borrowings currently bear interest at a rate equal to, at CPI’s option, LIBOR plus 2.25% per annum or the ABR plus 1.25% per annum, payable quarterly. The ABR is the greater of (a) the Prime Rate and (b) the Federal Funds Rate plus 0.50%. In addition to customary fronting and administrative fees under the Senior Credit Facility, CPI pays letter of credit participation fees equal to the applicable Revolver LIBOR margin per annum on the average daily amount of the letter of credit exposure, and a commitment fee of 0.50% per annum on the average daily unused amount of revolving commitment. As of September 30, 2005 (1) the Term Loan borrowing consisted of one tranche of $80 million with interest payable on November 14, 2005, at 6.03% per annum and (2) a Revolving commitment of $4.7 million for letter of credit exposure; with Letter of Credit participation fees and fronting fees payable quarterly at a combined interest rate of 3.0% per annum.

The Senior Credit Facility requires 1.0% of the original Term Loan amount to be repaid annually in quarterly installments of 0.25% beginning June 30, 2004 and continuing for five years, with the remainder due in equal quarterly installments thereafter. CPI is required to prepay its outstanding loans, subject to certain exceptions and limitations, with net cash proceeds received from certain events, including, without limitation (1) all such proceeds received from certain asset sales by CPI Holdco, CPI or any of CPI’s subsidiaries; (2) all such proceeds received from issuances of debt (other than certain specified permitted debt) or preferred stock by CPI Holdco, CPI or any of CPI’s subsidiaries, (3) all such proceeds paid to CPI Holdco, CPI or any of CPI’s subsidiaries from casualty and condemnation events in excess of amounts applied to replace, restore or reinvest in any properties for which proceeds were paid within a specified period and (4) 50% of such proceeds received from issuances of common equity by, or equity contributions to, CPI Holdco.

CPI is also required to make an annual prepayment within 90 days after the end of each fiscal year based on a calculation of Excess Cash Flow (‘‘ECF’’), as defined in the Senior Credit Facility, multiplied by a factor of 25%, 50% or 75% depending on the leverage ratio at the end of the fiscal year, less optional prepayments made during the fiscal year. On December 30, 2004, CPI made an ECF payment of $3.9 million. The ECF payment was applied pro rata, in accordance with the provisions of the Senior Credit Facility, against the remaining scheduled installments of Term Loan principal due up to, but not including, the September 30, 2009 scheduled principal installment. Based on a forecasted calculation of ECF, CPI does not anticipate that it will be required to make an ECF payment for the fiscal year ending September 30, 2005, due to the optional prepayment made in March 2005 in excess of the ECF payment calculation.

CPI can make optional prepayments on the outstanding loans at any time without premium or penalty, except for customary ‘‘breakage’’ costs with respect to LIBOR loans. On March 31, 2005, CPI made an optional prepayment of $5.7 million, in addition to the quarterly scheduled Term Loan amortization payment. The optional prepayment was applied pro rata, in accordance with the provisions of the Senior Credit Facility, against the remaining scheduled installments of Term Loan principal due up to June 30, 2009, with the balance applied to the September 30, 2009 installment.

The Senior Credit Facility contains a number of covenants that, among other things, restrict, subject to certain exceptions, the ability of CPI Holdco, CPI and CPI's subsidiaries: sell assets; engage in mergers and acquisitions; pay dividends and distributions or repurchase their capital stock; incur additional indebtedness or issue equity interests; make investments and loans; create liens or further negative pledges on assets; engage in certain transactions with affiliates; enter into sale and leaseback transactions; amend agreements or make prepayments relating to subordinated indebtedness; and amend or waive provisions of charter documents in a manner materially adverse to the lenders. CPI and CPI’s subsidiaries must comply with: a minimum interest coverage ratio; a maximum total leverage ratio; a minimum fixed charge coverage ratio; and a maximum capital expenditures limitation, each calculated on a consolidated basis for CPI and CPI’s subsidiaries. CPI Holdco must also comply with a minimum interest coverage ratio, a minimum fixed charge coverage ratio and a maximum leverage ratio, each calculated on a consolidated basis for CPI Holdco and its subsidiaries. As of September 30, 2005, CPI and CPI Holdco were in compliance with all Senior Credit Facility financial covenants.

Subject in certain cases to applicable notice provisions and grace periods, events of default under the Senior Credit Facility include, among other things: failure to make payments when due; breaches

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of representations and warranties in the documents governing the Senior Credit Facility; non-compliance by CPI Holdco, CPI and/or CPI’s subsidiaries with certain covenants; failure by CPI Holdco, CPI and/or CPI’s subsidiaries to pay certain other indebtedness or to observe any other covenants or agreements that would allow acceleration of such indebtedness, collectively in excess of $5.0 million at any time; events of bankruptcy or insolvency of CPI Holdco, CPI and/or CPI’s subsidiaries; certain uninsured and unstayed judgments of $5.0 million or more against CPI Holdco; impairment of the security interests in the collateral or the guarantees under the Senior Credit Facility; and a change in control, as defined in the documents governing the Senior Credit Facility.

8% Senior Subordinated Notes of CPI

In connection with the Merger, on January 23, 2004, CPI issued $125 million in aggregate principal amount of its 8% Notes. The proceeds of the 8% Notes were used to redeem the Predecessor’s outstanding indebtedness and pay part of the Merger consideration. The 8% Notes have no sinking fund requirements.

The 8% Notes bear interest at the rate of 8.0% per year, payable on February 1 and August 1 of each year. The 8% Notes will mature on February 1, 2012. The 8% Notes are unsecured obligations, jointly and severally guaranteed by CPI Holdco and each of CPI’s domestic subsidiaries. The payment of all obligations relating to the 8% Notes are subordinated in right of payment to the prior payment in full in cash or cash equivalents of all senior debt (as defined in the indenture governing the 8% Notes) of CPI, including debt under the Senior Credit Facility. Each guarantee of the 8% Notes is and will be subordinated to guarantor senior debt (as defined in the indenture governing the 8% Notes) on the same basis as the 8% Notes are subordinated to CPI’s senior debt.

At any time or from time to time on or after February 1, 2008, CPI, at its option, may redeem the 8% Notes, in whole or in part, at the redemption prices (expressed as percentages of principal amount) set forth below, together with accrued and unpaid interest thereon, if any, to the redemption date, if redeemed during the 12-month period beginning on February 1 of the years indicated below:

Year				Optional Redemption Price
2008				104%
2009				102%
2010 and thereafter				100%

At any time or from time to time prior to February 1, 2007, and subject to certain conditions, CPI may redeem up to 35% of the aggregate principal amount of the 8% Notes at a redemption price equal to 108% of the principal amount of the 8% Notes to be redeemed, plus accrued and unpaid interest to the date of redemption, with the net cash proceeds of one or more qualified equity offerings. At any time on or prior to February 1, 2008, the 8% Notes may also be redeemed or purchased (by CPI or any other person) in whole but not in part, at CPI’s option, upon the occurrence of a change of control (as defined in the indenture governing the 8% Notes) at a price equal to 100% of the principal amount of the 8% Notes, plus a ‘‘make-whole’’ premium (as defined in the indenture governing the 8% Notes) to the redemption price on February 1, 2008, and accrued and unpaid interest, if any, to, the date of redemption or purchase.

Upon a change of control, CPI will be required to make an offer to purchase all or any part of the 8% Notes for a cash price equal to 101% of the principal amount, plus accrued and unpaid interest thereon, if any, to the date of purchase.

The indenture governing the 8% Notes contains a number of covenants that, among other things, restrict, subject to certain exceptions, the ability of CPI and its restricted subsidiaries (as defined in the indenture governing the 8% Notes) to incur additional indebtedness, sell assets, consolidate or merge with or into other companies, pay dividends or repurchase or redeem capital stock or subordinated indebtedness, make certain investments, issue capital stock of their subsidiaries, incur liens and enter into certain types of transactions with their affiliates.

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Events of default under the indenture governing the 8% Notes include: failure to make payments on the 8% Notes when due; failure to comply with covenants in the indenture governing the 8% Notes; a default under certain other indebtedness of CPI or any of its restricted subsidiaries that is caused by a failure to make payments on such indebtedness or that results in the acceleration of the maturity of such indebtedness; the existence of certain final judgments or orders against CPI or any of the restricted subsidiaries; and the occurrence of certain insolvency or bankruptcy events.

Floating Rate Senior Notes of CPI Holdco

On February 22, 2005, CPI Holdco issued $80.0 million in principal amount of its FR Notes. The FR Notes were issued at a 1% discount. The proceeds from the issuance of FR Notes were used to make a distribution to stockholders of CPI Holdco of approximately $75.8 million and to pay fees and expenses of approximately $3.5 million associated with the issuance of FR Notes. The FR Notes have no sinking fund requirements.

The FR Notes require interest payments at an annual interest rate, reset at the beginning of each semi-annual period, equal to the then six-month LIBOR plus 5.75%, payable semiannually on February 1 and August 1 of each year. CPI Holdco may, at its option, elect to pay interest through the issuance of additional FR Notes for any interest payment date on or after August 1, 2006 and on or before February 1, 2010. If CPI Holdco elects to pay interest through the issuance of additional FR Notes, the annual interest rate on the FR Notes will increase by an additional 1% step-up, with the step-up increasing by an additional 1% for each interest payment made through the issuance of additional FR Notes (up to a maximum of 4%). The FR Notes will mature on February 1, 2015.

The FR Notes are general unsecured obligations of CPI Holdco. The FR Notes are not guaranteed by any of CPI Holdco’s subsidiaries and are structurally subordinated to all existing and future indebtedness and other liabilities of CPI Holdco’s subsidiaries. The FR Notes are senior in right of payment to CPI Holdco’s existing and future indebtedness that is expressly subordinated to the FR Notes.

At any time or from time to time prior to February 1, 2007, CPI Holdco, at its option, may redeem the FR Notes in whole or in part at a ‘‘make whole’’ premium, plus accrued and unpaid interest to the date of redemption. At any time or from time to time on or after February 1, 2007, CPI Holdco, at its option, may redeem the Notes in whole or in part at the redemption prices (expressed as percentages of principal amount) set forth below, together with accrued and unpaid interest thereon, if any, to the redemption date, if redeemed during the 12-month period beginning on February 1 of the years indicated below:

Year				Optional Redemption Price
2007				103%
2008				102%
2009				101%
2010 and thereafter				100%

At any time or from time to time prior to February 1, 2007, and subject to certain conditions, CPI Holdco, at its option, may redeem up to 35% of the aggregate principal amount of the FR Notes at a redemption price equal to 100% of the principal amount of the FR Notes to be redeemed, plus a premium equal to the interest rate per annum on the FR Notes applicable on the date on which the notice of redemption is given, plus accrued and unpaid interest to the date of redemption, with the net cash proceeds of one or more qualified equity offerings.

Upon a change of control, as defined in the indenture governing the FR Notes, CPI Holdco will be required to make an offer to purchase all or any part of the outstanding FR Notes for a cash price equal to 101% of the principal amount, plus accrued and unpaid interest thereon, if any, to the date of purchase.

The indenture governing the FR Notes contains certain covenants that, among other things, limit the ability of CPI Holdco and its restricted subsidiaries (as defined in the indenture governing the FR

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Notes) to incur additional indebtedness, sell assets, consolidate or merge with or into other companies, pay dividends or repurchase or redeem capital stock or subordinated indebtedness, make certain investments, issue capital stock of their subsidiaries, incur liens and enter into certain types of transactions with their affiliates.

Events of default under the indenture governing the FR Notes include: failure to make payments on the FR Notes when due; failure to comply with covenants in the indenture governing the FR Notes; a default under certain other indebtedness of CPI Holdco or any of its restricted subsidiaries that is caused by a failure to make payments on such indebtedness or that results in the acceleration of the maturity of such indebtedness; the existence of certain final judgments or orders against CPI Holdco or any of the restricted subsidiaries; and the occurrence of certain insolvency or bankruptcy events.

Dividends from CPI to Holdco

For fiscal year 2005, CPI paid $4.1 million of cash dividends to CPI Holdco to fund cash interest payments of $3.1 million on the FR Notes and to make a $1.0 million payment for collateral on the Swap (as defined under Item 7A ‘‘Quantitative and Qualitative Disclosures About Market Risk.’’). CPI Holdco’s future ability to make semi-annual cash interest payments on its FR Notes and any interest and related obligations will depend on CPI’s ability to make dividends to CPI Holdco in the amounts necessary for such payments. The agreements governing the Senior Credit Facility and the indenture governing the 8% Notes impose restrictions on CPI’s ability to make these payments. CPI’s ability to make these payments will depend, among other things, on CPI’s level of indebtedness at the time of the proposed dividend, the amount of dividends, distributions and certain other restricted payments made in the past and whether CPI is in default under the agreements governing its debt. 

San Carlos Sale Agreement

In February 2003, we entered into an agreement to sell the land and close our facilities located in San Carlos, California. The purchase price is $23.8 million. Under the sale agreement, the buyer has paid us a $13.0 million deposit on the purchase price, which we are using to defray the costs of moving our San Carlos operations to our Palo Alto facility and to a new location in the Palo Alto area. The $13.0 million deposit is nonrefundable unless we breach the sale agreement.

The closing of the sale is subject to a number of conditions, including the requirement that we vacate our facilities and obtain regulatory closure of certain permitted equipment located on the property. Although there can be no assurance that the sale of the San Carlos property will occur, we expect to close the sale of the property in fiscal year 2007.

As of September 30, 2005, the San Carlos land and building was classified as held for use in property, plant and equipment and the advance payments from the sale of the property, aggregating $13.5 million, are classified as a long-term liability in the accompanying Consolidated Balance Sheets. As of September 30, 2005, we had capitalized recoverable selling costs of $0.7 million relating to the sale of the San Carlos property and classified these amounts as other long-term assets in the Consolidated Balance Sheets. As of September 30, 2005, the San Carlos land and building had a net book value of $23.7 million and the building continues to be depreciated over its remaining useful life. Based on current projections, we do not expect to recognize a loss on the sale of the San Carlos property.

Capital Expenditures

Our continuing operations typically do not have large capital expenditure requirements. Capital expenditures are generally made to replace existing assets, increase productivity, facilitate cost reductions or meet regulatory requirements. Capital expenditures were $3.1 million, $3.8 million and $17.1 million in fiscal years 2003, 2004 and 2005, respectively. The relocation of the San Carlos operations is expected to be completed in fiscal year 2007 with additional capital expenditures of approximately $5 million in fiscal year 2006. Total capital expenditures for fiscal year 2006 are

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expected to be approximately $14 million, including approximately $5 million to complete the relocation of the San Carlos operations, $4 million for a proposed expansion of the Canadian facility to accommodate expected growth and $5 million for ongoing capital expenditures.

Contractual Obligations

The following table summarizes our significant contractual obligations at September 30, 2005 and the effect that such obligations are expected to have on our liquidity and cash flows in future periods (in thousands):

				Total				Less than 1 year				1-3 years				3-5 years				More than 5 years
Debt obligations				$	285,000				—				—				80,000				205,000
Operating leases					8,331				1,303				1,881				1,488				3,659
Total cash obligations				$	293,331				1,303				1,881				81,488				208,659
Standby letters of credit				$	4,708				4,708				—				—				—

The expected timing of payment amounts of the obligations is estimated based on current information; timing of payments and actual amounts paid may be different.

Recent Events

On December 15, 2005, CPI Holdco and CPI entered into Amendment No. 3 (the ‘‘Amendment’’), to the Senior Credit Facility. The Amendment increased the commitments under the Term Loan by $10 million, and CPI borrowed an additional $10 million thereunder. In addition, among other things, the Amendment (1) permitted CPI to pay a dividend (not to exceed $20 million) to CPI Holdco to fund a dividend by CPI Holdco to its stockholders, (2) amends the definition of Excess Cash Flow in the Senior Credit Facility to decrease Excess Cash Flow for CPI’s fiscal year 2006 by the excess of the amount of the dividend described in clause (2) over the gross proceeds of the $10 million additional borrowing, and (3) permits CPI or CPI Holdco to use up to $70 million of the proceeds of the first equity issuance by CPI Holdco to repurchase or redeem the FR Notes or the 8% Notes.

CPI used the proceeds of the additional Term Loan borrowing to fund a portion of a special cash dividend of $17 million paid to the holders of CPI Holdco’s common stock on December 15, 2005. In addition, on December 15, 2005, CPI's Board of Directors approved a payment of $3,250,000 in bonuses to CPI employees and directors (other than directors who are employees or affiliates of Cypress) to reward them for the increase in Company value.

Recent Accounting Pronouncements

In March 2004, the Emerging Issues Task Force (‘‘EITF’’) reached a consensus on Issue No. 03-01, ‘‘The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments’’ (‘‘EITF 03-01’’). EITF 03-01 provides guidance on other-than-temporary impairment models for marketable debt and equity securities accounted for under Statement of Financial Accounting Standards (‘‘SFAS’’) No. 115, ‘‘Accounting for Certain Investments in Debt and Equity Securities,’’ and non-marketable equity securities accounted for under the cost method. The EITF developed a basic three-step model to evaluate whether an investment is other-than-temporarily impaired. The Financial Accounting Standards Board (‘‘FASB’’) issued EITF 03-01-1 in September 2004, which delayed the effective date of the recognition and measurement provisions of EITF 03-01. We do not expect the adoption of EITF 03-01 to have a material impact on our results of operations or financial condition.

In December 2004, the FASB issued SFAS No. 123 (revised 2004) ‘‘Share-Based Payments’’ ("SFAS No. 123R"). SFAS No. 123R requires entities to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award and recognize the cost over the period during which an employee is required to provide service

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in exchange for the award. SFAS No. 123R eliminates the alternative method of accounting for employee share-based payments previously available under APB No. 25. The Company is considered a non-public entity under SFAS No. 123R, accordingly, the Company is required to adopt SFAS No. 123R in the first quarter of its fiscal year 2007. We have not yet determined the impact of applying the provisions of SFAS No. 123R.

In November 2004, the FASB issued SFAS No. 151, ‘‘Inventory Costs—an amendment of ARB No. 43, Chapter 4’’, which is the result of the FASB’s project to reduce differences between U.S. and international accounting standards. SFAS No. 151 requires idle facility costs, abnormal freight, handling costs, and amounts of wasted materials (spoilage) be treated as current-period costs. Under this concept, if the costs associated with the actual level of spoilage or production defects are greater than the costs associated with the range of normal spoilage or defects, the difference would be charged to current-period expense, not included in inventory costs. We are required to adopt SFAS No. 151 in the beginning of fiscal year 2006 and its adoption is not expected to have a significant impact on our results of operations or financial condition.

In December 2004, the FASB issued SFAS No. 153, ‘‘Exchanges of Nonmonetary Assets,’’ (‘‘SFAS No. 153’’) an amendment of APB Opinion No. 29. SFAS No. 153 addresses the measurement of exchanges of nonmonetary assets and redefines the scope of transactions that should be measured based on the fair value of the assets exchanged. SFAS No. 153 is effective for nonmonetary asset exchanges beginning in our first quarter of fiscal year 2006. We do not expect the adoption of SFAS No. 153 to have a material impact on our results of operations or financial condition.

In March 2005, the FASB issued Interpretation No. 47, ‘‘Accounting for Conditional Asset Retirement Obligations,’’ which clarifies that an entity is required to recognize a liability for the fair value of a conditional asset retirement obligation if the fair value can be reasonably estimated even though uncertainty exists about the timing and (or) method of settlement. We are required to adopt Interpretation No. 47 by the end of fiscal year 2006. We do not expect the implementation of Interpretation No. 47 to have a significant impact on our results of operations or financial condition.

In May 2005, the FASB issued SFAS No. 154, ‘‘Accounting Changes and Error Corrections.’’ SFAS No. 154 replaces APB Opinion No. 20, ‘‘Accounting Changes,’’ and SFAS No. 3, ‘‘Reporting Accounting Changes in Interim Financial Statement,’’ and changes the requirements for the accounting for and reporting of a change in accounting principle. We are required to adopt SFAS No. 154 for accounting changes and error corrections in fiscal year 2007. Our results of operations and financial condition will only be impacted by SFAS No. 154 if we implement changes in accounting principle that are addressed by the standard or correct accounting errors in future periods.

In June 2005, the FASB issued a FASB Staff Position (‘‘FSP’’) interpreting FASB Statement No. 143, ‘‘Accounting for Asset Retirement Obligations,’’ specifically FSP 143-1, ‘‘Accounting for Electronic Equipment Waste Obligations’’ (‘‘FSP 143-1’’). FSP 143-1 addresses the accounting for obligations associated with Directive 2002/96/EC (‘‘Directive’’), Waste Electrical and Electronic Equipment, which was adopted by the European Union (‘‘EU’’). The FSP provides guidance on how to account for the effects of the Directive but only with respect to historical waste associated with products placed on the market on or before August 13, 2005. FSP 143-1 is effective the later of the first reporting period ending after June 8, 2005, or the date of the adoption of the law by the applicable EU-member country. The adoption of FSP 143-1 did not have a material impact on our results of operations or financial condition.

In June 2005, the EITF reached a consensus on Issue No. 05-06, ‘‘Determining the Amortization Period for Leasehold Improvements’’ (‘‘EITF 05-06’’). EITF 05-06 provides guidance for determining the amortization period used for leasehold improvements acquired in a business combination or purchased after the inception of a lease, collectively referred to as subsequently acquired leasehold improvements. EITF 05-06 provides that the amortization period used for the subsequently acquired leasehold improvements to be the lesser of (a) the subsequently acquired leasehold improvements’ useful lives, or (b) a period that reflects renewals that are reasonably assured upon the acquisition or the purchase. EITF 05-06 is effective on a prospective basis for subsequently acquired leasehold improvements purchased or acquired in periods beginning after the date of the FASB’s ratification,

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which was on June 29, 2005. We do not expect the adoption of EITF 05-06 to have a material impact on our results of operations or financial condition.

Critical Accounting Policies

Management is required to make judgments, assumptions and estimates in preparing our financial statements and related disclosures in conformity with accounting principles generally accepted in the United States. The following critical accounting policies are those policies that management believes affect its more significant estimates and assumptions used in preparation of our consolidated financial statements.

Revenue recognition:    The estimated sales values of performance under certain contracts to commercial customers and U.S. Government fixed price contracts are recognized under the percentage of completion method of accounting. When applying the percentage of completion method, we rely on estimates of total expected contract revenue and costs. Recognized revenues and profit are subject to revisions as the contract progresses towards completion. Revisions in profit estimates are charged to income in the period in which they become determinable.

Allowance for doubtful accounts:    We monitor the creditworthiness of our customers based on a variety of factors, including the length of time the receivables are past due, the financial health of the customer, economic conditions and historical experience. If collectibility is considered uncertain, then we will record a reserve to reduce the receivable to the amount considered collectible. If circumstances change, then further adjustments could be required.

Warranty obligations:    Our products are generally subject to warranties, and we provide for the estimated future costs of repair, replacement or customer accommodation at the time of sale as an additional cost of the sale. Management’s estimates are based on historical costs for warranty and are adjusted when circumstances indicate that future costs are expected to vary from historical levels. If actual product failure rates or material usage incurred differ from our estimates, then revisions to the estimated warranty liability would be required.

Inventory valuation:    We review inventory quantities on hand and adjust for excess and obsolete inventory based primarily on historical usage rates and our estimates of product demand and production. Actual demand may differ from our estimates, in which case we may have understated or overstated the provision required for obsolete and excess inventory, which would have an impact on our operating results.

We also review the carrying value of inventory for lower of cost or market on an individual product or contract basis. A loss reserve is charged to cost of sales if product cost or the estimated contract cost at completion is in excess of net realizable value (selling price less estimated cost of disposal). If actual contract cost at completion is different than originally estimated, then a loss or gain provision adjustment is recorded that would have an impact on our operating results.

Goodwill and other intangible assets and long-lived assets:    Goodwill represents the excess of acquisition costs over the estimated fair value of the net assets acquired. The FASB issued SFAS No. 142, ‘‘Goodwill and Other Intangible Assets,’’ which requires that amortization of goodwill cease and that we evaluate the recoverability of goodwill and other intangible assets annually, or more frequently if events or changes in circumstances, such as a decline in sales, earnings or cash flows, or material adverse changes in the business climate, indicate that the carrying value of an asset might be impaired. Goodwill is considered to be impaired when the net book value of a reporting unit exceeds its estimated fair value. Our reporting units consist of our six operating divisions.

Fair values are established using a discounted cash flow methodology (specifically, the income approach). The determination of discounted cash flows is based on our strategic plans and long-range forecasts. The revenue growth rates included in the forecasts are our best estimates based on current and anticipated market conditions, and the profit margin assumptions are projected based on the current and anticipated costs structures.

We perform an annual evaluation for the impairment of long-lived assets, other than goodwill, based on expectations of non-discounted future cash flows compared to the carrying value of the

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operating division in accordance with SFAS No. 144, ‘‘Accounting for the Impairment or Disposal of Long-Lived Assets.’’ Our cash flow estimates are based upon historical cash flows, as well as management projections of future cash flows in connection with our annual company-wide planning process, and include a terminal valuation based upon a multiple of EBITDA. We estimate the EBITDA multiple by reviewing comparable company information and other industry data. We believe that our procedures for estimating gross future cash flows, including the terminal valuation, are reasonable and consistent with current market conditions.

Purchase accounting:    Accounting for business combinations requires the allocation of purchase price to identifiable tangible and intangible assets and liabilities based upon their fair value. The allocation of purchase price is highly judgmental and requires the extensive use of estimates and fair value assumptions, which can have a significant impact on operating results. As a result of the Merger, the assets acquired and liabilities assumed were adjusted to reflect fair value, and the excess of the purchase price over the fair value was recorded as goodwill. The revised fair values significantly impacted our results of operations subsequent to the Merger and their comparability to the results of operations of the Predecessor.

Item 7A:    Quantitative and Qualitative Disclosures About Market Risk

Our exposure to market risk for changes in interest rates relates primarily to our long-term debt and our investment in overnight government securities.

We have variable rate debt that comprises an $80 million term loan due in 2010 under our Senior Credit Facility and $80 million in FR Notes. Our variable rate debt is subject to changes in the prime rate and the LIBOR rate. We entered into an interest rate swap contract (the ‘‘Swap) with a notional amount of $80.0 million to effectively convert the FR Notes to a fixed rate of 9.9% through the Swap maturity date in January 2008. We also have $125 million of fixed rate 8% Notes.

We performed a sensitivity analysis to assess the potential loss in future earnings that a 10% increase in interest rates over a one-year period would have on the variable rate $80 million term loan under our Senior Credit Facility. The impact was determined based on the hypothetical change from the end of period market rates over a period of one year and results in a net decrease of future annual earnings of approximately $0.3 million.

Foreign Currency Exchange Risk

Although the majority of our revenue and expense activities are transacted in U.S. dollars, we do transact business in foreign countries. Our primary foreign currency cash flows are in Canada and several European countries. We have limited market risk exposure from foreign currency financial instruments. The functional currency for all of our foreign subsidiaries is the U.S. Dollar. Most sales contracts are in U.S. Dollars, and foreign sales entities purchase inventory from our North American manufacturing operations. Our Canadian manufacturing operation purchases large quantities of different high power microwave devices from our U.S. manufacturing operations. Gains or losses resulting from the translation into U.S. dollars of amounts denominated in foreign currencies are included in the determination of net income or loss. We limit our foreign currency translation exposure primarily through natural hedging (offsetting foreign currency payables with foreign currency receivables). These efforts reduce, but do not eliminate, the impact of foreign currency movements on our financial results.

In an effort to reduce our foreign currency exposure to Canadian dollar denominated expenses, we entered into Canadian dollar forward contracts to hedge the Canadian dollar denominated costs for our manufacturing operation in Canada. Net income includes recognized gains from foreign currency forward contracts of $1.3 million and $20,000 for fiscal years 2005 and 2004, respectively. As of September 30, 2005, we had outstanding forward contract commitments to purchase Canadian dollars for an aggregate U.S. notional amount of $12.1 million. The last forward contract expires on March 10, 2006. At September 30, 2005, the fair value of unrealized foreign currency forward contracts was $1.7 million, and the unrealized gain was approximately $1.2 million, net of related tax expense. We anticipate recognizing the entire unrealized gain in operating earnings within the next twelve months.

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Item 8.    Financial Statements and Supplementary Data

The consolidated financial statements required by this item are included in a separate section beginning on page 59.

Item 9.    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A.    Controls and Procedures

Management, including our principal executive officer and principal financial officer, has evaluated, as of the end of the period covered by this report, the effectiveness of the design and operation of our disclosure controls and procedures with respect to the information generated for use in this report. Based upon, and as of the date of that evaluation, the principal executive officer and principal financial officer concluded that the disclosure controls and procedures were effective to provide reasonable assurances that information required to be disclosed in the reports filed or submitted under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable, not absolute, assurance of achieving the desired control objectives and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based upon the above evaluation, management believes that its controls do provide such reasonable assurances.

There have been no changes in our internal control over financial reporting that occurred during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Item 9B.    Other Information

None.

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PART III

Item 10. Directors and Executive Officers of the Registrant

The following table sets forth certain information about our directors and executive officers as of December 9. 2005. All directors serve for a period of one year or until their successors are duly elected and qualified.

Name				Age				Position(s)
Michael Targoff(1)(2)(3)					61			Chairman of the Board of Directors
O. Joe Caldarelli(3)					55			Chief Executive Officer and Director
Robert A. Fickett					45			President, Chief Operating Officer and Director
Joel A. Littman					53			Chief Financial Officer, Treasurer and Secretary
John R. Beighley					53			Vice President and Assistant Secretary
Don C. Coleman					51			Vice President
Mike Cheng					50			Vice President
Andrew E. Tafler					50			Vice President
Michael F. Finley(1)(2)(3)					43			Director
Jeffrey P. Hughes(1)					65			Director
Chris Toffales					49			Director

(1)	Member of the Audit Committee. Mr. Targoff is the chairperson of the committee.

(2)	Member of the Compensation Committee. Mr. Finley is the chairperson of the committee.

(3)	Member of the Executive Committee. Mr. Targoff is the chairperson of the committee.

Michael Targoff became a director of CPI Holdco and CPI in January 2004 and Chairman of the board of directors of CPI Holdco in March 2004. Mr. Targoff is the founder and Chief Executive Officer of Michael B. Targoff & Co., a company that seeks active or controlling investments in telecommunications and related industry early stage companies. Mr. Targoff currently serves as Vice Chairman and director of Loral Space & Communications Ltd., and serves on the board of directors of Infocrossing, Inc., ViaSat, Inc. and Leap Wireless International, Inc. From 1996 to 1998, Mr. Targoff was the President and Chief Operating Officer of Loral Space & Communications Ltd. Prior to that, Mr. Targoff served as Senior Vice President and Secretary of Loral Corporation. Mr. Targoff received a B.A. degree from Brown University and a J.D. from Columbia University School of Law.

O. Joe Caldarelli became Chief Executive Officer and a director of the Predecessor and CPI in March 2002. Prior to this, Mr. Caldarelli was a Co-Chief Operating Officer of CPI since October 2000 and Vice President of CPI since August 1995. Mr. Caldarelli is also the Division President of the Communications and Medical Products Division. Mr. Caldarelli was Vice President and General Manager for the Communications and Medical Products Division under the Electron Device Business of Varian Associates, Inc., from 1985 until August 1995 and was President and a director of Varian Canada, Inc. from 1992 until August 1995. From 1982 until 1985, Mr. Caldarelli was Marketing Manager of the Communications and Medical Products Division of Varian Associates, Inc. and served as its Equipment Operations Manager from 1979 until 1982. Prior to joining Varian Associates, Inc., Mr. Caldarelli served as Manufacturing Engineering Manager for Medtronic Canada, Inc. Mr. Caldarelli holds a B.S. degree in mechanical engineering from the University of Toronto.

Robert A. Fickett became President, Chief Operating Officer and a director of the Predecessor and CPI in March 2002. Prior to this, Mr. Fickett was a Co-Chief Operating Officer of CPI since October 2000 and Vice President of CPI since April 1998. Mr. Fickett has also been the Division President of the Microwave Power Products Division since April 1998. From January 1996 to April 1998, Mr. Fickett was Vice President of Operations for the Microwave Power Products Division. From 1993 until January 1996, he was President and Chief Executive Officer of Altair Technologies, Inc., a contract manufacturer. From 1982 until 1993, Mr. Fickett held a number of positions with Varian Associates, Inc., including Engineering Manager of the Microwave Power Products Division’s Klystron

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Engineering Group, to which he was promoted in 1989. Mr. Fickett received a B.S. degree in mechanical engineering from the University of California, Berkeley.

Joel A. Littman became Chief Financial Officer of the Predecessor and CPI in September 2001. Mr. Littman was Corporate Controller for CPI from November 1996 to September 2001. From September 1989 to November 1996 Mr. Littman served as Controller of the Microwave Power Products Division of Varian Associates, Inc. and CPI. Prior to that Mr. Littman held various finance positions with Varian Associates, Inc. and TRW Inc. Mr. Littman received a B.A. degree in economics and an M.B.A., both from the University of California at Los Angeles.

John R. Beighley became a Vice President of the Predecessor and CPI in March 1997 and currently heads our Worldwide Field Sales Organization. From May 1992 to March 1997, Mr. Beighley was Western Hemisphere Sales Manager responsible for sales in the Americas, as well as the Far East and Australia. From June 1989 to May 1992, Mr. Beighley was the North American Sales Manager. From March 1981 to June 1989, Mr. Beighley held a number of Product Marketing and Field Sales positions with Varian Associates, Inc. Mr. Beighley received a B.S. degree in marketing from San Francisco State University and an M.B.A. from Santa Clara University.

Don C. Coleman became a Vice President of the Predecessor and CPI in February 1999 and also became Division President of the Beverly Microwave Division in February 1999. Mr. Coleman was Vice President of Manufacturing for the Beverly Microwave Division from February 1996 until accepting his current position. From 1990 until 1996, Mr. Coleman held the position of Engineering Manager for Receiver Protector Products at the Beverly Microwave Division. Mr. Coleman held a variety of manufacturing and development engineering positions at Varian Associates, Inc. from the time he joined us in 1976 until 1990. Mr. Coleman received a B.S. degree in engineering from the University of Massachusetts.

Mike Cheng became a Vice President of the Predecessor and CPI in August 2000 and currently heads our Eimac Division. From April 1999 to August 2000, Mr. Cheng was Vice President of Operations for the Microwave Power Products Division. From 1994 until April 1999, he was Vice President of Marketing for the Microwave Power Products Division. From 1980 until 1994, Mr. Cheng held a number of manufacturing and engineering positions with Varian Associates, Inc., including Production Manager of the Microwave Power Products Division’s Klystron Engineering Group, to which he was promoted in 1989. Prior to joining Varian Associates, Inc., Mr. Cheng was an engineer in the Nuclear Energy Division of General Electric Corporation. Mr. Cheng received a B.S. degree in chemical engineering from the University of California, Berkeley and an M.B.A. from Golden Gate University.

Andrew E. Tafler became a Vice President of CPI Holdco and CPI in December 2005. Mr. Tafler became Division President of the Satcom Division in May 2004. Mr. Tafler was previously Vice President of Operations for the Satcom Division from 2000 to 2004. From 1989 to 2000, Mr. Tafler held the Business Development Manager and then the Operations Manager positions at the Communications and Medical Products Division of the Electron Device Group of Varian Associates, Inc. Mr. Tafler held a number of manufacturing and marketing positions at Varian Associates Inc. from 1984 to 1989. Prior to joining Varian Associates Inc., Mr. Tafler served in engineering and management positions with Bell Canada Inc. Mr. Tafler holds a B.A.Sc. degree in Electrical Engineering from the University of Toronto.

Michael F. Finley became a director of CPI Holdco in January 2004. Mr. Finley currently serves on the board of directors of Williams Scotsman International Inc., Affinia Group Inc. and Cooper Standard Automotive Inc. Mr. Finley has been a Managing Director of The Cypress Group since 1998 and has been a member of The Cypress Group since its formation in April 1994. Prior to joining The Cypress Group, he was a Vice President in the Merchant Banking Group at Lehman Brothers Inc. Mr. Finley received a B.A. degree from St. Thomas University and an M.B.A. from the University of Chicago’s Graduate School of Business.

Jeffrey P. Hughes became a director of CPI Holdco and CPI in April 2005. Mr. Hughes currently serves on the Board of Directors of Financial Guaranty Insurance Company. Mr. Hughes is a Vice

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Chairman of The Cypress Group. Mr. Hughes helped found The Cypress Group in 1994, after 26 years at Lehman Brothers as a senior investment banker and merchant banker. Mr. Hughes started Lehman Brothers’ private financing department and led early leveraged buy out financings; had senior investment banking coverage responsibilities for industrial, energy and consumer product companies; was co-head of the financial institutions group; and was a member of Lehman Brothers’ investment committee. Mr. Hughes joined Lehman Brothers in 1968 and became a partner in 1976. Mr. Hughes received a B.A. degree from Wesleyan University and an L.L.B. degree from Duke University Law School.

Chris Toffales became a director of CPI Holdco and CPI in January 2004. Mr. Toffales currently serves on the board of directors of Irvine Sensors Corporation. Mr. Toffales is currently the President of CTC Aero, LLC, and is a consultant in the defense industry. From 1999 to 2003, Mr. Toffales was the Senior Vice President, Corporate Marketing and President of DRS Systems Company. From 1994 to 1999, Mr. Toffales was Vice President of Business Development and Advanced Programs at Lockheed Martin Fairchild Systems. Prior to that, Mr. Toffales was the Vice President of Imaging and Space Programs for Loral Corporation. Mr. Toffales received a B.E. degree in electrical engineering from the City College of New York.

Audit Committee and Audit Committee Financial Expert

Our audit committee consists of three members of the Board of Directors, none of whom are Company executives. Our Board of Directors has determined that Michael B. Targoff meets the definition of an ‘‘audit committee financial expert,’’ as set forth in Item 401(h)(2) of SEC Regulation S-K, and meets The Nasdaq National Market standards of independence adopted by the SEC for membership on an audit committee.

Code of Ethics

We have adopted a code of ethics that applies to our principal executive officer, principal financial officer and to our controller. The code of ethics is filed as an exhibit to this annual report.

Item 11. Executive Compensation

The following table shows certain information concerning compensation earned by our Chief Executive Officer and our next four most highly compensated executive officers (the ‘‘named executive officers’’) for each of the last three fiscal years.

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Summary Compensation Table

								Annual Compensation												Long-Term Compensation
Name and Principal Position				Fiscal Year				Salary				Bonus (a)				Other Annual Compensation (b)				Securities Underlying Options # of shares				All Other Compensation (c)
O. Joe Caldarelli Chief Executive Officer				2005 2004 2003				$445,500 360,000 324,000				$1,143,438 1,203,310 792,000				* * $296,000				— 187,005 89,050				$35,938 75,455 24,843
Robert A. Fickett Chief Operating Officer and President				2005 2004 2003				280,000 250,000 255,008				650,750 800,500 421,875				* * 216,458				— 115,765 53,430				21,788 20,323 20,697
Joel A. Littman Chief Financial Officer, Treasurer and Secretary				2005 2004 2003				200,000 160,000 161,518				385,750 475,500 217,200				* * 176,958				— 67,678 26,715				14,341 11,519 11,031
Don C. Coleman Vice President				2005 2004 2003				175,000 159,000 160,519				240,750 327,720 178,875				* * 101,025				— 35,620 17,810				12,704 11,421 10,923
Mike Cheng Vice President				2005 2004 2003				171,000 155,000 156,354				160,750 292,887 174,375				* * 109,125				— 35,620 17,810				12,274 11,030 10,387

*	Did not exceed the lesser of $50,000 or 10% of the total annual salary and bonus reported for the named executive officer.

(a)	See ‘‘—Management Incentive Plan’’. In addition to bonuses under our management incentive plan, fiscal year 2004 also includes a bonus paid by the Predecessor to O. Joe Caldarelli of $500,000, Robert A. Fickett of $300,000, Joel A. Littman of $200,000, Don C. Coleman of $100,000 and Mike Cheng of $100,000 as transaction bonuses in connection with the closing of the Merger.

(b)

Includes amounts paid for personal benefits and amounts reimbursed for the payment of taxes on certain perquisites. Amounts that represent at least 25% of the total amount of Other Annual Compensation are described separately below. Fiscal year 2003 also includes compensation expense for: O. Joe Caldarelli of $276,500, Robert A. Fickett of $197,500, Joel A. Littman of $158,000, Don C. Coleman of $79,000 and Mike Cheng of $79,000 that was attributable to shares of the Predecessor’s common stock purchased by certain executive officers at a price that was subsequently determined to be at below fair value.

(c)	Consists of: (1) Company contributions to our 401(k) plan and non-qualified deferred compensation plan for named executive officers, except Mr. Caldarelli, (2) Company contributions to the defined benefit plan for Mr. Caldarelli, and (3) Company-paid premiums for group life insurance for each of the named executive officers.

Option Grants in Last Fiscal Year

In fiscal year 2005, no options were granted to the named executive officers.

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Aggregate option exercises in last fiscal year and fiscal year-end option values

The following table provides information concerning stock option exercises by each of the named executive officers during the fiscal year ended September 30, 2005 and information concerning unexercised options held by these officers at the end of the fiscal year. The value was calculated by determining the difference between the fair value of underlying securities and the exercise price.

Name				Shares Acquired On Exercise				Value Realized				Number of Securities Underlying Unexercised Options at Fiscal Year-End								Value of Unexercised In-the-Money Options at Fiscal Year-End
												Exercisable				Unexercisable				Exercisable				Unexercisable
O. Joe Caldarelli					—				—				225,048				67,678			$	8,513,919			$	2,176,524
Robert A. Fickett					—				—				139,030				39,182				5,217,781				1,260,093
Joel A. Littman					—				—				77,028				21,372				2,837,529				687,324
Don C. Coleman					—				—				46,484				10,686				1,739,258				343,662
Mike Cheng					—				—				52,540				10,686				2,008,811				343,662

2004 Stock Incentive Plan

In January 2004 we established our 2004 Stock Incentive Plan to provide an incentive for key employees, consultants, advisors and directors of CPI Holdco and its subsidiaries and reserved 623,350 shares of CPI Holdco’s common stock for issuance under the 2004 Stock Incentive Plan. In September 2004, we amended the 2004 Stock Incentive Plan to increase the shares reserved for issuance thereunder by 89,050. Awards under the 2004 Stock Incentive Plan may include stock options, stock appreciation rights, restricted stock, stock awards or any combination thereof. Options granted under the 2004 Stock Incentive Plan may be non-qualified stock options or incentive stock options, as determined by the compensation committee of the board of directors. The option price will be determined by the compensation committee, but with respect to incentive stock options, will not be less than the fair market value on the date of grant. For employees holding more than 10% of the voting rights of all classes of stock, the exercise price of incentive stock options may not be less than 110% of the fair market value of the common stock on the date of grant and the options will not be exercisable later than five years from the date of grant.

Options granted under the 2004 Stock Incentive Plan include both fixed and performance awards and expire ten years from the date of grant. The fixed awards vest at a rate of 20% to 25% per year. The performance awards were scheduled to vest at a rate of 20% to 25% per year subject to our meeting performance targets as of the last day of the fiscal year ending immediately prior to the performance vesting date. However, in September 2005, the compensation committee of our board of directors approved the acceleration of vesting of all outstanding performance options. The purpose of the acceleration was to reward management for its performance. 

In March 2005, pursuant to the terms of the 2004 Stock Incentive Plan, adjustments were made to the options outstanding under this plan to reflect the special cash dividend paid to our stockholders in connection with the offering of the FR Notes. As a result of these adjustments, the exercise price of the options outstanding under the 2004 Stock Incentive Plan was adjusted by dividing the prior exercise price of such options by 1.781, the number of shares issuable upon exercise of those options was adjusted by multiplying the number of shares previously issuable pursuant to the options by 1.781, and the total number of shares reserved for issuance under that plan was also increased by a factor of 1.781. All stock option numbers reflect these adjustments.

In accordance with FASB Interpretation 44, ‘‘Accounting for Certain Transactions Involving Stock Compensation,’’ we determined that there were no accounting consequences for the adjustments made to the number of options issued and their respective exercise prices. It was determined that the aggregate intrinsic value of the stock options immediately after the adjustment was not greater that aggregate intrinsic value of the stock options immediately before the adjustment, and the ratio of exercise price per share to the market value was not reduced.

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2000 Stock Option Plan

Our 2000 Stock Option Plan was originally adopted by the Predecessor. In connection with the Merger, we assumed the 2000 Stock Option Plan, and stock options outstanding under the 2000 Stock Option Plan became 100% vested on January 23, 2004, the Merger closing date. Holders of options under the Predecessor’s 2000 Stock Option Plan were offered the opportunity to either (1) roll over their stock options to purchase common stock of the Predecessor into options to purchase common stock of CPI Holdco pursuant to option rollover agreements or (2) exercise their stock options. Management, including Messrs. Caldarelli, Fickett, Coleman, Littman, Cheng and Beighley, collectively elected to rollover options to purchase 298,341 shares of the Predecessor’s common stock at prices ranging from $0.62 to $2.25 per share. The rollover options are subject to the terms of the 2000 Stock Option Plan, and, among other things, have a ten year expiration period and are subject to transferability restrictions and continued employment. No further options will be granted under the 2000 Stock Option Plan. In March 2005, pursuant to the terms of the 2000 Stock Option Plan, adjustments were made to the options outstanding under this plan to reflect the special cash dividend paid to our stockholders in connection with the offering of the FR Notes. As a result of these adjustments, the exercise price of the options outstanding under the 2000 Stock Option Plan was adjusted by dividing the prior exercise price of such options by 1.781, the number of shares issuable upon exercise of those options was adjusted by multiplying the number of shares previously issuable pursuant to the options by 1.781, and the total number of shares reserved for issuance under that plan was also increased by a factor of 1.781. All stock option numbers reflect these adjustments.

Retirement plans

During fiscal year 2003, we established a defined benefit pension plan for our Chief Executive Officer, O. Joe Caldarelli. The amount of annual pension payable to Mr. Caldarelli at age 65 is equal to: (1) 2% of the average of Mr. Caldarelli’s highest average indexed earnings for each year of pensionable service before December 31, 1990 plus (2) the aggregate of 2% of Mr. Caldarelli’s indexed earnings for each year of pensionable service on or after January 1, 1991. However, the amounts payable to Mr. Caldarelli under the plan cannot exceed the maximum pension limits under the Canadian Income Tax Act, which currently generally limit annual payments to approximately $1,800 (Canadian dollars) for each year of service.

Based on the limits imposed under the Canadian Income Tax Act, we estimate that the annual benefits Mr. Caldarelli would receive pursuant to the pension plan upon retirement at age 65 (assuming continued service until then) would be approximately $66,000 (Canadian dollars).

We maintain the Communications & Power Industries, Inc. Non-Qualified Deferred Compensation Plan for a select group of our executive employees. Under the plan, if a participant’s elective deferrals under our 401(k) plan have reached the dollar limit specified in the Internal Revenue Code with respect to any plan year, the participant may defer his or her base salary or annual award under the management incentive plan described below (see ‘‘—Management incentive plan’’). In addition, we add to a participant’s account under the plan an amount equal to a specified percentage of the participant’s base salary in excess of the social security taxable wage base. All participant's accounts are 100% vested. Each participant will receive a distribution of the balance of the participant’s account as a lump sum cash payment within one year of his or her termination of employment for any reason. As of September 30, 2005, the liability under this plan was approximately $135,000.

Management incentive plan

Under our management incentive plan, we have paid bonuses upon the achievement of certain financial performance and individual goals. Financial performance goals are based upon an adjusted EBITDA calculation. Our management incentive plan has been reviewed and approved annually by the compensation committee of the board of directors.

Employment Arrangements

We entered into an employment agreement dated March 19, 2002 with Joe Caldarelli. Pursuant to the employment agreement, Mr. Caldarelli is entitled to receive a base salary of $300,000. The Board

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of Directors has since approved periodic annual increases. Mr. Caldarelli is entitled to participate in the management incentive plan and has a target bonus of one times his base salary. If we terminate Mr. Caldarelli’s employment (other than due to his conviction of a felony offense), he will be entitled to continued payment of base salary for a minimum of 18 months and a maximum of 30 months. During the severance period, Mr. Caldarelli generally will continue to participate in medical and all other benefit programs and will be entitled to receive his management incentive award for the entire year in which he is terminated.

We entered into substantially similar employment agreements, each dated September 30, 2002, with Robert Fickett and Joel Littman. Mr. Fickett is entitled to receive a base salary of $250,000 and Mr. Littman is entitled to receive a base salary of $144,000. These agreements include provisions for the base salary to be reviewed and adjusted at least annually. Each employment agreement provides that the executive is eligible to participate in the management incentive plan. Pursuant to each employment agreement, if we terminate the executive’s employment (other than due to his conviction of a felony offense), that executive will be entitled to continued payment of base salary for 18 months. During the severance period, each executive generally will continue to participate in medical and all other benefit programs and will be entitled to receive his management incentive award for the entire year in which he is terminated.

We have employment letters, each dated November 2, 2002, with Don Coleman and Mike Cheng, which provide for an annual base salary of $159,000 and $155,000, respectively. Our current practice is for each base salary to be reviewed and adjusted as appropriate. Each employment letter provides that the executive is entitled to participate in the management incentive plan. Pursuant to each employment letter, if the executive is terminated without cause at any time during the two-year period following a change in control event, upon the executive’s execution of a general release, he will be entitled to continued payment of base salary and the continuation of employee benefits for 12 months, 100% of the management incentive award that otherwise would have been earned by him, and full outplacement services.

Compensation Committee Interlocks and Insider Participation

In March 2004, our board of directors designated our compensation committee. Michael Finley and Michael Targoff are, and since March 2004 have been, the members of our compensation committee.

Director Compensation

Directors that are neither our officers nor principals or employees of Cypress (‘‘outside directors’’) currently receive compensation of $32,500 per year, health care benefits paid on behalf of directors of $15,790 per year plus $1,250 for each board or committee meeting attended. Directors are reimbursed for out-of-pocket expenses incurred in connection with attending meetings of our board of directors and its committees. Outside directors also are entitled to receive options to purchase shares of common stock of CPI Holdco under the 2004 Stock Incentive Plan. During fiscal year 2004, 8,014 options were granted each to Mr. Targoff and Mr. Toffales. The exercise price of the options is the fair value on the date of grant, and such options vest at a rate of 20% per year and expire ten years from the date of grant. Directors that are not outside directors do not currently receive any compensation directly for their service on the board of directors.

During fiscal year 2004, Mr. Toffales also provided consulting services to us and was paid fees of $22,500 plus related out-of-pocket expenses.

Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

The following table shows information known to us with respect to the beneficial ownership of our common stock as of December 8, 2005, as adjusted to reflect the sale of the shares of common stock offered, by: (1) each of our directors (2) each named executive officer; (3) all of our directors and executive officers as a group; and (4) each person or group of affiliated persons whom we know to beneficially own more than 5% of our common stock

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Beneficial ownership and percentage ownership are determined in accordance with the rules of the Securities and Exchange Commission. This information does not necessarily indicate beneficial ownership for any other purpose. In computing the number of shares beneficially owned by a person and the percentage ownership of that person’s shares of common stock, underlying options and warrants that are exercisable within 60 days of December 8, 2005 are considered to be outstanding. To our knowledge, except as indicated in the footnotes to this table and subject to community property laws where applicable, the persons named in the table have sole voting and investment power with respect to all shares of our common stock shown as beneficially owned by them.

Percentage of beneficial ownership before this offering is based on 4,275,566 shares of our common stock outstanding as of December 8, 2005.

The address for those individuals for which an address is not otherwise indicated is: c/o CPI Holdco, Inc., 811 Hansen Way, Palo Alto, California 94303.

Name and Address of Beneficial Owner				Number of Shares Owned				Shares Subject to Options				Percent of Class
The Cypress Group 65 East 55th Street, 28th Floor New York, NY 10022					4,251,122	(1)							99.4	%
Cypress Merchant Banking Partners II L.P.					4,032,289								94.3	%
Cypress Merchant Banking II C.V.					171,419								4.0	%
55th Street Partners II L.P.					38,912									*
Cypress Side-by-Side LLC					8,502									*
Michael Targoff					21,256				1,603					*
Chris Toffales					3,188				1,603					*
O. Joe Caldarelli									225,048				5.0	%
Robert A. Fickett									139,030				3.1	%
Joel A. Littman									77,028				1.8	%
Mike Cheng									52,540				1.2	%
Don C. Coleman									46,484				1.1	%
Andy Tafler									23,117					*
John Beighley									29,208					*
Executive officers and directors as a group (9 people)					24,444				595,662				12.7	%

*	Represents less than 1% of total.

(1)

Includes 171,419 shares of common stock owned by Cypress Merchant Banking II C.V., 4,032,289 shares of common stock owned by Cypress Merchant Banking Partners II L.P., 38,912 shares of common stock owned by 55th Street Partners II L.P. (collectively, the ‘‘Cypress Funds’’) and 8,502 shares owned by Cypress Side-By-Side LLC. Cypress Associates II L.L.C. is the managing general partner of Cypress Merchant Banking II C.V. and the general partner of Cypress Merchant Banking Partners II L.P. and 55th Street Partners II L.P., and has voting and investment power over the shares held or controlled by each of these funds. Messrs. Jeffrey P. Hughes, James L. Singleton, David P. Spalding and James A. Stern, each of whom is a managing member of Cypress Associates II L.L.C., each disclaims ownership of the membership interests owned by the Cypress Funds. Cypress Side-By-Side LLC is a sole member limited liability company of which Mr. James A. Stern is the sole member. The address of each of the Cypress Funds and of Cypress Side-By-Side LLC is c/o The Cypress Group, 65 East 55th Street, 28th Floor, New York, NY 10022.

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Securities Authorized for Issuance Under Equity Compensation Plans

The following table provides information as of September 30, 2005 with respect to the shares of CPI Holdco common stock that may be issued under existing equity compensation plans. The category ‘‘Equity Compensation plans approved by security holders’’ consists of the 2000 Stock Incentive Plan and the category ‘‘Equity Compensation plans not approved by security holders’’ consists of the 2004 Stock Incentive Plan.

Plan Category				Number of Securities to be Issued upon Exercise of Outstanding Options				Weighted- average Exercise Price of Outstanding Options				Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plan
Equity compensation plans approved by security holders					295,669			$	0.98				—
Equity compensation plans not approved by security holders					650,860			$	13.49				61,540
Total					946,529			$	9.58				61,540

For a description of our 2004 Stock Incentive Plan, see ‘‘Executive Compensation—2004 Stock Incentive Plan’’ and for a description of our 2000 Stock Option Plan, see ‘‘Executive Compensation—2000 Stock Option Plan.’’

Item 13. Certain Relationships and Related Transactions

Management Stockholders Agreement

We, Cypress, our outside directors and certain of our executive officers (together with our outside directors, the ‘‘management stockholders’’) entered into a management stockholders agreement dated as of January 23, 2004. This agreement contains restrictions on transfer, rights to repurchase shares of common stock held by such management stockholders upon their termination of employment, tag-along rights on certain transfers of common stock by Cypress, drag-along rights in favor of Cypress, rights of first refusal on transfers of common stock by management stockholders, voting agreements and non-competition and non-solicitation covenants.

This agreement grants the management stockholders and certain of their permitted transferees with customary ‘‘piggyback’’ registration rights. If at any time after the initial public offering of our common stock we propose to register any common stock under the Securities Act of 1933, as amended (the ‘‘Securities Act’’) (pursuant to a demand or otherwise), other than on a registration statement on Form S-4 or S-8, or in connection with an exchange offer, the management stockholders may elect to include in, or ‘‘piggyback’’ on, the registration all or a portion of the shares of our common stock held by them. The managing underwriter, if any, of the offering pursuant to the registration will have the right to limit the number of shares to be included by the management stockholders. In addition, the management stockholders may not (1) sell shares in a public offering if the managing underwriters determine in their reasonable judgment that such participation would have an adverse effect on such offering, and (2) exercise piggyback rights to the extent that the exercise would result in a sale by such management stockholders, on a cumulative basis, of a greater percentage of our common stock that was ever held by such management stockholders than the percentage sold by Cypress. In connection with an offering of common stock, we have agreed to indemnify the selling management stockholders and their controlling persons against certain liabilities, including liabilities under the Securities Act. In addition, we would bear all registration expenses incurred in connection with these registrations, and the selling stockholders would pay all underwriting fees, discounts, and commissions applicable to the sale of their securities.

The management stockholders agreement also imposes ‘‘lock-up’’ restrictions on the management stockholders preventing them from selling our common stock during certain periods following our registered offerings.

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Registration Rights Agreement

We entered into a registration rights agreement with Cypress on January 23, 2004. Under the registration rights agreement Cypress and its affiliates and certain persons who acquire our common stock from the them (the ‘‘Cypress Holders’’) have the right, subject to certain limitations, at any time on or after the date that is 180 days after an initial public offering of our common stock, to demand that we file a registration statement under the Securities Act covering all or a portion of such Cypress Holder's shares of our common stock. The number of such demands is generally unlimited.

In addition, the registration rights agreement grants the Cypress Holders customary ‘‘piggyback’’ registration rights. If at any time after an initial public offering of our common stock we propose to register any common stock under the Securities Act (pursuant to a demand or otherwise) other than on a registration statement on Form S-4 or S-8, or in connection with an exchange offer, each of the Cypress Holders may elect to include in, or ‘‘piggyback’’ on, the registration all or a portion of the shares of our common stock held by such Cypress Holders. However, the managing underwriter, if any, of the offering pursuant to the registration has the right to limit the number of shares to be included by these holders. In connection with an offering of common stock, we have agreed to indemnify the selling Cypress Holders and their controlling persons against certain liabilities, including liabilities under the Securities Act. In addition, we would bear all registration expenses incurred in connection with these registrations (provided that, in connection with demand registrations, we are only obligated to pay registration expenses for the first 10 of such registrations). The selling stockholders would pay all underwriting fees, discounts, and commissions applicable to the sale of their securities.

Item 14.   Principal Accountant Fees and Services

KPMG LLP ("KPMG") has served as our independent registered public accounting firm since 1995. The following table sets forth the aggregate fees billed to us by KPMG for professional services during fiscal years 2005 and 2004, as well as out-of-pocket costs incurred in connection with these services (in thousands):

				Fiscal Year
				2005				2004
Audit Fees				$	580			$	538
Audit- Related Fees					240				333
Tax Fees					16				186
Total				$	836			$	1,057

Audit Fees: Consists of fees for professional services rendered for the audit of our financial statements and review of the interim financial statements included in quarterly reports.

Audit-Related Fees: Consists of fees for assurance and related services that are reasonably related to the performance of the audit or review of our financial statements that are not reported under ‘‘Audit Fees’’, and services that are normally provided by KPMG in connection with statutory and regulatory filings or engagements. These services include consultations in connection with acquisitions and advice on other accounting-related matters. Audit-related fees were primarily comprised of services related to the offering and registration of FR Notes and 8% Notes in fiscal year 2005 and 2004, respectively.

Tax Fees: Consists of fees for professional services for tax compliance, tax advice and tax planning. These services include tax planning, assistance with the preparation of various tax returns, services rendered in connection with acquisitions and advice on other tax-related matters.

Pre-Approval of Services Required

Under the policies and procedures established by the Board of Directors of CPI Holdco, all engagements for audit and permissible non-audit services to be provided by our independent registered public accounting firm must be pre-approved by the audit committee, or if there is none, the entire board of directors (the ‘‘Audit Committee’’).

56

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Company management and the applicable independent auditor will each confirm to the Audit Committee that each non-audit service submitted for pre-approval is permissible under all applicable legal requirements. The term of any pre-approval pursuant to the policy shall be twelve months from the date of pre-approval, unless the Audit Committee specifically provides for a different period. The Audit Committee will periodically revise the list of pre-approved services based on subsequent determinations. The Audit Committee may delegate pre-approval authority to one or more of its members provided that such member(s) is not a member of management. The member or members to whom such authority is delegated shall report any pre-approval decisions to the Audit Committee at its next scheduled meeting.

The annual audit services engagement terms and fees will be subject to the specific pre-approval of the Audit Committee. The Audit Committee will approve, if necessary, any changes in terms, conditions and fees resulting from changes in audit scope, company structure or other matters. In addition to the annual audit services engagement approved by the Audit Committee, the Audit Committee may grant pre-approval for other audit services, which are those services that only the independent auditor reasonably can provide. The Audit Committee believes that the provision of audit-related services and/or tax services (such as tax compliance, tax planning and tax advice) does not impair the independence of the auditor, and therefore the Audit Committee may pre-approve such services.

In addition, the Audit Committee may grant pre-approval to non-audit services not described above that it believes are routine and recurring services, provided that the Audit Committee cannot approve any services that constitute prohibited non-audit services under SEC rules. With respect to each proposed pre-approved service, the independent auditor will provide back-up documentation, which will be provided to the Audit Committee regarding the specific services to be provided.

The Audit Committee has determined that the non-audit services provided by KPMG are compatible with maintaining the independence of KPMG.

PART IV

Item 15. Exhibits and Financial Statement Schedules

(a) The following financial statements and schedules are filed as a part of this report:

(1) Consolidated Financial Statements

	•	Report of Independent Registered Public Accounting Firm

	•	Consolidated Balance Sheets

	•	Consolidated Statements of Operations

	•	Consolidated Statements of Stockholders' Equity (Deficit) and Comprehensive Income

	•	Consolidated Statements of Cash Flows

	•	Notes to Consolidated Financial Statements

(2) Consolidated Financial Statement Schedules

Schedule II—Valuation and Qualifying Accounts

All remaining schedules are omitted because they are not applicable, or because the required information is included in the financial statements or notes thereto.

(3) The index to the Exhibits begins on page 105 of this annual report.

57

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Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders
CPI Holdco, Inc.:

We have audited the accompanying consolidated balance sheets of CPI Holdco, Inc. and subsidiaries (‘‘Successor’’) as of September 30, 2005 and October 1, 2004, and the related consolidated statements of operations, stockholders’ equity (deficit) and comprehensive income, and cash flows for the year ended September 30, 2005 and for the 36-week period ended October 1, 2004 (‘‘Successor periods’’), and for the 16-week period ended January 22, 2004, and the year ended October 3, 2003 (‘‘Predecessor periods’’) of Communications & Power Industries Holding Corporation and subsidiaries (‘‘Predecessor’’). In connection with our audits of the consolidated financial statements, we also have audited the related financial statement schedule. These consolidated financial statements and financial statement schedule are the responsibility of the companies’ management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule 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 aforementioned Successor consolidated financial statements present fairly, in all material respects, the financial position of CPI Holdco, Inc. and subsidiaries as of September 30, 2005 and October 1, 2004, and the results of their operations and their cash flows for the Successor periods, in conformity with U.S. generally accepted accounting principles. Further, in our opinion, the aforementioned Predecessor consolidated financial statements present fairly, in all material respects, the results of operations and cash flows of Communications & Power Industries Holding Corporation and subsidiaries for the Predecessor periods, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

As discussed in Note 3 to the consolidated financial statements, effective January 23, 2004, CPI Holdco, Inc. acquired all of the outstanding stock of Communications & Power Industries Holding Corporation in a business combination accounted for as a purchase. As a result of the acquisition, the consolidated financial information for the periods after the acquisition is presented on a different cost basis than that for the periods before the acquisition and, therefore, is not comparable.

/s/KPMG LLP

Mountain View, California
December 15, 2005

58

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CPI HOLDCO, INC.
and subsidiaries

CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)

				September 30, 2005				October 1, 2004
Assets
Current Assets:
Cash and cash equivalents				$	26,511				40,476
Restricted cash					1,287				2,279
Accounts receivable, net					40,633				35,914
Inventories					50,620				38,074
Deferred tax assets					12,346				12,285
Prepaid and other current assets					3,981				3,796
Total current assets					135,378				132,824
Property, plant, and equipment, net					83,624				70,127
Deferred debt issue costs, net					11,061				8,910
Intangible assets, net					77,941				78,481
Goodwill					145,462				139,614
Other long-term assets					2,416				1,251
Total assets				$	455,882				431,207
Liabilities and Stockholders' Equity
Current Liabilities:
Current portion of senior term loan				$	—				3,944
Accounts payable					21,421				15,790
Accrued expenses					27,247				20,939
Product warranty					6,359				6,074
Income taxes payable					1,546				1,661
Advance payments from customers					13,405				12,031
Total current liabilities					69,978				60,439
Deferred income taxes					35,556				39,118
Advance payments from sale of San Carlos property					13,450				13,450
Long-term debt					284,231				210,606
Total liabilities					403,215				323,613
Commitments and contingencies
Stockholders’ Equity:
Common stock ($0.01 par value, 5,500,000 shares
authorized; 4,275,566 shares issued and outstanding)					43				43
Additional paid-in capital					34,683				103,534
Accumulated other comprehensive income					1,621				1,369
Retained earnings					16,320				2,648
Total stockholders’ equity					52,667				107,594
Total liabilities and stockholders' equity				$	455,882				431,207

See accompanying notes to the consolidated financial statements.

59

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CPI HOLDCO, INC.
and subsidiaries

CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)

				Year Ended September 30, 2005 (Successor)				36-Week Period Ended October 1, 2004 (Successor)				16-Week Period Ended January 22, 2004 (Predecessor)				Year Ended October 3, 2003 (Predecessor)
Sales				$	320,732				202,266				79,919				265,434
Cost of sales					215,680				135,672				56,189				183,957
Amortization of acquisition-related inventory write-up					351				5,500				—				—
Gross profit					104,701				61,094				23,730				81,477
Operating costs and expenses:
Research and development					7,218				5,253				2,200				6,860
Selling and marketing					18,547				11,082				4,352				15,650
General and administrative					28,329				12,696				6,033				17,939
Merger expenses					—				—				6,374				—
Amortization of acquisition-related intangible assets					7,487				13,498				—				—
Acquired in-process research and development					—				2,500				—				—
Gain on sale of Solid State Products Division					—				—				—				(136	)
Total operating costs and expenses					61,581				45,029				18,959				40,313
Operating income					43,120				16,065				4,771				41,164
Interest expense, net					20,310				10,518				8,902				14,540
Income (loss) before taxes					22,810				5,547				(4,131	)			26,624
Income tax expense					9,138				2,899				439				10,076
Net income (loss)					13,672				2,648				(4,570	)			16,548
Preferred dividends:
Senior redeemable preferred stock					—				—				3,861				5,911
Junior preferred stock					—				—				2,382				3,851
Net income (loss) attributable to common stock				$	13,672				2,648				(10,813	)			6,786

See accompanying notes to the consolidated financial statements.

60

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CPI HOLDCO, INC.
and subsidiaries

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
AND COMPREHENSIVE INCOME

(in thousands, except shares)

				Common Stock								Additional Paid-in Capital				Deferred Stock Compensation				Stockholder Loans				Accumulated Other Comprehensive Income				Retained Earnings (Deficit)				Total
				Shares				Amount
Predecessor
Balances, September 27, 2002					4,908,172			$	49				19,111				—				(1,223	)			—				(91,041	)			(73,104	)
Net income					—				—				—				—				—				—				16,548				16,548
Amortization of discount and issue costs on senior redeemable preferred stock					—				—				—				—				—				—				(214	)			(214	)
Dividends on senior redeemable preferred stock					—				—				—				—				—				—				(5,911	)			(5,911	)
Payment of dividends on junior preferred stock					—				—				—				—				—				—				(3,851	)			(3,851	)
Issuance of stock options at less than fair value					—				—				1,509				(1,289	)			—				—				—				220
Interest accrued on stockholder loans					—				—				—				—				(33	)			—				—				(33	)
Sale of common stock at less than fair value					100,000				1				899				—				—				—				—				900
Balances, October 3, 2003					5,008,172				50				21,519				(1,289	)			(1,256	)			—				(84,469	)			(65,445	)
Net loss					—				—				—				—				—				—				(4,570	)			(4,570	)
Amortization of discount and issue costs on senior redeemable preferred stock					—				—				—				—				—				—				(829	)			(829	)
Amortization of discount and issue costs on junior preferred stock					—				—				—				—				—				—				(653	)			(653	)
Dividends on senior redeemable preferred stock					—				—				—				—				—				—				(3,861	)			(3,861	)
Payment of dividends on junior preferred stock					—				—				—				—				—				—				(2,382	)			(2,382	)
Amortization of deferred stock based compensation					—				—				—				1,289				—				—				—				1,289
Interest accrued on stockholder loans					—				—				—				—				(10	)			—				—				(10	)
Balances, January 22, 2004					5,008,172				50				21,519				—				(1,266	)			—				(96,764	)			(76,461	)
Successor
Exercise of stock options					136,537				1				363				—				—				—				—				364
Elimination of Predecessor equity from merger transaction					(5,144,709	)			(51	)			(21,882	)			—				—				—				96,764				74,831
Proceeds from stockholders loans					—				—				—				—				1,266				—				—				1,266
Net income					—				—				—				—				—				—				2,648				2,648
Unrealized gain on cash flow hedges, net of tax					—				—				—				—				—				1,369				—				1,369
Total comprehensive income																																	4,017
Issuance of common stock to Cypress, net of issue costs					4,251,122				43				97,457				—				—				—				—				97,500
Value of Predecessor stock options assumed in merger					—				—				5,039				—				—				—				—				5,039
Income tax benefit from the exercise of Predecessor stock options					—				—				463				—				—				—				—				463
Sale of common stock to directors					24,444				—				575				—				—				—				—				575
Balances, October 1, 2004					4,275,566				43				103,534				—				—				1,369				2,648				107,594
Net income					—				—				—				—				—				—				13,672				13,672
Unrealized gain on cash flow hedges, net of tax					—				—				—				—				—				252				—				252
Total comprehensive income																																	13,924
Income tax benefit adjustment from the exercise of Predecessor stock options					—				—				(27	)			—				—				—				—				(27	)
Stock-based compensation expense					—				—				6,985				—				—				—				—				6,985
Special cash dividend					—				—				(75,809	)			—				—				—				—				(75,809	)
Balances, September 30, 2005					4,275,566			$	43				34,683				—				—				1,621				16,320				52,667

See accompanying notes to the consolidated financial statements.

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CPI HOLDCO, INC.
and subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

				Year Ended September 30, 2005 (Successor)				36-Week Period Ended October 1, 2004 (Successor)				16-Week Period Ended January 22, 2004 (Predecessor)				Year Ended October 3, 2003 (Predecessor)
Operating Activities
Net cash provided by operating activities				$	31,349				12,203				6,574				34,482
Investing Activities
Purchase of Predecessor, net of cash acquired					—				(113,130	)			—				—
Advance payments from sale of San Carlos property					—				13,450				—				—
Expenses relating to sale of San Carlos property					(224	)			(451	)			—				—
Capital expenditures					(17,131	)			(3,317	)			(459	)			(3,067	)
Purchase of Econco's net assets, net of cash acquired					(18,325	)			—				—				—
Proceeds from sale of Solid State Products Division					—				—				—				136
Net cash used in investing activities					(35,680	)			(103,448	)			(459	)			(2,931	)
Financing Activities
Retirement of debt and preferred stock:
Senior subordinated notes					—				(74,000	)			(26,000	)			—
Senior redeemable preferred stock					—				(29,735	)			—				—
Junior preferred stock					—				(32,336	)			—				—
Dividends on senior redeemable preferred stock					—				(19,310	)			—				—
Mortgaging financing					—				(17,500	)			—				—
Proceeds from (payment for) the issuance of debt:
Floating rate senior notes					79,200				—				—				—
Senior subordinated notes					—				125,000				—				—
Senior term loan					—				90,000				—				—
Debt issue costs					(3,455	)			(9,653	)			—				(339	)
Proceeds from the repayment of Predecessor
stockholder loans					—				1,266				—				—
Net proceeds from the issuance of common stock					—				98,075				—				110
Repayment on senior term loan					(9,550	)			(450	)			—				—
Repayments on capital leases					(20	)			—				—				(45	)
Stockholder distribution payments					(75,809	)			—				—				—
Repayments on mortgage refinancing					—				—				—				(250	)
Proceeds from the exercise of stock options					—				364				—				—
Net cash (used in) provided by financing activities					(9,634	)			131,721				(26,000	)			(524	)
Net (Decrease) Increase in Cash and Cash Equivalents					(13,965	)			40,476				(19,885	)			31,027
Cash and cash equivalents at beginning of period					40,476				—				33,751				2,724
Cash and cash equivalents at end of period				$	26,511				40,476				13,866				33,751

See accompanying notes to the consolidated financial statements.

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CPI HOLDCO, INC.
and subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
(in thousands)

				Year Ended September 30, 2005 (Successor)				36-Week Period Ended October 1, 2004 (Successor)				16-Week Period Ended January 22, 2004 (Predecessor)				Year Ended October 3, 2003 (Predecessor)
Detail of Net Cash Provided by Operating Activities
Net income (loss)				$	13,672				2,648				(4,570	)			16,548
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation					6,427				3,072				1,529				5,820
Amortization of intangibles					7,750				13,679				249				473
Amortization of deferred debt issue costs					1,304				743				2,285				1,383
Amortization of discount on floating rate senior notes					31				—				—				—
Amortization of acquisition-related inventory write-up					351				5,500				—				—
Stock-based compensation expense from performance stock options					4,165				—				—				—
Stock-based compensation expense from acceleration of vesting of performance stock options					2,820				—				—				—
Stock-based compensation expense from stock options issued at less than fair value					—				—				1,289				220
Compensation expense from common stock issued at less than fair value					—				—				—				790
Allowance for doubtful accounts					60				81				28				133
Acquired in-process research and development					—				2,500				—				—
Deferred income taxes					(3,791	)			(7,248	)			—				—
Interest accrued on stockholder loans					—				—				(10	)			(33	)
Net loss on the disposition of assets					446				197				7				92
Gain on sale of Solid State Products Division					—				—				—				(136	)
Changes in operating assets and liabilities, net of
Econco acquisition:
Restricted cash					992				(2,279	)			—				—
Accounts receivable					(3,433	)			(6,408	)			3,513				(3,096	)
Inventories					(10,705	)			74				(750	)			3,422
Prepaid and other current assets					157				(290	)			235				427
Other long-term assets					(1,136	)			(90	)			—				—
Accounts payable					5,429				2,247				(2,085	)			1,513
Accrued expenses					5,405				(7,573	)			7,067				3,114
Product warranty					173				235				438				578
Income taxes payable					(142	)			2,545				(1,909	)			625
Advance payments from customers					1,374				2,570				(742	)			2,609
Net cash provided by operating activities				$	31,349				12,203				6,574				34,482
Supplemental Cash Flow Disclosures
Cash paid for interest				$	17,460				14,762				2,027				13,298
Cash paid for taxes, net of refunds				$	13,311				7,599				2,434				8,628
Supplemental Disclosures of Noncash Investing and and Financing Activities
Dividends on senior redeemable preferred stock				$	—				—				3,861				5,911

See accompanying notes to the consolidated financial statements.

63

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CPI HOLDCO, INC.
and subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.    Description of Business

CPI Holdco, Inc. (‘‘CPI Holdco’’), through its wholly owned subsidiary, Communications & Power Industries, Inc. (‘‘CPI’’), provides microwave and radio frequency solutions for critical defense, communications, medical, scientific and other applications. References to the ‘‘Company’’ refer to the Successor post-Merger and the Predecessor prior to the Merger; see Note 3 for a description of the Merger. The Company operates six manufacturing divisions in North America, and sells and services its products and customers worldwide primarily through a direct sales force.

2.    Summary of Significant Accounting Policies

Basis of Presentation:    The accompanying consolidated financial statements for periods subsequent to January 22, 2004 represent the consolidated financial statements of CPI Holdco after giving effect to the Merger. For periods ending prior to January 23, 2004, the accompanying consolidated financial statements represent the consolidated results and financial position of Holding.

There is currently no public market for CPI Holdco’s common stock.

Principles of Consolidation:    The consolidated financial statements include those of the Company and its subsidiaries. Significant intercompany balances, transactions, and stockholdings have been eliminated in consolidation.

Fiscal Year:    The Company’s fiscal years are the 52- or 53-week periods that end on the Friday nearest September 30. The Successor’s fiscal year did not change from that of the Predecessor. Fiscal year 2005 consisted of the 52-week period ended September 30, 2005, fiscal year 2004 consisted of the 16-week period ended January 22, 2004 and the 36-week period ended October 1, 2004, and fiscal year 2003 consisted of the 53-week period ended October 3, 2003.

Use of Estimates:    The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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 sales and costs and expenses during the reporting period. The most significant of these estimates and assumptions relate to market values for inventories reported at lower of cost or market, self insurance liabilities for worker’s compensation losses, recoverability and valuation of recorded amounts of long-lived assets, identifiable intangible assets, including goodwill, and the estimated market price of common stock for purposes of determining stock compensation expense. Actual results could differ from these estimates and such differences could be material.

Restricted Cash:    Restricted cash is primarily comprised of bank guarantees from customer advance payments to our international subsidiaries. The bank guarantees become unrestricted cash when performance under the customers’ sales contract is complete.

Revenue Recognition:    Sales are recognized when persuasive evidence of an arrangement exists, delivery has occurred, the price is fixed or determinable, and collectibility is reasonably assured. The Company’s products are generally subject to warranties, and the Company provides for the estimated future costs of repair, replacement or customer accommodation in cost of sales.

The estimated sales values of performance under certain contracts to commercial customers and U.S. Government fixed-price contracts are recognized under the percentage of completion method of accounting where the sales value is determined on the basis of costs incurred. Sales under cost-reimbursement contracts, which are primarily for research and development, are recorded as costs are incurred and include estimated earned fees in the proportion that costs incurred to date bear to total estimated costs. The fees under certain commercial and U.S. Government contracts may be increased or decreased in accordance with cost or performance incentive provisions that measure

64

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CPI HOLDCO, INC.
and subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

actual performance against established targets or other criteria. Such incentive fee awards or penalties are included in revenue at the time the amounts can be reasonably determined.

Fair Value of Financial Instruments:    Financial instruments include cash and cash equivalents, restricted cash, accounts receivable, derivative instruments, accounts payable, and long-term debt. Cash equivalents include highly liquid short-term investments with original maturities of three months or less, readily convertible to known amounts of cash. As of September 30, 2005, and October 1, 2004, cash equivalents were $25.3 million and $37.3 million, respectively. The carrying value of the Company’s cash, restricted cash, accounts receivable, derivative instruments and accounts payable approximate their fair values. The estimated fair value of the Company’s debt as of September 30, 2005 and October 1, 2004, was $294.8 million and $223.4 million, respectively. The fair value estimates were based on market interest rates and other market information available to management as of each balance sheet date presented. The approximate fair values do not take into consideration expenses that could be incurred in an actual settlement.

Inventories:    Inventories are stated at the lower of average cost or market, primarily using the average cost method. Cost includes labor, material and overhead costs.

The Company assesses the valuation of inventory and periodically writes down the value for estimated excess and obsolete inventory based upon actual usage and estimates about future demand. The excess balance determined by this analysis becomes the basis for our excess inventory charge. Management personnel play a key role in our excess inventory review process by providing updated sales forecasts, managing product rollovers and working with manufacturing to maximize recovery of excess inventory. If actual market conditions are less favorable than those projected by management, additional write-downs may be required. If actual market conditions are more favorable than anticipated, inventory previously written down may be sold, resulting in lower cost of sales and higher income from operations than expected in that period.

Management also reviews the carrying value of inventory for lower of cost or market on an individual product or contract basis. A loss reserve is charged to cost of sales if product cost or the estimated contract cost at completion is in excess of net realizable value (selling price less estimated cost of disposal). If actual contract cost at completion is different than originally estimated, then a loss or gain provision adjustment is recorded that would have an impact on our operating results.

Property, Plant, and Equipment:    Property, plant and equipment are stated at cost. Major improvements are capitalized, while maintenance and repairs are expensed currently. Plant and equipment are depreciated over their estimated useful lives using the straight-line method. Leasehold improvements are amortized using the straight-line method over their estimated useful lives, or the remaining term of the lease, whichever is shorter.

During the second quarter of fiscal year 2004, as a result of valuations that were performed in connection with the Merger purchase price allocation, the Company revised the useful lives of its property, plant and equipment to reflect the current economic useful life of its assets. The following table summarizes the current useful lives for the main components of property, plant and equipment:

Asset Category				Years
Buildings				25
Land improvements				20
Process equipment				12
Machinery and equipment				7 to 12
Office furniture and equipment				5 to 10

Gains and losses resulting from the disposition of assets (property, plant and equipment) are reported on a net basis under the caption ‘‘General and administrative’’ in the accompanying Consolidated Statements of Operations.

65

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CPI HOLDCO, INC.
and subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Goodwill and Other Intangible Assets:    The Company accounts for business combinations using the purchase method of accounting pursuant to Statement of Financial Accounting Standards (‘‘SFAS’’) No. 141, ‘‘Business Combinations’’. Intangible assets acquired in a purchase method business combination are recognized and reported apart from goodwill, pursuant to the criteria specified by SFAS No. 141.

We account for goodwill and other intangible assets in accordance with SFAS No. 142, ‘‘Goodwill and Other Intangible Assets’’. SFAS No. 142 requires that goodwill and identifiable intangible assets with indefinite useful lives be tested for impairment at least annually. SFAS No. 142 also requires that intangible assets with estimable useful lives be amortized over their respective estimated useful lives and reviewed for impairment in accordance with SFAS No. 144, ‘‘Accounting for the Impairment or Disposal of Long-Lived Assets’’. Identifiable intangible assets are amortized over their useful lives of up to 50 years. We test goodwill for impairment annually or more frequently if events and circumstances warrant.

Long-Lived Assets:    We account for long-lived assets in accordance with SFAS No. 144, which requires that long-lived and intangible assets, including property, equipment, and leasehold improvements, be evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. We would recognize an impairment loss when the sum of the undiscounted future net cash flows expected to result from the use of the asset and its eventual disposition is less than its carrying amount. Such impairment loss would be measured as the difference between the carrying amount of the asset and its fair value. Assets to be disposed of would be separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and would no longer be depreciated. The assets and liabilities of a disposal group classified as held for sale would be presented separately in the appropriate asset and liability sections of the balance sheet.

Product Warranty:    The Company’s products are generally warranted for a variety of periods, typically one to three years or a predetermined product usage life. A provision for estimated future costs of repair, replacement or customer accommodations is reflected in the accompanying consolidated financial statements. The Company assesses the adequacy of its preexisting warranty liabilities and adjusts the balance based on actual experience and changes in future expectations.

Deferred Debt Issue Costs:    Costs incurred related to the issuance of the Company’s long-term debt and other credit facilities are capitalized and amortized over the estimated time the obligations are expected to be outstanding using the effective interest method. Deferred debt issue costs for CPI Holdco’s Floating Rate Senior Notes due 2015 (the ‘‘FR Notes’’), revolving commitment, term loan and CPI’s 8% Senior Subordinated Notes due 2012 (‘‘8% Notes’’) are amortized over a period of 10 years, 6 years, 6.5 years and 8 years, respectively. Due to refinancing at the Merger closing date, the Predecessor’s $1.8 million unamortized balance of deferred debt issue costs were charged to interest expense on January 22, 2004. As of September 30, 2005, deferred debt issue costs were $13.1 million and accumulated amortization was $2.0 million.

Comprehensive Income:    Comprehensive income includes net income as well as other comprehensive income. The Company’s other comprehensive income consists of unrealized gains and losses on cash flow hedge contracts, net of tax.

Income Taxes:    The Company records income taxes using the asset and liability method. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

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CPI HOLDCO, INC.
and subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Business Risks and Credit Concentrations:    Defense-related applications, such as certain radar, electronic countermeasures and military communications, constitute a significant portion of the Company’s sales. Companies engaged in supplying defense-related equipment and services to government agencies are subject to certain business risks peculiar to that industry. Sales to the government may be affected by changes in procurement policies, budget considerations, changing concepts of national defense, political developments abroad, and other factors.

Derivative Instruments and Hedging:    The Company accounts for derivative instruments and hedging activities in accordance with SFAS No. 133, ‘‘Accounting for Derivative Instruments and Hedging Activities,’’ as amended by SFAS No. 138, ‘‘Accounting for Certain Derivative Instruments and Hedging Activities—an Amendment of SFAS 133’’ and SFAS 149, ‘‘Amendment of Statement 133 on Derivative Instruments and Hedging Activities.’’ In accordance with these standards, derivative instruments are recorded on the balance sheet as either an asset or liability measured at its fair value. The Company uses foreign currency forward contracts to hedge Canadian dollar expenses and interest rate swap agreements to reduce its exposure to changes in variable interest rates on debt. Derivatives are not used for speculative purposes.

The Company’s derivatives are designated as cash flow hedges and the effective portion of the change in fair value of the derivative is recorded in stockholders’ equity as a separate component of accumulated other comprehensive income and is recognized in the statement of operations when the hedged item affects earnings. The ineffective portion of the change in fair value of the derivative is immediately recognized in earnings.

Foreign Currency Translation:    The functional currency of the Company’s foreign subsidiaries is the U.S. dollar. Gains or losses resulting from the translation into U.S. dollars of amounts denominated in foreign currencies are included in the determination of net income or loss. Foreign currency translation gains and losses are reported on a net basis in the caption ‘‘General and administrative’’ in the Consolidated Statements of Operations.

Research and Development:    Company-sponsored research and development costs related to both present and future products are expensed currently. Customer-sponsored research and development costs are charged to cost of sales to match revenue received. Total expenditures incurred by the Company on research and development are summarized as follows (in thousands):

				Year Ended September 30, 2005 (Successor)				36-Week Period Ended October 1, 2004 (Successor)				16-Week Period Ended January 22, 2004 (Predecessor)				Year Ended October 3, 2003 (Predecessor)
CPI Sponsored				$	7,218				5,253				2,200				6,860
Customer Sponsored					5,889				2,388				1,104				3,725
Total Incurred				$	13,107				7,641				3,304				10,585

Stock-based Compensation:    As allowed by SFAS No. 123, ‘‘Accounting for Stock-Based Compensation,’’ as amended by SFAS No. 148, ‘‘Accounting for Stock-Based Compensation—Transition and Disclosure,’’ the Company applies the intrinsic value-based method of accounting prescribed by Accounting Principles Board (‘‘APB’’) Opinion No. 25, ‘‘Accounting for Stock Issued to Employees,’’ and related interpretations. Under this method, compensation expense is recorded only if the market price of the stock exceeded the exercise price at the measurement date. Since the Company’s stock is not publicly traded and therefore does not have a quoted market price, the Company computes an estimated market price of its stock based on valuation techniques for determining the fair value of closely held stock. The exercise prices of all stock options issued by CPI Holdco were at, or above, the estimated market price of the underlying stock at the date of issuance. The Company charges stock-based compensation expense against income under the caption ‘‘General

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and subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

and administrative’’ in the Consolidated Statements of Operations because the majority of holders of stock options are in administrative functions.

If compensation cost for the Company’s stock-based compensation plan had been determined using the fair value-based method of accounting under SFAS No. 123, then the Company’s net income (loss) would have changed to the pro forma amounts indicated below (in thousands):

				Year Ended September 30, 2005 (Successor)				36-Week Period Ended October 1, 2004 (Successor)				16-Week Period Ended January 22, 2004 (Predecessor)				Year Ended October 3, 2003 (Predecessor)
Net income (loss) as reported				$	13,672				2,648				(4,570	)			16,548
Add: Stock-based compensation included in net income (loss), net of tax					4,180				—				1,289				220
Deduct: Stock-based compensation
determined under fair value-based
method, net of tax					(4,642	)			(415	)			(227	)			(533	)
Pro forma net income (loss)				$	13,210				2,233				(3,508	)			16,235

Reclassifications:    Certain amounts in prior years’ consolidated financial statements have been reclassified to conform to the fiscal 2005 presentation. Net operating results have not been affected by these reclassifications.

Newly Adopted and Recently Issued Accounting Pronouncements:    In March 2004, the Emerging Issues Task Force (‘‘EITF’’) reached a consensus on Issue No. 03-01, ‘‘The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments’’ (‘‘EITF 03-01’’). EITF 03-01 provides guidance on other-than-temporary impairment models for marketable debt and equity securities accounted for under Statement of Financial Accounting Standards (‘‘SFAS’’) No. 115, ‘‘Accounting for Certain Investments in Debt and Equity Securities,’’ and non-marketable equity securities accounted for under the cost method. The EITF developed a basic three-step model to evaluate whether an investment is other-than-temporarily impaired. The Financial Accounting Standards Board (‘‘FASB’’) issued EITF 03-01-1 in September 2004, which delayed the effective date of the recognition and measurement provisions of EITF 03-01. We do not expect the adoption of EITF 03-01 to have a material impact on our results of operations or financial condition.

In December 2004, the FASB issued SFAS No. 123 (revised 2004) ‘‘Share-Based Payments’’ ("SFAS No. 123R"). SFAS No. 123R requires entities to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award and recognize the cost over the period during which an employee is required to provide service in exchange for the award. SFAS No. 123R eliminates the alternative method of accounting for employee share-based payments previously available under APB No. 25. The Company is considered a non-public entity under SFAS No. 123R, accordingly, the Company is required to adopt SFAS No. 123R in the first quarter of its fiscal year 2007. We have not yet determined the impact of applying the provisions of SFAS No. 123R.

In November 2004, the FASB issued SFAS No. 151, ‘‘Inventory Costs—an amendment of ARB No. 43, Chapter 4’’, which is the result of the FASB’s project to reduce differences between U.S. and international accounting standards. SFAS No. 151 requires idle facility costs, abnormal freight, handling costs, and amounts of wasted materials (spoilage) be treated as current-period costs. Under this concept, if the costs associated with the actual level of spoilage or production defects are greater than the costs associated with the range of normal spoilage or defects, the difference would be charged to current-period expense, not included in inventory costs. We are required to adopt SFAS

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and subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

No. 151 in the beginning of fiscal year 2006 and its adoption is not expected to have a significant impact on our results of operations or financial condition.

In December 2004, the FASB issued SFAS No. 153, ‘‘Exchanges of Nonmonetary Assets,’’ (‘‘SFAS No. 153’’) an amendment of APB Opinion No. 29. SFAS No. 153 addresses the measurement of exchanges of nonmonetary assets and redefines the scope of transactions that should be measured based on the fair value of the assets exchanged. SFAS No. 153 is effective for nonmonetary asset exchanges beginning in our first quarter of fiscal year 2006. We do not expect the adoption of SFAS No. 153 to have a material impact on our results of operations or financial condition.

In March 2005, the FASB issued Interpretation No. 47, ‘‘Accounting for Conditional Asset Retirement Obligations,’’ which clarifies that an entity is required to recognize a liability for the fair value of a conditional asset retirement obligation if the fair value can be reasonably estimated even though uncertainty exists about the timing and (or) method of settlement. We are required to adopt Interpretation No. 47 by the end of fiscal year 2006. We do not expect the implementation of Interpretation No. 47 to have a significant impact on our results of operations or financial condition.

In May 2005, the FASB issued SFAS No. 154, ‘‘Accounting Changes and Error Corrections.’’ SFAS No. 154 replaces APB Opinion No. 20, ‘‘Accounting Changes,’’ and SFAS No. 3, ‘‘Reporting Accounting Changes in Interim Financial Statement,’’ and changes the requirements for the accounting for and reporting of a change in accounting principle. We are required to adopt SFAS No. 154 for accounting changes and error corrections in fiscal year 2007. Our results of operations and financial condition will only be impacted by SFAS No. 154 if we implement changes in accounting principle that are addressed by the standard or correct accounting errors in future periods.

In June 2005, the FASB issued a FASB Staff Position (‘‘FSP’’) interpreting FASB Statement No. 143, ‘‘Accounting for Asset Retirement Obligations,’’ specifically FSP 143-1, ‘‘Accounting for Electronic Equipment Waste Obligations’’ (‘‘FSP 143-1’’). FSP 143-1 addresses the accounting for obligations associated with Directive 2002/96/EC (‘‘Directive’’), Waste Electrical and Electronic Equipment, which was adopted by the European Union (‘‘EU’’). The FSP provides guidance on how to account for the effects of the Directive but only with respect to historical waste associated with products placed on the market on or before August 13, 2005. FSP 143-1 is effective the later of the first reporting period ending after June 8, 2005, or the date of the adoption of the law by the applicable EU-member country. The adoption of FSP 143-1 did not have a material impact on our results of operations or financial condition.

In June 2005, the EITF reached a consensus on Issue No. 05-06, ‘‘Determining the Amortization Period for Leasehold Improvements’’ (‘‘EITF 05-06’’). EITF 05-06 provides guidance for determining the amortization period used for leasehold improvements acquired in a business combination or purchased after the inception of a lease, collectively referred to as subsequently acquired leasehold improvements. EITF 05-06 provides that the amortization period used for the subsequently acquired leasehold improvements to be the lesser of (a) the subsequently acquired leasehold improvements’ useful lives, or (b) a period that reflects renewals that are reasonably assured upon the acquisition or the purchase. EITF 05-06 is effective on a prospective basis for subsequently acquired leasehold improvements purchased or acquired in periods beginning after the date of the FASB’s ratification, which was on June 29, 2005. We do not expect the adoption of EITF 05-06 to have a material impact on our results of operations or financial condition.

3.    Mergers

Cypress Merger:    On January 23, 2004, CPI Holdco’s wholly-owned subsidiary, CPI Merger Sub Corp. (‘‘Merger Sub’’), merged (‘‘Merger’’) with and into Communications & Power Industries Holding Corporation (‘‘Holding’’ or the ‘‘Predecessor’’) pursuant to the terms of the Agreement and Plan of Merger (the ‘‘Merger Agreement’’), dated as of November 17, 2003, by and among Holding,

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CPI HOLDCO, INC.
and subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

CPI Holdco, Merger Sub and Green Equity Investors II, L.P., as the representative of the security holders of Holding, under which CPI Holdco, a corporation controlled by affiliates of The Cypress Group (‘‘Cypress’’), agreed to acquire Holding. In the Merger, each share of Holding’s common stock and stock options outstanding immediately prior to the Merger, other than a portion of stock options held by certain members of management (which were converted into options to purchase shares of CPI Holdco), were converted into the right to receive a pro rata portion of the aggregate merger consideration of $131.7 million. In connection with the Merger, CPI Holdco received an equity contribution of $100.0 million before expenses from affiliates of Cypress in exchange for 4,251,122 shares of common stock of CPI Holdco. Members of management of Holding, as a result of rolling over their options to purchase common stock of Holding, received stock options to purchase 167,513 shares (subsequently adjusted to 298,341 shares, see Note 12) of common stock of CPI Holdco (‘‘Rollover Options’’). The estimated fair value of Rollover Options was $5.0 million and was accounted for as Merger purchase price as of January 23, 2004.

In connection with the Merger, Holding and CPI refinanced all of their outstanding indebtedness. As part of the refinancing, CPI effected a covenant defeasance of $74.0 million outstanding aggregate principal amount of its 12% Senior Subordinated Notes (‘‘12% Notes’’) and redeemed the 12% Notes in full, each pursuant to the terms of the Indenture governing the 12% Notes. In addition, CPI terminated its credit facility, and Holding paid off all amounts owing under, and terminated, the loan agreement related to its San Carlos property. CPI also redeemed all of the outstanding shares of its 14% Junior Cumulative Preferred Stock and its Series B 14% Senior Redeemable Exchangeable Cumulative Preferred Stock.

The Merger transaction was accounted for using the purchase method of accounting as required by the Statement of Financial Accounting Standards (‘‘SFAS’’) No.141, ‘‘Business Combinations’’. Accordingly, the assets acquired and liabilities assumed were recorded at fair value, and the excess of the purchase price over the fair value of the assets acquired was recorded as goodwill. The allocation of the purchase price to specific assets and liabilities was based, in part, upon independent appraisals and internal estimates of cash flow and recoverability. The following table summarizes the final allocation of fair value of the assets acquired and liabilities assumed at January 23, 2004 (in thousands):

Net current assets				$	33,368
Property, plant and equipment					70,079
Identifiable intangible assets					92,160
Acquired in-process research and development					2,500
Goodwill					139,614
Debt and preferred stock					(172,881	)
Deferred tax liabilities, net					(33,169	)
Total				$	131,671

Net current assets includes $5.5 million for the revaluation of inventory. The $2.5 million of acquired in-process research and development represents the estimated fair value of acquired in-process research and development projects that had not yet reached technological feasibility on January 23, 2004 and had no alternative future use. Accordingly, this amount was written off at the Merger date. The value assigned to acquired in-process research and development is related to technology application projects involving development of VEDs for communications, scientific and military applications and development of power supplies, x-ray generators and transmitters for industrial, medical and military applications. The following table presents details of the purchased intangible assets acquired (in thousands):

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and subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

				Weighted Average Useful Life				Amount
Tradename				indefinite				$	4,400
Landlease				45 years					11,810
Backlog				1 year					17,450
Technology				37					58,500
Total								$	92,160

The following unaudited pro forma summary presents information as if the Merger had taken place at the beginning of each period presented. The pro forma amounts include certain adjustments, including depreciation based on the allocated purchase price of property and equipment, amortization of finite-lived intangible assets acquired, interest expense and taxes. One-time charges for the inventory write-up, merger expenses, acquired in-process research and development and backlog amortization, net of applicable taxes, are excluded from the pro forma net income amounts (in thousands):

				Fiscal Year
				2004				2003
Sales				$	282,185			$	265,434
Net income				$	16,313			$	11,640

Corporate Reorganization:    On March 12, 2004, Holding was merged with and into its wholly-owned subsidiary, CPI, with CPI as the surviving corporation (the ‘‘Intercompany Merger’’). As a result of the Intercompany Merger, all of the obligations of Holding existing prior to the Intercompany Merger became obligations of CPI. CPI is a wholly owned subsidiary of CPI Holdco. CPI Holdco is a holding company with no operations of its own.

4.    Econco Acquisition

On October 8, 2004, CPI purchased all of the outstanding stock of Econco Broadcast Service, Inc. (‘‘Econco’’) of Woodland, California for cash consideration of $18.3 million. Econco is a provider of rebuilding service for VEDs, allowing broadcasters and other users of these critical products to extend the life of their devices at a cost that is lower than buying a new VED.

The Econco acquisition was accounted for using the purchase method of accounting as required by Financial Accounting Standards Board (‘‘FASB’’) Statement No. 141, ‘‘Business Combinations.’’  Accordingly, the assets and liabilities of Econco were adjusted to their fair values and the excess of the purchase price over the fair value of the net assets acquired was recorded as goodwill. The allocation of the purchase price to specific assets and liabilities was based, in part, upon independent appraisals and internal estimates of cash flow and recoverability.

The following table summarizes the allocation of the fair value of the Econco assets acquired and liabilities assumed (in thousands):

Net current assets				$	2,049
Property, plant and equipment					3,239
Identifiable intangible assets					7,210
Goodwill					5,848
Total				$	18,346

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CPI HOLDCO, INC.
and subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Net current assets includes $0.4 million for the revaluation of inventory. The following table presents details of the purchased intangible assets acquired (in thousands):

				Weighted Average Useful Life				Amount
Non-compete agreement				5 years				$	110
Tradename				indefinite					1,400
Customer list and programs				25 years					5,700
Total								$	7,210

The consolidated financial statements include Econco’s financial results from the acquisition date. Pro forma results of operations, as if the acquisition had occurred at the beginning of fiscal year 2004 and 2005, have not been presented because the proforma results are not materially different from the Company’s consolidated results of operations as presented in the accompanying consolidated statements of operations.

5.    Supplemental Balance Sheet Information

Accounts Receivable:    Accounts receivable are stated net of allowances for doubtful accounts of $0.7 million at the end of fiscal years 2005 and 2004.

Inventories:    The following table provides details of inventories (in thousands):

				September 30, 2005				October 1, 2004
Raw material and parts				$	29,627			$	23,500
Work in process					12,540				10,067
Finished goods					8,453				4,507
Total inventories				$	50,620			$	38,074

Property, Plant, and Equipment:    The following table provides details of property, plant and equipment (in thousands):

				September 30, 2005				October 1, 2004
Land and land leaseholds				$	21,255			$	20,955
Buildings					27,874				23,669
Machinery and equipment					32,373				27,157
Construction in progress					11,373				1,393
					92,875				73,174
Less accumulated depreciation and amortization					(9,251	)			(3,047	)
Net property, plant and equipment				$	83,624			$	70,127

At September 30, 2005, construction in progress included $10.3 million for capital equipment, building and land lease improvements related to the relocation of the San Carlos production facility to Palo Alto, California.

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CPI HOLDCO, INC.
and subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Intangible Assets:    The following tables present the details of the Company’s total purchased intangible assets (in thousands):

September 30, 2005				Cost				Accumulated Amortization				Net
Technology				$	58,500			$	(3,317	)		$	55,183
Customer backlog					17,450				(17,450	)			—
Land lease					11,810				(444	)			11,366
Tradename					5,800				—				5,800
Customer list and programs					5,700				(197	)			5,503
Noncompete agreement					110				(21	)			89
Total				$	99,370			$	(21,429	)		$	77,941

October 1, 2004				Cost				Accumulated Amortization				Net
Technology				$	58,500			$	(1,350	)		$	57,150
Customer backlog					17,450				(12,148	)			5,302
Land lease					11,810				(181	)			11,629
Tradename					4,400				—				4,400
Total				$	92,160			$	(13,679	)		$	78,481

The estimated future amortization expense of purchased intangibles as of September 30, 2005 was as follows (in thousands):

Fiscal Year				Amount
2006				$	2,451
2007					2,451
2008					2,451
2009					2,451
2010					2,429
Thereafter					59,908
Total				$	72,141

Goodwill:    The following table presents the changes in goodwill by reportable segment during fiscal year 2005 (in thousands):

				October 1, 2004				Acquired				September 30, 2005
VED				$	125,769			$	5,848			$	131,617
Satcom Equipment					13,845				—				13,845
Total				$	139,614			$	5,848			$	145,462

As more fully described in Note 4 ‘‘Econco Acquisition’’, goodwill acquired consists of the excess of the purchase price for Econco over the fair value of the assets acquired.

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CPI HOLDCO, INC.
and subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Accrued Expenses:    The following table provides details of accrued expenses (in thousands):

				September 30, 2005				October 1, 2004
Payroll and employee benefits				$	16,781			$	13,484
Accrued interest					3,707				1,835
Other accurals					6,759				5,620
Total accrued expenses				$	27,247			$	20,939

Product Warranty:    The following table summarizes the activity related to product warranty during fiscal years 2005 and 2004 (in thousands):

				September 30, 2005				October 1, 2004
Beginning accrued warranty				$	6,074			$	5,401
Econco acquisition					112				—
Cost of warranty claims					(5,519	)			(4,527	)
Accruals for product warranty					5,692				5,200
Ending accrued warranty				$	6,359			$	6,074

6.    Long-Term Debt

Long-term debt comprises the following (in thousands):

				September 30, 2005				October 1, 2004
Term loan, expiring 2010				$	80,000			$	89,550
8% Senior subordinated notes, due 2012					125,000				125,000
Floating rate senior notes, due 2015, net of issue discount of $769 of issue discount of $769					79,231				—
					284,231				214,550
Less: Current portion					—				3,944
Long-term portion				$	284,231			$	210,606

Senior Credit Facility and Term Loan of CPI:    In connection with the Merger, CPI entered into a $130.0 million credit agreement, which was amended and restated on November 29, 2004, and further amended on February 16, 2005 and April 13, 2005 (the ‘‘Senior Credit Facility’’). The Senior Credit Facility consists of a $40.0 million revolving commitment, with a sub-facility of $15.0 million for letters of credit and $5.0 million for swingline loans (‘‘Revolver’’), which expires on January 23, 2010, and an $89.6 million term loan (which was reduced from the original $90.0 million amount) (‘‘Term Loan’’), which expires on July 23, 2010. As of September 30, 2005, the Company had no outstanding borrowings under the Revolver and $80.0 million remained outstanding under the Term Loan with no required current portion as the Company made optional prepayments in fiscal year 2005 of $5.7 million. Upon specified conditions, CPI may seek commitments for a new class of term loans, not to exceed $75 million. The Senior Credit Facility is guaranteed by CPI Holdco and all of CPI’s domestic subsidiaries and is secured by substantially all of their assets.

The Revolver borrowings currently bear interest at a rate equal to, at CPI’s option, LIBOR plus 2.75% per annum, or the Alternate Base Rate (‘‘ABR’’) plus 1.75% per annum. The Term Loan borrowings currently bear interest at a rate equal to, at CPI’s option, LIBOR plus 2.25% per annum or the ABR plus 1.25% per annum, payable quarterly. The ABR is the greater of (a) the Prime Rate and (b) the Federal Funds Rate plus 0.50%. In addition to customary fronting and administrative fees

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and subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

under the Senior Credit Facility, CPI pays letter of credit participation fees equal to the applicable Revolver LIBOR margin per annum on the average daily amount of the letter of credit exposure, and a commitment fee of 0.50% per annum on the average daily unused amount of revolving commitment. As of September 30, 2005 (1) the Term Loan borrowing consisted of one tranche of $80 million with interest payable on November 14, 2005, at 6.03% per annum and (2) a Revolving commitment of $4.7 million for letter of credit exposure; with Letter of Credit participation fees and fronting fees payable quarterly at a combined interest rate of 3.0% per annum.

The Senior Credit Facility requires 1.0% of the original Term Loan amount to be repaid annually in quarterly installments of 0.25% beginning June 30, 2004 and continuing for five years, with the remainder due in equal quarterly installments thereafter. CPI is required to prepay its outstanding loans, subject to certain exceptions and limitations, with net cash proceeds received from certain events, including, without limitation (1) all such proceeds received from certain asset sales by CPI Holdco, CPI or any of CPI’s subsidiaries; (2) all such proceeds received from issuances of debt (other than certain specified permitted debt) or preferred stock by CPI Holdco, CPI or any of CPI’s subsidiaries, (3) all such proceeds paid to CPI Holdco, CPI or any of CPI’s subsidiaries from casualty and condemnation events in excess of amounts applied to replace, restore or reinvest in any properties for which proceeds were paid within a specified period and (4) 50% of such proceeds received from issuances of common equity by, or equity contributions to, CPI Holdco.

CPI is also required to make an annual prepayment within 90 days after the end of each fiscal year based on a calculation of Excess Cash Flow (‘‘ECF’’), as defined in the Senior Credit Facility, multiplied by a factor of 25%, 50% or 75% depending on the leverage ratio at the end of the fiscal year, less optional prepayments made during the fiscal year. On December 30, 2004, CPI made an ECF payment of $3.9 million. The ECF payment was applied pro rata, in accordance with the provisions of the Senior Credit Facility, against the remaining scheduled installments of Term Loan principal due up to, but not including, the September 30, 2009 scheduled principal installment. Based on a forecasted calculation of ECF, CPI does not anticipate that it will be required to make an ECF payment for the fiscal year ending September 30, 2005, due to the optional prepayment made in March 2005 in excess of the ECF payment calculation.

CPI can make optional prepayments on the outstanding loans at any time without premium or penalty, except for customary ‘‘breakage’’ costs with respect to LIBOR loans. On March 31, 2005, CPI made an optional prepayment of $5.7 million, in addition to the quarterly scheduled Term Loan amortization payment. The optional prepayment was applied pro rata, in accordance with the provisions of the Senior Credit Facility, against the remaining scheduled installments of Term Loan principal due up to June 30, 2009, with the balance applied to the September 30, 2009 installment.

The Senior Credit Facility contains a number of covenants that, among other things, restrict, subject to certain exceptions, the ability of CPI Holdco, CPI and CPI’s subsidiaries to: sell assets; engage in mergers and acquisitions; pay dividends and distributions or repurchase their capital stock; incur additional indebtedness or issue equity interests; make investments and loans; create liens or further negative pledges on assets; engage in certain transactions with affiliates; enter into sale and leaseback transactions; amend agreements or make prepayments relating to subordinated indebtedness; and amend or waive provisions of charter documents in a manner materially adverse to the lenders. CPI and CPI’s subsidiaries must comply with: a minimum interest coverage ratio; a maximum total leverage ratio; a minimum fixed charge coverage ratio; and a maximum capital expenditures limitation, each calculated on a consolidated basis for CPI and CPI’s subsidiaries. CPI Holdco must also comply with a minimum interest coverage ratio, a minimum fixed charge coverage ratio and a maximum leverage ratio, each calculated on a consolidated basis for CPI Holdco and its subsidiaries. As of September 30, 2005, CPI and CPI Holdco were in compliance with all Senior Credit Facility financial covenants.

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CPI HOLDCO, INC.
and subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Subject in certain cases to applicable notice provisions and grace periods, events of default under the Senior Credit Facility include, among other things: failure to make payments when due; breaches of representations and warranties in the documents governing the Senior Credit Facility; non-compliance by CPI Holdco, CPI and/or CPI’s subsidiaries with certain covenants; failure by CPI Holdco, CPI and/or CPI’s subsidiaries to pay certain other indebtedness or to observe any other covenants or agreements that would allow acceleration of such indebtedness, collectively in excess of $5.0 million at any time; events of bankruptcy or insolvency of CPI Holdco, CPI and/or CPI’s subsidiaries; certain uninsured and unstayed judgments of $5.0 million or more against CPI Holdco; impairment of the security interests in the collateral or the guarantees under the Senior Credit Facility; and a change in control, as defined in the documents governing the Senior Credit Facility.

8% Senior Subordinated Notes of CPI:    In connection with the Merger on January 23, 2004, CPI issued $125 million in aggregate principal amount of its 8% Senior Subordinated Notes (‘‘8% Notes’’). The proceeds of the 8% Notes were used to redeem the Predecessor’s outstanding indebtedness and pay part of the Merger consideration. The 8% Notes have no sinking fund requirements.

The 8% Notes bear interest at the rate of 8.0% per year, payable on February 1 and August 1 of each year. The 8% Notes will mature on February 1, 2012. The 8% Notes are unsecured obligations, jointly and severally guaranteed by CPI Holdco and each of CPI’s domestic subsidiaries. The payment of all obligations relating to the 8% Notes are subordinated in right of payment to the prior payment in full in cash or cash equivalents of all senior debt (as defined in the indenture governing the 8% Notes) of CPI, including debt under the Senior Credit Facility. Each guarantee of the 8% Notes is and will be subordinated to guarantor senior debt (as defined in the indenture governing the 8% Notes) on the same basis as the 8% Notes are subordinated to CPI’s senior debt.

At any time or from time to time on or after February 1, 2008, CPI, at its option, may redeem the 8% Notes, in whole or in part, at the redemption prices (expressed as percentages of principal amount) set forth below, together with accrued and unpaid interest thereon, if any, to the redemption date, if redeemed during the 12-month period beginning on February 1 of the years indicated below:

Year				Optional Redemption Price
2008					104	%
2009					102	%
2010 and thereafter					100	%

At any time or from time to time prior to February 1, 2007, and subject to certain conditions, CPI may redeem up to 35% of the aggregate principal amount of the 8% Notes at a redemption price equal to 108% of the principal amount of the 8% Notes to be redeemed, plus accrued and unpaid interest to the date of redemption, with the net cash proceeds of one or more qualified equity offerings. At any time on or prior to February 1, 2008, the 8% Notes may also be redeemed or purchased (by CPI or any other person) in whole but not in part, at CPI’s option, upon the occurrence of a change of control (as defined in the indenture governing the 8% Notes) at a price equal to 100% of the principal amount of the 8% Notes, plus a ‘‘make-whole’’ premium (as defined in the indenture governing the 8% Notes) to the redemption price on February 1, 2008, and accrued and unpaid interest, if any, to, the date of redemption or purchase.

Upon a change of control, CPI will be required to offer to purchase all or any part of the 8% Notes for a cash price equal to 101% of the principal amount, plus accrued and unpaid interest thereon, if any, to the date of purchase.

The indenture governing the 8% Notes contains a number of covenants that, among other things, restrict, subject to certain exceptions, the ability of CPI and its restricted subsidiaries (as defined in the indenture governing the 8% Notes) to incur additional indebtedness, sell assets, consolidate or

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and subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

merge with or into other companies, pay dividends or repurchase or redeem capital stock or subordinated indebtedness, make certain investments, issue capital stock of their subsidiaries, incur liens and enter into certain types of transactions with their affiliates.

Events of default under the indenture governing the 8% Notes include: failure to make payments on the 8% Notes when due; failure to comply with covenants in the indenture governing the 8% Notes; a default under certain other indebtedness of CPI or any of its restricted subsidiaries that is caused by a failure to make payments on such indebtedness or that results in the acceleration of the maturity of such indebtedness; the existence of certain final judgments or orders against CPI or any of the restricted subsidiaries; and the occurrence of certain insolvency or bankruptcy events.

Floating Rate Senior Notes of CPI Holdco:    On February 22, 2005, CPI Holdco issued $80.0 million in principal amount of its Floating Rate Senior Notes (‘‘FR Notes’’). The FR Notes were issued at a 1% discount. The proceeds from the issuance of FR Notes were used to make a special cash dividend to stockholders of CPI Holdco of approximately $75.8 million and to pay fees and expenses of approximately $3.5 million associated with the issuance of FR Notes. The FR Notes have no sinking fund requirements.

The FR Notes require interest payments at an annual interest rate, reset at the beginning of each semi-annual period, equal to the then six-month LIBOR plus 5.75%, payable semiannually on February 1 and August 1 of each year. CPI Holdco may, at its option, elect to pay interest through the issuance of additional FR Notes for any interest payment date on or after August 1, 2006 and on or before February 1, 2010. If CPI Holdco elects to pay interest through the issuance of additional FR Notes, the annual interest rate on the FR Notes will increase by an additional 1% step-up, with the step-up increasing by an additional 1% for each interest payment made through the issuance of additional FR Notes (up to a maximum of 4%). The FR Notes will mature on February 1, 2015.

The FR Notes are general unsecured obligations of CPI Holdco. The FR Notes are not guaranteed by any of CPI Holdco’s subsidiaries and are structurally subordinated to all existing and future indebtedness and other liabilities of CPI Holdco’s subsidiaries. The FR Notes are senior in right of payment to CPI Holdco’s existing and future indebtedness that is expressly subordinated to the FR Notes.

At any time or from time to time prior to February 1, 2007, CPI Holdco, at its option, may redeem the FR Notes in whole or in part at a ‘‘make whole’’ premium, plus accrued and unpaid interest to the date of redemption. At any time or from time to time on or after February 1, 2007, CPI Holdco, at its option, may redeem the Notes in whole or in part at the redemption prices (expressed as percentages of principal amount) set forth below, together with accrued and unpaid interest thereon, if any, to the redemption date, if redeemed during the 12-month period beginning on February 1 of the years indicated below:

Year				Optional Redemption Price
2007					103	%
2008					102	%
2009					101	%
2010 and thereafter					100	%

At any time or from time to time prior to February 1, 2007, and subject to certain conditions, CPI Holdco, at its option, may redeem up to 35% of the aggregate principal amount of the FR Notes at a redemption price equal to 100% of the principal amount of the FR Notes to be redeemed, plus a premium equal to the interest rate per annum on the FR Notes applicable on the date on which the notice of redemption is given, plus accrued and unpaid interest to the date of redemption, with the net cash proceeds of one or more qualified equity offerings.

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CPI HOLDCO, INC.
and subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Upon a change of control, as defined in the indenture governing the FR Notes, CPI Holdco will be required to offer to purchase all or any part of the outstanding FR Notes for a cash price equal to 101% of the principal amount, plus accrued and unpaid interest thereon, if any, to the date of purchase.

The indenture governing the FR Notes contains certain covenants that, among other things, limit the ability of CPI Holdco and its restricted subsidiaries (as defined in the indenture governing the FR Notes) to incur additional indebtedness, sell assets, consolidate or merge with or into other companies, pay dividends or repurchase or redeem capital stock or subordinated indebtedness, make certain investments, issue capital stock of their subsidiaries, incur liens and enter into certain types of transactions with their affiliates.

Events of default under the indenture governing the FR Notes include: failure to make payments on the FR Notes when due; failure to comply with covenants in the indenture governing the FR Notes; a default under certain other indebtedness of CPI Holdco or any of its restricted subsidiaries that is caused by a failure to make payments on such indebtedness or that results in the acceleration of the maturity of such indebtedness; the existence of certain final judgments or orders against CPI Holdco or any of the restricted subsidiaries; and the occurrence of certain insolvency or bankruptcy events.

Debt Maturities:    As of September 30, 2005, maturities on long-term debt were as follows (in thousands):

Fiscal Year				Amount
2006				$	0
2007					0
2008					0
2009					16,000
2010					64,000
Thereafter					205,000
Total				$	285,000

7.    Preferred Stock of CPI

At the closing of the Merger, CPI redeemed all of the outstanding shares of the Senior Redeemable Preferred Stock of CPI and Junior Preferred Stock of CPI and unpaid dividends were paid in full.

Senior Redeemable Preferred Stock of CPI:    Dividends on the Senior Preferred Stock accrued at the rate of 14% per annum, payable quarterly.

Junior Preferred Stock of CPI:    Dividends on the Junior Preferred Stock accrued at the rate of 14% per annum, payable quarterly. On or before the redemption of the Senior Preferred Stock or the exchange of Senior Preferred Stock into Exchange Notes, CPI was required to pay dividends on the Junior Preferred Stock in additional fully paid and non-assessable shares of Junior Preferred Stock having an aggregate liquidation preference equal to the amount of such dividends. At a value of $100 per share, the Predecessor paid preferred dividends on its Junior Preferred Stock through the issuance of 23,955, and 38,509 shares of Junior Preferred Stock for the 16-week period ended January 22, 2004 and for fiscal year 2003, respectively.

In December 2004, CPI filed a restated Certificate of Incorporation that does not allow for the issuance of preferred stock.

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CPI HOLDCO, INC.
and subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

8.    Contingencies and Commitments

From time to time, the Company may be subject to other claims that arise in the ordinary course of business. In the opinion of management, all such matters involve amounts that would not have a material adverse effect on the Company’s consolidated financial position if unfavorably resolved.

The Company entered into employment agreements with certain members of executive management that include provisions for the continued payment of salary, benefits and a pro-rata portion of annual bonus upon employment termination for periods ranging from 12 months to 30 months.

9.    Leases

At September 30, 2005, the Company was committed to minimum rentals under non-cancelable operating lease agreements primarily for land and facility space. A summary of future minimum lease payments follows (in thousands):

Fiscal Year				Optional Leases
2006				$	1,303
2007					1,011
2008					870
2009					796
2010					692
Thereafter					3,659
Total future minimum lease payments				$	8,331

Real estate taxes, insurance, and maintenance are also obligations of the Company. Rental expense under non-cancelable operating leases amounted to $1.3 million, $1.0 million, $0.4 million, and $1.3 million, for the fiscal year 2005, the 36-week period ended October 1, 2004, the 16-week period ended January 22, 2004, and fiscal year 2003, respectively.

10.    Derivative Financial Instruments

The Company uses forward exchange contracts to hedge the foreign currency exposure associated with forecasted manufacturing costs in Canada. As of September 30, 2005, CPI had outstanding forward contract commitments to purchase Canadian dollars for an aggregate U.S. notional amount of $12.1 million; the last forward contract expires on March 10, 2006. At September 30, 2005 and October 1, 2004, the fair value of foreign currency forward contracts was $1.7 million and $2.4 million, respectively, and the unrealized gain was approximately $1.2 million and $1.4 million, net of related tax expense, respectively.

The Company’s foreign currency forward contracts are designated as a cash flow hedge and are considered highly effective, as defined by SFAS No. 133, ‘‘Accounting for Derivative Instruments and Hedging Activities’’. The unrealized gains and losses from foreign exchange forward contracts are included in ‘‘Accumulated Other Comprehensive Income’’ in the Condensed Consolidated Balance Sheet, and the Company anticipates recognizing the entire unrealized gain in operating earnings within the next twelve months. Changes in the fair value of foreign currency forward contracts due to changes in time value are excluded from the assessment of effectiveness, and are recognized in General and Administrative in the Consolidated Statements of Operations when the hedged item affects earnings. The time value was not material for fiscal years 2005 or 2004. If the transaction being hedged fails to occur, or if a portion of any derivative is ineffective, the Company promptly recognizes the gain or loss on the associated financial instrument in General and Administrative in the

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CPI HOLDCO, INC.
and subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Consolidated Statements of Operations. No ineffective amounts were recognized due to anticipated transactions failing to occur in fiscal years 2005 and 2004. Realized gains and losses from foreign currency forward contracts are recognized in Cost of Sales and General and Administrative in the Consolidated Statements of Operations. For fiscal years 2005 and 2004, net income includes forward currency gains of $1.3 million and $20,000, respectively.

In April 2005, the Company expanded its use of derivatives to hedge the interest rate exposure associated with the FR Notes expiring February 1, 2015. On April 15, 2005, the Company entered into an $80 million interest rate swap contract (‘‘the Swap’’) to receive variable rate 6-month LIBOR interest and pay 4.15% fixed rate interest, which when combined with the 5.75% margin, results in a fixed rate of 9.9% on the FR Notes through January 31, 2008. The Swap interest payments are made semi-annually, beginning with the first payment on February 1, 2006. The Swap matures on January 31, 2008. In fiscal year 2005, the Company deposited $1.0 million as collateral for the Swap, which is included as Other Long-term Assets in the accompanying Consolidated Balance Sheets. The amount of collateral fluctuates based on the fair value of the Swap. The unrealized gains and losses from the Swap are included in ‘‘Accumulated Other Comprehensive Income’’ in the Consolidated Balance Sheet. The ineffective portion of the Swap was not significant and all parts of the interest rate swap gain or loss is included in the assessment of hedge effectiveness. At September 30, 2005, the fair value of the Swap was $0.7 million and the unrealized gain was approximately $0.4 million, net of related tax expense.

11.    Special Cash Dividend

In February 2005, the Board of Directors declared a special cash dividend to stockholders of approximately $75.8 million. The special cash dividend was made on the basis of the stockholders’ relative ownership in CPI Holdco’s outstanding common stock; Cypress received $75.4 million and our Outside Directors (as defined in Footnote 16) of the Company received a total of $0.4 million. This dividend was paid out of the net proceeds from the issuance of the $80 million in principal amount of FR Notes issued in February 2005.

12.    Stock-Based Compensation Plans

As a result of the special cash dividend to stockholders in February 2005, CPI Holdco adjusted the stock options outstanding under the Predecessor’s 2000 Stock Option Plan and CPI Holdco’s 2004 Stock Incentive Plan pursuant to the terms of those plans to reflect the special cash dividend made to the stockholders of CPI Holdco. As a result of these adjustments, the exercise price of the options outstanding under these plans was adjusted by dividing the prior exercise price of such options by 1.781, the number of shares issuable upon exercise of those options was adjusted by multiplying the number of shares previously issuable pursuant to the options by 1.781, and the total number of shares reserved for issuance under each such plan was also increased by a factor of 1.781. These adjustments increased the number of options outstanding from approximately 526,000 to 937,000 and reduced the range of exercise prices of the options outstanding from $1.10 to $36.00 per share down to $0.62 to $20.21 per share. All share and per share information presented has been adjusted for this equity restructuring transaction.

In accordance with FASB Interpretation 44, ‘‘Accounting for Certain Transactions Involving Stock Compensation,’’ the Company determined that there were no accounting consequences for the adjustments made to the number of options issued and their respective exercise prices. It was determined that the aggregate intrinsic value of the stock options immediately after the adjustment was not greater that aggregate intrinsic value of the stock options immediately before the adjustment, and the ratio of exercise price per share to the market value was not reduced.

2004 Stock Incentive Plan:    In January 2004, CPI Holdco established the 2004 Stock Incentive Plan (‘‘the 2004 Plan’’) to provide an incentive for key employees, consultants, advisors and directors

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CPI HOLDCO, INC.
and subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

of CPI Holdco and its subsidiaries, and reserved 623,350 shares of CPI Holdco’s common stock for issuance thereunder. In September 2004, an amendment was made to the 2004 Plan to increase the shares reserved for issuance under the 2004 Plan by 89,050 to 712,400 shares. Awards under the 2004 Plan may include stock options, stock appreciation rights, restricted stock, stock awards or any combination thereof. Options granted under the 2004 Plan shall be non-qualified stock options or incentive stock options, as determined by the Compensation Committee of the Board of Directors (‘‘the Committee’’), and as evidenced by the related award agreements. The option price shall be determined by the Committee, but with respect to incentive stock options, shall not be less than the fair market value on the date of grant. For employees holding more than 10% of the voting rights of all classes of stock, the exercise price of incentive stock options may not be less than 110% of the fair market value of the common stock on the date of grant and the options shall not be exercisable later than five years from the date of grant. As of September 30, 2005, 61,540 shares remain available for future issuance under the 2004 Plan.

CPI Holdco issued both time (‘‘Time’’) and performance (‘‘Performance’’) stock option awards under the 2004 Plan. Time stock option awards vest at a rate of 20% to 25% per fiscal year based on the grant date. Performance option awards vest at a rate of 20% to 25% per year if the Company achieves certain minimum annual EBITDA targets. All stock option grants under the 2004 Plan were issued at exercise prices equal to or greater than the estimated market price of the Company’s common stock at option grant date.

For Performance stock options, stock-based compensation expense is charged to income over the stock option vesting period that corresponds with the performance measurement period. Stock-based compensation expense is determined based on an estimate of the number of performance stock options expected to vest multiplied by the difference between (a) the estimated market price of the stock at the performance measurement date and (b) the option exercise price. At year end, the estimated market price of our stock was based upon a fair value estimate that was determined by an independent appraisal company. The Company was expecting to meet the EBITDA targets for all performance stock option awards that were granted under the 2004 Plan.

In September 2005, the Committee approved the acceleration of vesting of all unvested Performance stock options as of September 30, 2005. The purpose of the acceleration was to reward management for its performance. Stock-based compensation expense associated with the acceleration of vesting of 163,691 Performance stock options was $2.8 million. In fiscal year 2005, total stock-based compensation expense of $7.0 million includes the expense from the acceleration of vesting of stock options. In fiscal year 2004, no stock-based compensation expense was recorded for Performance stock options because the estimated market price of the stock during the 36-week period ended October 1, 2004 was not greater than the option exercise prices. In fiscal year 2003, the Predecessor issued stock options to employees that were subsequently determined to have been issued below the estimated market price of the stock on the date of grant. The stock-based compensation expense associated with the 2003 stock options was amortized as a charge against income on a straight-line basis over the four-year vesting period until the stock options became fully vested at the time of the Merger.

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CPI HOLDCO, INC.
and subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

A summary of the status of the Company’s Time stock options under the 2004 Plan, is presented below:

				Year Ended September 30, 2005								36-Week period ended October 1, 2004
				Number of Shares Under Option				Weighted Average Exercise Price				Number of Shares Under Option				Weighted Average Exercise Price
Outstanding at beginning of period					374,915			$	13.47				—				—
Granted					5,000			$	21.34				376,473			$	13.47
Forfeited					(624	)		$	13.21				(1,558	)		$	13.21
Exercised					—				—				—				—
Outstanding at end of period					379,291			$	13.58				374,915			$	13.47
Option exercisable at end of period					148,212								91,692
Weighted-average fair value of options granted during the period								$	12.46							$	2.64

A summary of the status of the Company’s Performance stock options under the 2004 Plan, is presented below:

				Year Ended September 30, 2005								36-Week period ended October 1, 2004
				Number of Shares Under Option				Weighted Average Exercise Price				Number of Shares Under Option				Weighted Average Exercise Price
Outstanding at beginning of period					267,193			$	13.21				—				—
Granted					5,000			$	21.34				268,751			$	13.21
Forfeited					(624	)		$	13.21				(1,558	)		$	13.21
Exercised					—				—				—				—
Outstanding at end of period					271,569			$	13.36				267,193			$	13.21
Option exercisable at end of period					271,569								66,798
Weighted-average fair value of options granted during the period								$	12.46							$	2.84

2000 Stock Option Plan:    In accordance with the terms of the stock option agreements, the unvested stock options outstanding under Holding’s 2000 Stock Option Plan (‘‘the 2000 Plan’’) became fully vested at the Merger closing date. The 2000 Plan option holders were offered the opportunity to either roll over their stock options into options to purchase common stock of CPI Holdco (‘‘Rollover Options’’) or exercise their stock options. Management elected to rollover options to purchase 298,341 shares of common stock at prices ranging from $0.62 to $2.25 per share. The Rollover Options have a minimum price guarantee of $13.212 per share based on the Merger consideration value that would have been received at the closing of the Merger if the options had been exercised at that time. The Rollover Options are otherwise subject to the terms of the 2000 Plan, and, among other things, have a ten year expiration period and are subject to transferability restrictions and continued employment. No further options are available for issuance under the 2000 Plan.

With respect to options granted in fiscal year 2003, the Company recorded deferred stock-based compensation of approximately $1.5 million for the difference between the exercise price at the grant date and the fair value as determined by the Board of Directors. The total deferred stock-based compensation was amortized to expense on a straight-line basis over the four-year vesting period until these options became fully vested at Merger closing. At Merger closing, the unrecognized deferred stock compensation cost of $1.2 million was charged to expense.

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CPI HOLDCO, INC.
and subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

A summary of the status of the Company’s stock options under the 2000 Plan, is presented below:

				Year Ended September 30, 2005								36-Week period ended October 1, 2004								16-Week period ended January 22, 2004								Year Ended October 3, 2003
				Number of Shares Under Option				Weighted Average Exercise Price				Number of Shares Under Option				Weighted Average Exercise Price				Number of Shares Under Option				Weighted Average Exercise Price				Number of Shares Under Option				Weighted Average Exercise Price
Outstanding at beginning of period					295,669			$	0.98				541,513			$	1.23				541,513			$	1.23				383,449			$	2.25
Granted					—				—				—				—				—				—				340,171			$	0.62
Forfeited					—				—				(2,672	)		$	1.71				—				—				(182,107	)		$	2.25
Exercised					—				—				(243,172	)		$	1.52				—				—				—				—
Outstanding at end of period					295,669			$	0.98				295,669			$	0.98				541,513			$	1.23				541,513			$	1.23
Option exercisable at end of period					295,669								295,669								541,513								147,111
Weighted-average fair value of options granted during the period									—								—								—							$	4.73

The fair value of each option grant, note above, is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:

				Year Ended September 30, 2005				36-Week period ended October 1, 2004				Year Ended October 3, 2003
Expected live (years)					5.96				6.67				5.00
Expected volatility					0.0	%			0.0	%			0.0	%
Dividend yield					0.0	%			0.0	%			0.0	%
Risk free interest rate					3.790	%			3.660	%			3.375	%

The following table summarizes information about stock options outstanding at September 30, 2005:

Options Outstanding												Options Exercisable
Exercise Price				Number of Shares				Weighted- Average Remaining Contractual Life (in years)				Number of Shares Exercisable				Weighted Average Exercise Price
$0.62					230,372			7.42					230,372			$0.62
$2.25					65,297			4.84					65,297			$2.25
$3.30					2,642			8.33					2,642			$3.30
$13.21					620,408			8.49					394,329			$13.21
$20.21					17,810			9.00					17,810			$20.21
$21.34					10,000			9.47					5,000			$21.34
					946,529								715,450

Holding Equity Plan:    In August 1995, Holding established the Holding 1995 Management Equity Plan (the "Holding Equity Plan"), under which certain of Holding's and CPI's present and former executive officers are participants. Under the Holding Equity Plan, participants were permitted to purchase shares of Holding common stock ("Management Shares") at a price determined by

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CPI HOLDCO, INC.
and subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Holding's Board of Directors to be the fair value of such Holding common stock on the date of the execution of an agreement to purchase the shares. In March 2003, the Company sold 100,000 shares to certain executive officers of Holding and CPI for $1.10 per share in cash under the Holding Equity Plan. In fiscal year 2003, the Company recorded compensation expense of $0.8 million related to this sale as the shares were determined to have been sold at less than the fair value. No additional shares will be purchased under the Holding Equity Plan.

13.    Employee Benefit Plans

Retirement Plans:    CPI provides a qualified 401(k) investment plan covering substantially all of its domestic employees, a pension contribution plan covering substantially all of its Canadian employees and a profit sharing plan covering substantially all of its Econco employees. These plans provide for CPI to contribute an amount based on a percentage of each participant's base pay. CPI also has a Non-Qualified Deferred Compensation Plan (the "Non-Qualified Plan") that allows eligible executives and directors to defer a portion of their compensation. Except for the Econco profit sharing plan, all participant contributions and Company matching contributions are 100% vested. For the Econco profit sharing plan, employee contributions are 100% vested, while employer contributions vest ratably over a 5 year period beginning with the second year of service. The Non-Qualified Plan liability amounted to approximately $0.1 million as of September 30, 2005 and October 1, 2004. Total CPI contributions to these plans were $3.6 million, $2.0 million, $0.8 million, and $2.7 million, for the fiscal year ended September 30, 2005, the 36-week period ended October 1, 2004, the 16-week period ended January 22, 2004, and for the fiscal year 2003, respectively.

Defined Benefit Plan:    In fiscal year 2003, the Company established a defined benefit pension plan for its Chief Executive Officer ("CEO"). The plan's benefits are based on the CEO's compensation earnings and are limited by statutory requirements of the Canadian Income Tax Act. All costs of the plan are borne by the Company. The plan's assets consist primarily of mutual funds and cash. The defined benefit pension plan is fully funded and the benefit obligation was $0.5 million and $0.4 million as of September 30, 2005 and October 1, 2004, respectively. Due to the immaterial amounts of the Company's defined benefit plan, additional disclosures in accordance with SFAS 87, "Employers' Accounting for Pensions", are not presented.

14.    Income Taxes

Income (loss) before income taxes for domestic and non-U.S. operations was as follows (in thousands):

				Year Ended September 30, 2005 (Successor)				36-Week Period Ended October 1, 2004 (Successor)				16-Week Period Ended January 22, 2004 (Predecessor)				Year Ended October 3, 2003 (Predecessor)
Domestic				$	12,018				5,150				(4,103	)			17,610
Non-U.S.					10,792				397				(28	)			9,014
Total				$	22,810				5,547				(4,131	)			26,624

84

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CPI HOLDCO, INC.
and subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Income tax expense (benefit) consists of the following (in thousands):

				Year Ended September 30, 2005 (Successor)				36-Week Period Ended October 1, 2004 (Successor)				16-Week Period Ended January 22, 2004 (Predecessor)				Year Ended October 3, 2003 (Predecessor)
Current
U.S. federal				$	8,094				8,733				99				6,541
State					1,796				1,220				235				1,891
Non-U.S.					3,040				191				105				1,644
Total Current					12,930				10,144				439				10,076
Deferred
U.S. federal					(4,668	)			(6,519	)			—				—
State					23				(699	)			—				—
Non-U.S.					853				(27	)			—				—
Total Deferred					(3,792	)			(7,245	)			—				—
Income tax expense				$	9,138				2,899				439				10,076

The significant components of the Company's deferred tax assets and liabilities were as follows (in thousands):

				September 30, 2005				October 1, 2004
Deferred tax assets:
Inventory and other reserves				$	9,067				8,966
Accrued vacation					1,840				1,755
Deferred compensation and other accruals					3,854				1,080
Capitalized merger costs					2,032				2,551
Foreign jurisdictions, net					43				36
State taxes					782				484
Net operating loss and credit carryforwards					—				1,464
Gross deferred tax assets					17,618				16,336
Valuation allowance					—				—
Total deferred tax assets					17,618				16,336
Deferred tax liabilities:
Accelerated depreciation					(12,297	)			(13,108	)
Acquisition-related intangibles					(26,297	)			(28,532	)
Other comprehensive income					(1,081	)			(912	)
Foreign jurisdictions, net					(1,153	)			(617	)
Total deferred tax liabilities					(40,828	)			(43,169	)
Net deferred tax liability					(23,210	)			(26,833	)

85

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CPI HOLDCO, INC.
and subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The deferred tax accounts were classified in the consolidated balance sheet as follows (in thousands):

				September 30, 2005				October 1, 2004
Deferred tax assets				$	12,346				12,285
Deferred income taxes (liability)					(35,556	)			(39,118	)
Net deferred tax liability				$	(23,210	)			(26,833	)

In connection with the January 23, 2004 Merger, the Company recorded an initial deferred tax liability of $48.2 million for the differences between the fair value of assets and liabilities acquired and their tax basis (excluding the portion of goodwill for which amortization is not deductible for tax purpose and certain other items). The Company also recognized the reversal of a previously established valuation allowance as a credit to goodwill as part of the allocation of purchase price rather than as a reduction of the income tax provision. The amount of valuation allowance credited to goodwill was $12.2 million. The reversal of the valuation allowance was based on the level of recent taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible. Management currently believes that it is more likely than not that the Company will realize the benefits of these deductible differences between book income and taxable income. As of September 30, 2005 and October 1, 2004, the Company had no valuation allowance established against its deferred tax assets. There was no change in the total valuation allowance for fiscal year 2005, and the net change in the total valuation allowance for fiscal year 2004 was a decrease of $10.3 million.

During the 36-week period ended October 1, 2004, the Company recognized a tax benefit related to the exercise of certain nonqualified stock options. The tax benefit from the exercise of the nonqualified stock options of approximately $0.5 million was credited directly to a component of stockholders' equity.

As of September 30, 2005, the Company had fully utilized the federal and state net operating loss carryforwards and federal foreign tax credit carryforward and had no net operating loss and foreign tax credit carryforwards to reduce future income subject to income taxes.

The Company is currently under examination by the Canada Revenue Agency for its tax returns filed in fiscal years 2000 through 2003. The Company believes that adequate accruals have been provided for any adjustments that may result from the current examination. In addition, the Company has provided adequate amounts for anticipated tax audit adjustments in various jurisdictions based on its estimate of additional taxes and interest due.

86

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CPI HOLDCO, INC.
and subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The differences between the effective income tax rate and the statutory federal income tax rate were as follows:

				Year Ended September 30, 2005 (Successor)				36-Week Period Ended October 1, 2004 (Successor)				16-Week Period Ended January 22, 2004 (Predecessor)				Year Ended September 30, 2005 (Predecessor)
Statutory federal income tax rate					35.0	%			35.0	%			(35.0	)%			35.0	%
Extraterritorial income exclusion benefit					(1.0	)			—				—				—
Foreign tax rate differential					0.1				1.7				4.3				(0.2	)
State taxes					5.2				6.1				3.7				4.6
In-process reasearch and development					—				8.9				—				—
Non-deductible expenses					0.8				0.6				0.6				1.4
Deferred tax assets not benefited					—				—				37.0				(3.0	)
Effective tax rate					40.1	%			52.3	%			10.6	%			37.8	%

15.    Segments, Geographic and Customer Information

The Company has two reportable segments: VED and satcom equipment. Reportable segments are differentiated based on product. The VED segment is made up of five divisions, which have been aggregated. The satcom equipment segment consists of one division. Each division has a President that reports either to the Chief Operating Officer, who in turns reports to the Chief Executive Officer ("CEO"), or directly to the CEO.

The CEO evaluates performance and allocates resources to each of these divisions based on the Company's principal performance measure, earnings before interest, income taxes, depreciation and amortization and certain other non-cash charges ("EBITDA"). These five divisions have similar economic characteristics as measured by EBITDA. The Company's analysis of the similarity of economic characteristics was based on both a historical and anticipated future analysis of performance. In addition, the aggregated divisions are similar in (i) the nature of their products, (ii) their manufacturing processes, (iii) their customers and (iv) their distribution and sales methods.

The VED segment develops, manufactures and distributes high power/high frequency microwave and radio frequency signal components. Its products include linear beam, cavity, power grid, crossed field and magnetron devices. These products are used in the communication, radar, electronic countermeasures, industrial, medical and scientific markets depending on the specific power and frequency requirements of the end-user and the physical operating conditions of the environment in which the VED will be located. These products are distributed through the Company's direct sales force, independent sales representatives and distributors.

The satcom equipment segment manufactures and supplies high power amplifiers and networks for satellite communication uplink and industrial applications. This segment also provides spares, service and other post sales support. Its products are distributed through the Company's direct sales force and independent sales representatives.

Amounts not reported as VED or satcom equipment are reported as other. Other for capital expenditures consists primarily of facility improvements and capital equipment for corporate and common facilities. Other for EBITDA consists primarily of corporate operating expenses and international subsidiary sales expenses. Corporate operating expenses include; headquarters general and administrative expenses, Merger expenses, stock-based compensation expenses and purchase accounting charges related to the Merger and Econco acquisition. Other for total assets consists primarily of investments in subsidiaries, corporate cash and cash equivalents and the net book value of corporate property, plant and equipment.

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CPI HOLDCO, INC.
and subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Sales and marketing, and certain finance and administration expenses, are allocated to the divisions and are included in the results reported. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies. Intersegment product transfers are recorded at cost.

Summarized financial information concerning the Company's reportable segments is shown in the following tables (in thousands):

				Year Ended September 30, 2005 (Successor)				36-Week Period Ended October 1, 2004 (Successor)				16-Week Period Ended January 22, 2004 (Predecessor)				Year Ended October 3, 2003 (Predecessor)
Sales from external customers
VED				$	262,291				175,294				69,048				219,870
Satcom equipment					58,441				26,972				10,871				45,564
Total				$	320,732				202,266				79,919				265,434
Intersegment product transfers
VED				$	25,106				10,907				4,070				15,662
Satcom equipment					74				20				—				—
Total				$	25,180				10,927				4,070				15,662
Capital expenditures
VED				$	7,362				2,958				403				2,612
Satcom equipment					456				67				23				352
Other					9,313				292				33				103
Total				$	17,131				3,317				459				3,067
EBITDA
VED				$	69,675				46,080				15,889				50,850
Satcom equipment					6,421				1,047				(229	)			4,183
Other					(18,799	)			(14,311	)			(9,111	)			(7,576	)
Total				$	57,297				32,816				6,549				47,457

				September 30, 2005 (Successor)				October 1, 2004 (Successor)				October 3, 2003 (Predecessor)
Total assets
VED				$	344,782				326,268				94,671
Satcom equipment					39,473				33,186				13,045
Other					71,627				71,753				74,252
Total				$	455,882				431,207				181,968

88

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CPI HOLDCO, INC.
and subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table reconciles net income (loss) to EBITDA (in thousands):

				Year Ended September 30, 2005 (Successor)				36-Week Period Ended October 1, 2004 (Successor)				16-Week Period Ended January 22, 2004 (Predecessor)				Year Ended October 3, 2003 (Predecessor)
Net income (loss)				$	13,672				2,648				(4,570	)			16,548
Depreciation and amortization					14,177				16,751				1,778				6,293
Interest expense, net					20,310				10,518				8,902				14,540
Income tax expense					9,138				2,899				439				10,076
EBITDA				$	57,297			$	32,816			$	6,549			$	47,457

Geographic sales by customer location were as follows (in thousands):

				Year Ended September 30, 2005 (Successor)				36-Week Period Ended October 1, 2004 (Successor)				16-Week Period Ended January 22, 2004 (Predecessor)				Year Ended October 3, 2003 (Predecessor)
United States				$	214,460				144,569				52,417				175,880
All foreign countries					106,272				57,697				27,502				89,554
Total sales				$	320,732				202,266				79,919				265,434

There were no individual foreign countries with sales greater than 10% of total sales for the periods presented.

Net property, plant and equipment by geographic area was as follows (in thousands):

				September 30, 2005				October 1, 2004
United States				$	75,589			$	62,162
Canada					7,924				7,888
Other					111				77
Total				$	83,624			$	70,127

The United States Government is the only customer that accounted for 10% or more of the Company's consolidated sales in fiscal years 2005, 2004 and 2003. Direct sales to the United States Government were $58.0 million, $42.6 million, $17.0 million, and $51.3 million, for fiscal year 2005, the 36-week period ended September 30, 2004, the 16-week period ended January 22, 2004, and fiscal year 2003, respectively. Accounts receivable from this customer represented 13% and 21% of consolidated accounts receivable at the end of fiscal years 2005 and 2004, respectively.

16.    Related Party Transactions

Merger Fees:    In connection with the Merger, the Predecessor paid merger fees for financial advisory and investment banking services of $1.2 million to Leonard Green & Partners, L.P. ("LGP"), an affiliate of the general partner of Green Equity Investors II, L.P., Holding's majority stockholder, and the Successor paid $2.5 million to Cypress Advisors, an affiliate of the general partner of Cypress Merchant Banking Partners II L.P., CPI Holdco's majority stockholder, and $0.3 million to Chris Toffales, a director of CPI and CPI Holdco. The financial advisory fees paid to Chris Toffales were for services performed prior to his appointment to the Board of Directors.

The Merger fees paid to LGP were charged to Merger Expenses in the Consolidated Statement of Operations for the 16-week period ended January 22, 2004. The Merger fees paid to Cypress were

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CPI HOLDCO, INC.
and subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

reported as a reduction to the $100 million equity contribution from affiliates of Cypress. The advisory fees paid to Chris Toffales were accounted for as part of the Merger purchase price since they were a direct cost of the Merger.

Outside Advisors:    Holding had a management services agreement with LGP to pay approximately $0.4 million, plus out-of-pocket expenses, annually to LGP. Certain individuals who were stockholders of the general partner of LGP were members of the Board of Directors of Holding and CPI. The management services agreement provided for management, consulting and financial planning services, including assistance in strategic planning, providing market and financial analyses, negotiating and structuring financing and exploring expansion opportunities. For the 16-week period ended January 22, 2004 and for fiscal year 2003, the Company paid $0.1 million and $0.4 million to LGP, respectively.

Outside Directors:    Directors that are neither our officers nor principals or employees of Cypress (each, an "Outside Director") receives compensation of $32,500 per year plus $1,250 for each Board or Committee meeting attended. Directors are reimbursed for out-of-pocket expenses incurred in connection with attending meetings of the board of directors and its committees. In March 2004, Mr. Targoff and Mr. Toffales purchased 21,256 and 3,188 shares of common stock of the Company, respectively, at a price of $23.52 per share. Mr. Toffales also provided consulting services to the Company and was paid fees of $3,750 and $22,500, plus related out-of-pocket expenses, in fiscal year 2005 and for the 36-week period ended October 1, 2004, respectively.

Outside Directors are also entitled to receive options to purchase shares of common stock of CPI Holdco under the 2004 Plan. During fiscal year 2004, 4,500 options (subsequently adjusted to 8,014 options) were granted to each of Mr. Targoff and Mr. Toffales. The exercise price of the options is $23.52 per share (subsequently adjusted to $13.21 per share), which was the fair value on the date of grant; such options vest at a rate of 20% per year and expire ten years from the date of grant. As discussed in Note 12, "Stock-based Compensation Plans", option shares and prices have been adjusted as a result of the equity restructuring as a result of the special cash dividend to stockholders in February 2005.

Stockholder Loans:    In connection with Holding's 1995 Management Equity Plan, certain executive officers of CPI and Holding elected to pay a portion of the purchase price for the shares of common stock purchased pursuant to such plan (the "Management Shares") by delivery of a secured promissory note (collectively, the "Management Notes") to Holding. Outstanding principal under each type of Management Note bore interest at an annually adjustable rate equal to the "Applicable Federal Rate" in effect under Internal Revenue Code Section 1274(d) for obligations of a term equal to the then-remaining term of such note. At the Merger closing, Management Notes of $1.3 million were paid in full through a reduction of proceeds from the sale of Management Shares.

17.    San Carlos Sale Agreement

The Company has entered into an agreement, dated February 2003, to sell the land and close its facilities located in San Carlos, California. The purchase price is $23.8 million. Under the sale agreement, the buyer has paid the Company a $13.0 million deposit on the purchase price, which the Company is using to defray the costs of moving its San Carlos operations to its Palo Alto facility and to a new location in the Palo Alto area. The $13.0 million deposit is nonrefundable unless the Company breaches the sale agreement. In connection with the sale agreement, the Company entered into an agreement regarding environmental conditions at the property and was named as an additional insured on a pollution liability insurance policy obtained by the purchaser that is intended to fund the remediation of the contamination of the San Carlos property to permit hospital and other "unrestricted" uses under the direction of the applicable environmental regulatory agency.

The closing of the sale is subject to a number of conditions, including the requirement that the Company vacate its facilities and obtain regulatory closure of certain permitted equipment located on

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and subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

the property. Although there can be no assurance that the sale of the San Carlos property will occur, the Company expects to close the sale of the property in fiscal year 2007.

Pursuant to the stock sale agreement by and between Varian Associates, Inc., the predecessor of Varian Medical Systems, Inc. ("Varian"), and the Company dated June 9, 1995, as amended, the Company had agreed to certain development restrictions affecting the San Carlos property. In connection with the San Carlos property sale agreement, Varian agreed to waive certain of the development restrictions on the San Carlos property in the event that the sale closes, subject to certain conditions, and further agreed to pay the Company $1.0 million, of which $0.5 million was paid as of September 30, 2005. In addition, the Company has agreed to relieve Varian of certain of its indemnity obligations to the Company for certain environmental liabilities related to the San Carlos property relating to periods prior to August 1995, and to reimburse Varian for certain potential environmental costs related to the San Carlos property that are not covered by insurance. The Company and Varian have also agreed to certain use restrictions and environmental cost-sharing provisions related to the Company's property in Beverly, Massachusetts, and the Company has relinquished its right to redevelop that property for residential or similar use.

As of September 30, 2005, the San Carlos land and building was classified as held for use in property, plant and equipment and the advance payments from the sale of the property, aggregating $13.5 million, are classified as a long-term liability in the accompanying Consolidated Balance Sheets. As of September 30, 2005, the Company had capitalized recoverable selling costs of $0.7 million relating to the sale of the San Carlos property and classified these amounts as other long-term assets in the accompanying Consolidated Balance Sheet. The San Carlos land and building had a net book value of $23.7 million as of September 30, 2005 and the building continues to be depreciated over its remaining useful life. Based on current projections, the Company does not expect to recognize a loss on the sale of the San Carlos property.

18.    Quarterly Financial Data (Unaudited)

In management's opinion, the unaudited data has been prepared on the same basis as the audited information and includes all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the data for the periods presented. Our results of operations have varied and may continue to fluctuate significantly from quarter to quarter. The results of operations in any period should not be considered indicative of the results to be expected from any future period (in thousands).

Year Ended September 30, 2005				First Quarter (Successor)				Second Quarter (Successor)				Third Quarter (Successor)				Fourth Quarter (Successor)
Sales				$	73,733				84,463				87,639				74,897
Gross profit				$	23,704				29,077				29,791				22,129
Net income (loss)				$	3,098				6,320				6,698				(2,444	)

Net loss in the fourth quarter of fiscal year 2005 included stock-based compensation expense of $2.8 million from the acceleration of vesting of performance stock options that were expected to vest in fiscal years 2006, 2007 and 2008, assuming that the performance criteria would have been achieved.

Year Ended October 1, 2004				First Quarter (Predecessor				January 3, 2004 to January 22, 2004 (Predecessor)				January 23, 2004 to April 2, 2004 (Successor)				Third Quarter (Successor)				Fourth Quarter (Successor)
Sales				$	68,313				11,606				65,641				72,345				64,280
Gross profit				$	21,172				2,558				19,614				21,953				19,527
Net income (loss)				$	4,839				(9,409	)			(6,833	)			11,471				(1,990	)

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CPI HOLDCO, INC.
and subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

19.    Subsequent Events

On December 15, 2005, CPI Holdco and CPI entered into Amendment No. 3 (the "Amendment"), to CPI's Senior Credit Facility. The Amendment increased the commitments under the term loan facility by $10 million, and CPI borrowed an additional $10 million thereunder. In addition, among other things, the Amendment (1) permitted CPI to pay a dividend (not to exceed $20 million) to CPI Holdco to fund a dividend by CPI Holdco to its stockholders, (2) amends the definition of Excess Cash Flow in the Senior Credit Facility to decrease Excess Cash Flow for CPI's fiscal year 2006 by the excess of the amount of the dividend described in clause (2) over the gross proceeds of the $10 million additional borrowing, and (3) permits CPI or CPI Holdco to use up to $70 million of the proceeds of the first equity issuance by CPI Holdco to repurchase or redeem the FR Notes or the 8% Notes.

CPI used the proceeds of the additional term loan borrowing to fund a portion of a special cash dividend of $17 million paid to the holders of CPI Holdco's common stock on December 15, 2005. In addition, on December 15, 2005, CPI's Board of Directors approved a payment of $3,250,000 in bonuses to CPI employees and directors (other than directors who are employees or affiliates of Cypress) to reward them for the increase in Company value.

20.    Supplemental Guarantors Condensed Consolidating Financial Information

On January 23, 2004, CPI issued $125.0 million of 8% Notes that are guaranteed by CPI Holdco and all of CPI's domestic subsidiaries. Separate financial statements of the Guarantors are not presented because (i) the Guarantors are wholly-owned and have fully and unconditionally guaranteed the 8% Notes on a joint and several basis, and (ii) the Company's management has determined that such separate financial statements are not material to investors. Instead, presented below are the consolidating financial statements of: (a) the parent, CPI Holdco or Holding, (b) the issuer, CPI, (c) the guarantor subsidiaries (all of the domestic subsidiaries), (d) the non-guarantor subsidiaries, (e) the consolidating elimination entries, and (f) the consolidated totals. The accompanying consolidating financial information should be read in connection with the consolidated financial statements of CPI Holdco.

Investments in subsidiaries are accounted for based on the equity method. The principal elimination entries eliminate investments in subsidiaries, intercompany balances, intercompany transactions and intercompany sales.

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and subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

CONDENSED CONSOLIDATING BALANCE SHEET
As of September 30, (Successor)
(in thousands)

				Parent (CPI Holdco)				Issuer (CPI)				Guarantor Subsidiaries				Non-Guarantor Subsidiaries				Consolidating Eliminations				Consolidated Total
Cash and cash equivalents				$	33				25,528				323				627				—				26,511
Restricted cash					—				—				1,180				107				—				1,287
Accounts receivable, net					—				22,082				5,531				13,020				—				40,633
Inventories					—				33,746				2,135				15,755				(1,016	)			50,620
Deferred tax assets					—				12,339				7				—				—				12,346
Intercompany receivable					—				17,849				2,278				8,064				(28,191	)			—
Prepaid and other current assets					165				3,930				127				791				(1,032	)			3,981
Total current assets					198				115,474				11,581				38,364				(30,239	)			135,378
Property, plant and equipment, net					—				72,462				3,166				7,996				—				83,624
Deferred debt issue costs, net					3,326				7,735				—				—				—				11,061
Intangible assets, net					—				61,500				6,965				9,476				—				77,941
Goodwill					—				92,041				5,848				47,573				—				145,462
Other long-term assets					1,515				901				—				—				—				2,416
Intercompany notes receivable					—				7,635				—				—				(7,635	)			—
Investment in subsidiaries					157,658				49,587				—				—				(207,245	)			—
Total assets				$	162,697				407,335				27,560				103,409				(245,119	)			455,882
Liabilities and stockholders' equity
Accounts payable				$	—				13,223				368				7,830				—				21,421
Accrued expenses					1,320				21,610				1,078				3,239				—				27,247
Product warranty					—				3,698				164				2,497				—				6,359
Income taxes payable					—				—				11				2,567				(1,032	)			1,546
Advance payments from customers					—				4,844				1,834				6,727				—				13,405
Intercompany payable					28,191				—				—				—				(28,191	)			—
Total current liabilities					29,511				43,375				3,455				22,860				(29,223	)			69,978
Deferred income taxes					272				28,240				—				7,044				—				35,556
Intercompany notes payable					—				—				—				7,635				(7,635	)			—
Advance payments from sale of San Carlos property									13,450																13,450
Long-term debt					79,231				205,000				—				—				—				284,231
Total liabilities					109,014				290,065				3,455				37,539				(36,858	)			403,215
Common stock					43				—				—				—				—				43
Parent investment					—				95,179				22,228				57,216				(174,623	)			—
Additional paid-in capital					34,683				—				—				—				—				34,683
Other comprehensive income					1,621				1,213				—				360				(1,573	)			1,621
Retained earnings					17,336				20,878				1,877				8,294				(32,065	)			16,320
Net stockholders’ equity					53,683				117,270				24,105				65,870				(208,261	)			52,667
Total liabilities and stockholders' equity				$	162,697				407,335				27,560				103,409				(245,119	)			455,882

93

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CPI HOLDCO, INC.
and subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

CONDENSED CONSOLIDATED BALANCE SHEET
As of October 1, 2004 (Sucessor)
(in thousands)

				Parent (CPI Holdco)				Issuer (CPI)				Guarantor Subsidiaries				Non-Guarantor Subsidiaries				Consolidating Eliminations				Consolidated Total
Assets
Cash and cash equivalents				$	—				38,131				113				2,232				—				40,476
Restricted cash					—				—				2,188				91				—				2,279
Accounts receivable, net					—				21,424				3,806				10,684				—				35,914
Inventories					—				28,916				99				9,059				—				38,074
Deferred tax assets					—				12,285				—				—				—				12,285
Intercompany receivable					—				26,841				—				1,730				(28,571	)			—
Prepaid and other current assets					0				3,066				168				570				(8	)			3,796
Total current assets					—				130,663				6,374				24,366				(28,579	)			132,824
Property, plant and equipment, net					—				62,162				22				7,943				—				70,127
Deferred debt issue costs, net					—				8,910				—				—				—				8,910
Intangible assets, net					—				67,847				—				10,634				—				78,481
Goodwill					—				92,041				—				47,573				—				139,614
Other long-term assets					—				1,251				—				—				—				1,251
Intercompany notes receivable					—				13,335				—				—				(13,335	)			—
Investment in subsidiaries					135,688				21,073				—				—				(156,761	)			—
Total assets				$	135,688				397,282				6,396				90,516				(198,675	)			431,207
Liabilities and stockholders' equity
Current portion of term loan				$	—				3,944				—				—				—				3,944
Accounts payable					—				11,556				99				4,135				—				15,790
Accrued expenses					—				17,449				556				2,929				5				20,939
Product warranty					—				3,877				—				2,197				—				6,074
Income taxes payable					—				1,274				—				395				(8	)			1,661
Advance payments from customers					—				6,463				1,012				4,556				—				12,031
Intercompany payable					28,094				—				482				—				(28,576	)			—
Total current liabilities					28,094				44,563				2,149				14,212				(28,579	)			60,439
Deferred income taxes					—				32,936				—				6,182				—				39,118
Intercompany notes payable					—				—				—				13,335				(13,335	)			—
Advance payments from sale of
San Carlos property					13,450				13,450
Long-term debt					—				210,606				—				—				—				210,606
Total liabilities					28,094				301,555				2,149				33,729				(41,914	)			323,613
Common stock					43				—				—				—				—				43
Parent investment					—				91,710				3,882				56,790				(152,382	)			—
Additional paid-in capital					103,534				—				—				—				—				103,534
Other comprehensive income					1,369				1,369				—				54				(1,423	)			1,369
Retained earnings (deficit)					2,648				2,648				365				(57	)			(2,956	)			2,648
Net stockholders’ equity					107,594				95,727				4,247				56,787				(156,761	)			107,594
Total liabilities and stockholders' equity				$	135,688				397,282				6,396				90,516				(198,675	)			431,207

94

---

CPI HOLDCO, INC.
and subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the Year Ended September 30, 2005 (Successor)
(in thousands)

				Parent (CPI Holdco)				Issuer (CPI)				Guarantor Subsidiaries				Non-Guarantor Subsidiaries				Consolidating Eliminations				Consolidated Total
Sales				$	—				223,642				45,782				113,861				(62,553	)			320,732
Cost of sales					—				157,324				37,146				82,747				(61,537	)			215,680
Amortization of acquisition- related inventory write-up					—				—				351				—				—				351
Gross profit					—				66,318				8,285				31,114				(1,016	)			104,701
Operating costs and expenses:
Research and development					—				2,532				—				4,686				—				7,218
Selling and marketing					—				7,486				3,632				7,429				—				18,547
General and administrative					—				21,451				1,902				4,976				—				28,329
Amortization of acquisition- related intangible assets					—				6,085				245				1,157				—				7,487
Total operating costs and expenses					—				37,554				5,779				18,248				—				61,581
Operating income					—				28,764				2,506				12,866				(1,016	)			43,120
Interest expense (income), net					4,600				14,687				(35	)			1,058				—				20,310
(Loss) income before income tax expense and equity in income of subsidiaries					(4,600	)			14,077				2,541				11,808				(1,016	)			22,810
Income tax (benefit) expense					(1,057	)			5,397				1,029				3,769				—				9,138
Equity in income of subsidiaries					17,215				9,551				—				—				(26,766	)			—
Net income				$	13,672				18,231				1,512				8,039				(27,782	)			13,672

95

---

CPI HOLDCO, INC.
and subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the Period from January 23, 2004 to October 1, 2004 (Successor)
(in thousands)

				Parent (CPI Holdco)				Issuer (CPI)				Guarantor Subsidiaries				Non-Guarantor Subsidiaries				Consolidating Eliminations				Consolidated Total
Sales				$	—				156,405				21,135				67,558				(42,832	)			202,266
Cost of sales					—				107,863				18,717				51,924				(42,832	)			135,672
Amortization of acquisition- related inventory write-up					—				5,500				—				—				—				5,500
Gross profit					—				43,042				2,418				15,634				—				61,094
Operating costs and expenses:
Research and development					—				1,579				—				3,674				—				5,253
Selling and marketing					—				4,765				1,581				4,736				—				11,082
General and administrative					—				9,053				455				3,188				—				12,696
Amortization of acquisition- related intangible assets					—				11,810				—				1,688				—				13,498
Acquired in-process research and development					—				1,415				—				1,085				—				2,500
Total operating costs and expenses					—				28,622				2,036				14,371								45,029
Operating income					—				14,420				382				1,263				—				16,065
Interest expense (income), net					—				9,348				(8	)			1,178				—				10,518
Income before income tax expense and equity in income of subsidiaries					—				5,072				390				85				—				5,547
Income tax expense					—				2,732				25				142				—				2,899
Equity in income of subsidiaries					2,648				308				—				—				(2,956	)			—
Net income (loss)				$	2,648				2,648				365				(57	)			(2,956	)			2,648

96

---

CPI HOLDCO, INC.
and subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
From October 4, 2003 to January 22, 2004 (Predecessor)
(in thousands)

				Parent (Holding)				Issuer (CPI)				Guarantor Subsidiaries				Non-Guarantor Subsidiaries				Consolidating Eliminations				Consolidated Total
Sales				$	—				60,721				10,673				26,470				(17,945	)			79,919
Cost of sales					—				43,551				9,448				21,223				(18,033	)			56,189
Gross profit					—				17,170				1,225				5,247				88				23,730
Operating costs and expenses:
Research and development					—				607				—				1,593				—				2,200
Selling and marketing					—				2,136				591				1,678				(53	)			4,352
General and administrative					355				4,973				236				1,508				(1,039	)			6,033
Merger expenses					5,074				1,300				—				—				—				6,374
Intercompany income					(755	)			(215	)			(53	)			—				1,023				—
Total operating costs and expenses					4,674				8,801				774				4,779				(69	)			18,959
Operating (loss) income					(4,674	)			8,369				451				468				157				4,771
Interest expense (income), net					590				7,731				(3	)			584				—				8,902
(Loss) income before income tax expense and equity in income of subsidiaries					(5,264	)			638				454				(116	)			157				(4,131	)
Income tax expense					—				334				55				50				—				439
Equity in income of subsidiaries					694				321				—				—				(1,015	)			—
Net (loss) income				$	(4,570	)			625				399				(166	)			(858	)			(4,570	)

97

---

CPI HOLDCO, INC.
and subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the Year Ended October 3, 2003 (Predecessor)
(in thousands)

				Parent (Holding)				Issuer (CPI)				Guarantor Subsidiaries				Non-Guarantor Subsidiaries				Consolidating Eliminations				Consolidated Total
Sales				$	—				198,881				33,397				93,398				(60,242	)			265,434
Cost of sales					—				146,738				29,575				68,115				(60,471	)			183,957
Gross profit					—				52,143				3,822				25,283				229				81,477
Operating costs and expenses:
Research and development					—				2,086				—				4,774				—				6,860
Selling and marketing					—				7,451				2,399				5,800				—				15,650
General and administrative					1,150				16,149				713				3,915				(3,988	)			17,939
Intercompany income					(2,450	)			(1,102	)			(263	)			—				3,815				—
Gain on sale of Solid State Products Division					—				(136	)			—				—				—				(136	)
Total operating costs and expenses					(1,300	)			24,448				2,849				14,489				(173	)			40,313
Operating income					1,300				27,695				973				10,794				402				41,164
Interest expense (income), net					2,029				10,510				(8	)			2,009				—				14,540
Income (loss) before income tax expense (benefit) and equity in income of subsidiaries					(729	)			17,185				981				8,785				402				26,624
Income tax expense (benefit)					(249	)			8,771				151				1,403				—				10,076
Equity in income of subsidiaries					17,028				8,441				—				—				(25,469	)			—
Net income				$	16,548				16,855				830				7,382				(25,067	)			16,548

98

---

CPI HOLDCO, INC.
and subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Year Ended September 30, 2005 (Successor)
(in thousands)

				Parent (CPI Holdco)				Issuer (CPI)				Guarantor Subsidiaries				Non-Guarantor Subsidiaries				Consolidating Eliminations				Consolidated Total
Operating activities
Net cash provided by (used in) operating activities				$	(4,023	)			35,928				435				(991	)			—				31,349
Investing activities
Expenses relating to sale of San Carlos property					—				(224	)			—				—				—				(224	)
Capital expenditures					—				(16,312	)			(205	)			(614	)			—				(17,131	)
Purchase of Econco's net assets, net of cash acquired					—				(18,325	)			—				—				—				(18,325	)
Net cash used in investing activities					—				(34,861	)			(205	)			(614	)			—				(35,680	)
Financing activities
Proceeds from/(payments for) the issuance of debt:									—
Floating rate senior notes					79,200				—				—				—				—				79,200
Debt issue costs					(3,455	)			—				—				—				—				(3,455	)
Repayment of senior term loan					—				(9,550	)			—				—				—				(9,550	)
Repayment on capital lease					—				—				(20	)			—				—				(20	)
Stockholder distribution payments					(75,809	)			—				—				—				—				(75,809	)
Intercompany dividends					4,120				(4,120	)			—				—				—				—
Net cash provided by (used in) financing activities					4,056				(13,670	)			(20	)			—				—				(9,634	)
Net increase (decrease) in cash and cash equivalents					33				(12,603	)			210				(1,605	)			—				(13,965	)
Cash and cash equivalents at beginning of period					—				38,131				113				2,232				—				40,476
Cash and cash equivalents at end of period				$	33				25,528				323				627				—				26,511

99

---

CPI HOLDCO, INC.
and subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Period from January 23, 2004 to October 1, 2004 (Successor)
(in thousands)

				Parent (CPI Holdco)				Issuer (CPI)				Guarantor Subsidiaries				Non-Guarantor Subsidiaries				Consolidating Eliminations				Consolidated Total
Operating activities
Net cash provided by (used in) operating activities				$	14,691				(5,139	)			138				2,513				—				12,203
Investing activities
Purchase of Predecessor, net of cash acquired					(113,130	)			—				—				—				—				(113,130	)
Advance payments from sale of San Carlos property					—				13,450				—				—				—				13,450
Expenses relating to sale of San Carlos property					—				(451	)			—				—				—				(451	)
Capital expenditures					—				(3,011	)			(25	)			(281	)			—				(3,317	)
Net cash (used in) provided by investing activities					(113,130	)			9,988				(25	)			(281	)			—				(103,448	)
Financing activities
Retirement of debt and preferred stock:
Senior subordinated notes					—				(74,000	)			—				—				—				(74,000	)
Senior redeemable preferred stock					—				(29,735	)			—				—				—				(29,735	)
Junior preferred stock					—				(32,336	)			—				—				—				(32,336	)
Dividends on senior redeemable preferred stock					—				(19,310	)			—				—				—				(19,310	)
Mortgage financing					—				(17,500	)			—				—				—				(17,500	)
Proceeds from/(payments for) the issuance of debt:					—
Senior subordinated notes					—				125,000				—				—				—				125,000
Senior term loan					—				90,000				—				—				—				90,000
Debt issue costs					—				(9,653	)			—				—				—				(9,653	)
Proceeds from the repayment of Predecessor stockholder loans					—				1,266				—				—				—				1,266
Net proceeds from the issuance of common stock					98,075				—				—				—				—				98,075
Repayment of senior term loan					—				(450	)			—				—				—				(450	)
Proceeds from exercise of stock options					364				—				—				—				—				364
Net cash provided by financing activities					98,439				33,282				—				—				—				131,721
Net increase in cash and cash equivalents					—				38,131				113				2,232				—				40,476
Cash and cash equivalents at beginning of period					—				—				—				—				—				—
Cash and cash equivalents at end of period				$	—				38,131				113				2,232				—				40,476

100

---

CPI HOLDCO, INC.
and subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
From October 4, 2003 to January 22, 2004 (Predecessor)
(in thousands)

				Parent (Holding)				Issuer (CPI)				Guarantor Subsidiaries				Non-Guarantor Subsidiaries				Consolidating Eliminations				Consolidated Total
Operating activities
Net cash provided by (used in) operating activities				$	—				6,513				206				(145	)			—				6,574
Investing activities
Capital expenditures					—				(416	)			(2	)			(41	)			—				(459	)
Net cash used for investing activities					—				(416	)			(2	)			(41	)			—				(459	)
Financing activitites
Retirement of senior subordinated notes					—				(26,000	)			—				—				—				(26,000	)
Net cash used in financing activities					—				(26,000	)			—				—				—				(26,000	)
Net (decrease) increase in cash and cash equivalents					—				(19,903	)			204				(186	)			—				(19,885	)
Cash and cash equivalents at beginning of period					—				30,561				1,718				1,472				—				33,751
Cash and cash equivalents at end of period				$	—				10,658				1,922				1,286				—				13,866

101

---

CPI HOLDCO, INC.
and subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
For the Year Ended October 3, 2003 (Predecessor)
(in thousands)

				Parent (Holding)				Issuer (CPI)				Guarantor Subsidiaries				Non-Guarantor Subsidiaries				Consolidating Eliminations				Consolidated Total
Operating activities
Net cash provided by operating activities				$	2,480				29,839				1,025				15,574				(14,436	)			34,482
Investing activities
Proceeds from sale of Solid State Products Division					—				136				—				—				—				136
Equity investment in subsidiary					(2,299	)			—				—				—				2,299				—
Capital expenditures					—				(2,492	)			(5	)			(570	)			—				(3,067	)
Net cash used in investing activities					(2,299	)			(2,356	)			(5	)			(570	)			2,299				(2,931	)
Financing activities
Payment of debt issue costs					(41	)			(298	)			—				—				—				(339	)
Net proceeds from the issuance of common stock					110				—				—				—				—				110
Repayments on capital leases					—				—				—				(45	)			—				(45	)
Repayments on mortgage refinancing					(250	)			—				—				—				—				(250	)
Repayment of intercompany note					—				—				—				(14,436	)			14,436				—
Proceeds from parent investment in subsidiary					—				2,299				—				—				(2,299	)			—
Net cash (used in) provided by financing activities					(181	)			2,001				—				(14,481	)			12,137				(524	)
Net increase in cash and cash equivalents					—				29,484				1,020				523				—				31,027
Cash and cash equivalents at beginning of period					—				1,077				698				949				—				2,724
Cash and cash equivalents at end of period				$	—				30,561				1,718				1,472				—				33,751

102

---

CPI HOLDCO, INC.
and subsidiaries

Schedule II — Valuation and Qualifying Accounts
(in thousands)

Description				Balance at Beginning of Period				Charged to Costs and Expenses				Write-off's (Recoveries)				Balance at End of Period
Allowance for doubtful accounts receivable
Year Ended September 30, 2005				$	660				60				(3	)			723
Year Ended October 1, 2004				$	575				109				24				660
Year Ended October 3, 2003				$	577				133				135				575

103

---

SIGNATURES

Pursuant to the requirements of Section 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.

By:  /s/ O. JOE CALDARELLI                       O. Joe Caldarelli   Chief Executive Officer and Director

By:    /s/ JOEL A. LITTMAN                                              Joel A. Littman                  Chief Financial Officer, Treasurer and Secretary

Date: December 20, 2005

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

Signature		Title		Date
/s/ O. JOE CALDARELLI		Chief Executive Officer and Director (Principal Executive Officer)		December 20, 2005
O. Joe Caldarelli
ROBERT A. FICKETT*		Chief Operating Officer President and Director		December 20, 2005
/s/ JOEL A. LITTMAN		Chief Financial Officer, Treasurer and Secretary (Principal Financial and Accounting Officer)		December 20, 2005
Joel A. Littman
MICHAEL TARGOFF*		Chairman of the Board of Directors		December 20, 2005
MICHAEL F. FINLEY*		Director		December 20, 2005
JEFFREY P. HUGHES*		Director		December 20, 2005
CHRIS TOFFALES*		Director		December 20, 2005

*By: /s/ Joel A. Littman                             

Joel A. Littman, Attorney-in-fact

SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION 15(D) OF THE ACT OF BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO SECTION 12 OF THE ACT

No annual report to security holders covering the registrant’s last fiscal year has been sent to the registrant’s security holders, and no proxy statement, form of proxy or other proxy soliciting material has been sent to more than ten of the registrant’s security holders with respect to any annual or other meeting of security holders. No such report or proxy material is expected to be furnished to security holders subsequent to the filing of the annual report on this Form.

104

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EXHIBIT INDEX

Exhibit No.				Description
2.1				Agreement and Plan of Merger, dated as of November 17, 2003, by and among CPI Holdco, Inc. (‘‘CPI Holdco’’), CPI Merger Sub Corp., Communications & Power Industries Holding Corporation (‘‘Holding’’) and Green Equity Investors II, L.P., as Securityholders' Representative (Exhibit 2.4)(7)
2.2				Stock Sale Agreement (‘‘Stock Sale Agreement’’), dated as of June 9, 1995, by and between Communications & Power Industries, Inc. (‘‘CPI’’) (as successor by merger to CPII Acquisition Corp., then known as Communications & Power Industries Holding Corporation) and Varian Associates, Inc. (‘‘Varian Associates’’) (Exhibit 2.1)(1)
2.3				First Amendment to Stock Sale Agreement, dated as of August 11, 1995, by and among Holding, CPI (as successor by merger to CPII Acquisition) and Varian Associates (Exhibit 2.2)(1)
2.4				Second Amendment to Stock Sale Agreement, dated as of August 11, 1995, by and among Holding, CPI (as successor by merger to CPII Acquisition) and Varian Associates (Exhibit 2.3)(1)
2.5				Modification Agreement to Stock Sale Agreement, dated June 18, 2004, by and between CPI and Varian Medical Systems, Inc. (Exhibit 10.2)(11)
3.1				Restated Certificate of Incorporation of CPI, filed with the Delaware Secretary of State on December 10, 2004 (Exhibit 3.1)(12)
3.2				Amended and Restated Bylaws of CPI, dated March 19, 2002 (Exhibit 3.2)(4)
3.3				Restated Certificate of Incorporation of CPI Holdco, Inc. (Exhibit 3.3)(9)
3.4				Amendment to Restated Certificate of Incorporation of CPI Holdco, Inc., filed with the Delaware Secretary of State on March 12, 2004 (Exhibit 3.4)(9)
3.5				By-Laws of CPI Holdco, Inc. (Exhibit 3.5)(9)
4.1				Indenture, dated as of January 23, 2004, by and among CPI, as Issuer, the Guarantors named therein, as Guarantors, and The Bank of New York Trust Company, N.A. (as successor to BNY Western Trust Company), as Trustee (Exhibit 4.1)(8)
4.2				Form of Management Stockholders Agreement among CPI Holdco, Cypress Merchant Banking Partners II L.P., Cypress Merchant Banking II C.V., 55th Street Partners II L.P., Cypress Side-by-Side LLC, and certain management stockholders named therein (Exhibit 10.5)(8)
4.3				Indenture, dated as of February 22, 2005, by and between CPI Holdco, as Issuer, and The Bank of New York Trust Company, N.A., as Trustee (Exhibit 10.2)(13)
10.1				Credit Agreement, dated as of January 23, 2004, amended and restated as of November 29, 2004, by and among CPI, as Borrower, the Guarantors named therein, the Lenders from time to time party thereto, UBS Securities LLC, Bear, Stearns & Co. Inc., UBS Loan Finance LLC, UBS AG, Stamford Branch, Bear Stearns Corporate Lending Inc., Wachovia Bank, National Association, and Wachovia Capital Markets, LLC (Exhibit 10.1)(12)
10.2				Amendment No. 1, dated as of February 16, 2005, to the Credit Agreement (Exhibit 10.1)(13)
10.3				Amendment No. 2, dated as of April 13, 2005, to the Credit Agreement (Exhibit 10.1)(14)
10.4				Amendment No. 3, dated as of December 15, 2005, to the Credit Agreement (Exhibit 10.1)(16)
10.5				Security Agreement, dated as of January 23, 2004, among CPI, the Guarantors party thereto, and UBS AG, Stamford Branch (Exhibit 10.2)(8)
10.6				Cross License Agreement, dated as of August 10, 1995, between CPI and Varian Associates (Exhibit 10.11)(1)

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Exhibit No.				Description
10.7				Agreement of Purchase and Sale (San Carlos Property), dated February 7, 2003, by and between CPI (as successor to Holding) and Palo Alto Medical Foundation; Seventh Amendment, dated November 12, 2003; and Ninth Amendment, dated June 16, 2004 (Exhibit 10.1)(11)
10.8				Agreement re: Environmental Matters, dated June 18, 2004, by and between 301 Holding LLC, CPI, Varian Medical Systems, Inc. and Palo Alto Medical Foundation (Exhibit 10.3)(11)
10.9				Assignment and Assumption of Lessee's Interest in Lease (Units 1-4, Palo Alto) and Covenants, Conditions and Restrictions on Leasehold Interests (Units 1-12, Palo Alto), dated as of August 10, 1995, by and among Varian Realty Inc., Varian Associates and CPI (Exhibit 10.13)(1)
10.10				Fourth Amendment of Lease, dated December 15, 2000, by and between The Board of Trustees of the Leland Stanford Junior University and CPI (Exhibit 10.10)(3)
10.11				Sublease (Unit 8, Palo Alto), dated as of August 10, 1995, by and between Varian Realty Inc. and CPI (Exhibit 10.15)(1)
10.12				Sublease (Building 4, Palo Alto), dated as of August 10, 1995, by and between CPI, as Sublessee, Varian, as Sublessor, and Varian Realty Inc., as Adjacent Property Sublessor (Exhibit 10.16)(1)
10.13				First Amendment to Sublease, Subordination, Non-Disturbance and Attornment Agreement, dated as of April 2, 1999, by and among Varian, Inc., CPI, Varian, and Varian Realty Inc. (Exhibit 10.15)(15)
10.14				Second Amendment to Sublease, dated as of April 28, 2000, by and between Varian, Inc. and CPI (Exhibit 10.16 (15)
10.15				Communications & Power Industries 2000 Stock Option Plan (Exhibit 10.32)(2)
10.16				First Amendment to Communications and Power Industries 2000 Stock Option Plan (Exhibit 10.32.1)(5)
10.17				Form of Stock Option Agreement 2000 Stock Option Plan (Exhibit 10.33)(2)
10.18				Form of Option Rollover Agreement (U.S. Employees) (Exhibit 10.3)(8)
10.19				Form of Option Rollover Agreement (Canadian Employees) (Exhibit 10.5)(15)
10.20				The 2004 Stock Option Plan (Exhibit 10.1)(10)
10.21				Amendment to the 2004 Stock Option Plan (Exhibit 10.27)(12)
10.22				Form of Option Agreement (Employees) (Exhibit 10.2)(10)
10.23				Form of Option Agreement (Directors) (Exhibit 10.3)(10)
10.24				Pension Plan for Executive Employees of CPI Canada, Inc. (as applicable to O. Joe Caldarelli) effective January 1, 2002 (Exhibit 10.43)(7)
10.25				Employment Agreement for O. Joe Caldarelli, dated March 19, 2002 (Exhibit 10.37)(6)
10.26				Employment Agreement for Robert A. Fickett, dated September 30, 2002 (Exhibit 10.38)(6)
10.27				Employment Agreement for Joel A. Littman, dated September 30, 2002 (Exhibit 10.39)(6)
10.28				Employment Agreement for Mike Cheng, dated November 2, 2002 (Exhibit 10.40)(7)
10.29				Employment Agreement for Don C. Coleman, dated November 2, 2002 (Exhibit 10.41)(7)
10.30				Code of Ethics
21				Subsidiaries of the Registrant (Exhibit 21)(15)
24				Powers of Attorney of the Board of Directors
31				Certifications of Chief Executive Officer and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32				Certifications of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350

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(1)	Incorporated by reference to CPI's Registration Statement on Form S-1 (Registration No. 33-96858) filed on September 12, 1995

(2)	Incorporated by reference to CPI's Annual Report on Form 10-K for the fiscal year ended September 29, 2000

(3)	Incorporated by reference to CPI's Quarterly Report on Form 10-Q for the quarter ended December 29, 2000

(4)	Incorporated by reference to CPI's Quarterly Report on Form 10-Q for the quarter ended March 29, 2002

(5)	Incorporated by reference to CPI's Quarterly Report on Form 10-Q for the quarter ended April 4, 2003

(6)	Incorporated by reference to CPI's Annual Report on Form 10-K for the fiscal year ended September 27, 2002

(7)	Incorporated by reference to CPI's Annual Report on Form 10-K for the fiscal year ended October 3, 2003

(8)	Incorporated by reference to CPI's Quarterly Report on Form 10-Q for the quarter ended January 2, 2004

(9)	Incorporated by reference to CPI's Registration Statement on Form S-4 (Registration No. 333-113867-04) filed on March 23, 2004

(10)	Incorporated by reference to CPI Holdco's Quarterly Report on Form 10-Q for the quarter ended April 2, 2004

(11)	Incorporated by reference to CPI Holdco's Quarterly Report on Form 10-Q for the quarter ended July 2, 2004

(12)	Incorporated by reference to CPI Holdco's Annual Report on Form 10-K for the fiscal year ended October, 1, 2004

(13)	Incorporated by reference to CPI Holdco's Form 8-K filed on February 23, 2005

(14)	Incorporated by reference to CPI Holdco's Form 8-K filed on April 19, 2005

(15)	Incorporated by reference to CPI Holdco's Registration Statement on Form S-4 (Registration No. 333-123917) filed on April 7, 2005

(16)	Incorporated by reference to CPI Holdco's Form 8-K filed on December 16, 2005

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