Form 10-K for the year ended September 30, 2005 (the “Report”), which accompanies this certification, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of  1934.

2.The information contained in the Report fairly presents, in all material respects, the financial condition of the Registrant at the end of such year and the results of operations of the Registrant for such year.

/s/ W. J. Zable	/s/ W.W. Boyle
W. J. Zable	W. W. Boyle
Chief Executive Officer	Chief Financial Officer
Date: December 12, 2005