BUSINESS SEGMENTS

Information regarding the amounts of revenue, operating profit and loss and identifiable assets attributable to each of our industrybusiness segments, is set forth in Note 1311 to the Consolidated Financial Statements for the year ended September 30, 2003.2004. 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 of this filing.7.

DEFENSE

Cubic’s defense business segment operates as the Cubic Defense Applications (CDA) group. Continuing the strategic realignment begun in fiscal 2002, CDA consolidated its division profit centers intogroup consisting of three market-focused business units in fiscal 2003:units: Training Systems, Mission Support, and Communications and& Electronics.  CDA’sOur products include customized military range instrumentation systems, tactical engagement simulation systems, firearm simulation systems, communications and surveillance systems, HF and UHF/VHF surveillance receivers, transceiverspower amplifiers, and avionics systems.  Services provided by CDAOur services include training mission support, computer simulation training, distributed interactive simulation, development of military training doctrine, and field operations and maintenance.  The group markets itsWe market our capabilities directly to various U. S.US government departments and agencies and foreign governments.  In addition, CDA contractswe frequently contract or teams frequentlyteam with other leading defense suppliers.

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 actual 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.US 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 of the three U. S.US Army training centers in past years at Fort Polk, LA (Joint Readiness Training Center – JRTC) and Hohenfels, Germany (Combat Maneuver Training Center – CMTC).  Last year, theThe group completed the second of two similaralso built ranges in recent years, in the U. K.UK and Canada, for the British Army.  Early in 2003,The TSBU was awarded separate contracts by Canada ($92 million) and Australia ($46 million) foris currently working on similar land combat training centers for Canada, Australia and in those nations.the Middle East. To meet new customer demand for mobile instrumented training, TSBU has also developed a transportable, deployable system, known as IHITS, now being fielded by the U. S.US 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.US Army and Marine Corps forces, as well as Air Force security forces, other U. S.US agencies and many international customers.  We produce MILES equipment in the U. S.US and at our New Zealand-based subsidiary, Oscmar International.

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TSBU’s newest segment,division, Simulation Systems, is the result of acquiring ECC International Corporation at the end of fiscal 2003.  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.

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Mission Support Services

CDA’s Mission Support Business Unit (MSBU), along with the separate Analysis & Learning Technology Division (ALTD), is a leading provider of tactical knowledge-based services to the U. S.US Government and allied nations, with an emphasis on military training.  MSBU/ALTD consistOur mission support business consists of nearly 2,5003,100 people located at 64 sites in 26 states and 18 other nations.  The unit’svarious places throughout the world.  Our personnel serve with their clients in their actual environment and prepare forces through comprehensive training, education and exercises to meet the full scope of their missions, from large scale combat operations, to special operations, peacekeeping or humanitarian assistance operations worldwide.  The unitsWe plan, prepare, execute and document realistic and focused mission rehearsal exercises (live and computer-based) as final preparation of forces prior to their deployment to mission areas.  In addition, the unitswe provide high level consultation and advisory services to the governments and militaries of allied nations.  U. S.US government service contracts are typically awarded on a competitive basis with options for multiple years.  In this competitive market, MSBU/ALTD are viewed as premier service providers and formidable competitors.  TheyWe typically compete as prime contractors to the government, but also team with other companies depending on the skills required.  Much of the business unit’sour early work centered on battle command simulation and training, in which military commanders are taught to make correct decisions in battle situations.  More recently, the business base has broadened to include live training support, distance learning, weapons effects modeling, intelligence analysis and military force modernization.

Principal MSBUOur programs include providing mission support services to two of the Army’s major combat training centers, the Joint Readiness Training Center (JRTC),CTCs, JRTC, as prime contractor, and the National Training Center (NTC), as a subcontractor.  These services include planning, executing and documenting large scale exercises aimed at stressing U. S.US forces in situations as close to actual combat as possible.

At U. S.US Joint Forces Command, Cubic supports and helps manage all aspects of the operations of the Joint Warfighting Center (JWFC).  On the Marine Air Ground Task Force Training Systems Support (MTSS) contract, Cubic provides “cradle-to-grave”comprehensive training and exercise support to U. S.US Marine forces worldwide, including real-world mission rehearsals.  We have planned and executed virtually all USMC simulation-based exercises worldwide since 1998, directly preparing Marines for combat operations.

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

At the U. S.US Army I Corps Battle Simulation Center, Cubic provides all technical and operational expertise necessary to support worldwide training, exercises, evaluations and mission rehearsals for I Corps active and reserve component units, the new Stryker brigades, other services and joint organizations.

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 weapons.  Cubic supports DTRA with modeling and simulations to assess and predict the effects of such weapons in combat and other environments, as well as the training of U. S.US forces, first responders, and other users of DTRA products.

ALTD has multiple contracts with government agencies for development and deployment of distance learning tools and programs to improve the quality and reach of training and education initiatives for large organizations.  ALTD’s principal business is in 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.

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Competition also exists among projects for funding in the defense budget.  While the U. S.US defense budget has seen sharpabove 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.  The U. S.US 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.  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 is athe 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, Cubic 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, New York / New Jersey region, Washington, D.C. / Baltimore / Virginia region, Los Angeles region, San Diego region, San Francisco, Minneapolis/St. Paul, Chicago, Houston, Atlanta, South Florida, Vancouver and Edmonton, Canada, Brisbane, Australia, Singapore, Bangkok, Thailand, 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 percent37.5% ownership, was awarded a contract called “PRESTIGE” to privatize the London Transport fare collection system.  This 17-year contract, now in its sixthseventh year, is the largest automated fare collection contract ever awarded.  Cubic’sOur share of the work, including all options exercised to date, exceeds $800 million over the 17-year life of the contract.

Industry Overview

Transport agencies, particularly those based in the U.S.,US, 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 increasing demand for open systems and commercial off-the-shelf products. This demand is evidenced by transit agency participationfierce competition to win these jobs, often resulting in industry standards initiatives to increase interoperability and to actively encourage more competition.low initial contract profitability.

Furthermore, advancesAdvances 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

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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,

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We also seek a reasonable balance between systems and service work in both the defense and transportation segments. In aggregate, approximately 35%41% of our sales revenue in 20032004 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. As an example,In September 2003 we recently acquired ECC International. This acquisitionInternational, which expanded our presence in the training market by adding virtual training, which complements our existing focus on live and constructive training. In August 2004 we made a small but strategic acquisition of a company named Traf-Park for $2.4 million, which expands our product offerings in transportation, to include parking systems for large regional transit authorities.

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 itsour 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 $5.5 million, $4.8 million, $8.4 million and $9.8 million in 2004, 2003, 2002, and 2001, 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 20032004 to $51 million, compared to $46 million compared toand $41 million in 2003 and 2002, and 2001;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 4,7005,700 persons at September 30, 2003.2004.

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.  From time to time we also obtain third party financing to assist in working capital requirements.

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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 multi-yearmultiyear 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 multi-yearmultiyear contract; and

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

Most U.S.US 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;

•                  the need to compete against companies or teams of companies that may be long-term 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;

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•                  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 to bid on contracts that are held by other companies and are scheduled to expire if the agency determinesdecides to extend the existing contract.  If we are unable to win 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.

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;

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

•                  unfamiliar 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;

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•                  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.   We are exposed to fluctuations in exchange rates, which could causehave 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 85% of our contracts in 20032004 were 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.

We may be liable for civil or criminal penalties under a variety of complex procurement 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.US 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; and

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

•the Sarbanes Oxley Act of 2002; and

•tax laws and regulations in the US 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.

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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 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 notes payable to several insurance companies.borrowing arrangements.  The terms of these notesborrowing arrangements include provisions that require and/or limit our levels of working capital, debt and tangible 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 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

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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.

For example, one of the subcontractors we engaged to perform a portion of the work on the PRESTIGE contract with TranSys failed to perform.  Consequently, we were forced to terminate this subcontractor and are completing the subcontractor’s work on our own.  We have incurred and will continue to incur additional costs to complete this work and have asserted a claim against the subcontractor to recover appropriate damages.  The subcontractor has claimed that we wrongfully terminated the subcontract and seeks damages from us.  This situation has resulted in our realizing lower profit margins than we had anticipated, and could limit increases in future profit margins and cash flows from the contract until the situation is resolved.  There can be no assurance that we will be able to complete the subcontractor’s work in a cost effective manner, that the failure will not adversely affect our contract with TranSys, that we will not be liable to the subcontractor’s claim or that we will be able to recover any of our damages from the subcontractor.14

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 recently completed the acquisition of ECC International Corp., a defense company that sells simulated and related training programs for armed forces, for a cost of approximately $43.9 million.  We may not be able to integrate this business, or any other acquisitionsacquired 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 also may have unexpected liabilities or adverse operating issues.

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 gross margins. 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 percent75% 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 have need forusing approximately 90,000150,000 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:

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Item 6. SELECTED FINANCIAL DATA.

FINANCIAL HIGHLIGHTS AND SUMMARY OF CONSOLIDATED OPERATIONS

(amounts in thousands, except per share data)

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

Per share amounts have been adjusted retroactively to reflect a 3-for-1 stock split which occurred in April 2002.

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above reduced 2004 net income in the fourth quarter by approximately $3.8 million after taxes. As discussed more fully under Transportation Systems Segment below, we settled a dispute with a former subcontractor, resulting in the former subcontractor agreeing to pay us damages, the 2004 impact of which was to approximately offset the costs of pursuing our claim.  Approximately $5.3 million, after taxes, of the 2003 net income was from gains on the sale of two parcels of real estate in the second and third quarters, representing about 20 cents per share.which were no longer used in the business. Net income in 2002 had included a fourth quarter tax benefit of $2.5 million and charges related to facility closing costs inmillion. The following table summarizes the United Kingdom of $0.6 million, after taxes, incurred in the first quarter. Goodwill amortization under former accounting rules had reduced 2001effects on our net income by about $1.7 million after taxes, while we had also realized a $0.9 million gain, after taxes, from the sale of securities in that year.these items and provides additional insight into our results of operations:

As depicted on

Without the table below, without these items described above, net income would have been about $31.3 million, $27.5 million and $21.6 million (pro forma $1.17, $1.03 and $.81 per share)grown by 13% in the years ended September 30, 2003, 2002 and 2001, respectively. Earnings before the items identified below grew by 14 percent from 20022004 compared to 2003 and by 27 percentabout 23% from 20012002 to 2002.2003. These increases were the result of increased sales volume from the defense segment and improved operating incomeperformance from both segments, with the biggest increases coming from the defense business.

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Gross margins declinedimproved to 22.2 percent23.9% in 2004 compared to 22.2% in 2003 and 23.9% in 2002. This improvement resulted primarily from 23.9 percentthe settlement reached with a subcontractor on the PRESTIGE contract, the impact of which is described more fully in 2002 and 23.1 percent in 2001. In the transportation segment sales increases came from the PRESTIGE contract in London, which has lower than average margins, and from new contracts in North America, which are in the development phase, a time when contracts typically yield lower margins. Gross margins in the defense segment also declined somewhat in 2003, due primarily to lower than normal margins from the operations and maintenance business. See the segment sections following for further details.section following.

Selling, general and administrative (SG&A) expenses grew by about $2.4 million from 2002 to 2003 and fell to 13.9 percentwere 14.8% of sales compared to 15.3 percent in 2002 and 15.2 percent in 2001. The increase13.9% in 2003 and 15.3% in 2002. Higher SG&A spendingexpenses in the defense segment came primarily from the transportation segment,business acquired in September 2003 and due to increasedan increase in selling expenses incurred in pursuit of new business opportunities. In the transportation systems segment the SG&A expense increase came primarily from legal, consulting and engineering support costs incurred related to a contractual dispute with a former subcontractor, on the PRESTIGE contract and other contract related legal matterswhich has now been settled. Fiscal 2003 SG&A spending decreased as a percentage of sales due to an increase in the U.S and Australia. In 2002 thesales volume without a significant increase in SG&A spending resulted from heightened proposal activity for potential new contracts in the defense segment, while the transportation segment increased its marketing efforts in Europe. In 2002, the transportation segment also incurred legal costs in connection with our dispute of a contract tender in Australia and we provided for costs related to shutting down a facility in England.spending.

Research and development (R&D) spending was lowercosts continued to be incurred primarily in 2003 thanconnection with customer funded activities in 2002 as we shifted engineering resources from2004, while company sponsored activities to customer funded development activities.R&D spending remained at about the same level as in 2003. We do not rely heavily on independentcompany 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 product development activity increased in 20032004 to $51 million, compared to $46 million compared toin 2003 and $41 million in 2002 and 2001;2002; however, these costs are included in cost of sales as they are directly related to contract performance.

WeAs mentioned above, we realized gainsa gain from the sale of two real properties during the year, onea split-dollar life insurance policy in San Diego County and the other in England. Net proceeds from the sale2004 of the San Diego property were $7.0$2.3 million which generated a pretax gainafter applicable income taxes of $6.2approximately $2.2 million. We had owned this property for more than 30 years and had previously used it in a divested operation, but have held the property as an investment for the past ten years. The gain from the sale of this propertythe policy was primarily realized in the second quarter. The facility south of London was sold for approximately $5.0 million, resulting inthird quarter, with a pretax gain of $2.2 million. We had owned that facility for nearly 20 years, but acquired a different facility in the same area last year and moved into the refurbished building this year, therefore, the old facility was no longer required. The gain from the sale of this property wasminor amount realized in the thirdfourth quarter.

Interest and dividend income decreased in both 20032004 and 2002,2003, because of declininglower interest rates, in both years and due to lower cash balances available for investmentinvestment. Other income increased in 2003. In addition, other income was lower2004 primarily due to a gain on the sale of marketable securities after having decreased in 2003 due to lower rental income because we sold the building in San Diego County described above, which was previously leased to an unrelated company.income.

Our effective tax rate for 20032004 was about 33.6 percent34.4% of pretax income compared to 28.1 percent33.6% in 20022003 and 33.0 percent28.1% in 2001.2002.

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The overall effective rate increased from 2003 to 2004 due to a higher tax gain on the sale of the life insurance policy and reduced tax credits.  Income tax expense for the year ended September 30,in 2002 was unusually low due to a $2.5 million tax benefit realized from our subsidiary in Denmark during the fourth quarter. We expect ourOur effective tax rate in 2004 to increase to 34 percent and to as high as 35 percent in following years as more of our income is generated from our U.S. businesses rather than from the U.K., where the corporate income tax rate is lower. This effective rate could be affected in future years by, among other factors, the

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mix of business between the U.S.US and foreign jurisdictions, our ability to take advantage of available tax credits, and audits of our records by taxing authorities.

In light of recent tax legislation that provides incentives for repatriation of capital to the US, we are currently evaluating the amount of capital we will require in Europe in the future and whether we might be able to take advantage of the provisions of the legislation by reinvesting some amount of capital in the United States. This decision will depend, in part, on the outcome of contract proposals we have submitted in Europe that is not yet known. Our policy is to not provide for US taxes on earnings from foreign operations because our intention is to grow our business in those foreign locations and we, therefore, consider the earnings to be indefinitely reinvested. However, if we were to decide to reinvest a portion of this capital in the U.S, we believe the related tax liability would not have a material impact on our results of operations or financial position.

Defense Segment

As depicted

Defense sales in the following table, defense segment sales increased2004 grew to $453 million from $314 million in fiscal 2002 to $365 million in fiscal 2003, a 16 percent24% increase. Growth in defense sales was 16% from 2002 to 2003. 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, overall defense sales increased 13% from 2003 to 2004. This growth followed an 11 percent increase in sales from 2001 to 2002. The increase in both years came from our existing defense training and government services businesses. The most significant growth in 2003 came fromdespite a 42 percent increasedecrease of nearly $20 million in training systems sales, other than from SSD, due primarily to significanta decline in air combat training sales from the 2003 level. Activity on the major new air combat training contract we won in 2003 was still in the early stages in 2004, while several previous air combat training contracts were substantially completed in the first quarter of 2004. MILES sales also decreased in 2004, but this decrease was more than offset by higher sales from ground combat training systems. Training systems sales increased 42% in 2003 because of new orders for our MILES products and air combat training systems. Government servicesCommunications and electronics business unit sales grew by 5 percentwere also higher in 2004 because of a contract we won in 2003 after having increased by 22 percent in 2002. We continued to solidify our position in 2003 as an important service provider todevelop a common data link subsystem (CDLS) for the U.S. government. Sales of communicationsUS Navy. Communications and electronics systemssales decreased by 7 percent7% in 2003 from the 2002 level. Government services sales increased by $57 million in 2004, a 38% increase. More than half of this increase came from a service contract at the Joint Readiness Training Center in Louisiana, due to a high level of activity related to the conflict in Iraq. Future sales volume from this contract will depend on customer requirements which are yet to be determined. Even without this one contract, government services sales grew by 20% in 2004, after having decreasedincreased by 11 percent5% in 2002. However, we were awarded several new communications contracts in 2003 that create potential for growth in this business area.2003.

Operating income in the defense segment was up by 37 percent over the 2002 level, from $17.9 million to $24.6 million. This40% in 2004, following an increase followed significant profit improvement from 2001 to 2002 as well.of 37% in 2003.  Higher operating income came primarily from all three business units, with the training systems business due to sales growth and improved profit marginsmost significant increase in 2004 coming from air combat training systems.government services.

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In transportation systems, the difference between total backlog and funded backlog represents extension of the service portion of the PRESTIGE contract for the final five years of the seventeen year contract. We have treated this portion of the contract as unfunded until we complete the initial system installation phase of the contract, which is expected to occur within the next several months. Options for the purchase of additional systems or equipment are not included in backlog until exercised.

In defense, theThe difference between total backlog and funded backlog represents options under multi-yearmultiyear service contracts. Funding for these contracts comes from annual operating budgets of the U.S.US government and the options are normally exercised annually. Options for the purchase of additional systems or equipment are not included in backlog until exercised, nor are IDIQ contracts until an order is received.

Business Acquisition

In late September 2003, we acquired all the shares of Orlando, Florida-based ECC International Corporation (ECC) for $43.9 million. TheMost of the purchase price was paid in fiscal 2003; however, approximately $5 million was not paid until October 2003 and is included in our cash flows for fiscal 2004. In August 2004, we acquired a small automated parking systems company in Montreal, Canada, called Traf-Park, for $2.4 million in cash. This is a strategic acquisition further strengthens our position in the defense marketplace, broadening the scope of our core training business to include virtual simulation capabilities.  Cubic Defense Applications has now formed a Simulation Systems Division, enhancing our position in Orlando, from which we conduct overall Central Florida business development and general management of key U.S. Marine Corps and Navy programs forbelieve will augment our Mission Support Business Unit. The acquisition

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had no impact on operating results for fiscal 2003, as it was made within days of the end of the fiscal year.product offerings to large regional transit customers.

New Accounting Standards

In November 2002, theRevised FASB issued Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (FIN 45), which makes changes in the accounting for, and disclosures of, guarantees. FIN 45 requires certain guarantees to be recorded at fair value rather than recording a liability only when a loss is probable and reasonably estimable. FIN 45 also requires a guarantor to make significant new disclosures, even when the likelihood of making any payments under the guarantee is remote. The disclosure requirements of the new standard were effective December 15, 2002 and the initial recognition and measurement provisions were applicable on a prospective basis to guarantees issued or modified after December 31, 2002. We did not have any guarantees outstanding as of September 30, 2003 that fall within the scope of FIN 45.

In April 2003, the FASB issued Interpretation No. 46 (FIN 46-R), “Consolidation of Variable Interest Entities (FIN 46), which will significantly change whether entities included” was issued in its scope are consolidated by their sponsors, transferors, or investors. FIN 46 introduces a new consolidation model,December 2003 and became effective in the variable interests model, which determines control based on potential variability in gains and losses of the entity being evaluated for consolidation. The new standard is effective at the end of fiscal years ending after December 15, 2003, which for us will be as of September 30,quarter ended March 31, 2004. WeTo date, we have not yet completed our evaluationinvested in any variable interest entities for which we are the primary beneficiary and, therefore, we have concluded that the adoption of theFIN 46-R had no impact if any, FIN 46 will have on our financial position andor results of operations.

Liquidity and Capital Resources

Growth in unbilled accounts receivable during the year resulted in negative cash flows from operations in both 2004 and 2003 of $28 million and $26 million, respectively, compared to positive cash flows from operations of $17 million in 2002 and $11 million in 2001. Cash2002. Operating cash flows from the defense segment were positive in 2003,all three years, while transportation systems operating cash flows have been negative the past two years. Defense operating cash flows in 2004 were only slightly positive despite the growth in operating income, due to an increase in working capital in support of the 24% sales increase. Although the sales growth caused accounts receivable to grow by $28 million in 2004, the level of working capital utilized in our defense business compares favorably to benchmark data from similar defense companies and we consider the level of receivables in defense to be within the normal range.

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accounting for a particular contract. Generally we record 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 more likely than not.probable. Provisions are made on a current basis to fully recognize any anticipated losses on contracts.

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.

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

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supportable, we believe that certain positions are likely to be challenged and that we may not succeed.prevail. We adjust these reserves in light of changing facts and circumstances, such as the progress of a tax audit.

TaxTa 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 outside the United States for the foreseeable future. These undistributed earnings totaled approximately $47.6$59.0 million at September 30, 2003.2004.

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,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 at September 30, 2003:follows:

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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 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 growthInflation

•                   Salary growth

•Expected return on plan assets

•     Retirement rates

•                  Retirement rates

•Mortality rates

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