PART I - FINANCIAL INFORMATION

ITEM 1 - FINANCIAL STATEMENTS

CUBIC CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

(amounts in thousands, except per share data)

See accompanying notes.

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CUBIC CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)

Note: The balance sheet at September 30, 2005 has been derived from the audited financial statements at that date.

See accompanying notes.

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CUBIC CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(in thousands)

See accompanying notes.

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CUBIC CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

March 31,June 30, 2006

Note 1 – Basis for Presentation

The accompanying unaudited consolidated condensed financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all information and footnotes required by accounting principles generally accepted in the United States for complete financial statements.

In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the quarter ended March 31,June 30, 2006 are not necessarily indicative of the results that may be expected for the year ending September 30, 2006. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s annual report on Form 10-K for the year ended September 30, 2005.

The preparation of the financial statements in conformity with U. S. generally accepted accounting principles requires management to make estimates and assumptions 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. Actual results could differ from those estimates.

Note 2 – Balance Sheet Details

The components of accounts receivable are as follows (in thousands):

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The amount classified as not currently due is an estimate of the amount of long-term contract accounts receivable that will not be collected within one year from March 31,June 30, 2006. Of this amount, approximately $17.5 million relates to the Prestige contract in the United Kingdom and the balance to other transportation systems contracts in the U.S.

Inventories consist of the following (in thousands):

At March 31,June 30, 2006, work in process and inventoried costs under long-term contracts includes approximately $6.6$5.6 million in costs incurred in advance of contract award or outside the scope of work on several contracts, primarily in the defense segment. Such costs were $5.8 million as of September 30, 2005. Management believes it is probable these costs, plus appropriate profit margin, will be recovered under contract change orders or upon the award of new contracts within the next year.

Note 3 – Comprehensive Income

Comprehensive income (loss) is as follows (in thousands):

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Note 4 – Segment Information

Business segment financial data is as follows (in millions):

Note 5 – Financing Arrangements

The Company has a committed five-year revolving credit agreement with a group of financial institutions in the amount of $150 million until March 2010. As of March 31,June 30, 2006, $35$35.2 million was outstanding under this agreement at a rate of 5.7%6.2% and is included in current liabilities because it is management’s intent to repay the borrowing within one year.

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Note 6 – Pension Plans

The components of net periodic pension benefits costs are as follows (in thousands):

Note 7 – DividendNew Accounting Pronouncement

On February 21,July 13, 2006, the Financial Accounting Standards Board of Directors declared a 9 cents per common share dividend payable on April 21, 2006, to shareholders of record at the close of business on Marchissued Interpretation No. (FIN) 48, Accounting for Uncertainty in Income Taxes, which is effective for fiscal years beginning after December 31, 2006. The $2.4 million dividend payablepurpose of FIN 48 is includedto clarify and set forth consistent rules for accounting for uncertain tax positions in other current liabilitiesaccordance with FAS 109, Accounting for Income Taxes. The cumulative effect of applying the provisions of this interpretation are required to be reported separately as an adjustment to the opening balance of March 31, 2006.retained earnings in the year of adoption. We are in the process of reviewing and evaluating FIN 48, and therefore the ultimate impact of its adoption is not yet known.

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CUBIC CORPORATION

ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

March 31,June 30, 2006

Our two primary businesses are in the defense and transportation industries. These are high technology businesses that design, manufacture and integrate complex systems and provide essential services to meet the needs of various federal and regional government agencies in the U.S. and other nations around the world.

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 engagement and virtual simulation 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 multi-agency, 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 for the quarter ended March 31,June 30, 2006 increased to $206.6$214.9 million compared to $182.0$213.8 million in the second fiscalthird quarter last year, an increase of 14%.The increase came from the defense1%. Defense segment which grew to $145.2 million from $120.2 million, while transportation systems sales were down slightly2% from $152.8 million in the third quarter of fiscal 2005 to $149.4 million in the third quarter this year. Transportation systems sales increased 8% from $57.2 million last year at $57.8to $61.8 million compared to $58.4 million.in the third quarter this year.

For the first sixnine months of the fiscal year, sales increased to $401.7$616.6 million in 2006, from $372.0$585.8 million last year, an increase of 8%5%. All of theThe sales increase came from both segments, with the defensebiggest increase coming from defense. Defense segment whichsales grew from $242.2$395.0 million in the first halfnine months of 2005 to $272.7$422.1 million this year, an increase of 13%7%. Transportation systems sales for the first sixnine months were $121.5$183.3 million this year compared to $122.3$179.5 million last year.year, an increase of 2%. See the segment discussions following for further analysis of segment sales.

Operating income in the secondthird fiscal quarter was $1.5increased to $10.3 million in both 2006 andcompared to $1.6 million in 2005. The transportation systemsDefense segment incurred an operating loss of $2.8income improved to $9.6 million for the quarter, compared to a loss of $5.6 million in the second quarter last year, while defense operating income decreased from $7.6 million in the secondthird quarter last year. The transportation systems segment generated operating income of 2005$1.1 million for the third quarter this year compared to an operating loss of $5.2 million in the secondsame quarter thislast year.

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Operating income for the first sixnine months of the fiscal year increased from $9.1$10.7 million in 2005 to $10.1$20.4 million this year due to the transportation systems segment generating a profit of $400

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thousand$1.5 million this year compared to a loss of $3.7$8.9 million in the first sixnine months last year. Defense systems operating income decreased from $14.2$21.8 million in the first halfnine months of last year to $11.1$20.7 million for the same period this year. See the segment discussions following for further analysis of operating income by segment.

Net income in the secondthird quarter was $729 thousand,$6.0 million, or 322 cents per share, this year compared to $554$822 thousand, or 23 cents per share, last year. A decreaseThe increase in operating income from the defense segment was offset byand improvement in the transportation systems segment from a reductionloss to a small profit resulted in operating loss from transportation systems.this improvement in net income compared to last year.

For the first sixnine months of the year, net income increased from $5.8$6.6 million, or 2225 cents per share, in 2005 to $11.2$17.2 million, or 4264 cents per share this year. The increase came primarily from better operating results in the transportation systems segment and a gain on the sale of real estate that had been held for investment purposes for many years, but was sold in the first quarter ended December 31, 2005.of the fiscal year. The gain from the sale of the investment real estate was approximately $4.3 million, after applicable income taxes, or about 16 cents per share.

Product cost of sales as a percentage of product sales increased from 83.7% in the second quarter last year to 89.7% this year due primarily to cost increases on contracts in both segments, as described in the segment discussions following. As a result of this cost growth in the second quarter, for the first half of the fiscal year cost of product sales grew from 81.7% of sales in 2005 to 86.7% in 2006.

Service cost of sales as a percentage of service sales increased from 78.9% in the second quarter of 2005 to 81.6% this year. This increase was due to lower sales from a transportation systems service contract in Europe that has a high profit margin, as described in the segment discussion following. This same contract caused service cost of sales as a percentage of sales to increase from 79.9% in the first half of 2005 to 81.7% in 2006.

Selling, general and administrative (SG&A) expenses decreased by $5.7$13.0 million from last year’s second quarter and decreased from 16.6% to 11.9% of sales, with the decrease coming primarily from the transportation systems segment. SG&A was higher than normal in the second quarter last year because the transportation systems segment had recorded an allowance for doubtful accounts provision of $4.2 million related to a contract in dispute. For the first sixnine months of the fiscal year, SG&A expenses decreased $11.5 million, from 15.7%14.2% to 11.7%11.4% of sales, with the decrease coming from both segments. In the first halfnine months last year, the defense segment had incurred higher than normal selling expenses related to contract proposals, while such activities returned to a more normal level in the first halfnine months this year. TransportationLower transportation systems selling expenses and staffing reductions also contributed to reduced SG&A expenses were lower for several reasons.in that segment. In addition, to thean allowance for doubtful accounts provision mentioned above,of more than $4 million had contributed to higher legalSG&A expenses were incurred last year relatedin transportation systems in the first nine months of 2005.

In December 2004, Financial Accounting Standards Board Position 109-2 was issued and established standards for how an issuer accounts for a special one-time dividends received deduction on the repatriation of certain foreign earnings to a dispute, that was settled, with a former subcontractor. In addition, staffing reductions and lower contract proposal costs this year contributedU.S. taxpayer pursuant to the decreaseAmerican Jobs Creation Act of 2004 (the Act). The Financial Accounting Standards Board (FASB) staff believes that the lack of clarification of certain provisions within the Act and the timing of the enactment necessitated a practical exception to the Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes (SFAS No. 109), requirement to reflect in SG&Athe period of enactment the effect of a new tax law. Accordingly, an enterprise was allowed time beyond the financial reporting period of enactment to evaluate the effect of the Act on its plan for reinvestment or repatriation of foreign earnings for purposes of applying SFAS No. 109. The Company determined during its third fiscal quarter of 2006 that it had sufficient information to make an informed decision on the impact of the Act on the Company’s repatriation plans. Based on that decision, the Company plans to repatriate approximately $48.0 million in transportation systems.extraordinary dividends, as defined by the Act, during the fourth quarter of 2006 and, accordingly, has recorded a $1.5 million tax liability as of June 30, 2006. The Company was also able to reverse approximately $900 thousand in tax reserves during the quarter ended June 30, 2006, which management believes are no longer required.

OurOther than the above third quarter tax provision adjustments, our projected effective tax rate for fiscal 2006 is 34.0%32.6% of pretax income, which is reflected in the provision recorded for the first six nine

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months of the year, compared to a rate of 33.3%30.4% used in last year’s first half.nine-month period. The projected2005 effective rate is higher this yearwas lower primarily because more of the operating income in 2005 came from the UK, where rates are lower than in the U.S. In addition, the U.S. research and development credit expired on December 31, 2005 and has not been extended by Congress.Congress, increasing the projected effective rate this year. The effective rate for fiscal 2006 could be affected by, among other factors, the mix of business between the U.S. and foreign jurisdictions, our ability to take advantage of available tax credits and audits of our records by taxing authorities.

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Defense Segment

Defense segment sales increased to $145.2decreased 2%, from $152.8 million in the quarter ended March 31, 2006, from $120.2 million in the secondthird quarter of fiscal 2005 a 21% increase.to $149.4 million in the third quarter this year. Communications and electronics sales increased more than 50%,decreased slightly, from $11.3$15.7 million in the secondthird quarter of 2005 to $17.1$15.5 million in the secondthird quarter this year. NewSales increased from contracts for the supply of data links for unmanned aerial vehicles (UAV) in the U.S. and U. K. added to, while sales of communications and electronics salesproducts decreased for the quarter, as well as increased sales of personnel locator systems and communications products.quarter. Training Systems sales increaseddecreased from $51.0$63.2 million in the secondthird quarter last year to $55.4$59.5 million this year, a 9% increase. Increased sales of tactical laser engagement systems and new6% decrease. New task orders for development of the next generation air combat training system more than offset slightlyresulted in higher air combat training sales; however, sales of ground combat training systems decreased. In addition, delayed U.S. government funding for small arms training systems in 2006 resulted in lower sales from ground combat and small arms training systems.this product line. Government services sales increased 24%, from $57.2 million in the second fiscalwere nearly equal to last year’s third quarter, of 2005 to $71.0at $72.0 million this year, compared to $72.2 million last year. After having decreased significantly in the first quarter this year,Higher sales from contracts for the key contract atmodeling the Joint Readiness Training Center (JRTC) in Fort Polk, LA returned to a level consistent with the previous year, whileeffects of weapons of mass destruction were offset by lower sales from all other significant sectors of this business unit increased over last year.mission support activities. This can be attributed in part to reduced U.S. government funding during the period for battlefield simulation support activities.

Defense segment sales for the first sixnine months of the fiscal year increased to $272.7$422.1 million in 2006 from $242.2$395.0 million last year, a 13%7% increase. Communications and electronics sales were higher by 34%, having increased 20% from $24.6$40.3 million to $32.9$48.4 million for the six monthnine-month period. TheNearly all of the increase came from contracts for the six month period resulted from the same factors as in the second quarter.data link systems. Training systems sales increased from $98.3$161.5 million in the first sixnine months of 2005 to $112.9$172.4 million this year, a 15% increase. This resultedprimarily from increased sales of tactical laser

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requirements, asmaintenance phase, which generates lower sales than the customersystem design and installation phase. Service sales were lower in Europe primarily because of the gradual phase-out of old ticket issuing equipment which is phasing out the oldbeing replaced by modern equipment and replacing it with new equipment of modern design which does not require the same support from us.requiring less maintenance. We are competing for the contracts to provide the new equipment and have been successful in winning a portion of the work awarded thus far. In addition, a contract for the maintenance of communications equipment in London was completed at the end of fiscal 2005, and was not renewed in 2006, further impacting service sales for the quarter and first halfnine months of the year. We anticipate lower sales from the transportation systems segment in fiscal 2007 due to the expected completion of several systems contracts in North America and a decrease in opportunities to sell new systems in the near term.

Transportation systems incurred an operating lossgenerated a modest profit of $2.8$1.1 million in the secondthird quarter this year compared to a loss of $5.6$5.2 million in the secondthird quarter of 2005. Cost growth of $4.8 million on certain systems contracts in North America and Australia resultedpartially offset profits from service related contracts and European systems contracts. Improved operating performance on the Prestige contract also contributed to the operating profit for the quarter.

The design, manufacture and a substantial portion of the installation of equipment on the North American and Australian contracts referred to above is complete. Nevertheless, there continues to be risk that we will not be able to complete these contracts within our current estimates to complete. These risks include potential higher costs for software integration, customer-caused delays in the loss in the second quarter, as we continuedinstallation of hardware and customer directed changes to work toward completion of these contracts. The design and manufacturing activity on all but one of these contracts is substantially complete, however, the current challenge is in completing the installation and system integration.configuration. We also believe that customer directed work outside the scope of the contracts and customer delay of progress toward completion of these contracts has resulted in a portion of the cost growth in this quarter and for several previous quarters.we have already experienced. We are currently assessingcontinuing to assess the contractual basis for claims on these contracts and measuring the cost impact related to these customer required changes to the scope of work. While we believe we are entitled to recover some of the additional costs we have incurred and costs we may incur in the future due to these customer delays or changes, the process is a long one and the amount of recovery from claims cannot be determined at this time. Therefore, all related costs have been expensed and no revenues from these claims have been recorded to-date.

Service contracts in North America and Europe continued to generate operating income in the second quarter, although operating income from European service contracts was lower than last year due primarily to the decrease in sales volume described above. The decrease in sales volume from the Prestige contract, mentioned above, also decreased operating income for the quarter.

For the first six monthsthree quarters of the fiscal year, operating income in the transportation systems segment was $400 thousand this year,$1.5 million, compared to an operating loss of $3.7$8.9 million last year. TheLosses recorded on the North American and Australian contracts mentioned above generated greater losses in 2005 thanwere lower in the first halfnine months of this year.2006 than in 2005. However, lower sales from the Prestige contract and European service contracts resulted in decreased operating income from these contracts in the current year compared to last year.

Backlog

As reflected in the table below, total backlog decreased about $70approximately $32 million at March 31,June 30, 2006 compared to September 30, 2005.2005, but increased by $38 million during the third quarter. Transportation systems backlog decreased by $54$24 million, while defense backlog decreased about $16 million.$8 million for the first nine months of the fiscal year. Funded backlog decreased by $47only $1 million during the six-monthnine-month period, with transportation systems decreasing by $54$24 million and defense funded backlog increasing by $7$23 million.

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