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UnitedStatesSECURITIES AND EXCHANGE COMMISSION Washington, D.C.20549

Form 10-K

ANNUAL REPORTPURSUANT TO SECTION 13 OR 15(d) OFTHE SECURITIES EXCHANGE ACT OF1934

For the fiscal year ended December 31,2005

Commission file number1-11398

CPI AEROSTRUCTURES, INC.

(Exact name of registrant as specified in itscharter)

|                                                             |  |                                    |  |  |  |  |
|-------------------------------------------------------------|--|------------------------------------|--|--|--|--|
| NewYork                                                     |  | 11-2520310                         |
| (State orother jurisdiction ofincorporation ororganization) |  | (I.R.S. EmployerIdentificationNo.) |
|                                                             |

60 Heartland Blvd., Edgewood, New York11717

(Address of principal executiveoffices)

(631)586-5200

(Registrant’s telephonenumber, including area code)

Securities registeredpursuant to Section 12(b) of the Act:

|                              |  |                                          |  |  |  |  |
|------------------------------|--|------------------------------------------|--|--|--|--|
| Titleof Each Class           |  | Name of each exchange on whichregistered |
| CommonStock, $.001 par value |  | American Stock Exchange,Inc.             |
|                              |

Securities registered pursuant toSection 12(g) of the Act: None

Indicateby check mark if the registrant is a well-known seasoned issuer, asdefined in Rule 405 of the Securities Act.

Yes  No 

Indicateby check mark if the registrant is not required to file reportspursuant to Section 13 or Section 15(d) of the Act.

Yes  No 

Indicateby check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months, and (2) hasbeen subject to such filing requirements for the past 90 days.

Yes  No 

Indicate by check mark if the disclosure ofdelinquent filers pursuant to Item 405 of Regulation S-K is notcontained herein, and will not be contained, to the best ofregistrant’s knowledge, in definitive proxy or informationstatements incorporated by reference in Part III of this Form 10-K orany amendment to this Form10-K.  

Indicate by checkmark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definition of‘‘accelerated filer’’ and‘‘large accelerated filer’’ in Rule 12b-2of the Exchange Act (check one).

Largeaccelerated filer   Acceleratedfiler   Non-acceleratedfiler  

Indicate by checkmark whether the registrant is a shell company (as defined in Rule12-b2 of the Exchange Act).

Yes  No 

As of June  30,  2005 (the last businessday of the registrant’s most recently completed second fiscalquarter), the aggregate market value of the registrant’s commonstock (based on its reported last sale price on the American StockExchange of $9.00) held by non-affiliates of the registrant was$38,305,917.

As of March  24,  2006,the registrant had 5,447,042 common shares, $.001 par value,outstanding.

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CPIAEROSTRUCTURES, INC.FORM 10-K ANNUALREPORT-2005TABLE OFCONTENTS

|         |  |          |  |                                                                                               |  |    |  |  |  |  |  |  |  |  |
|---------|--|----------|--|-----------------------------------------------------------------------------------------------|--|----|--|--|--|--|--|--|--|--|
| PARTI   |  | 1        |
|    |  | Item1.   |  | Descriptionof Business                                                                        |  | 1  |
|    |  | Item 1A. |  | RiskFactors                                                                                   |  | 7  |
|    |  | Item1B.  |  | Unresolved staffcomments                                                                      |  | 9  |
|    |  | Item2.   |  | Description ofProperties                                                                      |  | 9  |
|    |  | Item 3.  |  | LegalProceedings                                                                              |  | 9  |
|    |  | Item4.   |  | Submission of Matters to a Vote of SecurityHolders                                            |  | 9  |
| PARTII  |  | 10       |
|    |  | Item 5.  |  | Market forCommon Equity, Related Stockholder Matters and Issuer Purchases ofEquity Securities |  | 10 |
|    |  | Item6.   |  | Selected FinancialData                                                                        |  | 11 |
|    |  | Item7.   |  | Management’s Discussion and Analysis of FinancialCondition and Results ofOperations     |  | 12 |
|    |  | Item7A.  |  | Quantitative and Qualitative Disclosures About MarketRisk                                     |  | 15 |
|    |  | Item 8.  |  | FinancialStatements and SupplementaryData                                                     |  | 15 |
|    |  | Item 9.  |  | Changes inand Disagreements with Accountants on Accounting and FinancialDisclosure            |  | 15 |
|    |  | Item9A.  |  | Controls andProcedures                                                                        |  | 15 |
|    |  | Item9B.  |  | OtherInformation                                                                              |  | 16 |
| PARTIII |  | 17       |
|    |  | Item 10. |  | Directorsand Executive Officers of theRegistrant                                              |  | 17 |
|    |  | Item11.  |  | ExecutiveCompensation                                                                         |  | 19 |
|    |  | Item12.  |  | Security Ownership of Certain Beneficial Owners andManagement                                 |  | 23 |
|    |  | Item13.  |  | Certain Relationships and RelatedTransactions                                                 |  | 25 |
|    |  | Item14.  |  | Principal Accountant Fees andServices                                                         |  | 25 |
| PARTIV  |  | 26       |
|    |  | Item 15. |  | Exhibits andFinancial StatementSchedules                                                      |  | 26 |
|         |

SignaturesExhibits

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PARTI

Item 1.     DESCRIPTION OFBUSINESS

Introduction

CPI Aerostructures, Inc.(‘‘CPI Aero’’ or the‘‘Company’’) is engaged in the contractproduction of structural aircraft parts principally for the UnitedStates Air Force and other branches of the U.S. armed forces. We alsoprovide aircraft parts to the commercial sector of the aircraftindustry but we are not currently pursuing new business in this sector.Our strategy for growth includes de-emphasizing our commercialoperations and concentrating on government and military sales.96% of our revenues for 2005, 99% of our revenues for2004 and 98% of our revenues for 2003 were derived fromgovernment contract sales.

We operate as a prime contractorsupplying structural aircraft parts under prime contracts with the U.S.Government. In that capacity, we deliver skin panels, leading edges,flight control surfaces, engine components, wing tips, cowl doors,nacelle assemblies and inlet assemblies for military aircraft such asthe C-5A ‘‘Galaxy’’ cargo jet, the T-38‘‘Talon’’ jet trainer, the C-130‘‘Hercules’’ cargo jet, the A-10‘‘Thunderbolt’’ or‘‘Warthog’’ attack jet and the E-3‘‘Sentry’’ AWACS jet. We also operate as asubcontractor to leading aerospace prime contractors such as NorthropGrumman Corporation, Lockheed Martin Corporation and Vought AircraftIndustries, Inc. This is a field of opportunity that has opened up tous over the past two years. As a subcontractor, we deliver podassemblies and bonded assemblies as well as perform small benchassembly work. We also supply commercial aircraft products includingaprons and engine mounts, which attach jet engine housings to aircraftsuch as the Lear 60 and Astra Galaxy business jets. Our products aresub-assemblies, a series of parts fixed together to form a larger unitthat will comprise a part of a complex aerodynamic structure. Inconjunction with our assembly operations, we provide engineering,technical and program management services to our customers.

CPIhas 25 years of experience as a contractor, completing over 2,100contracts to date. Most members of our management team have heldmanagement positions at large defense contractors, including NorthropGrumman Corporation, Lockheed Martin Corporation and The FairchildCorporation. Our technical team possesses extensive technical expertiseand program management and integration capabilities. Our competitiveadvantage lies in our ability to offer large contractor capabilitieswith the flexibility and responsiveness of a small company, whilestaying competitive in cost and delivering superior quality products.While the larger prime contractors compete for significant modificationawards and subcontract components to other suppliers, they generally donot compete for awards for smaller modifications or spare and repairparts, even for planes for which they are the original manufacturer. Wequalify as a small business because we have less than 1,000 employees,and this allows us to compete on military awards set aside forcompanies with this small business status.

While historically themajority of our contracts have been valued below $200,000, we havecompeted for, and have been awarded, significantly larger contracts,including an estimated $61  million award for the T-38‘‘Talon’’ jet trainer and an estimated$215  million award for the C-5 cargo plane. We intend tocontinue to bid on these larger contracts. We believe that our successwith the T-38 and C-5 programs will allow us to compete moreeffectively for larger awards in the future.

CPI was incorporatedunder the laws of the State of New York in January  1980 underthe name Composite Products International, Inc. CPI changed its name toConsortium of Precision Industries, Inc. in April  1989 and toCPI Aerostructures, Inc. in July  1992. In January  2005,we began doing business under the name CPI Aero.

Our principaloffice is located at 60 Heartland Blvd., Edgewood, New York 11717 andour telephone number is (631) 586-5200.

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Discontinued Operations

In 1997, inan effort to diversify our business, we acquired Kolar Machine, Inc., amanufacturer of precision machine parts for the electronics industry.As a result of the downturn in the electronic manufacturing sector, weterminated Kolar’s operations in December  2001, closedits Ithaca New York, facility and liquidated most of its assets throughan auction in February  2002. Due to our decision to close theKolar facilities and liquidate its assets, Kolar’s operationshave been classified as‘‘discontinued.’’

SignificantContracts

The ongoing maintenance of existing aircraft by theU.S. Air Force is the primary driver of our growth in both the numberof contracts and the size of awards. Our contracts with the Air Forceaccounted for substantially all of our revenue for 2003, 2004 and 2005.In most cases, we supply structural aircraft parts for aircraft thatare no longer being manufactured but continue to be used and need to bemaintained. CPI Aero has been awarded contracts within thesemaintenance programs on the C-5A and T-38. The following table setsforth the current actual and estimated Department of Defense budgetsfor the government’s fiscal years ended and endingSeptember  30,  2005, 2006 and 2007:

Department ofDefenseBudgets*

|          |  |            |  |                |  |               |  |         |  |           |  |         |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|----------|--|------------|--|----------------|--|---------------|--|---------|--|-----------|--|---------|--|--|--|--|--|--|--|--|--|--|--|--|--|--|
|     |  | Actual2005 |  | Estimated 2006 |  | Estimated2007 |
| Aircraft |  | Spares(1)  |  | Mods(2)        |  | Spares(1)     |  | Mods(2) |  | Spares(1) |  | Mods(2) |
| C-5A     |  | 78         |  | 114            |  | 117           |  | 111     |  | 126       |  | 223     |
| T-38     |  | 37         |  | 171            |  | 38            |  | 190     |  | 41        |  | 143     |
|          |

|  |              |                                                   |
|--|--------------|---------------------------------------------------|
|  | •  | Source:Department of Defense (amounts inmillions) |

|  |              |                                     |
|--|--------------|-------------------------------------|
|  | •  | (1) Programs to procure spareparts. |

|  |              |                                                    |
|--|--------------|----------------------------------------------------|
|  | •  | (2) Programs for aircraftmodification and upgrade. |

The C-5A‘‘Galaxy’’ cargo jet is one of the largestaircraft in the world and can carry a maximum cargo load of270,000  pounds. Lockheed delivered the first C-5A in 1970. TheC-5A Galaxy carries fully equipped combat-ready military units to anypoint in the world on short notice and then provides field support tosustain the fighting force. The Air Force has created a comprehensiveprogram to ensure the capabilities of its C-5A fleet until 2040. We areone of the leading suppliers of structural spare parts and assembliesfor the C-5A aircraft. We assemble numerous C-5A parts, includingpanels, slats, spoilers and wing-tips and are the only supplier of C-5Awing-tips to the U.S. government. Like the C-5A itself, the wing-tip isa large structure and is expensive — costing up to $750,000 foreach replacement piece. Our first C-5A contract was approximately$590,000 of structural spares and was awarded in 1995. In 2004, the AirForce awarded us a seven-year TOP contract to build an assortment ofparts for the C-5A, including wing tips and panels. The TOP contract isthe largest contract in our history, with a potential value of up to$215  million. Since 1995, we have received releases undercontracts for C-5A parts aggregating approximately $79  million,including $11.8  million from the TOP contract. Future releasesunder the TOP contract are unpredictable. C-5A contracts accounted forapproximately 25% of our revenues for 2005.

The T-38‘‘Talon’’ is a twin-engine, high-altitude,supersonic jet primarily used for pilot training that first flew in1959. More than 1,100 were delivered to the Air Force between 1961 and1972, when production ended. There are approximately 500 T-38’sin active service with the Air Force, which has a program designed toextend the structural life of the T-38 until 2020. In 2001, we wereawarded a ten-year contract to build the structural inlets for the T-38Propulsion Modification Program. At the time, the T-38 contract was thelargest in our history, worth an estimated $61  million over thelife of the program. The length and size of this program allow us todevelop a long-term backlog and establish ourselves as a successfulprime contractor for larger and longer term programs. The T-38 contractaccounted for 46% of our revenues for 2005.

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The balance of our revenue is generatedfrom various smaller contract awards on assorted aircraft, includingthe MH-60S helicopter and the E-3 AWACS jet.

Sales andMarketing

We obtain all of our military contracts for ourproducts and services through the process of competitive bidding. Whilehistorically the majority of our contracts have been valued below$200,000, we successfully have competed for and have been awardedsignificantly larger contracts. Our average sales cycle, whichgenerally commences at the time a prospective customer issues a requestfor proposal and ends upon delivery of the final product to thecustomer, typically ranges from six to 18 months. Our militarycustomers have included Defense Supply Center Richmond,Wright-Patterson Air Force Base (AFB), Warner Robins AFB, Tinker AFB,NAVICP, Hill AFB, U.S. Army and Redstone. Our commercial customers haveincluded Boeing, B.F. Goodrich (Rohr), Northrop Grumman, LockheedMartin, Nordam, Shinmaywa and Derco.

We use third party serviceproviders to help locate small government contracts that are regularlyposted by the various defense logistic agencies. The service providersscreen contracts according to criteria we establish and forwardmatching contracts to us. We then view the relevant contracts directlyon government websites and select contracts on which we will bid basedon how well they fit our core competency. As of March  24,2006, we had over $350  million in bids outstanding, and wecontinue to make bids on contracts on a weekly basis. We generally bidon 40 to 50 contracts per week. Over the past three years, we have beenawarded approximately 13% of the contracts on which we havebid.

We qualify for small business status because we have fewerthan 1,000 employees. The military’s fiscal year 2005 programgoals were 23% for small business prime contracting and43% for subcontracting. During 2005, approximately 50% ofthe value of our current contracts were awarded to us under thisprogram.

The U.S. Air Force operates three Air Logistics Centers(ALC) through which it purchases all structural replacement andmodification parts. Each ALC is located on a domestic Air Force baseand is responsible for the repair and modification of differentaircraft. Parts worn out in the normal course of operation anddiscarded instead of repaired are ordered through the centralizedDefense Supply Center Richmond (DSCR). We use on-site consultants ateach ALC and the DSCR to help in the procurement process. Theseconsultants are important as relationship managers and typically haveprevious experience on the procurement side. The consultants provide uswith timely feedback and keep us apprised of large contracts that mightbe up for bidding. Additionally, we currently have agreements with sixsales representatives to market our products to a broader base ofcustomers.

The Market

The majority of our parts are soldfor use by the U.S. Air Force. Accordingly, the national defense budgetand procurement funding decisions drive demand for our business. TheU.S. Department of Defense (DoD) budget has been increasing over thepast few years. Government spending requirements for procurement,operations and maintenance for 2006 and beyond will continue to beaffected by the global war on terrorism through the continued need formilitary missions and reconstruction efforts in Iraq and Afghanistanand the related fiscal consequences of war. We expect that DoD spendingwill grow with the overall level of defense spending and we expect tobenefit to the extent that such spending is allocated to aircraftmodification programs and spending on spare and repair parts.

TheDoD recently completed the Congressionally mandated 2006 QuadrennialDefense Review (QDR). The QDR affirms the DoD’s prior commitmentto its prior extensive investments in cargo transportability andstrategic lift and for maintaining and enhancing this capability byrecapitalizing and modernizing its mobility platforms, including theacquisition and modernization of C-5 aircraft, one of our majorprograms.

Notwithstanding defense budget increases and theDoD’s commitment to maintaining support for aging aircraft,there has been a significant slowdown in government contract awards aswell as releases 

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under previously awarded contracts. Faced withthe uncertainties of appropriations and timing of contract awards andreleases under previously awarded contracts, which we believe have beendriven by the uncertainties of war and market and economic trends, wehave expanded our activities to include operating as a subcontractor toleading aerospace prime contractors. While the slowdown in governmentcontract awards also has affected these prime contractors, because theyare able to bid on and receive contract awards for different programsthan we are, we believe that pursuing such opportunities will enable usto access programs that we would not otherwise be able to given oursmaller size and resources. By increasing our customer base, we arepositioned to take advantage of additional market opportunities andreduce the impact of the slowdown in government contract awards andreleases. These subcontracting opportunities have begun to materialize,and we have been awarded some initial subcontracts. We currently haveproposals submitted to multiple prime contractors, and while we cannotpredict the timing of awards, some of our outstanding proposals are sosignificant in size that any single award could increase our revenueand net income substantially

Backlog

We produce customassemblies pursuant to long-term contracts and customer purchaseorders. Backlog consists of aggregate values under such contracts andpurchase orders, excluding the portion previously included in operatingrevenues on the basis of percentage of completion accounting, andincluding estimates of future contract price escalation. Substantiallyall of our backlog is subject to termination at will and rescheduling,without significant penalty. Congress often appropriates funds for aparticular program or contract on a yearly or quarterly basis, eventhough the contract may call for performance that is expected to take anumber of years. Therefore, our funded backlog does not include thefull value of our contracts. Our backlog as of December31,  2004 and December  31,  2005, was asfollows:

|          |  |                        |  |                        |  |  |  |  |  |  |
|----------|--|------------------------|--|------------------------|--|--|--|--|--|--|
| Backlog  |  | December31,  2004      |  | December  31,2005      |
| Funded   |  | $23,871,036            |  | $22,218,392            |
| Unfunded |  |   34,931,824 |  |   28,291,000 |
| Total    |  | $58,802,860            |  | $50,509,392            |
|          |

Ofthe total amount of our backlog at December  31,  2005,approximately 99.4% was attributable to government contracts.Approximately $18.6  million (91%) of the funded backlogat December  31,  2005 is expected to be recognized asrevenue during 2006.

Although our new contract awards decreasedto $16.6  million in 2005, the government has continued torequest quotes and our bidding activity and win rate remains at theirapproximate historical levels, we are currently experiencing asignificant slowdown of government procurement. Our reduced backlog isreflective of this general slowdown in overall governmentordering.

Material and Parts

We subcontract production ofsubstantially all component parts incorporated into our products tothird party manufacturers under firm fixed price orders. Our decisionto purchase certain components generally is based upon whether thecomponents are available to meet required specifications at a cost anddelivery consistent with customer requirements. From time to time, weare required to purchase custom made parts from sole suppliers andmanufacturers in order to meet specific customer requirements. To date,we have not experienced material delays in connection with obtainingcustom parts and we believe that the loss of any single supplier ormanufacturer would not have a material adverse effect on ourbusiness.

We obtain our raw materials from several commercialsources. Although certain items are only available from limited sourcesof supply, we believe that the loss of any single supplier would nothave a material adverse effect on ourbusiness.

Competition

The markets for our products arehighly competitive. We compete with numerous larger, well-establishedprime contractors engaged in the supply of aircraft parts andassemblies to the 

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military, including Northrop GrummanCorporation, Lockheed Martin Corporation, The Boeing Company, TheNordam Group and Vought Aircraft Industries, Inc. All of thesecompetitors possess significantly larger infrastructures, greaterresources and the capabilities to respond to much larger contracts. Incertain instances, we also may act as a subcontractor to some of thesemajor prime contractors. We also compete against smaller contractorssuch as Aerocomponents, Aerospace Engineering and Support, GSEDynamics, Honeycomb Company of America, Alton Iron Works, B&BDevices and Precision Manufacturing.

We believe that ourcompetitive advantage lies in our ability to offer large contractorcapabilities with the flexibility and responsiveness of a smallcompany, while staying competitive in cost and delivering superiorquality products. While the larger prime contractors compete forsignificant modification awards and subcontract components to othersuppliers, they generally do not compete for awards in smallermodifications, spares and replacement parts, even for planes for whichthey are the original manufacturer. We believe we compete effectivelyagainst the smaller competitors because our smaller competitorsgenerally do not have the expertise we have in responding to requestsfor proposals for government contracts.

GovernmentRegulation

Environmental Regulation

We are subject toregulations administered by the United States Environmental ProtectionAgency, the Occupational Safety and Health Administration, variousstate agencies and county and local authorities acting in cooperationwith federal and state authorities. Among other things, theseregulatory bodies impose restrictions to control air, soil and waterpollution, to protect against occupational exposure to chemicals,including health and safety risks, and to require notification orreporting of the storage, use and release of certain hazardouschemicals and substances. The extensive regulatory framework imposescompliance burdens and risks on us. Governmental authorities have thepower to enforce compliance with these regulations and to obtaininjunctions or impose civil and criminal fines in the case ofviolations.

The Comprehensive Environmental Response,Compensation and Liability Act of 1980 (CERCLA) imposes strict, jointand several liability on the present and former owners and operators offacilities that release hazardous substances into the environment. TheResource Conservation and Recovery Act of 1976 (RCRA) regulates thegeneration, transportation, treatment, storage and disposal ofhazardous waste. In New York, the handling, storage and disposal ofhazardous substances are governed by the Environmental ConservationLaw, which contains the New York counterparts of CERCLA and RCRA. Inaddition, the Occupational Safety and Health Act, which requiresemployers to provide a place of employment that is free from recognizedand preventable hazards that are likely to cause serious physical harmto employees, obligates employers to provide notice to employeesregarding the presence of hazardous chemicals and to train employees inthe use of such substances.

Our operations require the use of alimited amount of chemicals and other materials for painting andcleaning, including solvents and thinners, which are classified underapplicable laws as hazardous chemicals and substances. We have obtaineda permit from the Town of Islip, New York, Building Division in orderto maintain a paint booth containing flammable liquids.

FederalAviation Administration Regulation

We are subject to regulationby the Federal Aviation Administration (FAA) under the provisions ofthe Federal Aviation Act of 1958, as amended. The FAA prescribesstandards and licensing requirements for aircraft and aircraftcomponents. We are subject to inspections by the FAA and may besubjected to fines and other penalties (including orders to ceaseproduction) for noncompliance with FAA regulations. Our failure tocomply with applicable regulations could result in the termination ofor our disqualification from some of our contracts, which could have amaterial adverse effect on our operations.

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Government Contract Compliance

Ourgovernment contracts are subject to the procurement rules andregulations of the United States government. Many of the contract termsare dictated by these rules and regulations. Specifically, cost-basedpricing is determined under the Federal Acquisition Regulations (FAR),which provide guidance on the types of costs that are allowable inestablishing prices for goods and services under U.S. Governmentcontracts. For example, costs such as those related to charitablecontributions, advertising, interest expense, and public relations areunallowable, and therefore not recoverable through sales. During andafter the fulfillment of a government contract, we may be audited inrespect of the direct and allocated indirect costs attributed thereto.These audits may result in adjustments to our contract costs.Additionally, we may be subject to U.S. government inquiries andinvestigations because of our participation in government procurement.Any inquiry or investigation can result in fines or limitations on ourability to continue to bid for government contracts and fulfillexisting contracts.

We believe that we are in substantialcompliance with all federal, state and local laws and regulationsgoverning our operations and have obtained all material licenses andpermits required for the operation of ourbusiness.

Insurance

We maintain a $2  milliongeneral liability insurance policy, a $10  million productsliability insurance policy, and a $5  million umbrella liabilityinsurance policy. Additionally, we maintain a $5  milliondirector and officers’ insurance policy. We believe thiscoverage is adequate for the types of products presently marketedbecause of the strict inspection standards imposed on us by ourcustomers before they take possession of our products. Additionally,the Federal Acquisition Regulations generally provide that we will notbe held liable for any loss of or damage to property of the governmentthat occurs after the government accepts delivery of our products andthat results from any defects or deficiencies in our products unlessthe liability results from willful misconduct or lack of good faith onthe part of our managerial personnel.

ProprietaryInformation

None of our current assembly processes or productsis protected by patents. We rely on proprietary know-how andconfidential information and employ various methods to protect theprocesses, concepts, ideas and documentation associated with ourproducts. These methods, however, may not afford complete protectionand there can be no assurance that others will not independentlydevelop such processes, concepts, ideas and documentation.

Employees

As of March  24,  2006, CPI Aero had72 full-time employees. We employ temporary personnel with specializeddisciplines on an as-needed basis. None of our employees is a member ofa union. We believe that our relations with our employees aregood.

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Item 1A.     RISK FACTORS

Youshould consider the following risks carefully in evaluating us and ourbusiness before making an investment decision. The risks describedbelow are not the only risks we face. Additional risks may also impairour business operations. If any of the following risks occur, ourbusiness, results of operations or financial condition could bematerially adversely affected. If that happens, the trading price ofour common shares could decline, and you may lose all or part of yourinvestment.

Risks related to our business

Wedepend on government contracts for most of our revenues.

We area supplier, either directly or as a subcontractor, to the U.S.government and its agencies, principally the U.S. Air Force. 96%of revenue for 2005, 99% of revenue for 2004 and 98% ofour revenue for 2003 were derived from government contract sales. Twoof our contracts, for the T-38 ‘‘Talon’’and the C-5, accounted for 46% and 25% of our revenue for2005, respectively. We depend on these government contracts for most ofour business. If we are suspended or barred from contracting with theU.S. government, if our reputation or relationship with individualfederal agencies were impaired, or if the government otherwise ceaseddoing business with us or significantly decreased the amount ofbusiness it does with us, our business, prospects, financial conditionand operating results would be materially adversely affected.

Weface risks relating to government contracts.

There are inherentrisks in contracting with the U.S. government, including risks that arepeculiar to the defense industry, which could have a material adverseeffect on our business, prospects, financial condition and operatingresults. All contracts with the U.S. government contain provisions andare subject to laws and regulations that give the government rights andremedies not typically found in commercial contracts, including rightsthat allow the government to:

|  |              |                                                                    |
|--|--------------|--------------------------------------------------------------------|
|  | •  | terminatecontracts for convenience in whole or in part at anytime; |

|  |              |                                                                                               |
|--|--------------|-----------------------------------------------------------------------------------------------|
|  | •  | reduce or modify contracts orsubcontracts if its requirements or budgetary constraintschange; |

|  |              |                                                                                                                            |
|--|--------------|----------------------------------------------------------------------------------------------------------------------------|
|  | •  | cancel multi-year contracts andrelated orders if funds for contract performance for any subsequentyear become unavailable; |

|  |              |                                                                                |
|--|--------------|--------------------------------------------------------------------------------|
|  | •  | adjustcontract costs and fees on the basis of audits completed by itsagencies; |

|  |              |                                                     |
|--|--------------|-----------------------------------------------------|
|  | •  | claim rights in products andsystems produced by us; |

|  |              |                                                               |
|--|--------------|---------------------------------------------------------------|
|  | •  | suspend or barus from doing business with U.S. government;and |

|  |              |                                                |
|--|--------------|------------------------------------------------|
|  | •  | control or prohibit the export ofour products. |

If the U.S. government terminates a contract forconvenience, we may recover only our incurred or committed costs,settlement expenses and profit on work completed prior to thetermination. If the government terminates a contract for default, wemay not recover even those amounts, and instead may be liable forexcess costs incurred by the government in procuring undelivered itemsand services from another source.

We have risksassociated with competing in the bidding process for U.S. governmentcontracts.

We obtain many of our U.S. government contractsthrough a competitive bidding process. In the bidding process, we facethe following risks:

|  |              |                                                                                                                                  |
|--|--------------|----------------------------------------------------------------------------------------------------------------------------------|
|  | •  | We must bid onprograms in advance of their completion, which may result in unforeseentechnological difficulties or costoverruns; |

|  |              |                                                                                                                                               |
|--|--------------|-----------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | We must devote substantialtime and effort to prepare bids and proposals for competitively awardedcontracts that may not be awarded to us; and |

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|  |              |                                                                                |
|--|--------------|--------------------------------------------------------------------------------|
|  | •  | Awarded contractsmay not generate sales sufficient to result in profitability. |

We are subject to strict governmental regulations relating to theenvironment, which could result in fines and remediation expense in theevent of non-compliance.

We are required to comply withextensive and frequently changing environmental regulations at thefederal, state and local levels. Among other things, these regulatorybodies impose restrictions to control air, soil and water pollution, toprotect against occupational exposure to chemicals, including healthand safety risks, and to require notification or reporting of thestorage, use and release of certain hazardous substances into theenvironment. This extensive regulatory framework imposes significantcompliance burdens and risks on us. In addition, these regulations mayimpose liability for the cost of removal or remediation of certainhazardous substances released on or in our facilities without regard towhether we knew of, or caused, the release of such substances.Furthermore, we are required to provide a place of employment that isfree from recognized and preventable hazards that are likely to causeserious physical harm to employees, provide notice to employeesregarding the presence of hazardous chemicals and to train employees inthe use of such substances. Our operations require the use of a limitedamount of chemicals and other materials for painting and cleaning thatare classified under applicable laws as hazardous chemicals andsubstances. If we are found not to be in compliance with any of theserules, regulations or permits, we may be subject to fines, remediationexpenses and the obligation to change our business practice, any ofwhich could result in substantial costs that would adversely impact ourbusiness operations and financial condition.

We may be subjectto fines and disqualification for non-compliance with Federal AviationAdministration regulations.

We are subject to regulation by theFederal Aviation Administration under the provisions of the FederalAviation Act of 1958, as amended. The FAA prescribes standards andlicensing requirements for aircraft and aircraft components. We aresubject to inspections by the FAA and may be subjected to fines andother penalties (including orders to cease production) fornoncompliance with FAA regulations. Our failure to comply withapplicable regulations could result in the termination of or ourdisqualification from some of our contracts, which could have amaterial adverse effect on our operations.

If our subcontractorsor suppliers fail to perform their contractual obligations, our primecontract performance and our ability to obtain future business could bematerially and adversely impacted.

Many of our contracts involvesubcontracts with other companies upon which we rely to perform aportion of the services that we must provide to our customers. There isa risk that we may have disputes with our subcontractors, includingdisputes regarding the quality and timeliness of work performed by thesubcontractor, customer concerns about the subcontract, our failure toextend existing task orders or issue new task orders under asubcontract, or our hiring of personnel of a subcontractor. A failureby one or more of our subcontractors to satisfactorily provide on atimely basis the agreed-upon supplies or perform the agreed-uponservices may materially and adversely impact our ability to perform ourobligations as the prime contractor. Subcontractor performancedeficiencies could result in a customer eliminating our ability toprogress bill or terminating our contract for default. A prohibition onprogress billing may have an adverse effect upon our profitability anda default termination could expose us to liability and have a materialadverse effect on our ability to compete for future contracts andorders. In addition, a delay in our ability to obtain components andequipment parts from our suppliers may affect our ability to meet ourcustomers’ needs and may have an adverse effect upon ourprofitability.

We utilize the percentage of completion method ofaccounting which involves considerable use of estimates in determiningrevenues, costs and profits and in assigning amounts to accountingperiods.

We recognize revenue from our contracts over thecontractual period under the percentage-of-completion (POC) method ofaccounting. Under the POC method of accounting, sales and gross profitare recognized as work is performed based on the relationship betweenactual costs 

8

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incurred and total estimated costs at thecompletion of the contract. Recognized revenues that will not be billedunder the terms of the contract until a later date are recorded as anasset captioned ‘‘Costs and estimated earnings in excessof billings on uncompleted contracts.’’ Contracts wherebillings to date have exceeded recognized revenues are recorded as aliability captioned ‘‘Billings in excess of costs andestimated earnings on uncompleted contracts.’’ Changes tothe original estimates may be required during the life of the contract.Estimates are reviewed monthly and the effect of any change in theestimated gross margin percentage for a contract is reflected in costof sales in the period the change becomes known. The use of the POCmethod of accounting involves considerable use of estimates indetermining revenues, costs and profits and in assigning the amounts toaccounting periods. As a result, there can be a significant disparitybetween earnings (both for accounting and taxes) as reported and actualcash received by us during any reporting period. We continuallyevaluate all of the issues related to the assumptions, risks anduncertainties inherent with the application of the POC method ofaccounting; however, we cannot assure you that our estimates will beaccurate. If our estimates are not accurate or a contract isterminated, we will be forced to adjust revenue in later periods.Furthermore, even if our estimates are accurate, we may have ashortfall in our cash flow and we may need to borrow money to pay taxesuntil the reported earnings materialize to actual cashreceipts.

If the contracts associated with our backlog wereterminated, our financial condition would be adverselyaffected.

The maximum contract value specified under eachgovernment contract that we enter into is not necessarily indicative ofthe revenues that we will realize under that contract. Because we maynot receive the full amount we expect under a contract, we may notaccurately estimate our backlog because the actual accrual of revenueson programs included in backlog may never occur or may change.Cancellations of pending contracts or terminations or reductions ofcontracts in progress could have a material adverse effect on ourbusiness, prospects, financial condition or results of operations. Asof December  31,  2005, our backlog was $50.5million, of which 44% was funded and 56% wasunfunded.

We may be unable to retain personnel who are key toour operations.

Our success, among other things, is dependent onour ability to attract and retain highly qualified senior officers andengineers. Competition for key personnel is intense. Our ability toattract and retain senior officers and experienced, top rate engineersis dependent on a number of factors, including prevailing marketconditions and compensation packages offered by companies competing forthe same talent. The inability to hire and retain these persons mayadversely affect our production operations and other aspects of ourbusiness.

Item 1B.     UNRESOLVED STAFF COMMENTS

NotApplicable

Item 2. DESCRIPTION OF PROPERTY

CPIAerostructures’ executive offices and production facilities aresituated in an approximate 60,000 square foot building located at 60Heartland Blvd., Edgewood, New York 11717. CPI Aerostructures occupiesthis facility under a ten-year lease that commenced in January2005. The current monthly base rent is $32,703, plus real estate taxes.Our base rent increases at 3% per year through 2014. We believethat our facilities are adequate for our current needs.

Item3. LEGAL PROCEEDINGS

None

Item4. SUBMISSION OF MATTERS TO A VOTE OFSECURITYHOLDERS

None

9

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PARTII

|               |                                                                                               |
|---------------|-----------------------------------------------------------------------------------------------|
| Item 5.  | MARKET FOR COMMON EQUITY, RELATEDSTOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITYSECURITIES |

Market Information

Our common shares arelisted on the American Stock Exchange under the symbol CVU. Thefollowing table sets forth for 2004 and 2005, the high and low salesprices of our common shares for the periods indicated, as reported bythe American StockExchange.

|                                 |  |        |        |        |  |        |        |        |  |  |
|---------------------------------|--|--------|--------|--------|--|--------|--------|--------|--|--|
| Period                          |  | High   |        | Low    |
| 2004                            |  |   |   |   |  |   |   |   |
| QuarterEnded March  31,2004     |  | $11.86 |        | $9.45  |
| QuarterEnded June  30,2004      |  | $11.70 |        | $9.55  |
| Quarter EndedSeptember  30,2004 |  | $12.02 |        | $8.91  |
| Quarter EndedDecember  31,2004  |  | $11.57 |        | $8.65  |
| 2005                            |  |   |        |   |
| QuarterEnded March  31,2005     |  | $11.66 |        | $9.55  |
| Quarter EndedJune  30,2005      |  | $10.14 |        | $8.80  |
| Quarter EndedSeptember  30,2005 |  | $10.35 |        | $8.90  |
| Quarter EndedDecember  31,2005  |  | $10.10 |        | $9.14  |
|                                 |

On March24,  2006, the closing sale price for our common shares on theAmerican Stock Exchange was $9.85. On March  24,  2006,there were 141 holders of record of our common shares and, we believe,over 2,200 beneficial owners of our common shares.

DividendPolicy

To date, we have not paid any dividends on our commonshares. Any payment of dividends in the future is within the discretionof our board of directors and will depend on our earnings, if any, ourcapital requirements and financial condition and other relevantfactors. Our board of directors does not intend to declare any cash orother dividends in the foreseeable future, but intends instead toretain earnings, if any, for use in our businessoperations.

Recent Sales of Unregistered Securities, Use ofProceeds from Registered Securities

We made the following salesof unregistered securities during the three months endedDecember  31,2005.

|             |  |                   |  |            |  |                                                                                                            |  |                                  |  |                                                                          |  |  |  |  |  |  |  |  |  |  |  |  |
|-------------|--|-------------------|--|------------|--|------------------------------------------------------------------------------------------------------------|--|----------------------------------|--|--------------------------------------------------------------------------|--|--|--|--|--|--|--|--|--|--|--|--|
| Dateof Sale |  | Title of Security |  | NumberSold |  | Consideration Receivedand DescriptionofUnderwriting or OtherDiscounts to MarketPrice AffordedtoPurchasers  |  | ExemptionfromRegistrationClaimed |  | If Option, Warrant orConvertible Security, Terms of ExerciseorConversion |
| 12/6/05     |  | CommonStock       |  | 1,975      |  | Common Stock issued underPerformance Equity Plan 2000 — no cashconsideration received by the Company |  | 4(2)                             |  | N/A                                                                      |
| 12/7/05     |  | CommonStock       |  | 1,667      |  | Common stock issued upon exercise ofoptions: $10,452.09 cash consideration received by theCompany          |  | 4(2)                             |  | N/A                                                                      |
| 12/7/05     |  | CommonStock       |  | 15,000     |  | Common stock issued upon exercise ofoptions: $95,250.00 cash consideration received by theCompany          |  | 4(2)                             |  | N/A                                                                      |
|             |

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|               |                       |
|---------------|-----------------------|
| ITEM 6.  | SELECTEDFINANCIALDATA |

|                                                                           |  |                         |            |         |  |        |            |         |  |        |            |         |  |             |        |        |             |         |        |        |  |        |        |        |  |  |
|---------------------------------------------------------------------------|--|-------------------------|------------|---------|--|--------|------------|---------|--|--------|------------|---------|--|-------------|--------|--------|-------------|---------|--------|--------|--|--------|--------|--------|--|--|
| Statementof Operations Data:                                              |  | Years Ended December31, |
|                                                                      |  | 2005                    |            | 2004    |  | 2003   |            | 2002    |  | 2001   |
| Revenue                                                                   |  | $                       | 25,526,404 |    |  | $      | 30,269,030 |    |  | $      | 27,288,035 |    |  | $23,999,257 |        | $      | 15,024,027  |    |
| Costofsales                                                               |  |                    | 19,513,391 |    |  |   | 19,973,231 |    |  |   | 18,283,252 |    |  | 16,297,905  |        |   | 10,955,264  |    |
| Grossprofit                                                               |  |                    | 6,013,013  |    |  |   | 10,295,799 |    |  |   | 9,004,783  |    |  | 7,701,352   |        |   | 4,068,763   |    |
| Selling,general and administrativeexpenses                                |  |                    | 3,342,729  |    |  |   | 3,424,953  |    |  |   | 3,177,173  |    |  | 2,691,632   |        |   | 1,479,421   |    |
| Incomefromoperations                                                      |  |                    | 2,670,284  |    |  |   | 6,870,846  |    |  |   | 5,827,610  |    |  | 5,009,720   |        |   | 2,589,342   |    |
| Other(income)expense:                                                     |  |                    |       |    |  |   |       |    |  |   |       |    |  |        |   |   |             |    |   |   |  |   |   |   |
| Interest/other income(expense)                                            |  |                    | 5,463      |    |  |   | 7,294      |    |  |   | 16,206     |    |  | 69,233      |        |   | (1,620      | )  |
| Interestexpense                                                           |  |                    | (18,314    | )  |  |   | (8,109     | )  |  |   | (148,006   | )  |  | (510,329)   |        |   | (155,825    | )  |
| Gainon extinguishment ofdebt                                              |  |                    | —    |    |  |   | —    |    |  |   | 2,431,233  |    |  | —     |        |   | —     |    |
| Totalother (income) expense,net                                           |  |                    | (12,851    | )  |  |   | (815       | )  |  |   | 2,299,433  |    |  | (441,096)   |        |   | (157,445    | )  |
| Incomefrom continuingoperations                                           |  |                    | 2,657,433  |    |  |   | 6,870,031  |    |  |   | 8,127,043  |    |  | 4,568,624   |        |   | 2,431,897   |    |
| Gain(loss) on sale of assets held for sale — discontinuedoperations |  |                    | —    |    |  |   | —    |    |  |   | 461,235    |    |  | —     |        |   | (10,422,816 | )  |
| Lossfrom operations of discontinuedoperations                             |  |                    | —    |    |  |   | —    |    |  |   | —    |    |  | —     |        |   | (3,647,200  | )  |
| Income(loss) before provision for incometaxes                             |  |                    | 2,657,433  |    |  |   | 6,870,031  |    |  |   | 8,588,278  |    |  | 4,568,624   |        |   | (11,638,119 | )  |
| Provisionfor incometaxes                                                  |  |                    | (1,138,000 | )  |  |   | (1,794,000 | )  |  |   | (195,000   | )  |  | (124,000)   |        |   | —     |    |
| Netincome(loss)                                                           |  | $                       | 1,519,433  |    |  | $      | 5,076,031  |    |  | $      | 8,393,278  |    |  | $4,444,624  |        | $      | (11,638,119 | )  |
| Basicnet income per commonshare:                                          |  |                    |       |    |  |   |       |    |  |   |       |    |  |        |   |   |             |    |   |   |  |   |   |   |
| Incomefrom continuingoperations                                           |  | $                       | 0.28       |    |  | $      | 0.94       |    |  | $      | 1.63       |    |  | $1.63       |        | $      | 0.92        |    |
| Income(loss) from discontinuedoperations                                  |  |                    | —    |    |  |   | —    |    |  |   | 0.09       |    |  | —     |        |   | (5.31       | )  |
| Income(loss) per common share —basic                                |  | $                       | 0.28       |    |  | $      | 0.94       |    |  | $      | 1.72       |    |  | $1.63       |        | $      | (4.39       | )  |
| Dilutednet income per commonshare:                                        |  |                    |       |    |  |   |       |    |  |   |       |    |  |        |   |   |             |    |   |   |  |   |   |   |
| Incomefrom continuingoperations                                           |  | $                       | 0.25       |    |  | $      | 0.83       |    |  | $      | 1.47       |    |  | $1.40       |        |   | —     |    |
| Incomefrom discontinuedoperations                                         |  |                    | —    |    |  |   | —    |    |  |   | 0.09       |    |  | —     |        |   |        |    |
| Incomeper common share — diluted                                    |  | $                       | 0.25       |    |  | $      | 0.83       |    |  | $      | 1.56       |    |  | $1.40       |        |   | —     |    |
| Basicweighted average number of sharesoutstanding                         |  |                    | 5,422,101  |    |  |   | 5,386,595  |    |  |   | 4,872,255  |    |  | 2,721,522   |        |   | 2,653,538   |    |
| Dilutedweighted average number of sharesoutstanding                       |  |                    | 6,114,808  |    |  |   | 6,096,302  |    |  |   | 5,382,266  |    |  | 3,181,834   |        |   | —     |    |
|                                                                           |

|                                                                           |  |                |            |        |  |        |            |        |  |            |  |        |            |        |  |        |            |         |  |  |  |  |  |  |  |  |
|---------------------------------------------------------------------------|--|----------------|------------|--------|--|--------|------------|--------|--|------------|--|--------|------------|--------|--|--------|------------|---------|--|--|--|--|--|--|--|--|
| BalanceSheet Data:                                                        |  | At December31, |
|                                                                      |  | 2005           |            | 2004   |  | 2003   |            | 2002   |  | 2001       |
| Cash                                                                      |  | $              | 877,182    |   |  | $      | 1,756,350  |   |  | $2,794,310 |  | $      | 91,937     |   |  | $      | 180,578    |    |
| Costsand estimated earnings in excess of billings on uncompletedcontracts |  |           | 28,389,202 |   |  |   | 26,030,507 |   |  | 17,449,887 |  |   | 11,382,106 |   |  |   | 6,967,385  |    |
| Totalcurrentassets                                                        |  |           | 31,458,345 |   |  |   | 29,609,862 |   |  | 23,399,350 |  |   | 15,202,592 |   |  |   | 13,372,211 |    |
| Totalassets                                                               |  |           | 32,687,784 |   |  |   | 30,759,124 |   |  | 23,939,090 |  |   | 15,604,746 |   |  |   | 13,830,697 |    |
| Totalcurrentliabilities                                                   |  |           | 5,428,429  |   |  |   | 5,213,460  |   |  | 4,079,976  |  |   | 13,227,018 |   |  |   | 16,184,868 |    |
| Workingcapital(deficiency)                                                |  |           | 26,029,916 |   |  |   | 24,396,402 |   |  | 19,319,374 |  |   | 1,975,574  |   |  |   | (2,812,657 | )  |
| Shorttermdebt                                                             |  |           | 87,617     |   |  |   | 83,144     |   |  | 7,303      |  |   | 8,024,160  |   |  |   | 11,307,384 |    |
| Longtermdebt                                                              |  |           | 42,188     |   |  |   | 129,276    |   |  | 26,311     |  |   | 40,192     |   |  |   | —    |    |
| Shareholders’equity(deficiency)                                     |  |           | 27,162,272 |   |  |   | 25,416,388 |   |  | 19,832,803 |  |   | 2,337,536  |   |  |   | (2,354,171 | )  |
| Totalliabilities and shareholders’equity                            |  |           | 32,687,784 |   |  |   | 30,759,124 |   |  | 23,939,090 |  |   | 15,604,746 |   |  |   | 13,830,697 |    |
|                                                                           |

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|              |                                                                                            |
|--------------|--------------------------------------------------------------------------------------------|
| Item7.  | MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS |

Forward-LookingStatements

When used in this Form 10-K and in future filings byus with the Commission, the words or phrases ‘‘willlikely result,’’ ‘‘managementexpects’’ or ‘‘we expect,’’‘‘will continue,’’ ‘‘isanticipated,’’ ‘‘estimated’’or similar expressions are intended to identify‘‘forward-looking statements’’ within themeaning of the Private Securities Litigation Reform Act of 1995.Readers are cautioned not to place undue reliance on any suchforward-looking statements, each of which speaks only as of the datemade. As such statements are subject to certain risks and uncertaintiesthat could cause actual results to differ materially from historicalearnings and those presently anticipated or projected. The risks areincluded in ‘‘Item 1A: Risk Factors’’ and‘‘Item 7: Management’s Discussion and Analysis ofFinancial Condition and Results of Operations’’ includedin this Form 10-K. We have no obligation to publicly release the resultof any revisions, which may be made to any forward-looking statementsto reflect anticipated or unanticipated events or circumstancesoccurring after the date of such statements.

You should read thefinancial information set forth below in conjunction with our financialstatements and notes. Except as otherwise indicated, the followingdiscussion does not include the results of operations of Kolar, Inc.,which have been reclassified as discontinuedoperations.

Business Operations

Our operations consist ofthe design and production of structural aircraft parts principally forthe United States Air Force and other branches of the U.S. armedforces. We also provide aircraft parts to the commercial sector of theaircraft industry, but we are not currently pursuing business in thissector.

We compete with other prime contractors to win contractsthrough a process of competitive bidding. Additionally, we bid onsubcontract work to leading aerospace prime contractors. This is afield of opportunity that has opened up to us over the past twoyears.

After winning a contract, the length of the contractvaries but is typically between one and two years for U.S. governmentcontracts (although our T-38 contract and our C-5 TOP contract are forperiods of 10 years and 7 years, respectively), and up to 10 years forcommercial contracts. Our one commercial contract has an indefinitelife. Except in cases where contract terms permit us to bill on aprogress basis, we must incur upfront costs in producing assemblies andbill our customers upon delivery. Because of the upfront costsincurred, the timing of our billings and the nature of thepercentage-of-completion method of accounting described below, therecan be a significant disparity between the periods in which (a) costsare expended, (b) revenue and earnings are recorded and (c) cash isreceived.

Critical Accounting Policies

RevenueRecognition

We recognize revenue from our contracts over thecontractual period under the percentage-of-completion (POC) method ofaccounting. Under the POC method of accounting, sales and gross profitare recognized as work is performed based on the relationship betweenactual costs incurred and total estimated costs at the completion ofthe contract. Recognized revenues that will not be billed under theterms of the contract until a later date are recorded as an assetcaptioned ‘‘Costs and estimated earnings in excess ofbillings on uncompleted contracts.’’ Contracts wherebillings to date have exceeded recognized revenues are recorded as aliability captioned ‘‘Billings in excess of costs andestimated earnings on uncompleted contracts.’’ Changes tothe original estimates may be required during the life of the contract.Estimates are reviewed monthly and the effect of any change in theestimated gross margin percentage for a contract is reflected in costof sales in the period the change becomes known. The use of the POCmethod of accounting involves considerable use of 

12

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estimates in determining revenues, costs andprofits and in assigning the amounts to accounting periods. As aresult, there can be a significant disparity between earnings (both foraccounting and taxes) as reported and actual cash received by us duringany reporting period. We continually evaluate all of the issues relatedto the assumptions, risks and uncertainties inherent with theapplication of the POC method of accounting; however, we cannot assureyou that our estimates will be accurate. If our estimates are notaccurate or a contract is terminated, we will be forced to adjustrevenue in later periods. Furthermore, even if our estimates areaccurate, we may have a shortfall in our cash flow and we may need toborrow money to pay taxes until the reported earnings materialize toactual cash receipts.

In December  2004, the FASB issuedSFAS No. 123(R) (revised 2004), ‘‘Share-BasedPayment’’, which amends FASB Statement No. 123 and waseffective for public companies for interim or annual periods beginningafter June  15,  2005. The new standard requires us toexpense employee stock options and other share-based payments. We willvalue our stock option expense using the Black-Scholes options pricingmodel.  

Results of Operations

Year EndedDecember  31,  2005 as Compared to the Year EndedDecember  31,  2004

Revenue. Ourrevenue for the year ended December  31,  2005 was$25,526,404 compared to $30,269,030 for 2004, representing a decreaseof $4,742,626 or 16%. This decrease was due to fewer contractsin 2005 as compared to 2004 and a less favorable productmix.

Gross profit. Gross profit for the year endedDecember  31,  2005 was $6,013,013, compared to $10,295,799for 2004, a decrease of $4,282,786 or 42%. Gross profit as apercentage of revenue for the year ended December  31,2005 was 24% compared to 34% for December31,  2004. Gross profit percentage declined for a number ofreasons, including rework costs related to a first article rejection,increased factory overhead related to our move to new, largerfacilities and related utility and maintenance costs, and higherindirect labor costs. The increased level of factory overhead andindirect labor have been maintained in anticipation of releases oncontracts, including the C-5 TOP contract, that we already have beenawarded and the receipt of any additional awards on some of our majoroutstanding bids. If these events are not forthcoming, we plan onreassessing this position.

Selling, general andadministrative expenses. Selling, general and administrativeexpenses for the year ended December  31,  2005 were$3,342,729, compared to $3,424,953 for 2004, a decrease of $82,224, or2%. This decrease reflects a decrease of approximately $240,000in officers’ bonuses, offset by an increase in expenses relatedto our efforts to sell to prime contractors.

Income fromoperations. Income from operations for the year endedDecember  31,  2005 was $2,670,284 compared to income fromoperations of $6,870,846 for the year ended December  31,2004, a decrease of $4,200,562, or 61%. The decrease was due tothe decrease in gross profit decribed earlier and increases in expensesrelated to our efforts to sell to prime contractors.

InterestExpense. Interest expense for the year ended December31,  2005 was $18,314, compared to $8,109 for 2004, an increaseof $10,205, or 126%. Interest expense is considered immaterialto our operations in both 2005 and 2004.

Income fromcontinuing operations. Income from continuing operations forthe year ended December  31,  2005 was $2,657,433 comparedto income from continuing operations for the year ended December31,  2004 of $6,870,031, a decrease of $4,212,598, or 61%.The decrease was due to the decrease in gross profit described earlierand increases in expenses related to our efforts to sell to primecontractors. The 2005 results include income taxes computed at aneffective tax rate of 43% compared to 26% for 2004. Theincrease was the result of us utilizing our remaining state netoperating loss carryforward at the beginning of 2005 and utilizing allof our federal net operating loss carry forward in 2004. Basic incomeper share for the year ended December  31,  2005 was $0.28on an average of 5,422,101 shares outstanding, compared to $0.94 pershare from continuing operations on an average of 5,386,595 sharesoutstanding for the year ended December  31,  2004.

13

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Year Ended December  31,2004 as Compared to the Year Ended December  31,2003

Revenue. Our revenue for the year endedDecember  31,  2004 was $30,269,030 compared to $27,288,035for 2003, representing an increase of $2,980,995 or 11%. Thisincrease was due to our company winning more than 200 new contractawards in 2004 totaling $17.9  million.

Grossprofit. Gross profit for the year ended December31,  2004 was $10,295,799, compared to $9,004,783 for 2003, anincrease of $1,291,016 or 14%. Gross profit as a percentage ofrevenue for the year ended December  31,  2004 was34% compared to 33% for the same period last year, dueprimarily to a more profitable sales mix.

Selling, general andadministrative expenses. Selling, general and administrativeexpenses for the year ended December  31,  2004 were$3,424,953, compared to $3,177,173 for 2003, an increase of $247,780,or 8%. This increase is primarily attributable to costs ofapproximately $102,000 incurred due to the relocation of ourfacilities, an increase of $80,000 in salaries due to the hiring ofadditional administrative employees and an increase of approximately$70,000 in travel costs.

Interest Expense. Interestexpense for the year ended December  31,  2004 was $8,109,compared to $148,006 for 2003, a decrease of $139,897, or 95%.The decrease in interest expense resulted from the repayment of debtusing the proceeds of our February  2003 publicoffering.

Income from continuing operations. Incomefrom continuing operations for the year ended December31,  2004 was $6,870,031 compared to income from continuingoperations for the year ended December  31,  2003 of$8,127,043 which includes a gain on extinguishment of debt of$2,431,233, a decrease of $1,257,012 or 15%. The 2004 resultsinclude income taxes computed at an effective tax rate of 26%because we utilized all of our remaining net operating losscarryforward for federal income tax purposes, approximately $4,400,000.Basic income per share for the year ended December  31,2004 was $0.94 on an average of 5,386,595 shares outstanding, comparedto $1.63 per share from continuing operations on an average of4,872,255 shares outstanding for the year ended December31,  2003.

Liquidity and CapitalResources

General

At December  31,  2005, wehad working capital of $26,029,916 compared to $24,396,402 atDecember  31,  2004, an increase of $1,633,514, or7%.

Cash Flow

A large portion of our cash is usedin paying for materials and processing costs associated with contractsthat are in process and which do not provide for progress payments.Additionally, contracts that permit us to bill on a progress basis mustbe classified as ‘‘on time’’ for us toapply for progress payments. Due to some delays in deliveries fromthree of our approximately 100 vendors, we are presently late on two ofour contracts, which precludes us from applying for progress paymentson these contracts. During the year ended December  31,2005, we incurred approximately $2,358,000 of costs related tocontracts in excess of the amounts that we were permitted to bill onsuch contracts. These costs are components of ‘‘Costs andestimated earnings in excess of billings on uncompletedcontracts’’ on our balance sheet and represent theaggregate costs and related earnings for uncompleted contracts forwhich the customer has not yet been billed. These costs and earningsare recovered upon shipment of products and presentation of billings inaccordance with contract terms.

Because the POC method ofaccounting requires us to use estimates in determining revenues, costsand profits and in assigning the amounts to accounting periods, therecan be a significant disparity between earnings (both for accountingand taxes) as reported and actual cash received by us during anyreporting period. Accordingly, it is possible that we may have ashortfall in our cash flow and may need to borrow money until thereported earnings materialize to actual cash receipts.

JP MorganChase Credit Facility

In September  2003, we entered intoa three-year, $5  million revolving credit facility with JPMorgan Chase Bank, secured by our assets. The facility specifiesinterest rates that range between the 

14

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Prime Rate and 225 basis points over LIBOR,depending on certain terms and conditions. The facility requires us tomaintain specified levels of working capital and other financial ratiosas defined. At December  31,  2005, we were in compliancewith all the covenants related to this facility. As of December31,  2005, we had not borrowed any funds pursuant to thisfacility. The Company’s line of credit with JPMorgan Chaseexpires in September  2006. We anticipate either extending theline or securing a new line of credit prior to September2006.

We believe that our existing resources, together with theavailability under our credit facility, will be sufficient to meet ourcurrent working capital needs for at least the next 12 months.

Contractual Obligations

The table below summarizesinformation about our contractual obligations as of December31,  2005 and the effects these obligations are expected to haveon our liquidity and cash flow in the futureyears.

|                                   |  |                           |           |                 |  |           |           |           |  |              |           |        |  |        |         |        |  |        |           |        |  |  |
|-----------------------------------|--|---------------------------|-----------|-----------------|--|-----------|-----------|-----------|--|--------------|-----------|--------|--|--------|---------|--------|--|--------|-----------|--------|--|--|
|                              |  | PaymentsDue By Period ($) |
| ContractualObligations            |  | Total                     |           | Less than1 year |  | 1-3 years |           | 4-5 years |  | After 5years |
| Short-TermDebt                    |  |                      | -0-       |            |  |      | -0-       |      |  |         | -0-       |   |  |   | -0-     |   |  |   | -0-       |   |
| CapitalLeaseObligations           |  |                      | 129,805   |            |  |      | 87,617    |      |  |         | 42,188    |   |  |   | -0-     |   |  |   | -0-       |   |
| OperatingLeases                   |  |                      | 3,923,955 |            |  |      | 386,250   |      |  |         | 807,610   |   |  |   | 856,794 |   |  |   | 1,873,301 |   |
| EmploymentAgreementCompensation** |  |                      | 1,329,020 |            |  |      | 895,870   |      |  |         | 433,150   |   |  |   | -0-     |   |  |   | -0-       |   |
| TotalContractual CashObligations  |  |                      | 5,382,780 |            |  |      | 1,369,737 |      |  |         | 1,282,948 |   |  |   | 856,794 |   |  |   | 1,873,301 |   |
|                                   |

|  |
|--|
|  |  |
|  |

** Theemployment agreements provide for bonus payments that are excluded fromthese amounts.

Inflation

Inflation historically has nothad a material effect on our operations.

|               |                                                          |
|---------------|----------------------------------------------------------|
| Item7A.  | QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUTMARKET RISK |

None

|               |                                            |
|---------------|--------------------------------------------|
| Item 8.  | FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA |

(a) FinancialStatements

This information appears following Item 15 of thisReport and is incorporated herein by reference.

|              |                                                                                     |
|--------------|-------------------------------------------------------------------------------------|
| Item9.  | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ONACCOUNTING AND FINANCIAL DISCLOSURE |

None

|               |                         |
|---------------|-------------------------|
| Item9A.  | CONTROLS AND PROCEDURES |

An evaluation ofthe effectiveness of our disclosure controls and procedures was made asof December  31,  2005 under the supervision and with theparticipation of our management, including our chief executive officerand chief financial officer. Based on that evaluation, we concludedthat our disclosure controls and procedures were not effective inrecording, processing, summarizing and reporting, on a timely basis,information required to be disclosed by us in reports that we file orsubmit under the Securities Exchange Act of 1934 as a result of thematerial weakness in our internal control over financial reportingdescribed below.

15

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In the process of conducting our audit forthe year ended December  31,  2005, J.H. Cohn LLP, ourindependent registered public accounting firm(‘‘JHC’’), identified that (i) costsincurred, revenue recognized and billings to the customer on certaincontracts during the year ended December  31,  2005 werenot recognized properly due to an error made during our conversion froma manual accounting system to MAPICS, an enterprise-wide electronicprocessing system, and that (ii) there had been a misapplication ofpercentage of completion accounting with respect to our commercialcontract. Our internal control over reviewing and recording revenuerecognition did not detect this error.

As part of thecommunications by JHC with our audit committee with respect toJHC’s audit procedures for the year ended December31,  2005, JHC informed the audit committee that thesedeficiencies constituted a material weakness under standardsestablished by the Public Company Accounting Oversight Board, or PCAOB.However, JHC confirmed to the audit committee that they would still beable to rely on their previously completed interim review of ourfinancial statements.

In order to remediate this materialweakness, our senior management will monitor all costs and controltotal amounts generated through the MAPICS system that relate tobillings and expenses and cross check such amounts to the generalledger and the applicable master job cost sheet. These remedial actionshave not been in place long enough to have been tested and will beassessed for their adequacy on a continuous basis.

Except asdescribed above, during the most recently completed fiscal quarter,there has been no change in our internal control over financialreporting that has materially affected, or is reasonably likely tomaterially affect, our internal control over financialreporting.

|                |                  |
|----------------|------------------|
| Item 9B.  | OTHERINFORMATION |

None

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PARTIII

Item 10.    DIRECTORS AND EXECUTIVE OFFICERS OF THEREGISTRANT

Our directors and executive officers are asfollows:

|                            |  |        |  |                                                   |  |  |  |  |  |  |
|----------------------------|--|--------|--|---------------------------------------------------|--|--|--|--|--|--|
| Name                       |  | Age    |  | Position                                          |
| EricRosenfeld(1)(2)(4)     |  | 48     |  | Chairmanof the Board of Directors (non-executive) |
| Edward J.Fred (1)          |  | 47     |  | Chief Executive Officer, President andDirector    |
| Arthur August (1)          |  | 71     |  | Chairman Emeritus andDirector                     |
| Vincent Palazzolo          |  | 42     |  | ChiefFinancial Officer                            |
| Walter Paulick(2)(3)(4)    |  | 59     |  | Director                                          |
| KennethMcSweeney (2)(3)(4) |  | 74     |  | Director                                          |
| A.C. Providenti(3)         |  | 68     |  | Director                                          |
| KeyEmployee                |  |   |  |                                              |
| FrankFunicelli             |  | 63     |  | Senior Vice President, BusinessDevelopment        |
|                            |

|  |
|--|
|  |  |
|  |

|           |                                       |
|-----------|---------------------------------------|
| (1)  | Memberof strategic planningcommittee. |

|           |                                  |
|-----------|----------------------------------|
| (2)  | Member of compensationcommittee. |

|           |                           |
|-----------|---------------------------|
| (3)  | Member of auditcommittee. |

|           |                                |
|-----------|--------------------------------|
| (4)  | Member of nominatingcommittee. |

Eric Rosenfeld has been the non-executivechairman of our board of directors since January  2005 and adirector and chairman of our strategic planning committee sinceApril  2003. Mr.  Rosenfeld has been the president andchief executive officer of Crescendo Partners, L.P., a New York-basedinvestment firm, since its formation in November  1998. Prior toforming Crescendo Partners, Mr.  Rosenfeld had been managingdirector at CIBC Oppenheimer and its predecessor company Oppenheimer& Co., Inc. for fourteen years. He was also chairman of the boardof Spar Aerospace Limited, a company that provides repair and overhaulservices for aircraft and helicopters used by governments andcommercial airlines, from May  1999 through November  2001,until its sale to L-3 Communications. Since April  2004,Mr.  Rosenfeld also has been chairman, president and chiefexecutive officer of Arpeggio Acquisition Corporation, a company thathas entered into a merger agreement with Hill International, Inc., aconstruction management firm. He is also a director of Sierra SystemsGroup, Inc., a Toronto Stock Exchange-listed information technology,management consulting and systems integration firm based in Canada; adirector of Emergis Inc., a Toronto Stock Exchange-listed company thatenables the electronic processing of transactions in the finance andhealthcare industries, the chairman of Computer Horizons Corp., aNasdaq-listed company that provides information technology services tocorporations. He was also a director of Geac Computer CorporationLimited which was a Toronto Stock Exchange and Nasdaq-listed companyuntil its acquisition by Golden Gate Capital in March, 2006. Mr.Rosenfeld recently served as a director of AD OPT Technologies Inc.,which was a Toronto Stock Exchange-listed company until it was acquiredby Kronos Inc. in November  2004. Mr.  Rosenfeld recentlyserved as a director and head of the special committee of PivotalCorporation, a Canadian based customer relations management softwarecompany that was sold to chinadotcom in February  2004.Mr.  Rosenfeld is a regular guest lecturer at Columbia BusinessSchool and he is a member of the faculty at the Directors College. Hehas served on numerous panels at Queen’s University Business LawSchool Symposia, McGill Law School and the World Presidents’Organization. He also has been a regular guest host on CNBC. Mr.Rosenfeld received an M.B.A. from Harvard University and an A.B. degreein economics from Brown University.

Edward J. Fred hasbeen an officer since February  1995 and a member of our board ofdirectors since January  1999. He was our controller fromFebruary  1995 to April  1998, when he was appointed chieffinancial officer, a position he held until June  2003 and thenfrom January  2004 to May  2004. He 

17

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was executive vice president from May2000 until December  2001 and was appointed to the position ofpresident in January  2002 and to the position of chief executiveofficer in January  2003. For approximately ten years prior tojoining our company, Mr.  Fred served in various positions forthe international division of Grumman, where he last held the positionof controller. Mr.  Fred holds a Bachelor of BusinessAdministration in Accounting from Dowling College and an Executive MBAfrom Hofstra University.

Arthur August, one of ourfounders, has been our chairman emeritus since January  2005 anda director since January  1980. From January  1980 untilDecember  2004, he was chairman of the board of directors and wasour president until December  2001 and our chief executiveofficer until December  2002. From 1956 to 1979, Mr.August was employed by Northrop Grumman Corporation where he last heldthe position of deputy director. Mr.  August holds a certificatein Aeronautical Design from the Academy of Aeronautics, a Bachelor ofScience degree in Industrial Management from C. W. Post College, aMasters degree in Engineering from New York University and is agraduate of the Program for Management Development at the HarvardGraduate School of Business.

Vincent Palazzolo has beenour chief financial officer since May  2004. From December2003 to May  2004, he was employed by J. H. Cohn LLP as an auditpartner. From 1988 through November  2003, Mr.  Palazzolowas employed by Goldstein Golub Kessler LLP(‘‘GGK’’), where he was an audit partnerfrom September  1999 through November  2003. While employedby GGK, from September  1999 to November  2003, Mr.Palazzolo also served as a managing director of American Express Taxand Business Services, Inc. Mr.  Palazzolo holds a Bachelor ofBusiness Administration in Accounting from Hofstra University is acertified public accountant and is a member of the American Instituteof Certified Public Accountants and the New York State Society ofCertified Public Accountants.

Walter Paulick has been adirector since April  1992 and chairman of our nominatingcommittee since March  2004. Mr.  Paulick is currently aself-employed development consultant. From 1982 to November1992, Mr.  Paulick was a vice president of Parr DevelopmentCompany, Inc., a real estate development company. From 1980 to 1982,Mr.  Paulick was employed by Key Bank, where he last held theposition of vice president. From 1971 to 1980, Mr.  Paulick was avice president of National Westminster U.S.A. Mr.  Paulick holdsan associate degree in Applied Science from Suffolk Community Collegeand Bachelor of Business Administration from DowlingCollege.

Kenneth McSweeney has been a director sinceFebruary  1998 and chairman of our compensation committee sinceApril  2003. Mr.  McSweeney has been an independentconsultant to the aerospace industry since January  1995. From1961 to 1995, Mr.  McSweeney served in various managementpositions for Northrop Grumman Corporation, most recently as the vicepresident of its Aerostructures Division and a director of businessdevelopment for the Mideast and gulf coast region. Mr.  McSweeneyhas extensive experience in aerostructures and logistics supportproducts and is a licensed professional engineer in New York State. Heholds Bachelor and Master of Science degrees in Electrical Engineeringfrom the Polytechnic Institute of Brooklyn and a Masters degree inBusiness Management from CW Post College. He also completed theExecutive Development Program at the Cornell School of Business andPublic Administration.

A. C. Providenti has been adirector and chairman of our audit committee since February2003. Since 1984, Mr.  Providenti has served as president of A.C.Providenti & Associates, Ltd., a consulting and strategic advisoryfirm. From 1977 to 1984, Mr.  Providenti served as senior vicepresident for finance and administration and as an executive committeemember for Northville Industries Corp., a multinational petroleumstorage, trading and distribution company. Mr.  Providenti holdsa Bachelor’s degree in Accounting from St. Francis College and aMasters of Business Administration from FordhamUniversity.

Frank Funicelli has been with us sinceMarch  1988, serving as our Director of Operations from 1988 to1995, our vice president of operations from 1995 to 2002, and our vicepresident of business development from 2002 to December  2003 andbecame our senior vice president, business development inJanuary  2004. From 1977 to 1988, was employed by FairchildRepublic Company where he served as Chief Industrial Engineer,Manufacturing Engineering Manager and Director of 

18

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Program Planning and Control. From 1966 to1977, he was with Grumman Aerospace where he served as IndustrialEngineer, Manager of Manufacturing Planning and Control and ProgramPlanning and Resource Control Manager. Mr.  Funicelli holds aBachelor of Science degree in Industrial Engineering from PrattInstitute and a Master of Science in Management Engineering from C.W.Post College.

Our board of directors is divided into threeclasses with only one class of directors being elected in each year andeach class serving a three-year term. The term of office of the secondclass of directors (Class II), consisting of Walter Paulick and EricRosenfeld, will expire at our annual meeting in 2006. The term ofoffice of the third class of directors (Class III), consisting ofArthur August and Edward J. Fred, will expire at our annual meeting in2007. The term of office of the first class of directors (Class I),consisting of Kenneth McSweeney and A.C. Providenti, will expire at ourannual meeting in 2008.

Section 16(a) Beneficial OwnershipReporting Compliance

Section 16(a) of the Securities ExchangeAct of 1934 requires our officers, directors and persons who own morethan ten percent of a registered class of our equity securities to filereports of ownership and changes in ownership with the Securities andExchange Commission. Officers, directors and ten percent stockholdersare required by regulation to furnish us with copies of all Section16(a) forms they file. Based solely on copies of such forms received orwritten representations from certain reporting persons that no Form 5swere required for those persons, we believe that, during the fiscalyear ended December  31,  2005, all filing requirementsapplicable to our officers, directors and greater than ten percentbeneficial owners were complied with.

Audit Committee FinancialExpert

Currently, our audit committee is comprised of WalterPaulick, Kenneth McSweeney and A.C. Providenti, with Mr.Providenti serving as the chairman of the audit committee. The board ofdirectors believes that Mr.  Providenti is an‘‘audit committee financial expert’’ (asdefined in Regulation 229.401(h) of Regulation S-K). The board ofdirectors also believes that Mr.  Providenti would be consideredan ‘‘independent’’ director under Item7(d)(3)(iv) of Schedule 14A of the Securities Exchange Act of1934.

Code of Ethics

In March  2004, our board ofdirectors adopted a written code of ethics that applies to ourdirectors, officers and employees. A copy of our code of ethics wasfiled as Exhibit 14 to our Annual Report on Form 10-KSB for the yearended December  31,  2003. Requests for copies of our codeof ethics should be sent in writing to CPI Aerostructures, Inc., 60Heartland Blvd., Edgewood, NY  11717, Attention: CorporateSecretary.

Item 11.    EXECUTIVE COMPENSATION

Thefollowing table sets forth all compensation awarded to, earned by, orpaid for all services rendered to us during the fiscal years endedDecember  31,  2005, 2004 and 2003, by our chief executiveofficer and our other executive officers whose total compensationexceeded $100,000 during the year ended December  31,  2005(‘‘Named ExecutiveOfficers’’).

19

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|                                                  |  |        |      |        |  |        |         |                                                             |  |        |         |        |  |        |        |        |  |  |
|--------------------------------------------------|--|--------|------|--------|--|--------|---------|-------------------------------------------------------------|--|--------|---------|--------|--|--------|--------|--------|--|--|
| Nameand PrincipalPosition                        |  | Year   |      | Salary |  | Bonus  |         | Long-TermCompensation Securities Underlying Options/SARs(#) |
| Edward J.Fred                                    |  |   | 2005 |   |  | $      | 250,706 |                                                        |  |   | -0-     |   |  |   | -0-    |   |
|     ChiefExecutiveOfficer    |  |   | 2004 |   |  | $      | 243,908 |                                                        |  | $      | 203,041 |   |  |   | -0-    |   |
|     President                |  |   | 2003 |   |  | $      | 228,242 |                                                        |  | $      | 174,800 |   |  |   | -0-    |   |
| VincentPalazzolo                                 |  |   | 2005 |   |  | $      | 172,351 |                                                        |  |   | -0-     |   |  |   | -0-    |   |
|     ChiefFinancialOfficer(1) |  |   | 2004 |   |  | $      | 110,485 |                                                        |  | $      | 31,725  |   |  |   | 50,000 |   |
|                                             |  |   | 2003 |   |  |   | -0-     |                                                        |  |   | -0-     |   |  |   | -0-    |   |
|                                                  |

|  |
|--|
|  |  |
|  |

|     |                                                                                                                  |
|-----|------------------------------------------------------------------------------------------------------------------|
| (1) | Mr.Palazzolo became employed as our chief financial officer on May17,  2004 at an annual base salary of$175,000. |

Option Grants in 2005

We did notgrant any options to employees in the fiscal year ended December31,  2005.

Aggregated Option Exercises and Fiscal Year EndOptionValues

|                  |  |                                |     |                   |  |                                                                                                    |     |                                                                                                 |  |           |  |              |  |  |  |  |  |  |
|------------------|--|--------------------------------|-----|-------------------|--|----------------------------------------------------------------------------------------------------|-----|-------------------------------------------------------------------------------------------------|--|-----------|--|--------------|--|--|--|--|--|--|
| Name             |  | SharesAcquired on Exercise (#) |     | Value Realized($) |  | Numberof Securities Underlying Unexercised Options atDecember  31,  2005 Exercisable/Unexercisable |     | Value of Unexercised In-The-MoneyOptions At December  31,  2005($)Exercisable/ Unexercisable(1) |
| Edward J.Fred    |  |                           | -0- |              |  |                                                                                               | -0- |                                                                                            |  | 398,334/0 |  | $2,645,286/0 |
| VincentPalazzolo |  |                           | -0- |              |  |                                                                                               | -0- |                                                                                            |  | 50,000/0  |  | $0/0         |
|                  |

|  |
|--|
|  |  |
|  |

|     |                                                                                                                                                                 |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (1) | Thesevalues are based on the difference between the closing sale price ofour common stock on December  31,  2005 of $9.94 and theexercise price of the options. |

EmploymentAgreements

Edward J. Fred

In February2005, we entered into an amended and restated employment agreement withEdward J. Fred, which provides for Mr.  Fred to serve as ourPresident and Chief Executive Officer until December  31,2007. Mr.  Fred’s annual base salary was $252,000 for 2005and increased to $267,120 on January  1,  2006 and willincrease to $283,150 on January  1,  2007. In addition,Mr.  Fred is eligible to receive an annual bonus. However, forthe year ended December  31,  2005, Mr.  Fred did notreceive a bonus. Mr.  Fred’s annual bonus is calculatedbased on changes in our revenues and earnings before interest, taxes,depreciation and amortization (‘‘EBITDA’’)from the prior year. 25% of the bonus amount is determined byrevenues and 75% by EBITDA. To the extent that a 10%annual increase in revenues and EBITDA from the prior year is achieved,Mr.  Fred is entitled to a target annual bonus equal to65% of his annual base salary. Should the revenue and/or EBITDAlevels fall short of or exceed a 10% increase from the prioryear, Mr.  Fred’s bonus will decrease or increase bypredetermined percentages. If there is more than a 15% annualdecrease in EBITDA or revenues, no EBITDA bonus or revenue bonus willbe paid. If there is an annual increase of 100% or more inEBITDA or revenues, Mr.  Fred’s  EBITDA bonus orrevenue bonus will be 75% more than the target annual bonus.Both bonuses will be adjusted pro rata if EBITDA and/or revenues fallin between two designated percentages. The first $140,000 of bonus willbe paid in cash and the balance will be paid half in cash and half inshares of our common stock. The shares of common stock will be valuedat the average of the last sale prices of the common stock for fiveconsecutive trading days ending two trading days before issuance.Mr.  Fred’s annual bonus for the years endingDecember  31,  2006 and 2007 will be calculated in the samemanner as the December  31,  2005 bonus was calculated.Pursuant to the terms of Mr.  Fred’s employment agreement,if a change of control (as such term is defined in the agreement)occurs prior to a termination by us without‘‘cause’’ or by Mr.  Fred for‘‘good reason’’ (as such terms are definedin the agreement), we must pay him a lump sum equal to three times the

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total compensation (including salary andbonus) earned by him during the last full calendar year of hisemployment. Mr.  Fred also has agreed not to compete with usduring the term of his employment and for two yearsthereafter.

Arthur August

Under the terms of Mr.August’s employment agreement, as amended, effectiveJanuary  2005, he became our chairman emeritus and will serve inthat position until December  31,  2006 and receive anannual base salary of $60,000. For the year ended December31,  2004, Mr.  August received an annual bonus equal to2% of our consolidated net income. Mr.  August was notentitled to receive any bonus for the year ended December31,  2005 and is not entitled to receive a bonus for the yearending December  31,  2006. Mr.  August is requiredto devote only such time to our business as he, in his sole discretion,deems necessary. Pursuant to the terms of Mr.  August’semployment agreement, if a change of control (as such term is definedin the agreement) occurs prior to a termination by us without‘‘cause’’ or by Mr.  August for‘‘good reason’’ (as such terms are definedin the agreement), we must pay him a lump sum equal to three times thetotal compensation (including salary and bonus) earned by him duringthe last full calendar year of his employment. Mr.  August hasagreed not to compete with us during the term of his employment and forfive years thereafter. As consideration for his agreement not tocompete with us for an extended period of time, we agreed to payMr.  August $300,000 in five, equal annual installments of$60,000 commencing on January  1,  2007.

VincentPalazzolo

In February  2005, we entered into an amendedand restated employment agreement with Vincent Palazzolo, whichprovides for Mr.  Palazzolo to serve as our Chief FinancialOfficer until December  31,  2006. Mr.Palazzolo’s annual base salary was $175,000 until July31,  2005 and then increased to $183,750 on August1,  2005. In addition, Mr.  Palazzolo is eligible toreceive an annual bonus. However, for the year ended December31,  2005, Mr.  Palazzolo did not receive a bonus.Mr.  Palazzolo’s annual bonus is calculated based onchanges in our revenues and EBITDA from the prior year. 25% ofthe bonus amount is determined by revenues and 75% by EBITDA. Tothe extent that a 10% annual increase in revenues and EBITDAfrom the prior year is achieved, Mr.  Palazzolo will be entitledto a target annual bonus equal to 45% of his annual base salary.Should the revenue and/or EBITDA levels fall short of or exceed a10% increase from the prior year, Mr.  Palazzolo’sbonus will decrease or increase by predetermined percentages. If thereis more than a 15% annual decrease in EBITDA or revenues, noEBITDA bonus or revenue bonus will be paid. If there is an annualincrease of 100% or more in EBITDA or revenues, Mr.Palazzolo’s  EBITDA bonus or revenue bonus will be75% more than the target annual bonus. Both bonuses will beadjusted pro rata if EBITDA and/or revenues fall in between twodesignated percentages. The first $75,000 of bonus will be paid in cashand the balance will be paid half in cash and half in shares of ourcommon stock. The shares of common stock will be valued at the averageof the last sale prices of the common stock for five consecutivetrading days ending two trading days before issuance. Mr.Palazzolo’s annual bonus for the year ending December31,  2006 will be calculated in the same manner as theDecember  31,  2005 bonus was calculated. Pursuant to theterms of Mr.  Palazzolo’s employment agreement, if achange of control (as such term is defined in the agreement) occursprior to a termination by us without‘‘cause’’ or by Mr.  Palazzolo for‘‘good reason’’ (as such terms are definedin the agreement), Mr.  Palazzolo may elect to receive a lump sumequal to $50,000 within 10 days of such election in lieu of hiscompensation and benefits under the employment agreement. Mr.Palazzolo also has agreed not to compete with us during the term of hisemployment and for two years thereafter.

CompensationArrangements for Directors

Each of our non-employee directorsreceives an annual cash fee of $10,000 (payable quarterly) and isgranted options to purchase 10,000 common shares on April1st of each year. The chairman of the audit committeereceives an additional annual cash fee of $20,000 (payable quarterly)and is granted an additional 20,000 options on April1st of each year and the chairman of the strategic

21

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planning committee receives an additionalcash fee of $10,000 payable quarterly. The chairman of the boardreceives an additional cash fee of $40,000 (payable quarterly) and isgranted an additional 25,000 options on January  1stof each year. Our directors will continue to be reimbursed for thereasonable expenses they incur in attending meetings.

EmployeeBenefit Plans

In October  2000, we adopted the Greit Planfor the purpose of offering senior management a deferred compensationdeath benefit plan that would provide a tax-free benefit for seniormanagement and which would be tax-neutral to us. Pursuant to the plan,we made a non-interest bearing loan to Arthur August in the amount of$150,000, which Mr.  August used to purchase a Greit Plan. Thisplan has since been terminated and the surrender value of the GreitPlan has been returned to Mr.  August. Mr.  August hasplaced the proceeds from the surrender value in an annuity in our name,which will appreciate to at least $150,000 by September  2011 inorder to repay the loan made to him. Mr.  August also assigned tous an insurance policy on his life in the amount of $150,000 and agreedto maintain it until the date upon which the annuity matures.Accordingly, the loan to Mr.  August will be repaid upon thematurity date of the annuity or upon the death of Mr.  August,whichever occurs first.

Stock Options

Performance EquityPlan 2000

The Performance Equity Plan 2000 authorizes the grantof 1,230,000 stock options, stock appreciation rights, restrictedstock, deferred stock, stock reload options, and other stock basedawards. As of December  31,  2005, options to purchase anaggregate of 860,000 common shares had been granted under this plan, ofwhich 750,750 options remain outstanding at exercise prices rangingfrom $1.20 to $10.24 per share. As of March  24,  2006,options to purchase 373,025 common shares remain available forgrant.

1998 Performance Equity Plan

The 1998 PerformanceEquity Plan authorizes the grant of 463,334 stock options, stockappreciation rights, restricted stock, deferred stock, stock reloadoptions, and other stock based awards. As of December  31,2005, options to purchase an aggregate of 546,002 common shares hadbeen granted, of which 208,334 remain outstanding at exercise pricesranging from $2.53 to $11.31 per  share. As of March24,  2006, options to purchase 666 common shares remain availablefor grant.

1995 Stock Option Plan

The 1995 Employee StockOption Plan authorizes the grant of 200,000 stock options and stockappreciation rights. As of December  31,  2005, options topurchase an aggregate of 419,000 common shares had been granted, ofwhich 155,001 remain outstanding at exercise prices ranging from $6.27to $10.48 per share. As of March  24,  2006, options topurchase 285 additional common shares remain available forgrant.

1992 Employee Stock Option Plan

The 1992 EmployeeStock Option Plan authorized the grant of 83,334 options, all of whichhave been granted and 41,002 shares remain outstanding at exerciseprices ranging from $2.59 to $6.27 per  share. No more shares maybe granted under this plan.

Other Options and Warrants

OnFebruary  19,  2003, we issued to EarlyBirdCapital, Inc.(and its designees) five-year warrants to purchase an aggregate of200,000 common shares as compensation for acting as underwriter for ourFebruary  2003 public offering. The exercise price of thewarrants is $4.40 per share. As of December  31,  2005,warrants to purchase 5,000 common shares had beenexercised.

22

----

|                |                                                                                              |
|----------------|----------------------------------------------------------------------------------------------|
| Item 12.  | SECURITYOWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATEDSTOCKHOLDER MATTERS |

The table and accompanying footnotes setforth certain information as of March  24,  2006, withrespect to the ownership of our common sharesby:

|  |              |                                                                             |
|--|--------------|-----------------------------------------------------------------------------|
|  | •  | each person or group whobeneficially owns more than 5% of our commonshares; |

|  |              |                       |
|--|--------------|-----------------------|
|  | •  | each of ourdirectors; |

|  |              |                                          |
|--|--------------|------------------------------------------|
|  | •  | each of our Named ExecutiveOfficers; and |

|  |              |                                                        |
|--|--------------|--------------------------------------------------------|
|  | •  | all of our directors andexecutive officers as a group. |

A person is deemed to be thebeneficial owner of securities that can be acquired by the personwithin 60 days of March  24,  2006 upon the exercise ofwarrants or options. Accordingly, common shares issuable upon exerciseof options and warrants that are currently exercisable or exercisablewithin 60 days of March  24,  2006 have been included inthe table with respect to the beneficial ownership of the person owningthe options or warrants, but not with respect to any otherpersons.

|                                                                                    |  |                            |           |                     |  |        |      |         |  |  |
|------------------------------------------------------------------------------------|--|----------------------------|-----------|---------------------|--|--------|------|---------|--|--|
| Nameand Address of Beneficial Owner                                                |  | SharesBeneficiallyOwned(1) |           | Percent of Class(2) |
| Edward J.Fred(3)                                                                   |  |                       | 403,434   | (4)            |  |   | 6.9  | %  |
| ArthurAugust(3)                                                                    |  |                       | 604,419   | (5)            |  |   | 10.4 | %  |
| VincentPalazzolo(3)                                                                |  |                       | 50,000    | (6)            |  |   |      | *  |
| WalterPaulick(3)                                                                   |  |                       | 35,000    | (7)            |  |   |      | *  |
| KennethMcSweeney(3)                                                                |  |                       | 38,334    | (8)            |  |   |      | *  |
| A.C.Providenti(3)                                                                  |  |                       | 70,000    | (9)            |  |   | 1.3  | %  |
| EricRosenfeldc/o Crescendo Partners10 East53rd Street, 36th floorNew York, NY10022 |  |                       | 1,004,334 | (10)           |  |   | 18.2 | %  |
| MidwoodCapital Management, LLC One Washington Mall,8th FloorBoston, MA02108        |  |                       | 483,750   | (11)           |  |   | 8.9  | %  |
| RutabagaCapital Management64 Broad Street, 3rdFloorBoston, MA02109                 |  |                       | 580,300   | (12)           |  |   | 10.7 | %  |
| Alldirectors and executive officers as a group (sevenpersons)                      |  |                       | 2,205,521 | (12)           |  |   | 34.0 | %  |
|                                                                                    |

|  |
|--|
|  |  |
|  |

|   |              |
|---|--------------|
| * | Lessthan 1%. |

|     |                                                                                                                                                                                                                              |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (1) | Unless otherwisenoted, we believe that all persons named in the table have sole votingand investment power with respect to all common shares beneficiallyowned by them, subject to community property laws, whereapplicable. |

|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | There are 5,447,042shares currently issued and outstanding. Each person beneficially ownsa percentage of our outstanding common shares equal to a fraction, thenumerator of which is the number of common shares held by such personplus the number of common shares that he can acquire within 60 days ofMarch  24,  2006 upon the exercise or conversion ofoptions, warrants or convertible securities and the denominator ofwhich is 5,447,042 (the number of common shares currently outstanding)plus the number of shares he can so acquire during such 60-dayperiod. |

23

----

|     |                                                                                                                                                           |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------|
| (3) | Unlessotherwise noted, the business address of each of the following personsis c/o CPI Aerostructures, Inc., 60 Heartland Blvd., Edgewood, New York11717. |

|     |                                                                                                |
|-----|------------------------------------------------------------------------------------------------|
| (4) | Includes 398,334 commonshares that Mr.  Fred has the right to acquire upon exercise ofoptions. |

|     |                                                                                                                                                                                                                                                                                                                              |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (5) | Includes (a) 385,000common shares that Mr.  August has the right to acquire uponexercise of options and (b) 3,000 common shares are owned by Mr.August’s wife. Excludes an aggregate of 3,034 common sharesowned by Mr.  August’s adult children, all of which sharesMr.  August disclaims beneficial ownership. |

|     |                                                                                             |
|-----|---------------------------------------------------------------------------------------------|
| (6) | Includes common shares that Mr.Palazzolo has the right to acquire upon exercise of options. |

|     |                                                                                                                                                                                                           |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (7) | Represents common shares that Mr.Paulick has the right to acquire upon exercise of options. Does notinclude 10,000 common shares underlying options that will be granted toMr.  Paulick on April  1,2006. |

|     |                                                                                                                                                                                                                     |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (8) | Includes 25,000 commonshares that Mr.  McSweeney has the right to acquire upon exerciseof options. Does not include 10,000 common shares underlying optionsthat will be granted to Mr.  McSweeney on April  1,2006. |

|     |                                                                                                                                                                                                                                 |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (9) | Represents common sharesthat Mr.  Providenti has the right to acquire upon exercise ofoptions. Does not include an aggregate of 30,000 common sharesunderlying options that will be granted to Mr.  Providenti onApril  1,2006. |

|      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (10) | Represents (a) 46,000common shares beneficially owned as joint tenants by Mr.Rosenfeld and his wife; (b) 883,334 shares held by Crescendo PartnersII, L.P. Series L (‘‘Crescendo PartnersII’’); and (c) 75,000 common shares that Mr.Rosenfeld has the right to acquire upon exercise of options. Mr.Rosenfeld is the senior managing member of the sole general partner ofCrescendo Partners II. Mr.  Rosenfeld disclaims beneficialownership of the shares held by Crescendo Partners II, except to theextent of his pecuniary interest therein. Does not include 10,000common shares underlying options that will be granted to Mr.Rosenfeld on April  1,2006. |

|      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (11) | Represents (a) 231,324common shares held by Midwood Capital Partners, L.P.(‘‘LP’’) and (b) 252,426 common shares heldby Midwood Capital Partners QP, L.P.(‘‘QP’’ and together with LP, the‘‘Funds’’). Midwood Capital Management LLC(‘‘Capital’’) is the sole general partnerof the Funds and, as such, has the sole authority to vote and disposeof all of the common shares held by the Funds. David E. Cohen and RossD. DeMont are the managers of Capital and as such, have sharedauthority to vote and dispose of all of the common shares held by theFunds. The foregoing information was derived from an Amendment toSchedule 13G filed with the Securities and Exchange Commission on March21,  2006. |

|      |                                                                                                                                                                 |
|------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (12) | Theinformation with respect to Rutabaga Capital Management is derived froma Schedule 13G filed with the Securities and Exchange Commission onFebruary  14,2006. |

|            |                                                                                                                                                                                                  |
|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (13)  | Includes an aggregateof 1,038,334 common shares that Messrs. Fred, August, Palazzolo,Paulick, McSweeney, Providenti and Rosenfeld have the right to acquireupon exercise of outstanding options. |

24

----

Equity Compensation PlanInformation

The following table sets forth certain informationat December  31,  2005 with respect to our equitycompensation plans that provide for the issuance of options, warrantsor rights to purchase oursecurities.

|                                                             |  |                                                                                        |           |                                                                         |  |                                                                                                                                           |      |        |  |        |         |        |  |  |
|-------------------------------------------------------------|--|----------------------------------------------------------------------------------------|-----------|-------------------------------------------------------------------------|--|-------------------------------------------------------------------------------------------------------------------------------------------|------|--------|--|--------|---------|--------|--|--|
| PlanCategory                                                |  | Number of Securities tobeIssued upon Exerciseof Outstanding Options,Warrants andRights |           | Weighted-AverageExercise Price ofOutstandingOptions,Warrants and Rights |  | Number ofSecuritiesRemaining Available forFuture Issuance underEquityCompensation Plans(excluding securitiesreflectedin the first column) |
| EquityCompensation Plans Approved by SecurityHolders        |  |                                                                                   | 1,155,087 |                                                                    |  | $                                                                                                                                         | 4.89 |   |  |   | 373,976 |   |
| EquityCompensation Plans Not Approved by SecurityHolders(1) |  |                                                                                   | 195,000   |                                                                    |  | $                                                                                                                                         | 4.40 |   |  |   | -0-     |   |
|                                                             |

|  |
|--|
|  |  |
|  |

|     |                                                                                                   |
|-----|---------------------------------------------------------------------------------------------------|
| (1) | See‘‘Stock Options — Other Options andWarrants’’ description above. |

Item13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Forinformation concerning employment agreements with, compensation of, andstock options granted to our executive officers and directors, see‘‘Item 10. ExecutiveCompensation.’’

Item 14.    PRINCIPAL ACCOUNTANTFEES AND SERVICES

Principal AccountantFees

|                   |  |        |         |        |  |        |         |        |  |  |
|-------------------|--|--------|---------|--------|--|--------|---------|--------|--|--|
|              |  | 2005   |         | 2004   |
| AuditFees(1)      |  | $      | 144,000 |   |  | $      | 125,000 |   |
| AuditRelated Fees |  |   | — |   |  |   | — |   |
| TaxFees(2)        |  |   | 24,922  |   |  |   | 20,600  |   |
| All OtherFees(3)  |  |   | 9,926   |   |  |   | 31,500  |   |
| Total             |  | $      | 178,848 |   |  | $      | 177,100 |   |
|                   |

|  |
|--|
|  |  |
|  |

|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (1) | Representsthe aggregate fees billed for professional services rendered by ourprincipal accountants for the audits of our annual financial statementsfor the years ended December  31,  2005 and December31,  2004 and review of financial statements included in ourquarterly reports on Form 10-Q or services that are normally providedby the accountant in connection with statutory and regulatory filingsor engagements for those periods. |

|     |                                                                                                                                                                                                                    |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | Represents the aggregate fees billed forprofessional services rendered by our principal accountants for thepreparation of our federal and state income tax returns for the yearsended December  31,  2005 and2004. |

|     |                                                                                                                                                                                             |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (3) | Represents the aggregate fees billedfor other professional services rendered by our principal accountants,including the audit of our 401 (K) profit sharing plan and out ofpocket expenses. |

Audit Committee Pre-Approval Policies andProcedures

In accordance with Section 10A(i) of the SecuritiesExchange Act of 1934, before we engage our independent accountants torender audit or non-audit services, the engagement is approved by ouraudit committee. Our audit committee approved all of the fees referredto in the sections entitled ‘‘Audit Fees,’’‘‘Audit-Related Fees,’’ ‘‘TaxFees’’ and ‘‘All Other Fees’’above.

25

----

PART IV

Item 15.    EXHIBITS,FINANCIAL STATEMENTSCHEDULES

|               |  |                                                                                                                                                                                                                             |  |                |  |  |  |  |  |  |
|---------------|--|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--|----------------|--|--|--|--|--|--|
| ExhibitNumber |  | Name of Exhibit                                                                                                                                                                                                             |  | No. inDocument |
| 1.1           |  | Formof Underwriting Agreement between EarlyBirdCapital, Inc. and theCompany, dated February  12,  2003.(9)                                                                                                                  |  | 1.1            |
| 3.1           |  | Certificateof Incorporation of the Company, as amended.(1)                                                                                                                                                                  |  | 3.1            |
| 3.1(a)        |  | Certificate ofAmendment of Certificate of Incorporation filed on July14,1998.(3)                                                                                                                                            |  | 3.1(a)         |
| 3.2           |  | Amended andRestated By-Laws of theCompany.(12)                                                                                                                                                                              |  | 3.2            |
| 4.7           |  | Form of Warrantissued to designees of EarlyBirdCapital, Inc., dated February19,  2003.(11)                                                                                                                                  |  | 4.7            |
| 10.1          |  | 1992Stock Option Plan.(1)                                                                                                                                                                                                   |  | 10.3           |
| 10.2          |  | 1995Employee Stock OptionPlan.(2)                                                                                                                                                                                           |  | 10.4           |
| 10.3          |  | Form of militarycontract.(1)                                                                                                                                                                                                |  | 10.7           |
| 10.4          |  | AssetPurchase Agreement, dated September  9,  1997 by and amongKolar Machine, Inc., a New York corporation, Daniel Liguori, theCompany and Kolar, Inc., a Delaware corporation and wholly-ownedsubsidiary of theCompany.(5) |  | 10.19          |
| 10.5          |  | 1998Performance EquityPlan.(3)                                                                                                                                                                                              |  | 10.28          |
| 10.6          |  | PerformanceEquity Plan 2000.(4)                                                                                                                                                                                             |  | 10.29          |
| 10.6.1        |  | Amendment to PerformanceEquity Plan2000(16)                                                                                                                                                                                 |  | 10.6.1         |
| *10.7         |  | Stock OptionAgreement, dated August  14,  2001, between Edward J. Fredand theCompany.(5)                                                                                                                                    |  | 10.35          |
| *10.8         |  | Stock OptionAgreement, dated August  14,  2001, between Arthur Augustand theCompany.(6)                                                                                                                                     |  | 10.36          |
| *10.9         |  | EmploymentAgreement, dated August  14,  2001, between Edward J. Fredand theCompany.(7)                                                                                                                                      |  | 10.38          |
| *10.10        |  | EmploymentAgreement, dated August  14,  2001, between Arthur Augustand theCompany.(7)                                                                                                                                       |  | 10.39          |
| 10.11         |  | Auction SaleAgreement among Kolar, Inc., JP Morgan Chase and JP Morgan Leasing,Inc., dated January  10,2002.(8)                                                                                                             |  | 10.40          |
| *10.12        |  | Stock OptionAgreement between the Company and Arthur August, dated June18,2002.(9)                                                                                                                                          |  | 10.55          |
| *10.13        |  | Stock OptionAgreement between the Company and Edward J. Fred, dated June18,2002.(10)                                                                                                                                        |  | 10.56          |
| 10.14         |  | Form of Merger& Acquisition Agreement, between EarlyBirdCapital, Inc. and theCompany.(11)                                                                                                                               |  | 10.26          |
| 10.15         |  | RegistrationRights Agreement between the Company and Chemical Investments datedFebruary  26,  2002, as assigned to Crescendo Partners,II.(11)                                                                               |  | 10.27          |
|               |

26

----

|               |  |                                                                                                                                          |  |                |  |  |  |  |  |  |
|---------------|--|------------------------------------------------------------------------------------------------------------------------------------------|--|----------------|--|--|--|--|--|--|
| ExhibitNumber |  | Name of Exhibit                                                                                                                          |  | No. inDocument |
| 10.15.1       |  | Schedule of OmittedDocument in the form of Exhibit 10.16, including material detail inwhich such document differs from Exhibit10.16.(11) |  | 10.27.1        |
| *10.16        |  | LetterAgreement Amending Employment Agreement between Edward J. Fred and theCompany, dated December  12,2002(11)                         |  | 10.28          |
| *10.17        |  | LetterAgreement Amending Employment Agreement, between Edward J. Fred and theCompany, dated January  1,2003.(11)                         |  | 10.29          |
| *10.18        |  | LetterAgreement Amending Employment Agreement between Arthur August and theCompany, dated January  1,2003(11)                            |  | 10.30          |
| *10.19        |  | Stock OptionAgreement between Vincent Palazzolo and the Company dated as ofMay  17,  2004(12)                                            |  | 10.22          |
| *10.20        |  | Amended and RestatedEmployment Agreement between Edward J. Fred and the Company, datedFebruary  7,  2005.(13)                            |  | 10.23          |
| *10.21        |  | Amended and RestatedEmployment Agreement between Vincent Palazzolo and the Company, datedFebruary  7,2005.(13)                           |  | 10.24          |
| *10.22        |  | LetterAgreement Amending Employment Agreement between Arthur August and theCompany, dated as of December  1,2005.(14)                    |  | 10.23          |
| 14            |  | Code of BusinessConduct andEthics(15)                                                                                                    |  | 14             |
| **21          |  | Subsidiaries ofthe Registrant.                                                                                                           |  |           |
| **23.1        |  | Consent ofJ.H. Cohn LLP                                                                                                                  |  |           |
| **23.2        |  | Consent ofGoldstein Golub Kessler LLP                                                                                                    |  |           |
| **31.1        |  | Rule 13a-14(a)/15d-14(a)Certification of Chief ExecutiveOfficer                                                                          |  |           |
| **31.2        |  | Rule13a-14(a)/15d-14(a) Certification of Chief FinancialOfficer                                                                          |  |           |
| **32.1        |  | CertificationPursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906of the Sarbanes-Oxley Act of2002                      |  |           |
|               |

|  |
|--|
|  |  |
|  |

|   |                                                |
|---|------------------------------------------------|
| * | Managementcompensation contract orarrangement. |

|    |                |
|----|----------------|
| ** | Filedherewith. |

|     |                                                                                                                                                                            |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (1) | Filed as an exhibit tothe Company’s Registration Statement on Form S-1 (No. 33-49270)declared effective on September  16,  1992 and incorporatedherein by reference. |

|     |                                                                                                                                               |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | Filed as anexhibit to the Company’s Annual Report on Form 10-KSB for yearended December  31,  1995 and incorporated herein byreference. |

|     |                                                                                                                                                   |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------|
| (3) | Filed as an exhibitto the Company’s Annual Report on Form 10-KSB for the year endedDecember  31,  1998 and incorporated herein byreference. |

|     |                                                                                                                                                   |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------|
| (4) | Filed as an exhibitto the Company’s Annual Report on Form 10-KSB for the year endedDecember  31,  2000 and incorporated herein byreference. |

|     |                                                                                                                               |
|-----|-------------------------------------------------------------------------------------------------------------------------------|
| (5) | Filed as an exhibitto Schedule 13D filed on behalf of Edward J. Fred on October19,  2001 and incorporated herein byreference. |

|     |                                                                                                                              |
|-----|------------------------------------------------------------------------------------------------------------------------------|
| (6) | Filed as an exhibitto Schedule 13D filed on behalf of Arthur August on October19,  2001 and incorporated herein byreference. |

27

----

|     |                                                                                                                                                          |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------|
| (7) | Filed as anexhibit to the Company’s Quarterly Report on Form 10-QSB for thequarter ended September  30,  2001 and incorporated hereinby reference. |

|     |                                                                                                                                                |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------|
| (8) | Filed as anexhibit to the Company’s Current Report on Form 8-K datedJanuary  22,  2002, as amended, and incorporated herein byreference. |

|     |                                                                                                                           |
|-----|---------------------------------------------------------------------------------------------------------------------------|
| (9) | Filed as an exhibitto Schedule 13D filed on behalf of Arthur August on July12,  2002 and incorporated herein byreference. |

|      |                                                                                                                            |
|------|----------------------------------------------------------------------------------------------------------------------------|
| (10) | Filed as an exhibitto Schedule 13D filed on behalf of Edward J. Fred on July12,  2002 and incorporated herein byreference. |

|      |                                                                                                                                                                             |
|------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (11) | Filed as an exhibitto the Company’s Registration Statement on Form SB-2 (No.333-101902) declared effective on February  12,  2003 andincorporated herein byreference. |

|      |                                                                                                                              |
|------|------------------------------------------------------------------------------------------------------------------------------|
| (12) | Filed as an exhibitto the Company’s Current Report on Form 8-K dated May24,  2004 and incorporated herein byreference. |

|      |                                                                                                                                   |
|------|-----------------------------------------------------------------------------------------------------------------------------------|
| (13) | Filed as an exhibitto the Company’s Current Report on Form 8-K datedFebruary  7,  2005 and incorporated herein byreference. |

|      |                                                                                                                                   |
|------|-----------------------------------------------------------------------------------------------------------------------------------|
| (14) | Filed as an exhibitto the Company’s Current Report on Form 8-K datedDecember  1,  2005 and incorporated herein byreference. |

|      |                                                                                                                                                   |
|------|---------------------------------------------------------------------------------------------------------------------------------------------------|
| (15) | Filed as an exhibitto the Company’s Annual Report on Form 10-KSB for the year endedDecember  31,  2003 and incorporated herein byreference. |

|      |                                                                                                                              |
|------|------------------------------------------------------------------------------------------------------------------------------|
| (16) | Filed as an exhibitto the Company’s Current Report on Form 8-K dated May24,  2005 and incorporated herein byreference. |

28

----

CPIAEROSTRUCTURES, INC.

INDEX TO FINANCIALSTATEMENTS

|  |
|--|
|  |  |
|  |

|                                                                                              |  |           |  |  |  |  |
|----------------------------------------------------------------------------------------------|--|-----------|--|--|--|--|
|                                                                                         |  |      |
| Reportsof Independent Registered Public AccountingFirms                                      |  | F-2       |
|                                                                                         |  |      |
| FinancialStatements:                                                                         |  |      |
| Balance Sheets asof December  31,  2005 and2004                                              |  | F-4       |
| Statements of Income for the YearsEnded December  31,  2005, 2004 and2003                    |  | F-5       |
| Statements of Shareholders’Equity for the Years EndedDecember  31,  2005, 2004and 2003 |  | F-6       |
| Statements of Cash Flows forthe Years Ended December  31,  2005, 2004 and2003                |  | F-7       |
| Notes to FinancialStatements                                                                 |  | F-8 -F-18 |
|                                                                                              |

F-1

----

Reportof Independent Registered Public AccountingFirm

To the Board of Directors andShareholdersCPI Aerostructures, Inc.

We haveaudited the accompanying balance sheets of CPI Aerostructures, Inc. asof December  31,  2005 and 2004, and the related statementsof income, changes in shareholders' equity and cash flows for theyears then ended. These financial statements are the responsibility ofthe Company's management. Our responsibility is to express anopinion on these financial statements based on our audits.

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

In our opinion, the financial statements referred to abovepresent fairly, in all material respects, the financial position of CPIAerostructures, Inc. as of December  31,  2005 and 2004,and its results of operations and cash flows for the years then ended,in conformity with accounting principles generally accepted in theUnited States of America.

/s/J.H. CohnLLPJ.H. Cohn LLP

Jericho, NewYorkMarch  29,  2006

F-2

----

REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM

To the Board of DirectorsCPIAerostructures, Inc.

We have audited theaccompanying statements of income, shareholders' equity and cashflows of CPI Aerostructures, Inc. for the year ended December31,  2003. These financial statements are the responsibility ofthe Company's management. Our responsibility is to express anopinion on these financial statements based on ouraudit.

We conducted our audit in accordance with thestandards of the Public Company Accounting Oversight Board (UnitedStates). Those standards require that we plan and perform the audit toobtain reasonable assurance about whether the financial statements arefree of material misstatement. An audit includes examining, on a testbasis, evidence supporting the amounts and disclosures in the financialstatements. An audit also includes assessing the accounting principlesused and significant estimates made by management, as well asevaluating the overall financial statement presentation. We believethat our audit provides a reasonable basis for ouropinion.

In our opinion, the financial statements referredto above present fairly, in all material respects, the results of theoperations of CPI Aerostructures, Inc. and its cash flows for the yearended December  31,  2003 in conformity with United Statesgenerally accepted accounting principles.

/s/Goldstein Golub Kessler LLPGOLDSTEIN GOLUBKESSLER LLPNew York, NewYork

January  30,2004

F-3

----

CPIAEROSTRUCTURES, INC.

BALANCESHEETS

|  |
|--|
|  |  |
|  |

|                                                                                                                                                                                   |  |                 |            |                  |  |        |            |         |  |  |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--|-----------------|------------|------------------|--|--------|------------|---------|--|--|
|                                                                                                                                                                              |  | December31,2005 |            | December 31,2004 |
| ASSETS                                                                                                                                                                            |  |            |            |             |
| CurrentAssets:                                                                                                                                                                    |  |            |       |             |  |   |       |    |
| Cash                                                                                                                                                                              |  | $               | 877,182    |             |  | $      | 1,756,350  |    |
| Accountsreceivable                                                                                                                                                                |  |            | 1,849,796  |             |  |   | 1,641,002  |    |
| Costsand estimated earnings in excess of billings on uncompletedcontracts                                                                                                         |  |            | 28,389,202 |             |  |   | 26,030,507 |    |
| Prepaidexpenses and other currentassets                                                                                                                                           |  |            | 342,165    |             |  |   | 182,003    |    |
| Totalcurrentassets                                                                                                                                                                |  |            | 31,458,345 |             |  |   | 29,609,862 |    |
| Plantand equipment,net                                                                                                                                                            |  |            | 962,209    |             |  |   | 882,758    |    |
| Deferred taxassets                                                                                                                                                                |  |            | 24,000     |             |  |   | —    |    |
| Otherassets                                                                                                                                                                       |  |            | 243,230    |             |  |   | 266,504    |    |
| TotalAssets                                                                                                                                                                       |  | $               | 32,687,784 |             |  | $      | 30,759,124 |    |
| LIABILITIESAND SHAREHOLDERS’EQUITY                                                                                                                                          |  |            |       |             |  |   |       |    |
| CurrentLiabilities:                                                                                                                                                               |  |            |       |             |  |   |       |    |
| Accountspayable                                                                                                                                                                   |  | $               | 4,559,181  |             |  | $      | 4,332,255  |    |
| Accruedexpenses                                                                                                                                                                   |  |            | 146,521    |             |  |   | 525,061    |    |
| Currentportion of long-termdebt                                                                                                                                                   |  |            | 87,617     |             |  |   | 83,144     |    |
| Deferredincometaxes                                                                                                                                                               |  |            | 502,000    |             |  |   | 144,000    |    |
| Incometaxespayable                                                                                                                                                                |  |            | 133,110    |             |  |   | 129,000    |    |
| Totalcurrentliabilities                                                                                                                                                           |  |            | 5,428,429  |             |  |   | 5,213,460  |    |
| Long-termdebt, net of currentportion                                                                                                                                              |  |            | 42,188     |             |  |   | 129,276    |    |
| Otherliabilities                                                                                                                                                                  |  |            | 54,895     |             |  |   | —    |    |
| TotalLiabilities                                                                                                                                                                  |  |            | 5,525,512  |             |  |   | 5,342,736  |    |
| Commitments                                                                                                                                                                       |  |            |       |             |  |   |       |    |
| Shareholders’Equity:                                                                                                                                                        |  |            |       |             |  |   |       |    |
| Common stock— $.001 par value; authorized 50,000,000 shares, issued5,475,057 and 5,443,415 shares, respectively, and outstanding 5,444,042and 5,412,400 shares,respectively |  |            | 5,475      |             |  |   | 5,443      |    |
| Additionalpaid-incapital                                                                                                                                                          |  |            | 22,768,135 |             |  |   | 22,541,716 |    |
| Retainedearnings                                                                                                                                                                  |  |            | 4,709,518  |             |  |   | 3,190,085  |    |
| Treasurystock, 31,015 shares of common stock (atcost)                                                                                                                             |  |            | (320,856   | )           |  |   | (320,856   | )  |
| TotalShareholders’Equity                                                                                                                                                    |  |            | 27,162,272 |             |  |   | 25,416,388 |    |
| TotalLiabilities and Shareholders’Equity                                                                                                                                    |  | $               | 32,687,784 |             |  | $      | 30,759,124 |    |
|                                                                                                                                                                                   |

SeeNotes to Financial Statements

F-4

----

CPI AEROSTRUCTURES,INC.

STATEMENTS OFINCOME

|  |
|--|
|  |  |
|  |

|                                                                              |  |        |            |         |  |        |            |         |  |        |            |         |  |  |
|------------------------------------------------------------------------------|--|--------|------------|---------|--|--------|------------|---------|--|--------|------------|---------|--|--|
| Yearended December31,                                                        |  | 2005   |            | 2004    |  | 2003   |
| Revenue                                                                      |  | $      | 25,526,404 |    |  | $      | 30,269,030 |    |  | $      | 27,288,035 |    |
| Costof sales                                                                 |  |   | 19,513,391 |    |  |   | 19,973,231 |    |  |   | 18,283,252 |    |
| Grossprofit                                                                  |  |   | 6,013,013  |    |  |   | 10,295,799 |    |  |   | 9,004,783  |    |
| Selling,general and administrativeexpenses                                   |  |   | 3,342,729  |    |  |   | 3,424,953  |    |  |   | 3,177,173  |    |
| Incomefromoperations                                                         |  |   | 2,670,284  |    |  |   | 6,870,846  |    |  |   | 5,827,610  |    |
| Otherincome(expense):                                                        |  |   |       |    |  |   |       |    |  |   |       |    |
| Interest/other income                                                        |  |   | 5,463      |    |  |   | 7,294      |    |  |   | 16,206     |    |
| Interestexpense                                                              |  |   | (18,314    | )  |  |   | (8,109     | )  |  |   | (148,006   | )  |
| Gainon extinguishment ofdebt                                                 |  |   | —    |    |  |   | —    |    |  |   | 2,431,233  |    |
| Totalother income (expense),net                                              |  |   | (12,851    | )  |  |   | (815       | )  |  |   | 2,299,433  |    |
| Incomefrom continuingoperations                                              |  |   | 2,657,433  |    |  |   | 6,870,031  |    |  |   | 8,127,043  |    |
| Gainon sale of assets held for sale — discontinuedoperations |  |   | —    |    |  |   | —    |    |  |   | 461,235    |    |
| Incomebefore provision for income taxes                                      |  |   | 2,657,433  |    |  |   | 6,870,031  |    |  |   | 8,588,278  |    |
| Provisionfor incometaxes                                                     |  |   | (1,138,000 | )  |  |   | (1,794,000 | )  |  |   | (195,000   | )  |
| Netincome                                                                    |  | $      | 1,519,433  |    |  | $      | 5,076,031  |    |  | $      | 8,393,278  |    |
| Basicnet income per commonshare:                                             |  |   |       |    |  |   |       |    |  |   |       |    |
| Income fromcontinuingoperations                                              |  | $      | 0.28       |    |  | $      | 0.94       |    |  | $      | 1.63       |    |
| Incomefrom discontinuedoperations                                            |  |   | —    |    |  |   | —    |    |  |   | .09        |    |
| Incomeper commonshare — basic                                |  | $      | 0.28       |    |  | $      | 0.94       |    |  | $      | 1.72       |    |
| Dilutednet income per commonshare:                                           |  |   |       |    |  |   |       |    |  |   |       |    |
| Income fromcontinuingoperations                                              |  | $      | 0.25       |    |  | $      | 0.83       |    |  | $      | 1.47       |    |
| Incomefrom discontinuedoperations                                            |  |   | —    |    |  |   | —    |    |  |   | .09        |    |
| Incomeper commonshare — diluted                              |  | $      | 0.25       |    |  | $      | 0.83       |    |  | $      | 1.56       |    |
| Sharesused in computing earnings per commonshare:                            |  |   |       |    |  |   |       |    |  |   |       |    |
| Basic                                                                        |  |   | 5,422,101  |    |  |   | 5,386,595  |    |  |   | 4,872,255  |    |
| Diluted                                                                      |  |   | 6,114,808  |    |  |   | 6,096,302  |    |  |   | 5,382,266  |    |
|                                                                              |

SeeNotes to Financial Statements

F-5

----

CPIAEROSTRUCTURES, INC.

STATEMENTS OFSHAREHOLDERS’ EQUITY

|  |
|--|
|  |  |
|  |

Years ended December31,  2005, 2004 and2003

|  |
|--|
|  |  |
|  |

|                                                                                      |  |              |           |        |  |                          |         |                                       |  |               |            |                                |  |        |             |         |  |        |          |         |  |        |            |         |  |  |
|--------------------------------------------------------------------------------------|--|--------------|-----------|--------|--|--------------------------|---------|---------------------------------------|--|---------------|------------|--------------------------------|--|--------|-------------|---------|--|--------|----------|---------|--|--------|------------|---------|--|--|
|                                                                                 |  | CommonShares |           | Amount |  | AdditionalPaid-inCapital |         | (AccumulatedDeficit)/RetainedEarnings |  | TreasuryStock |            | TotalShareholders’Equity |
| Balanceat January  1,2003                                                            |  |         | 2,785,668 |   |  | $                        | 2,786   |                                  |  | $             | 12,613,974 |                           |  | $      | (10,279,224 | )  |  |   | —  |    |  | $      | 2,337,536  |    |
| Netincome                                                                            |  |         | —   |   |  |                     | — |                                  |  |          | —    |                           |  |   | 8,393,278   |    |  |   | —  |    |  |   | 8,393,278  |    |
| Amortizationof fair value of warrants issued in conjunction with consultingagreement |  |         | —   |   |  |                     | — |                                  |  |          | 105,354    |                           |  |   | —     |    |  |   | —  |    |  |   | 105,354    |    |
| Commonstock issued in secondary publicoffering                                       |  |         | 2,300,000 |   |  |                     | 2,300   |                                  |  |          | 7,756,790  |                           |  |   | —     |    |  |   | —  |    |  |   | 7,759,090  |    |
| Commonstock issued for bankfees                                                      |  |         | 20,000    |   |  |                     | 20      |                                  |  |          | 88,669     |                           |  |   | —     |    |  |   | —  |    |  |   | 88,689     |    |
| Commonstock issued upon exercise of options andwarrants                              |  |         | 196,102   |   |  |                     | 196     |                                  |  |          | 733,660    |                           |  |   | —     |    |  |   | —  |    |  |   | 733,856    |    |
| Taxbenefits from stock optionplans                                                   |  |         | —   |   |  |                     | — |                                  |  |          | 415,000    |                           |  |   | —     |    |  |   | —  |    |  |   | 415,000    |    |
| Balanceat December  31,2003                                                          |  |         | 5,301,770 |   |  |                     | 5,302   |                                  |  |          | 21,713,447 |                           |  |   | (1,885,946  | )  |  |   | —  |    |  |   | 19,832,803 |    |
| Netincome                                                                            |  |         | —   |   |  |                     | — |                                  |  |          | —    |                           |  |   | 5,076,031   |    |  |   | —  |    |  |   | 5,076,031  |    |
| Commonstock issued upon exercise of options andwarrants                              |  |         | 138,120   |   |  |                     | 138     |                                  |  |          | 371,319    |                           |  |   | —     |    |  |   | —  |    |  |   | 371,457    |    |
| Treasurystock                                                                        |  |         | —   |   |  |                     | — |                                  |  |          | —    |                           |  |   | —     |    |  | $      | (320,856 | )  |  |   | (320,856   | )  |
| Commonstock issued as employeecompensation                                           |  |         | 3,525     |   |  |                     | 3       |                                  |  |          | 35,950     |                           |  |   | —     |    |  |   | —  |    |  |   | 35,953     |    |
| Taxbenefits from stock optionplans                                                   |  |         | —   |   |  |                     | — |                                  |  |          | 421,000    |                           |  |   | —     |    |  |   | —  |    |  |   | 421,000    |    |
| Balanceat December  31,2004                                                          |  |         | 5,443,415 |   |  |                     | 5,443   |                                  |  |          | 22,541,716 |                           |  |   | 3,190,085   |    |  |   | (320,856 | )  |  |   | 25,416,388 |    |
| Netincome                                                                            |  |         | —   |   |  |                     | — |                                  |  |          | —    |                           |  |   | 1,519,433   |    |  |   | —  |    |  |   | 1,519,433  |    |
| Commonstock issued upon exercise ofoptions                                           |  |         | 29,667    |   |  |                     | 30      |                                  |  |          | 153,263    |                           |  |   | —     |    |  |   | —  |    |  |   | 153,293    |    |
| Commonstock issued as employeecompensation                                           |  |         | 1,975     |   |  |                     | 2       |                                  |  |          | 19,156     |                           |  |   | —     |    |  |   | —  |    |  |   | 19,158     |    |
| Taxbenefits from stock optionplans                                                   |  |         | —   |   |  |                     | — |                                  |  |          | 54,000     |                           |  |   | —     |    |  |   | —  |    |  |   | 54,000     |    |
| Balanceat December  31,2005                                                          |  |         | 5,475,057 |   |  | $                        | 5,475   |                                  |  | $             | 22,768,135 |                           |  | $      | 4,709,518   |    |  | $      | (320,856 | )  |  | $      | 27,162,272 |    |
|                                                                                      |

SeeNotes to Financial Statements

F-6

----

CPI AEROSTRUCTURES,INC.

STATEMENTS OF CASHFLOWS

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|--|
|  |  |
|  |

|                                                                                                                      |  |        |            |         |  |        |            |         |  |        |            |         |  |  |
|----------------------------------------------------------------------------------------------------------------------|--|--------|------------|---------|--|--------|------------|---------|--|--------|------------|---------|--|--|
| Yearended December31,                                                                                                |  | 2005   |            | 2004    |  | 2003   |
| Cashflows from operatingactivities:                                                                                  |  |   |       |    |  |   |       |    |  |   |       |    |
| Netincome before operations of discontinuedsegment                                                                   |  | $      | 1,519,433  |    |  | $      | 5,076,031  |    |  | $      | 7,932,043  |    |
| Adjustmentsto reconcile net income before operations of discontinued segment tonet cash used in operatingactivities: |  |   |       |    |  |   |       |    |  |   |       |    |
| Depreciationandamortization                                                                                          |  |   | 193,628    |    |  |   | 184,355    |    |  |   | 131,204    |    |
| Deferredrent                                                                                                         |  |   | 54,895     |    |  |   | —    |    |  |   | —    |    |
| Warrantsissued for consultingfees                                                                                    |  |   | —    |    |  |   | —    |    |  |   | 105,354    |    |
| Commonstock issued for bank fees and employeecompensation                                                            |  |   | 19,158     |    |  |   | 35,953     |    |  |   | 88,689     |    |
| Gainon early extinguishment ofdebt                                                                                   |  |   | —    |    |  |   | —    |    |  |   | (2,431,233 | )  |
| Gainon sale of assets held for sale -discontinuedoperations                                                          |  |   | —    |    |  |   | —    |    |  |   | (461,235   | )  |
| Deferredportion of provision/(benefit) for incometaxes                                                               |  |   | 334,000    |    |  |   | 1,202,000  |    |  |   | (407,000   | )  |
| Taxbenefit for stockoptions                                                                                          |  |   | 54,000     |    |  |   | 421,000    |    |  |   | 415,000    |    |
| Changesin operating assets andliabilities:                                                                           |  |   |       |    |  |   |       |    |  |   |       |    |
| Decrease(increase) in accountsreceivable                                                                             |  |   | (208,794   | )  |  |   | 106,822    |    |  |   | 583,951    |    |
| Increasein costs and estimated earnings in excess of billingson uncompletedcontracts                                 |  |   | (2,358,695 | )  |  |   | (8,580,620 | )  |  |   | (6,067,781 | )  |
| Decrease(increase) in prepaid expenses and other currentassets                                                       |  |   | (136,888   | )  |  |   | 167,326    |    |  |   | 116,169    |    |
| Increasein otherassets                                                                                               |  |   | —    |    |  |   | (87,278    | )  |  |   | —    |    |
| Increase(decrease) in accounts payable and accruedexpenses                                                           |  |   | (151,614   | )  |  |   | 971,643    |    |  |   | (1,317,185 | )  |
| Increase(decrease) in income taxespayable                                                                            |  |   | 4,110      |    |  |   | (58,000    | )  |  |   | 187,000    |    |
| Netcash used in operatingactivities                                                                                  |  |   | (676,767   | )  |  |   | (560,768   | )  |  |   | (1,125,024 | )  |
| Cashflows from investingactivities-                                                                                  |  |   |       |    |  |   |       |    |  |   |       |    |
| Purchaseof plant andequipment                                                                                        |  |   | (273,080   | )  |  |   | (667,684   | )  |  |   | (268,790   | )  |
| Proceedsfrom sale of assets held for sale-discontinuedoperations                                                     |  |   | —    |    |  |   | —    |    |  |   | 1,203,146  |    |
| Netcash provided by(used in) investingactivities                                                                     |  |   | (273,080   | )  |  |   | (667,684   | )  |  |   | 934,356    |    |
| Cashflows from financingactivities:                                                                                  |  |   |       |    |  |   |       |    |  |   |       |    |
| Proceedsfrom exercise of stockoptions                                                                                |  |   | 153,293    |    |  |   | 50,601     |    |  |   | 733,856    |    |
| Proceedsfrom long-termdebt                                                                                           |  |   | —-   |    |  |   | 170,000    |    |  |   | —    |    |
| Paymentof long-term debt                                                                                             |  |   | (82,614    | )  |  |   | (30,109    | )  |  |   | (5,599,505 | )  |
| Proceedsfrom publicoffering                                                                                          |  |   | —    |    |  |   | —    |    |  |   | 7,759,090  |    |
| Netcash provided by financingactivities                                                                              |  |   | 70,679     |    |  |   | 190,492    |    |  |   | 2,893,441  |    |
| Netincrease (decrease) incash                                                                                        |  |   | (879,168   | )  |  |   | (1,037,960 | )  |  |   | 2,702,773  |    |
| Cashat beginning ofyear                                                                                              |  |   | 1,756,350  |    |  |   | 2,794,310  |    |  |   | 91,537     |    |
| Cashat end ofyear                                                                                                    |  | $      | 877,182    |    |  | $      | 1,756,350  |    |  | $      | 2,794,310  |    |
| Supplementalschedule of noncash investing and financingactivity:                                                     |  |   |       |    |  |   |       |    |  |   |       |    |
| Plantand equipment acquired through capitallease                                                                     |  | $      | —    |    |  | $      | 38,915     |    |  | $      | —    |    |
| Stockoptions proceeds paid through Company’sstock                                                              |  | $      | —    |    |  | $      | 320,856    |    |  | $      | —    |    |
| Supplementalschedule of cash flowinformation:                                                                        |  |   |       |    |  |   |       |    |  |   |       |    |
| Cashpaid during the year forinterest                                                                                 |  | $      | 18,314     |    |  | $      | 8,109      |    |  | $      | 148,006    |    |
| Cashpaid for incometaxes:                                                                                            |  | $      | 490,331    |    |  | $      | 199,500    |    |  |   | —    |    |
|                                                                                                                      |

SeeNotes to Financial Statements

F-7

----

CPIAEROSTRUCTURES, INC.     NOTES TO FINANCIALSTATEMENTSDecember  31,2005

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|--|
|  |  |
|  |

|    |                                                                           |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|----|---------------------------------------------------------------------------|--|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 1. | PRINCIPALBUSINESS ACTIVITYAND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: |  | CPI Aerostructures, Inc.’s(‘‘CPI’’ or the‘‘Company’’) operations consist of thedesign and production of complex aerospace structural subassembliesunder U.S. government and commercial contracts. The length of theCompany’s contracts varies but is typically between one and twoyears for U.S. government contracts, although our T-38 contract and ourC-5 TOP contract are for 10 years and 7 years, respectively. Our onecommercial contract has an indefinite life. |
|    |                                                                           |  |

|  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|--|--|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  |  | CPI’srevenue is recognized based on the percentage of completion method ofaccounting for its contracts measured by the percentage of total costsincurred to date to estimated total costs at completion for eachcontract. Contract costs include all direct material, labor costs,tooling and those indirect costs related to contract performance, suchas indirect labor, supplies, tools, repairs and depreciation costs.Selling, general and administrative costs are charged to expense asincurred. Estimated losses on uncompleted contracts are recognized inthe period in which such losses are determined. Changes in jobperformance may result in revisions to costs and income and arerecognized in the period in which revisions are determined to berequired. The percentage of completion method of accounting involvesconsiderable use of estimates in determining revenues, costs andprofits and in assigning the amounts to accounting periods and, as aresult, there can be a significant disparity between earnings (both foraccounting and taxes) as reported and actual cash received by us duringany reporting period. In accordance with industry practice, costs andestimated earnings in excess of billings on uncompleted contracts,included in the accompanying balance sheets, contain amounts relatingto contracts and programs with long production cycles, a portion ofwhich will not be realized within one year. CPI’s recordedrevenue may be adjusted in later periods in the event that CPI’scost estimates prove to be inaccurate or a contract isterminated. |
|  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |

|  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|--|--|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  |  | Our government contracts are subject to theprocurement rules and regulations of the United States government. Manyof the contract terms are dictated by these rules and regulations.Specifically, cost-based pricing is determined under the FederalAcquisition Regulations (‘‘FAR’’), whichprovide guidance on the types of costs that are allowable inestablishing prices for goods and services under U.S. Governmentcontracts. For example, costs such as those related to charitablecontributions, advertising, interest expense, and public relations areunallowable, and therefore not recoverable through sales. During andafter the fulfillment of a government contract, we may be audited inrespect of the direct and allocated indirect costs attributablethereto. These audits may result in adjustments to our contractcosts. |
|  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |

|  |  |                                                                                                                                                                                                                                                   |
|--|--|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  |  | The Company maintains cash in bank deposit accountswhich, at times, may exceed federally insured limits. The Company hasnot experienced any losses in such accounts. The Company believes it isnot exposed to any significant credit risk oncash. |
|  |  |                                                                                                                                                                                                                                                   |

|  |  |                                                                                                                                           |
|--|--|-------------------------------------------------------------------------------------------------------------------------------------------|
|  |  | Accounts receivable are reported at their outstandingunpaid principal balances. The Company writes off accounts when theyare deemed to be |
|  |  |                                                                                                                                           |

F-8

----

CPIAEROSTRUCTURES, INC.     NOTES TO FINANCIALSTATEMENTSDecember  31,2005

|  |
|--|
|  |  |
|  |

|  |  |                                                                                               |
|--|--|-----------------------------------------------------------------------------------------------|
|  |  | uncollectible. The Company has experiencedinsignificant amounts of bad debts in suchaccounts. |
|  |  |                                                                                               |

|  |  |                                                                                                                                                                                                          |
|--|--|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  |  | Depreciation and amortization of plant andequipment is provided by the straight-line method over the estimateduseful lives of the respective assets or the life of the lease, forleasehold improvements. |
|  |  |                                                                                                                                                                                                          |

|  |  |                                                                                                                                                                                                                                |
|--|--|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  |  | The preparation of financialstatements in conformity with accounting principles generally acceptedin the United States of America requires the use of estimates bymanagement. Actual results could differ from theseestimates. |
|  |  |                                                                                                                                                                                                                                |

|  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|--|--|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  |  | The Company reviews its long-lived assets andcertain related intangibles for impairment whenever changes incircumstances indicate that the carrying amount of an asset may not befully recoverable. As a result of its review, the Company does notbelieve that any such change has occurred. If such changes incircumstance are present, a loss is recognized to the extent thecarrying value of the asset is in excess of the sum of the undiscountedcash flows expected to result from the use of the asset and amountsexpected to be realized upon its eventual disposition. |
|  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |

|  |  |                                                                                                                                                                                                                                                                                                                  |
|--|--|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  |  | Thefair value of the Company’s short-term debt is estimated basedon the current rates offered to the Company for debt of similar termsand maturities. Using this method, the fair value of theCompany’s short-term debt was not significantly different thanthe stated value at December  31,  2005. |
|  |  |                                                                                                                                                                                                                                                                                                                  |

|  |  |                                                                                                                                                                                                                   |
|--|--|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  |  | TheCompany incurred freight and delivery costs of approximately $164,000,$178,000 and $176,000, respectively, during the years endedDecember  31,  2005, 2004 and 2003. These costs areincluded in cost of sales. |
|  |  |                                                                                                                                                                                                                   |

|  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|--|--|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  |  | Basic earnings per common shareis computed using the weighted-average number of shares outstanding.Diluted earnings per common share is computed using theweighted-average number of shares outstanding adjusted for theincremental shares attributed to outstanding options and warrants topurchase common stock. Incremental shares of 692,707, 727,479 and510,011 were used in the calculation of diluted earnings per commonshare in 2005, 2004 and 2003, respectively. Incremental shares of155,000 and 75,000 were not included in the diluted earnings per sharecalculations at December  31,  2005 and 2004, respectively,as their exercise price was in excess of the Company’s stockprice and, accordingly, these shares are not assumed to be exercisedfor the diluted earnings per share calculation. All shares wereincluded in the diluted earnings per share calculation forDecember  31,  2003. |
|  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |

F-9

----

CPIAEROSTRUCTURES, INC.     NOTES TO FINANCIALSTATEMENTSDecember  31,2005

|  |
|--|
|  |  |
|  |

|  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|--|--|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  |  | The Company has elected to applyAccounting Principles Board (‘‘APB’’)Opinion No. 25, Accounting for Stock Issued to Employees, andrelated interpretations in accounting for its stock options issued toemployees (intrinsic value) and has adopted the disclosure-onlyprovisions of Statement of Financial Accounting Standards(‘‘SFAS’’) No. 123, Accounting forStock-Based Compensation. Had the Company elected to recognizecompensation cost based on the fair value of the options granted at thegrant date as prescribed by SFAS No. 123, the Company’s netincome and income per common share would have been asfollows: |
|  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |

|                                                                                                                                          |  |        |           |        |  |        |           |        |  |        |           |        |  |  |
|------------------------------------------------------------------------------------------------------------------------------------------|--|--------|-----------|--------|--|--------|-----------|--------|--|--------|-----------|--------|--|--|
| Yearended December31,                                                                                                                    |  |   | 2005      |   |  |   | 2004      |   |  |   | 2003      |   |
| Netincome — asreported                                                                                                             |  | $      | 1,519,433 |   |  | $      | 5,076,031 |   |  | $      | 8,393,278 |   |
| Deduct:Total stock-based employee compensation expense determined under fairvalue based method for all awards, net of related taxeffects |  |   | 483,205   |   |  |   | 476,865   |   |  |   | 453,866   |   |
| Netincome — proforma                                                                                                               |  | $      | 1,036,228 |   |  | $      | 4,599,166 |   |  | $      | 7,939,412 |   |
| Basicincome per share — asreported                                                                                                 |  | $      | 0.28      |   |  | $      | 0.94      |   |  | $      | 1.72      |   |
| Basicincome per share — proforma                                                                                                   |  | $      | 0.19      |   |  | $      | 0.85      |   |  | $      | 1.63      |   |
| Dilutedincome per share — asreported                                                                                               |  | $      | 0.25      |   |  | $      | 0.83      |   |  | $      | 1.56      |   |
| Dilutedincome per share — proforma                                                                                                 |  | $      | 0.17      |   |  | $      | 0.75      |   |  | $      | 1.48      |   |
|                                                                                                                                          |

|  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|--|--|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  |  | TheCompany’s assumptions used to calculate the fair values ofoptions issued during 2005 were (i) risk-free interest rate of4.2% , (ii) expected life of 5 years, (iii) expected volatilityof 32%, and (iv) expected dividends of zero. In 2004, theCompany’s assumptions used to calculate the fair values ofoptions issued were (i) risk-free interest rates of 2.74% and4.00%, (ii) expected life of 5-10 years, (iii) expectedvolatility of 35%, and (iv) expected dividends of zero. In 2003,the Company’s assumptions used to calculate the fair values ofoptions issued were (i) risk-free interest rates of 2.10% and2.78%, (ii) expected life of 10 years, (iii) expected volatilityof 198%, and (iv) expected dividends of zero. |
|  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |

|  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|--|--|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  |  | InDecember  2004, the FASB issued SFAS No. 123(R) (revised 2004),‘‘Share-Based Payment’’, whichamends SFAS No. 123 and was effective for public companies for interimor annual periods beginning after June  15,  2005. The newstandard requires us to expense employee stock options and othershare-based payments. The company will value employee share optionsusing the Black-Scholes options pricing model.  The new standardmay be adopted in one of three ways — the modified prospectivetransition method, a variation of the modified prospective transitionmethod or the modified retrospective transition method. AtDecember  31,  2005 there is a deferred expense of $77,752for the unamortized portion of options issued during 2005, all of whichwill be expensed in 2006. |
|  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |

F-10

----

CPIAEROSTRUCTURES, INC.     NOTES TO FINANCIALSTATEMENTSDecember  31,2005

|  |
|--|
|  |  |
|  |

|    |                                                                            |  |                                                                                                                         |
|----|----------------------------------------------------------------------------|--|-------------------------------------------------------------------------------------------------------------------------|
| 2. | COSTSAND ESTIMATED EARNINGS IN EXCESS OF BILLINGS ON UNCOMPLETEDCONTRACTS: |  | At December  31,  2005, costsand estimated earnings in excess of billings on uncompleted contracts(unbilled) consistof: |
|    |                                                                            |  |

|                                                                           |  |                |            |            |  |        |            |        |  |        |            |        |  |  |
|---------------------------------------------------------------------------|--|----------------|------------|------------|--|--------|------------|--------|--|--------|------------|--------|--|--|
|                                                                      |  | U.S.Government |            | Commercial |  |   | Total      |   |
| Costsincurred on uncompletedcontracts                                     |  | $              | 41,075,851 |       |  | $      | 14,400,603 |   |  | $      | 55,476,454 |   |
| Estimatedearnings                                                         |  |           | 25,430,030 |       |  |   | 6,273,397  |   |  |   | 31,703,427 |   |
|                                                                      |  |           | 66,505,881 |       |  |   | 20,674,000 |   |  |   | 87,179,881 |   |
| Lessbillings todate                                                       |  |           | 39,878,934 |       |  |   | 18,911,745 |   |  |   | 58,790,679 |   |
| Costsand estimated earnings in excess of billings on uncompletedcontracts |  | $              | 26,626,947 |       |  | $      | 1,762,255  |   |  | $      | 28,389,202 |   |
|                                                                           |

|  | AtDecember  31,  2004, costs and estimated earnings in excessof billings on uncompleted contracts (unbilled) consistof: |
|--|-------------------------------------------------------------------------------------------------------------------------|

|                                                                           |  |                |            |            |  |        |            |        |  |        |            |        |  |  |
|---------------------------------------------------------------------------|--|----------------|------------|------------|--|--------|------------|--------|--|--------|------------|--------|--|--|
|                                                                      |  | U.S.Government |            | Commercial |  |   | Total      |   |
| Costsincurred on uncompletedcontracts                                     |  | $              | 32,764,584 |       |  | $      | 13,373,694 |   |  | $      | 46,138,278 |   |
| Estimatedearnings                                                         |  |           | 20,351,259 |       |  |   | 6,187,927  |   |  |   | 26,539,186 |   |
|                                                                      |  |           | 53,115,843 |       |  |   | 19,561,621 |   |  |   | 72,677,464 |   |
| Lessbillings todate                                                       |  |           | 28,746,944 |       |  |   | 17,900,013 |   |  |   | 46,646,957 |   |
| Costsand estimated earnings in excess of billings on uncompletedcontracts |  | $              | 24,368,899 |       |  | $      | 1,661,608  |   |  | $      | 26,030,507 |   |
|                                                                           |

|  | Unbilledcosts and estimated earnings are billed in accordance with applicablecontract terms. As of December  31,  2005, $ 2,115,000 ofthe balances above, primarily commercial contracts, are not expected tobe collected within one year. There are no amounts billed underretainage provisions. |
|--|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

F-11

----

CPIAEROSTRUCTURES, INC.     NOTES TO FINANCIALSTATEMENTSDecember  31,2005

|  |
|--|
|  |  |
|  |

|    |                     |  |                                                             |
|----|---------------------|--|-------------------------------------------------------------|
| 3. | ACCOUNTSRECEIVABLE: |  | Accounts receivable consists oftrade receivables asfollows: |
|    |                     |  |

|                                           |  |        |           |        |  |        |           |        |  |  |
|-------------------------------------------|--|--------|-----------|--------|--|--------|-----------|--------|--|--|
|                                      |  | 2005   |           | 2004   |
| Billedreceivables                         |  | $      | 1,517,669 |   |  | $      | 1,540,504 |   |
| Unbilledreceivables on completedcontracts |  |   | 332,127   |   |  |   | 100,498   |   |
|                                      |  | $      | 1,849,796 |   |  | $      | 1,641,002 |   |
|                                           |

|    |                     |  |                                                        |
|----|---------------------|--|--------------------------------------------------------|
| 4. | PLANTAND EQUIPMENT: |  | Plant and equipment, at cost, consistsof thefollowing: |
|    |                     |  |

|                             |  |        |           |        |  |                     |           |        |  |              |  |  |  |  |
|-----------------------------|--|--------|-----------|--------|--|---------------------|-----------|--------|--|--------------|--|--|--|--|
| December31,2005             |  | 2005   |           | 2004   |  | EstimatedUsefulLife |
| Machinery andequipment      |  | $      | 544,074   |   |  |                | 522,095   |   |  | 5to 10 years |
| Computerequipment           |  |   | 653,013   |   |  |                | 547,975   |   |  | 5years       |
| Furniture andfixtures       |  |   | 144,581   |   |  |                | 124,615   |   |  | 7years       |
| Automobiles andtrucks       |  |   | 23,488    |   |  |                | 23,488    |   |  | 5years       |
| Leaseholdimprovements       |  |   | 609,312   |   |  |                | 483,213   |   |  | 10years      |
| Less accumulated            |  |   | 1,974,468 |   |  |                | 1,701,386 |   |  |         |
| depreciationandamortization |  |   | 1,012,259 |   |  |                | 818,628   |   |  |         |
|                        |  | $      | 962,209   |   |  | $                   | 882,758   |   |  |         |
|                             |

|  |  |                                                                                                                                             |
|--|--|---------------------------------------------------------------------------------------------------------------------------------------------|
|  |  | Depreciationand amortization expense for the years ended December  31,2005, 2004 and 2003 was $193,628, $184,355 and $131,204,respectively. |
|  |  |                                                                                                                                             |

|    |                            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|----|----------------------------|--|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 5. | RELATEDPARTY TRANSACTIONS: |  | In October  2000, the Companyadopted a Greit Plan for the purpose of offering senior management adeferred compensation death benefit plan (the‘‘Plan’’) that provides a tax-free benefitand which is tax-neutral to the Company. Pursuant to the Plan, theCompany made a noninterest-bearing loan to an employee in the amount of$150,000, which was used to purchase the Plan. The Plan has since beenterminated. The surrender value has been returned to the employee whohas placed the proceeds from the surrender value in an annuity, whichwill mature to $150,000. Simultaneously, the employee purchased aninsurance policy in the amount of $150,000, of which the Company is thesole beneficiary. The loan to the employee will be repaid to theCompany upon the maturity date of the annuity or upon the death of theemployee, whichever occursfirst. |
|    |                            |  |

|    |                         |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|----|-------------------------|--|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 6. | DISCONTINUEDOPERATIONS: |  | On January  22,  2002, theCompany announced a decision made by the board of directors as ofDecember  31,  2001 to close the Kolar facilities locatedin Ithaca, New York, and liquidate its assets through a public auctionof its machinery and equipment and the private sale of its realestate.On February  21,  2002, Kolar sold a substantialportion of its machinery and equipment at an auction conducted byDaley-Hodkin Corporation at Kolar’s main facility in Ithaca, NewYork. In connection with the discontinuance of Kolar’soperations, the |
|    |                         |  |

F-12

----

CPIAEROSTRUCTURES, INC.     NOTES TO FINANCIALSTATEMENTSDecember  31,2005

|  |
|--|
|  |  |
|  |

|  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|--|--|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  |  | Company incurred a one-time charge of$10,422,816 related to the write-off of Kolar’s assets, net ofexpected proceeds, and an accrual for estimated losses during thephase-out period. The disposition of Kolar’s operationsrepresents a disposal of a business segment under APB Opinion No. 30 in2001. Accordingly, results of the operation have been classified asdiscontinued. On July  2,  2003, Kolar’s corporateentity was merged into the Company. For business segment reportingpurposes, Kolar’s business results were previously classified asthe ‘‘Machining’’ segment. In 2003, theCompany sold the remaining assets for Kolar and recorded a gain of$461,235. |
|  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |

|    |                                    |  |                                                                                                                                                                                  |
|----|------------------------------------|--|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 7. | LONGTERM DEBT AND CREDIT FACILITY: |  | Long term debtincludes capital leases which expire during 2007. The leases requiremonthly payments of principal and interest, imputed at an interest rateof 5% and 9% per annum. |
|    |                                    |  |

|  |  |                                                                  |
|--|--|------------------------------------------------------------------|
|  |  | Future minimum leasepayments under long-term debt are asfollows: |
|  |  |                                                                  |

|                                                                              |  |        |         |        |  |  |
|------------------------------------------------------------------------------|--|--------|---------|--------|--|--|
| Yearending December31                                                        |  |   |    |   |
| 2006             |  | $      | 87,617  |   |
| 2007             |  |   | 42,188  |   |
|                                                                         |  |   | 129,805 |   |
| Lesscurrentmaturities                                                        |  |   | 87,617  |   |
| Long-termdebt, less currentmaturities                                        |  | $      | 42,188  |   |
|                                                                              |

|  |  |                                                                                                                                                                                                                                        |
|--|--|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  |  | OnJanuary  28,  2003, the Company sold one of the tworemaining Kolar buildings and related land for $585,000 and onMay  7,  2003, the final building and related land was soldfor $190,000. The proceeds were used to repay bankloans. |
|  |  |                                                                                                                                                                                                                                        |

|  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|--|--|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  |  | On February  19,  2003, the Companyconsummated a public offering of 2,300,000 common shares at a price of$4.00 per share, raising gross and net proceeds of $9,200,000 and$7,759,000, respectively. Approximately $2,433,000 of the net proceedswere used to repay bank loans, $2,700,000 was used to repay the NotePayable — Seller, which had a carrying value plus accruedinterest of approximately $5,131,000. Accordingly, the Company recordeda gain of approximately $2,431,000 on the extinguishment of the debt.The remaining net proceeds of approximately $2,631,000 have been usedto fund continuing operations. |
|  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |

|  |  |                                                                                                                                                                                                                                                                                                                                                                                                               |
|--|--|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  |  | In September  2003,the Company entered into a three year, $5.0  million revolvingcredit facility with JP Morgan Chase Bank, secured by the assets of theCompany. The facility specifies interest rates that range between thePrime Rate and 225 basis points over LIBOR, depending on certain termsand conditions. As of December  31,  2005, the Company hasnot borrowed any funds pursuant to thisfacility. |
|  |  |                                                                                                                                                                                                                                                                                                                                                                                                               |

F-13

----

CPIAEROSTRUCTURES, INC.     NOTES TO FINANCIALSTATEMENTSDecember  31,2005

|  |
|--|
|  |  |
|  |

|    |              |  |                                                                                                                              |
|----|--------------|--|------------------------------------------------------------------------------------------------------------------------------|
| 8. | COMMITMENTS: |  | TheCompany has employment agreements with six employees. The aggregatefuture commitment under these agreements is asfollows: |
|    |              |  |

|                                                                              |  |        |           |        |  |  |
|------------------------------------------------------------------------------|--|--------|-----------|--------|--|--|
| Yearending December31,                                                       |  |   |      |   |
| 2006             |  | $      | 895,870   |   |
| 2007             |  |   | 433,150   |   |
|                                                                         |  | $      | 1,329,020 |   |
|                                                                              |

|  |  |                                                                                      |
|--|--|--------------------------------------------------------------------------------------|
|  |  | Theseagreements provide for additional bonus payments that are calculated asdefined. |
|  |  |                                                                                      |

|  |  |                                                                                                                                                                                             |
|--|--|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  |  | The Company leases an office and warehousefacility under a non-cancelable operating lease which expires inDecember  2014. The aggregate future commitment under thisagreement is asfollows: |
|  |  |                                                                                                                                                                                             |

|                        |  |        |           |        |  |  |
|------------------------|--|--------|-----------|--------|--|--|
| Yearending December31, |  |   |      |   |
| 2006                   |  | $      | 386,250   |   |
| 2007                   |  |   | 397,838   |   |
| 2008                   |  |   | 409,773   |   |
| 2009                   |  |   | 422,066   |   |
| 2010                   |  |   | 434,728   |   |
| Thereafter             |  |   | 1,873,300 |   |
|                   |  | $      | 3,923,955 |   |
|                        |

|  |  |                                                                                                                    |
|--|--|--------------------------------------------------------------------------------------------------------------------|
|  |  | Rentexpense for the years ended December  31,  2005, 2004 and2003 was $436,248, $313,167 and 299,984,respectively. |
|  |  |                                                                                                                    |

|    |              |  |                                                          |
|----|--------------|--|----------------------------------------------------------|
| 9. | INCOMETAXES: |  | The provision for income taxes consists of thefollowing: |
|    |              |  |

|                          |  |        |           |        |  |        |           |        |  |        |          |         |  |  |
|--------------------------|--|--------|-----------|--------|--|--------|-----------|--------|--|--------|----------|---------|--|--|
| Yearsended December  31, |  | 2005   |           | 2004   |  | 2003   |
| Current:                 |  |   |      |   |  |   |      |   |  |   |     |    |
| Federal                  |  | $      | 734,000   |   |  | $      | 572,000   |   |  | $      | 593,000  |    |
| Stateandlocal            |  |   | 70,000    |   |  | $      | 20,000    |   |  |   | 9,000    |    |
| Deferred:                |  |   |      |   |  |   |      |   |  |   |     |    |
| Federal                  |  |   | 334,000   |   |  |   | 1,202,000 |   |  |   | (407,000 | )  |
|                     |  | $      | 1,138,000 |   |  | $      | 1,794,000 |   |  | $      | 195,000  |    |
|                          |

F-14

----

CPIAEROSTRUCTURES, INC.     NOTES TO FINANCIALSTATEMENTSDecember  31,2005

|  |
|--|
|  |  |
|  |

|  |  |                                                                                                                                               |
|--|--|-----------------------------------------------------------------------------------------------------------------------------------------------|
|  |  | Thedifference between the income tax provision computed at the federalstatutory rate and the actual tax provision is accounted for asfollows: |
|  |  |                                                                                                                                               |

|                                                                                                                      |  |        |           |        |  |        |           |         |  |        |            |         |  |  |
|----------------------------------------------------------------------------------------------------------------------|--|--------|-----------|--------|--|--------|-----------|---------|--|--------|------------|---------|--|--|
| December31,                                                                                                          |  | 2005   |           | 2004   |  | 2003   |
|                                                                                                                 |  |   |      |   |  |   |      |    |  |   |       |    |
| Taxescomputed     at the federal    statutoryrate                            |  | $      | 904,000   |   |  | $      | 2,336,000 |    |  | $      | 2,920,000  |    |
| Stateincome    taxes                                                                             |  |   | 70,000    |   |  |   | 20,000    |    |  |   | —    |    |
| Permanent    differences                                                                         |  |   | 136,000   |   |  |   | 38,000    |    |  |   | —    |    |
| Utilizationof     net operating     loss    carryforward |  |   | 28,000    |   |  |   | (600,000  | )  |  |   | (2,725,000 | )  |
|                                                                                                                 |  | $      | 1,138,000 |   |  | $      | 1,794,000 |    |  | $      | 195,000    |    |
|                                                                                                                      |

|  | Thecomponents of deferred income tax assets and liabilities are asfollows: |
|--|----------------------------------------------------------------------------|

|                                     |  |            |  |            |  |  |  |  |  |  |
|-------------------------------------|--|------------|--|------------|--|--|--|--|--|--|
|                                |  | 2005       |  | 2004       |
|                                |  |       |  |       |
| Statenet operatinglosscarryforwards |  | —    |  | $204,000   |
| Temporarydifferences                |  | $(478,000) |  | (348,000)  |
|                                |  | $(478,000) |  | $(144,000) |
|                                     |

|  |  |                                                                                                                                                |
|--|--|------------------------------------------------------------------------------------------------------------------------------------------------|
|  |  | AtDecember  31,  2005 and 2004, the temporary differencesresults from depreciation and difference in revenue recognized betweenbook and taxes. |
|  |  |                                                                                                                                                |

|  |  |                                                                                                                                                                                                                                                                                                                                |
|--|--|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  |  | During 2004, the Company reversedapproximately $850,000 of valuation allowance, which was reducing thedeferred tax asset related to the Company’s net operating losscarryforwards to an amount that the Company deemed more likely than notto be realized. The Company has no valuation allowance atDecember  31,  2005. |
|  |  |                                                                                                                                                                                                                                                                                                                                |

|  |  |                                                                                                                                                                                                                                                                                                                                                                          |
|--|--|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  |  | The Company recognized,for income tax purposes, a tax benefit of $54,000, $421,000 and$415,000 for the years ended December  31,  2005, 2004 and2003, respectively, for compensation expense related to its stockoption plan for which no corresponding charge to operations has beenrecorded. Such amounts have been added to additional paid-in capital inthose years. |
|  |  |                                                                                                                                                                                                                                                                                                                                                                          |

F-15

----

CPIAEROSTRUCTURES, INC.     NOTES TO FINANCIALSTATEMENTSDecember  31,2005

|  |
|--|
|  |  |
|  |

|     |                             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|-----|-----------------------------|--|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10. | EMPLOYEE STOCK OPTIONPLANS: |  | In April  1992, the Company adopted the1992 Stock Option Plan (the ‘‘1992 Plan’’).The 1992 Plan, for which 83,334 common shares are reserved forissuance, provides for the issuance of either incentive stock optionsor nonqualified stock options to employees, consultants or others whoprovide services to the Company. The options may not be exercised morethan five years from the date of issuance. No more options may begranted under the 1992 Plan. |
|     |                             |  |

|  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|--|--|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  |  | In 1995, the Company adoptedthe 1995 Stock Option Plan (the ‘‘1995Plan’’), as amended, for which 200,000 common shares arereserved for issuance. The 1995 Plan provides for the issuance ofeither incentive stock options or nonqualified stock options toemployees, consultants or others who provide services to the Company.The options’ exercise price is equal to the closing price of theCompany’s shares on the day of issuance, except for incentivestock options granted to the Company’s president, which areexercisable at 110% of the closing price of the Company’sshares on the date of issuance. |
|  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |

|  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|--|--|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  |  | In 1998, the Companyadopted the 1998 Performance Equity Plan (the ‘‘1998Plan’’). The 1998 Plan, as amended, reserved 463,334common shares for issuance. The 1998 Plan provides for the issuance ofeither incentive stock options or nonqualified stock options toemployees, consultants or others who provide services to the Company.The options’ exercise price is equal to the closing price of theCompany’s shares on the day of issuance, except for incentivestock options granted to the Company’s president, which areexercisable at 110% of the closing price of the Company’sshares on the date of issuance. |
|  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |

|  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|--|--|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  |  | In 2000, the Companyadopted the Performance Equity Plan 2000 (the ‘‘2000Plan’’). The 2000 Plan, as amended, reserved 1,230,000common shares for issuance. The 2000 Plan provides for the issuance ofeither incentive stock options or nonqualified stock options toemployees, consultants or others who provide services to the Company.The options’ exercise price is equal to the closing price of theCompany’s shares on the day of issuance, except for incentivestock options granted to the Company’s president, which areexercisable at 110% of the closing price of the Company’sshares on the date of issuance. |
|  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |

|  |  |                                                                                                                                                                                     |
|--|--|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  |  | The Company has 285 optionsavailable for grant under the 1995 Plan, 666 options available forgrant under the 1998 Plan, and 373,025 options available for grantunder the 2000 Plan. |
|  |  |                                                                                                                                                                                     |

F-16

----

CPIAEROSTRUCTURES, INC.     NOTES TO FINANCIALSTATEMENTSDecember  31,2005

|  |
|--|
|  |  |
|  |

|  |  |                                                                                                                                                     |
|--|--|-----------------------------------------------------------------------------------------------------------------------------------------------------|
|  |  | A summary of the status of theCompany’s four stock option plans as of December31,  2005 and 2004 and changes during those years is asfollows: |
|  |  |                                                                                                                                                     |

|                                               |  |         |           |                                     |  |         |        |                                     |  |        |           |         |  |        |        |        |  |  |
|-----------------------------------------------|--|---------|-----------|-------------------------------------|--|---------|--------|-------------------------------------|--|--------|-----------|---------|--|--------|--------|--------|--|--|
|                                          |  | 2005    |           | 2004                                |
| FixedOptions                                  |  | Options |           | Weighted−averageExercisePrice |  | Options |        | Weighted−averageExercisePrice |
|                                          |  |    |      |                                |  |    |   |                                |  |   |      |    |  |   |   |   |
| Outstandingand exercisableat beginning ofyear |  |    | 1,074,752 |                                |  | $       | 4.53   |                                |  |   | 1,114,752 |    |  | $      | 3.84   |   |
| Grantedduringyear                             |  |    | 80,000    |                                |  |    | 10.01  |                                |  |   | 130,000   |    |  |   | 10.44  |   |
| Exercised/forfeited                           |  |    | (24,667   | )                              |  |    | 5.88   |                                |  |   | (170,000  | )  |  |   | 4.54   |   |
| Outstandingand exercisable at end ofyear      |  |    | 1,130,085 |                                |  | $       | 4.89   |                                |  |   | 1,074,752 |    |  | $      | 4.53   |   |
| Weighted-averagefair value of optionsgranted  |  |    |      |                                |  | $       | 3.49   |                                |  |   |      |    |  | $      | 5.66   |   |
|                                               |

|  | Thefollowing table summarizes information about stock options outstandingand exercisable at December  31,  2005: |
|--|------------------------------------------------------------------------------------------------------------------|

|                                              |  |                                 |           |                                          |  |                               |  |        |       |        |  |  |  |  |
|----------------------------------------------|--|---------------------------------|-----------|------------------------------------------|--|-------------------------------|--|--------|-------|--------|--|--|--|--|
|     RangeofExercisePrice |  | NumberOutstandingandExercisable |           | Weighted-averageRemainingContractualLife |  | Weighted-averageExercisePrice |
| $1.20-$1.65                                  |  |                            | 205,000   |                                     |  | 5.68years                     |  |   | 1.21  |   |
| $2.53-$2.59                                  |  |                            | 390,000   |                                     |  | 4.35years                     |  |   | 2.58  |   |
| $6.27-$6.97                                  |  |                            | 311,335   |                                     |  | 6.00years                     |  |   | 6.46  |   |
| $7.19-$11.31                                 |  |                            | 223,750   |                                     |  | 5.97years                     |  |   | 10.08 |   |
| $1.20-$11.31                                 |  |                            | 1,130,085 |                                     |  | 5.36years                     |  | $      | 4.89  |   |
|                                              |

|     |                       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|-----|-----------------------|--|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 11. | WARRANTS AND OPTIONS: |  | InFebruary  2003, the Company issued to an underwriter (and itsdesignees) warrants to purchase an aggregate of 200,000 shares of theCompany’s common stock as compensation related to theCompany’s public offering. The warrants are exercisable, inwhole or in part, at $4.40 per share from February  2004 throughFebruary  2008. At December  31,  2005 and 2004,warrants to purchase 195,000 shares remain outstanding. |
|     |                       |  |

|  |  |                                                                    |
|--|--|--------------------------------------------------------------------|
|  |  | Thefair value of the warrants on the date of issuance was$775,000. |
|  |  |                                                                    |

|     |                        |  |                                                                                                                                                                                                                                                                                                                                                                                                           |
|-----|------------------------|--|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 12. | EMPLOYEE BENEFIT PLAN: |  | OnSeptember  11,  1996, CPI’s board of directorsinstituted a defined contribution plan under Section 401(k) of theInternal Revenue Code (the ‘‘Code’’). OnOctober  1,  1998, the Company amended and standardizedboth the CPI and Kolar plans as required by the Code. Pursuant to theamended plan, qualified employees may contribute a percentage of theirpretax eligible |
|     |                        |  |

F-17

----

CPIAEROSTRUCTURES, INC.     NOTES TO FINANCIALSTATEMENTSDecember  31,2005

|  |
|--|
|  |  |
|  |

|  |  |                                                                                                                                                                                                                                                                                                                                                                                              |
|--|--|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  |  | compensation to the Plan and the Companywill match a percentage of each employee’s contribution.Additionally, the Company has a profit-sharing plan covering alleligible employees. Contributions by the Company are at the discretionof management. The amount of contributions recorded by the Company in2005, 2004 and 2003 amounted to $91,318, $108,706 and $81,310,respectively. |
|  |  |                                                                                                                                                                                                                                                                                                                                                                                              |

|     |                 |  |                                                                                                        |
|-----|-----------------|--|--------------------------------------------------------------------------------------------------------|
| 13. | MAJOR CUSTOMER: |  | 96% of the sales in 2005, 99% of thesales in 2004 and 98% of sales in 2003 were to the U.S.government. |
|     |                 |  |

|     |                  |  |                                                                                                                                                                                   |
|-----|------------------|--|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 14. | PUBLIC OFFERING: |  | On February  19,  2003, theCompany consummated a public offering of 2,300,000 common shares at aprice of $4.00 per share raising proceeds of $7,700,000, net ofoffering expenses. |
|     |                  |  |

|     |                                             |  |                          |
|-----|---------------------------------------------|--|--------------------------|
| 15. | SUMMARY OF QUARTERLY INFORMATION(UNAUDITED) |  |      |
|     |                                             |  |

|                                 |  |              |           |           |  |               |           |             |  |        |           |        |  |            |  |  |  |  |
|---------------------------------|--|--------------|-----------|-----------|--|---------------|-----------|-------------|--|--------|-----------|--------|--|------------|--|--|--|--|
|                            |  | QuarterEnded |
| 2005                            |  | March31,     |           | June  30, |  | September 30, |           | December31, |
| Revenue                         |  | $            | 6,245,102 |      |  | $             | 6,313,432 |        |  | $      | 6,452,246 |   |  | $6,515,624 |
| Income(loss) fromOperations     |  |         | 936,606   |      |  |          | 867,817   |        |  |   | 879,847   |   |  | (13,984)   |
| NetIncome/(Loss)                |  |         | 578,656   |      |  |          | 509,193   |        |  |   | 548,498   |   |  | (116,914)  |
| Basicearnings (loss) pershare   |  |         | 0.11      |      |  |          | 0.09      |        |  |   | 0.10      |   |  | (0.02)     |
| Dilutedearnings (loss) pershare |  |         | 0.09      |      |  |          | 0.08      |        |  |   | 0.09      |   |  | (0.01)     |
|                                 |

|                          |  |              |           |           |  |              |           |             |  |        |           |        |  |            |  |  |  |  |
|--------------------------|--|--------------|-----------|-----------|--|--------------|-----------|-------------|--|--------|-----------|--------|--|------------|--|--|--|--|
|                     |  | QuarterEnded |
| 2004                     |  | March31,     |           | June  30, |  | September30, |           | December31, |
| Revenue                  |  | $            | 6,228,108 |      |  | $            | 7,192,324 |        |  | $      | 7,877,023 |   |  | $8,971,575 |
| IncomefromOperations     |  |         | 1,088,018 |      |  |         | 1,547,904 |        |  |   | 1,965,399 |   |  | 2,269,525  |
| NetIncome                |  |         | 651,812   |      |  |         | 963,199   |        |  |   | 1,325,471 |   |  | 2,135,549  |
| Basicearnings pershare   |  |         | 0.12      |      |  |         | 0.18      |        |  |   | 0.25      |   |  | 0.39       |
| Dilutedearnings pershare |  |         | 0.11      |      |  |         | 0.16      |        |  |   | 0.22      |   |  | 0.34       |
|                          |

F-18

----

Inaccordance with Section 13 or 15(d) of the Exchange Act, the registrantcaused this report to be signed on its behalf by the undersigned,thereunto dulyauthorized.

|                        |  |                                     |  |                                                                         |  |  |  |  |  |  |
|------------------------|--|-------------------------------------|--|-------------------------------------------------------------------------|--|--|--|--|--|--|
| Dated:March  30,  2006 |  | CPI AEROSTRUCTURES,INC.(Registrant) |
|                   |  |                                |  |                                                                    |
|                   |  | By:                                 |  | /s/Edward J. Fred                                                       |
|                   |  |                                |  | Edward J. FredChief Executive Officer, President, Secretary andDirector |
|                        |

In accordance with the Exchange Act, thisreport has been signed below by the following persons on behalf of theregistrant and in the capacities and on the datesindicated:

|                      |  |                                                           |  |                |
|----------------------|--|-----------------------------------------------------------|--|----------------|
| Signature            |  | Title                                                     |  | Date           |
|                      |
| /s/Eric Rosenfeld    |  | Chairmanof the Board of Directors                         |  | March  30,2006 |
|                      |
| Eric Rosenfeld       |
|                      |
| /s/ Edward J.Fred    |  | Chief ExecutiveOfficer, President, Secretary and Director |  | March30,  2006 |
|                      |
| Edward J. Fred       |
|                      |
| /s/Arthur August     |  | ChairmanEmeritus                                          |  | March  30,2006 |
|                      |
| Arthur August        |
|                      |
| /s/ VincentPalazzolo |  | ChiefFinancial Officer                                    |  | March  30,2006 |
|                      |
| Vincent Palazzolo    |
|                      |
| /s/ WalterPaulick    |  | Director                                                  |  | March  30,2006 |
|                      |
| WalterPaulick        |
|                      |
| /s/ KennethMcSweeney |  | Director                                                  |  | March30,  2006 |
|                      |
| KennethMcSweeney     |
|                      |
| /s/ A.C.Providenti   |  | Director                                                  |  | March30,  2006 |
|                      |
| A.C.Providenti       |
|                      |

----