<PAGE>   1
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                    FORM 10-K

/x/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
    OF 1934
                  For the fiscal year ended September 27, 1996
                                       OR

/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES AND 
    EXCHANGE ACT OF 1934

              For the transition period from            to
                                             ----------    ----------
<TABLE>
<CAPTION>
<S>                                                                 <C> 
             Commission File Number: 33-96858-01                    Commission File Number: 33-96858
                     COMMUNICATIONS & 
                     POWER INDUSTRIES                                       COMMUNICATIONS & 
                   HOLDING CORPORATION                                   POWER INDUSTRIES, INC.
 (Exact name of registrant as specified in its charter)   (Exact name of registrant as specified in its charter)
                        DELAWARE                                                 DELAWARE
                (State of Incorporation)                                 (State of Incorporation)
                       77-0407395                                               77-0405693
        (I.R.S. employer identification number)                  (I.R.S. employer identification number)
                     607 HANSEN WAY                                           607 HANSEN WAY
            PALO ALTO, CALIFORNIA 94303-1110                         PALO ALTO, CALIFORNIA 94303-1110
                     (415) 846-2900                                           (415) 846-2900
  (Address, including zip code, and telephone number,      (Address, including zip code, and telephone number,
     including area code, of registrant's principal           including area code, of registrant's principal
                   executive offices)                                       executive offices)
 Securities registered pursuant to Section 12(b) of the     Securities registered pursuant to Section 12(b) of
                          Act:                                                   the Act:
                          NONE                                                     NONE
 Securities registered pursuant to Section 12(g) of the     Securities registered pursuant to Section 12(g) of
                          Act:                                                   the Act:
                          NONE                                                     NONE
</TABLE>

Indicate by check mark whether each registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .

Indicate by check mark if disclosure of delinquent filers pursuant to item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of each registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ( X )

The aggregate market value of voting stock of Communications & Power Industries
Holding Corporation held by non-affiliates is $1,050,000, based upon the selling
price of such stock. No voting stock of Communications & Power Industries, Inc.
is held by non-affiliates of Communications & Power Industries, Inc.
Communications & Power Industries, Inc.'s voting stock is wholly owned by
Communications & Power Industries Holding Corporation, a Delaware corporation.
Neither Communications & Power Industries, Inc.'s nor Communications & Power
Industries Holding Corporation's common stock is publicly traded.

Indicate the number of shares outstanding for each of the Registrant's classes
of Common Stock, as of the latest practicable date: COMMUNICATIONS & POWER
INDUSTRIES HOLDING CORPORATION: 200,000 SHARES OF COMMON STOCK, $.01 PAR VALUE,
AT FEBRUARY 1, 1996. COMMUNICATIONS & POWER INDUSTRIES, INC.: 1 SHARE OF COMMON
STOCK, $.01 PAR VALUE, AT FEBRUARY 1, 1996.

                      DOCUMENTS INCORPORATED BY REFERENCE:
                                     (None)


<PAGE>   2
                                     PART 1

ITEM 1:       BUSINESS

GENERAL

Communications & Power Industries Holding Corporation, Inc. ("Holding"), through
its wholly-owned subsidiary, Communications & Power Industries, Inc. ("CPI",
both companies together referred to as the "Company"), is a world leader in the
development, manufacture and distribution of components for systems used
primarily to generate, amplify and transmit high-power/high-frequency microwave
and radio frequency signals. End-use applications of these systems include the
transmission and amplification of voice, data and video signals for broadcasting
and telecommunications, transmission of radar signals for navigation and
location, transmission of false signals for electronic countermeasures (e.g.,
decoys and signal "jammers") and various other uses in the industrial, medical
and scientific markets.

The Company's products include microwave and power grid vacuum electronic
devices, microwave amplifiers, modulators, and various other power supply
equipment and devices. These products are consumables and have a finite life
based upon hours of usage, operating environment and application. The Company
operates six manufacturing locations in North America, and sells and services
its products and customers worldwide primarily through a direct sales force.

Communications & Power Industries, Inc. is a wholly-owned subsidiary of
Communications & Power Industries Holding Corporation. Both Holding and CPI are
Delaware corporations formed in 1995. The principal executive offices of Holding
and CPI are located at 607 Hansen Way, Palo Alto, California 94304 and their
telephone number is (415) 846-2900.

THE ACQUISITION

Prior to August 11, 1995, the Company's operations were part of the Electron
Devices Business division (the "Predecessor") of Varian Associates, Inc.
("Varian"). On August 11, 1995, CPII Acquisition Corp. ("CPII Acquisition")
acquired (in the matter described below) substantially all of the assets that
were used primarily in developing, manufacturing and distributing microwave and
power grid vacuum electronic devices, microwave amplifiers, modulators and
various other power supply equipment and devices through the Predecessor.
Pursuant to the terms of a Stock Sale Agreement dated June 9, 1995, as amended,
among Holding, CPII Acquisition, and Varian (the "Acquisition Agreement"), prior
to the consummation of the Acquisition, Varian and its affiliates contributed
the assets of the Predecessor that were located in the United States to CPI,
which was a newly-formed, wholly-owned Varian subsidiary. Subsequently, upon the
consummation of the Acquisition, Varian transferred all of the outstanding
capital stock of CPI to CPII Acquisition. The assets of the Predecessor that
were located in foreign jurisdictions were transferred from Varian or its
affiliates to newly-formed direct or indirect subsidiaries of CPI. In
consideration of the transfer of such capital stock and assets, CPII Acquisition
(including its affiliates) paid Varian (including its affiliates) an aggregate
purchase price of $196.2 million, subject to a post-closing adjustment (the
"Purchase Price"). Holding, CPII Acquisition and CPI's subsidiaries also assumed
certain specified liabilities of the Predecessor. The liabilities assumed by
Holding (with respect to which CPI has agreed to perform any necessary services)
included certain balance sheet liabilities of the Predecessor, which aggregated
approximately $24.1 million as of August 11, 1995, and certain contingent
liabilities (such as for certain product warranty claims) (the "Assumed
Liabilities"). Upon 


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<PAGE>   3
the merger of CPII Acquisition with and into CPI immediately following the
consummation of the Acquisition, CPI became a wholly-owned subsidiary of
Holding.

In connection with the consummation of the Acquisition, the Company also entered
into the following transactions:

       (1) Two senior term loans of CPI in the aggregate amount of $42.0 million
           and a revolving credit facility in a principal amount of up to $35.0
           million (including a $5.0 million sub-facility for letters of credit)
           pursuant to a senior credit agreement (the "Senior Credit
           Agreement"), of which approximately $23.0 million was drawn in
           connection with the consummation of the Acquisition,

       (2) Issuance of 12% Series A Senior Subordinated Notes due 2005 (the
           "Series A Senior Subordinated Notes") of CPI in the aggregate
           principal amount of $100.0 million (guaranteed by Holding and all of
           the Company's direct and indirect subsidiaries),

       (3) Issuance of units (the "Units") consisting of 150,000 shares of
           Series A 14% Senior Redeemable Exchangeable Cumulative Preferred
           Stock due 2007 (the "Series A Senior Preferred Stock") of CPI and
           10,500 shares of common stock of Holding ("Holding Common Stock") for
           $15.0 million,

       (4) Issuance of 100,000 shares of 14% Junior Cumulative Preferred Stock
           (the "Junior Preferred Stock") of CPI to Green Equity Investors II,
           L.P., a Delaware limited partnership ("GEI II") for $10.0 million,
           and

       (5) Issuance of shares of Holding Common Stock to GEI II and certain
           members of the senior management of CPI for $20.0 million (including
           $0.8 million paid by notes from members of senior management).

CPI subsequently exchanged the Series A Senior Subordinated Notes and Series A
Senior Preferred Stock, in exchange offers (the "Exchange Offers") registered
under the Securities Act of 1933, for otherwise identical 12% Series B Senior
Subordinated Notes due 2005 (the "Notes") and Series B 14% Senior Redeemable
Exchangeable Cumulative Preferred Stock due 2007 (the "Senior Preferred Stock"),
respectively.

GEI II initiated the Acquisition and currently owns approximately 71.8% of the
outstanding shares of Holding Common Stock. Holding, in turn, owns all of the
outstanding common stock of CPI. Accordingly, GEI II is able to elect all of the
members of the board of directors of Holding and thus to exercise control over
Holding's and CPI's business and affairs. Leonard Green & Partners, L.P., a
Delaware limited partnership, is an investment advisor to, and an affiliate of
the general partner of, GEI II. See "Security Ownership of Certain Beneficial
Owners and Management" and "Certain Relationships and Related Transactions."

Except as the context may otherwise require, the term the "Company" as used in
this Form 10-K refers to both the Company and the Predecessor.

PRODUCTS

The Company offers a comprehensive range of microwave and power grid vacuum
electronic devices, microwave amplifiers, modulators and various other power
supply equipment and devices for use in the communication, radar, 


                                      -2-
<PAGE>   4
electronic countermeasures, industrial, medical and scientific markets. The
Company offers over 6,600 products which generally have selling prices from
$2,000 to $50,000, with certain products ranging in price up to $1,000,000.
These products are consumables and have a finite life based upon hours of usage,
operating environment and application. Certain of the Company's products are
sold in more than one market depending on the specific power and frequency
requirements of the end-user and the physical operating conditions of the
environment in which the vacuum electronic device will be located.

Specific products which the Company offers include:

         -        VACUUM ELECTRONIC DEVICES. Helix traveling wave vacuum
                  electronic devices, klystron amplifiers, klystron
                  oscillators, gyrotrons, coupled cavity traveling wave vacuum
                  electronic devices, magnetrons, ring loop traveling wave
                  vacuum electronic devices, cross field amplifiers, extended
                  interaction klystrons, power grid vacuum electronic devices,
                  Klystrodes(R) and inductive output vacuum electronic devices.

         -        AMPLIFIERS. Satellite communication amplifiers,
                  instrumentation amplifiers, traveling wave tube transmitters,
                  FET modulators, magnetron modulators, test sets, X-ray
                  generators, Heat WaveTM products, microwave power modules,
                  microwave power boosters, traveling wave vacuum electronic
                  devices amplifiers and millimeter wave subsystems.

         -        RELATED DEVICES. Diode switches, waveguide assemblies,
                  pressure windows, receiver protectors, hermetic seals, high
                  voltage power supplies and radio frequency cavities.

MARKETS

The Company's products are used primarily to generate, amplify and transmit
high-power/high-frequency microwave, electronic and radio frequency signals.
End-use applications of these devices include the transmission and amplification
of voice, data, and video signals for broadcasting and telecommunications,
transmission of radar signals for navigation and location, transmission of false
radar signals for electronic countermeasures (e.g., decoys and signal "jammers")
and various other uses in the industrial, medical and scientific markets.

In Fiscal 1996, commercial sales, which represent sales for which a U.S.
Government entity is not the end-user, represented approximately 73.0% of the
Company's total sales. Direct and OEM sales to the U.S. Government represented
approximately 27.0% of the Company's total sales. These percentages reflect the
Company's development of products for the commercial marketplace. Prior to 1990,
the Company's primary customers were U.S. Government agencies and OEMs
manufacturing defense-related products. In Fiscal 1989, U.S. Government sales
represented approximately 48% of the Company's sales. Since the late 1980s, the
United States defense budget has been shrinking; however, in Fiscal 1995 and
Fiscal 1996, the Company's U.S. Government-related orders showed a slight
increase. Management expects that U.S. Government and defense-related end-users
will continue to provide a steady source of revenue.

In Fiscal 1996, approximately 66% of sales were derived from U.S. customers,
while approximately 34% were derived from international customers. Many domestic
OEMs, primarily those in the satellite communications market, export their
products, and management estimates that approximately 15% of the Company's sales
to U.S. customers ultimately have international end-users. Accordingly,
management believes that approximately 44% of Fiscal 1996 sales represent sales
to international end-users which is an increase from 42% in Fiscal 1995 and
approximately 56% of Fiscal 1996 sales represent sales to U.S. end-users which
is a decrease from 58% in Fiscal 1995. Excluding sales to the U.S. Government,
no single customer accounted for more than 5% of the Company's total sales in
Fiscal 


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<PAGE>   5
1996 or Fiscal 1995.

The Company operates in six different markets:

-        Communications Market - The communications market is comprised of
         applications for satellite communications ("SatCom") and broadcast
         sectors. In this market, the Company's products generate, amplify and
         transmit signals and data within an overall communication system.
         Sales(1) in the communication market were $118.4 million in Fiscal 1996
         compared to $110.5 million in Fiscal 1995 and $101.8 million for Fiscal
         1994.

-        Radar Market - The radar market includes microwave and power grid
         vacuum electronic devices, amplifiers and related equipment for air,
         ground and shipboard radar systems. The Company's vacuum electronic
         devices have been an integral component of radar systems for over four
         decades. Sales(1) in the radar market were $74.6 million for Fiscal 
         1996, $76.9 million for Fiscal 1995 and $87.3 million for Fiscal 1994.

-        Electronic Countermeasures Market - The electronic countermeasures
         market utilizes microwave vacuum electronic devices for systems that
         provide protection for ships, aircraft and high-value land targets
         against radar-guided munitions. Sales(1) in the electronic
         countermeasures market were $17.2 million, $20.1 million, and $18.8
         million in Fiscal 1996, Fiscal 1995, and Fiscal 1994, respectively.

-        Industrial Market - The industrial market includes applications for a
         wide range of systems used for materials processing, instrumentation
         and voltage generation. Sales in this market were $27.2 million for
         Fiscal 1996. On a pro-forma basis, sales were $22.6 million in Fiscal
         1995 and $15.9 million in Fiscal 1994. Industrial sales on a historical
         combined basis were $22.0 million and $15.6 million in Fiscal 1995 and
         Fiscal 1994, respectively.

-        Medical Market - The Company participates in the diagnostic and
         treatment sectors of the medical market. In the diagnostic market, the
         Company provides X-ray generators, including state-of-the-art,
         high-efficiency, lightweight power supplies and modern digital-based
         consoles for diagnostic equipment. In the treatment market, the Company
         provides microwave generators (klystrons) for high-end cancer therapy
         machines. Sales in this market were $16.3 million for Fiscal 1996. On a
         pro forma basis, sales were $17.4 million in Fiscal 1995 and $17.8
         million in Fiscal 1994. Medical sales on a historical basis were $15.8
         million and $15.9 million in Fiscal 1995 and Fiscal 1994, respectively.

-        Scientific Market - The scientific market consists primarily of
         equipment utilized in reactor fusion programs and accelerators for
         high-energy particle physics, referred to as "Big Science." Sales(1) in
         the scientific market were $3.7 million, $5.7 million and $7.6 million
         in Fiscal 1996, Fiscal 1995 and Fiscal 1994, respectively.

-----------------------
(1) Represents sales on a historical basis of the combined Predecessor and 
    Successor for Fiscal 1995. Pro-forma adjustments have no effect on this 
    comparison, as there are no sales to Varian in this market.


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<PAGE>   6
SALES, MARKETING AND SERVICE

As of September 27, 1996, the Company's 123 direct marketing and sales
professionals represent the largest direct sales, service and technical support
organization focused exclusively on high-power/high-frequency signal generation,
amplification and transmission. The Company's sales and service organization is
supplemented by outside representatives and a distributor which service certain
lower volume accounts. Each of the Company's sales professionals is responsible
for marketing the Company's entire product line. Company sales professionals
receive extensive technical training in all of the Company's products, which
allows them to provide customers with appropriate technical support, including
information on product application and implementation.

In addition to its direct sales force, the Company utilizes 32 external sales
organizations and one stocking distributor, Richardson Electronics, Ltd., to
service the needs of low volume customers. The majority of the third-party
organizations which the Company utilizes are located outside the U.S. and focus
primarily on customers in South America, South East Asia, the Far East, the
Middle East, Africa and Eastern Europe. Through the use of third-party sales
organizations, the Company has been better able to meet the needs of its foreign
customers by establishing a local presence in lower volume markets.

The Company also has a specialized network of eight factory service centers for
the SatCom replacement market. These service centers are located in California,
New Jersey, Amsterdam, Moscow, Tokyo, Singapore, Nanjing and Jakarta.

MANUFACTURING

The Company manufactures over 6,600 products in its six manufacturing locations
in North America. The Company has implemented modern manufacturing methodologies
based upon "continuous improvement," including JIT materials handling, Demand
Flow Technology, Statistical Process Control and Value Managed Relationships
with suppliers and customers. The Company has achieved the ISO-9000
international certification standard utilized in the European Community.

The Company's manufacturing process for power supplies, amplifiers and
transmitters consists of purchasing, high level assembly, and test. The Company
utilizes contract manufacturers whenever possible for subassembly. In the
manufacture of tubes, multiple steps are required. The process starts with
procurement of raw material and sub-assemblies from qualified suppliers, who
often deliver on a JIT basis. Raw materials are then formed, primarily by
machining, cleaning and plating certain parts. These steps utilize statistical
process control techniques to assure quality and high production yields.
Subassembly is then performed to produce a vacuum envelope, the essential part
of a vacuum electronic device. This subassembly process is performed utilizing
Demand Flow Technology, which helps to minimize inventory. Vacuum assemblies are
processed by pumping the atmosphere from the assemblies while heating the
assemblies in a furnace and simultaneously charging them with an electrical
current. When this step is complete, final assembly and testing is performed on
each product before shipment. The Company has developed sophisticated test
programs to assure that each product meets operating specifications.

Certain materials necessary for the manufacture of the Company's products, such
as molybdenum, OFHC copper, and some cathodes, are obtained from sole, or a
limited group of, suppliers. In addition, prices of these raw materials and key
components are subject to fluctuation.


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<PAGE>   7
COMPETITION

The industries and markets in which the Company operates are highly competitive.
The Company encounters intense competition in most of its business areas from
numerous other companies (such as Hughes Electronics Corporation, Litton
Industries, Inc., English Electric Valve Company (General Electric Company plc),
NEC Corporation and Thomson CSF), some of which have resources substantially
greater than those of the Company. Some of these competitors are also customers
of the Company. The Company's ability to compete in its markets depends to a
large extent on its ability to provide high quality products with shorter lead
times at a lower price than its competitors, and its readiness in facilities,
equipment and personnel.

The Company must also continually engage in effective research and development
efforts in order to introduce innovative new products for technologically
sophisticated customers and markets. There is an inherent risk that advances in
existing technology, including solid state technology, or the development of new
technology could adversely effect the Company's financial condition and results
of operations. Although solid state devices generally serve end-users' low-power
requirements more cost effectively and efficiently than microwave vacuum
electronic devices, only microwave vacuum electronic devices currently serve
high-power/high-frequency demands. The laws of physics limit the ability of
solid state technology to efficiently or cost effectively serve the
high-power/high-frequency applications of the Company's customers. These
applications' extreme operating parameters necessitate heat dissipation
capabilities which are satisfied by the Company's products. The Company's
management believes that each technology serves its own niche without
significant overlap.

BACKLOG

As of September 27, 1996, the Company had an order backlog of $153.4 million,
representing over seven months of sales compared to order backlog of $138.9
million as of September 29, 1995 and $136.1 million as of September 30, 1994.
Although the backlog consists of firm orders for which goods and services are
yet to be provided, these orders can be and sometimes are modified or
terminated. However, the amount of modifications and terminations has
historically not been material compared to total contract volume.


                                      -6-

<PAGE>   8
INTELLECTUAL PROPERTY

The Company owns a number of United States and foreign patents having various
expiration dates (collectively, the "Patents"). The Patents are directed to
various aspects of the technologies used by the Company in many of its
operations. In addition to the Patents, the Company has certain trade secrets,
know-how, trademarks and copyrights related to its technology and products. The
Company also has acquired certain intellectual property rights and incurred
certain obligations through license and research and development agreements with
third parties. These agreements may include royalty bearing licenses, technology
cross licenses and manufacturing supply agreements. Management does not believe
that any single patent or license is material to the success of the Company as a
whole. As a result of contracts with the U.S. Government which contain patent
and/or data rights clauses, the U.S. Government also has acquired royalty-free
licenses or other rights in inventions and technology resulting from certain
work done by the Company on behalf of the U.S. Government. The Company also has
certain software license agreements with vendors and suppliers which affect the
Company's intellectual property rights. The Company generally enters into
confidentiality agreements with its employees, consultants and vendors, and
generally limits access to and distribution of its proprietary information. The
Company maintains an intellectual property protection program designed to
preserve the intellectual property assets for the Company's future products.
This program includes the filing of new domestic and foreign patent
applications, copyright and trademark applications and the pursuit of
enforcement of its intellectual property rights. Nevertheless, there can be no
assurance that the steps taken by the Company will prevent misappropriation or
loss of its technology.

As part of the Acquisition, six United States patents and one United States
patent application, and their foreign counterparts, are jointly owned by the
Company and Varian along with related trade secrets and know-how, including
drawings, manufacturing and testing processes and designs (the "Key Component
Technology"). The Key Component Technology relates to the manufacture and
testing of certain key electron beam guns and key medical klystrons, and any
improvements thereto. Upon the consummation of the Acquisition, the Company and
Varian entered into a Cross License Agreement to allocate the rights to the Key
Component Technology between the Company and Varian.

In addition, in connection with the consummation of the Acquisition, the Company
and Varian entered into a Trademark License Agreement to permit the Company to
continue to market, advertise, distribute and sell its products using Varian's
trademarks on its products for a period of three years and may identify its
products as "formerly made by Varian" for a period of ten years.

EMPLOYEES

As of September 27, 1996, the Company had approximately 1,763 employees. None of
the Company's employees is subject to a collective bargaining agreement although
a limited number of the Company's sales force members located in Europe are
members of work councils or unions. The Company has not experienced any work
stoppages and believes that it has good relations with its employees.

Because of the specialized and technical nature of the Company's business, the
Company is highly dependent on the continued service of, and on its ability to
attract and retain, qualified technical, marketing, sales and managerial
personnel. The competition for such personnel is intense, and the failure to
retain and/or recruit additional or substitute key personnel in a timely manner,
could have a material adverse effect on the Company's business and operating
results.


                                      -7-

<PAGE>   9
U.S. GOVERNMENT CONTRACTS AND REGULATIONS

Management expects that a decreasing but significant portion of the Company's
sales will continue in the foreseeable future to result from contracts with the
U.S. Government, either directly or through prime contractors or subcontractors.
The Company's business with the U.S. Government is performed under fixed-price
and, to a lesser degree, cost-plus contracts. Fixed-price contracts accounted
for approximately 92% of the Company's U.S. Government sales in Fiscal 1996.
Approximately 8% was performed under cost-plus contracts.

Under fixed-price contracts, the Company agrees to perform certain work for a
fixed price and, accordingly, realizes all the benefit or detriment from
decreases or increases in the costs of performing the contract. In addition,
under U.S. Government regulations, certain costs, including certain financing
costs, portions of research and development costs, and certain expenses related
to the preparation of competitive bids and proposals and international sales are
not reimbursable. The U.S. Government also regulates the methods under which
costs are allocated to U.S. Government contracts.

U.S. Government contracts are, by their terms, subject to termination by the
U.S. Government either for its convenience or default by the contractor.
Cost-plus contracts provide that, upon termination, the contractor is generally
entitled to reimbursement of its incurred costs and, if the termination is for
convenience, a fee proportionate to the percentage of the work completed under
the contract is permitted. If the termination is for default, a contractor may
also receive a fee proportionate to any items delivered to and accepted by the
U.S. Government. Fixed-price contracts provide for payment upon termination for
items delivered to and accepted by the U.S. Government, and, if the termination
is for convenience, for reimbursement of its other incurred costs and a
reasonable profit on incurred costs. If a contract termination is for default,
however, (i) the contractor is paid an amount agreed upon for completed and
partially completed products and services accepted by the U.S. Government, (ii)
the U.S. Government is not liable for the contractor's incurred costs with
respect to unaccepted items, and is entitled to repayment of advance payments
and progress payments, if any, related to the terminated portions of the
contracts and (iii) the contractor may be liable for excess costs incurred by
the U.S. Government in procuring undelivered items from another source.

In addition to the right of the U.S. Government to terminate, U.S. Government
contracts are conditioned upon the availability of Congressional appropriations.
Congress usually appropriates funds for a given program on a fiscal year basis
even though contract performance may take many years. Consequently, at the
outset of a major program, multi-year contracts are usually funded for only the
first year (including any termination penalty), and additional monies are
normally committed to the contract by the procuring agency only as
appropriations are made by Congress for future fiscal years.

The Company's contracts with foreign governmental defense agencies are subject
to certain similar limitations and risks as those encountered with U.S.
Government contracts. Licenses are required from U.S. Government agencies to
export many of the Company's products. Certain of the Company's products are not
permitted to be exported.

Holding and Varian submitted the appropriate documentation requests and entered
into a novation agreement with the U.S. Government, as required by federal
procurement regulations, applicable to all contracts between or relating to the
Predecessor and the U.S. Government (the "Acquired Government Contracts") which
were acquired by the Company in connection with the Acquisition. This novation
agreement provides, among other things, that the Company assumes all obligations
under the Acquired Government Contracts and that the U.S. Government recognizes
the transfer to the Company of the Acquired Government Contracts and related
assets.


                                      -8-
<PAGE>   10
Due to its business with the U.S. Government, the Company may also be subject to
"qui tam" (whistle blower) suits brought by private plaintiffs in the name of
the U.S. Government upon the allegation that the Company submitted a false claim
to the U.S. Government, as well as to false claim suits brought by the U.S.
Government. A judgment against the Company in a qui tam or false claim suit
could cause the Company to be liable for substantial damages and could carry
penalties of suspension or debarment which would make the Company ineligible to
be awarded any U.S. Government contracts for a period of up to three years and,
thereby, could potentially have a material adverse effect on the Company's
financial condition and results of operations.

Similar to other companies which derive a substantial portion of their sales
from contracts with the U.S. Government for defense-related products, the
Company is subject to business risks, including changes in governmental
appropriations, national defense policies or regulations and availability of
funds. Any of these factors could adversely affect the Company's business with
the U.S. Government in the future.

ENVIRONMENTAL MATTERS

The Company is subject to a wide variety of federal, state and local
environmental laws and regulations which are subject to change and utilizes in
its operations a number of chemicals which are classified as hazardous or
similar substances. It is difficult to predict what impact these environmental
laws and regulations may have on the Company in the future. Restrictions on
chemical uses or certain manufacturing processes could restrict the ability of
the Company to operate in the manner in which the Company is currently operated
or is permitted to be operated. Although Varian is currently involved in a
substantial long-term remediation program relating to the past operations of the
Predecessor, management believes that the Company's current operations are in
substantial compliance with current environmental laws and regulations.
Nevertheless, it is possible that the Company may experience releases of certain
chemicals to environmental media, either from its own operations or properties
or from third-party operations or properties (such as off-site landfills), which
could constitute violations of environmental law (and have an impact on its
operations) or which could cause the incurrence of material cleanup costs or
other damages. For these reasons, the Company is involved from time to time in
legal proceedings involving compliance with environmental requirements
applicable to its ongoing operations, and may be involved in legal proceedings
involving exposure to chemicals or the remediation of environmental
contamination from past or present operations. Because certain environmental
laws impose joint, several, strict and retroactive liability upon current owners
or operators of facilities from which there have been releases of hazardous
substances, the Company could be held liable for remedial measures or other
damages (such as liability for personal injury actions) at properties it owns or
utilizes in its operations, even if the contamination was not caused by the
Company's operations.

Varian has agreed to indemnify the Company, to the extent permissible by law,
for environmental claims arising from the Predecessor's operations prior to the
consummation of the Acquisition, subject to certain exceptions and limitations.
See "Business - Relationship with Varian - Acquisition Agreement." With certain
limited exceptions, the Company is not indemnified by Varian for environmental
claims arising from the Company's operations after the consummation of the
Acquisition. There can be no assurance that material costs or liabilities will
not be incurred by the Company in connection with proceedings or claims related
to environmental conditions arising from the Company's operations. In addition,
although Varian will retain financial and other responsibility for certain
environmental liabilities of the Predecessor, including those for which, under
law, the Company would otherwise be responsible, there can be no assurance that
Varian will reimburse the Company for any particular environmental costs or do
so in a timely manner. Although the Company believes that Varian currently has
sufficient financial resources to satisfy its environmental indemnification
obligations to the 


                                      -9-
<PAGE>   11
Company, because of the long-term nature of many of Varian's remediation
obligations, there can be no assurance that Varian will continue to have the
financial resources to comply fully with its indemnification obligations to the
Company. Unreimbursed liabilities arising from environmental claims, if
significant, could have a material adverse effect on the Company's results of
operations and financial condition.

The Company is aware that Varian is engaged in certain ongoing environmental
investigatory and remedial work, which is in various stages of completion.
Varian has indemnified the Company, to the extent permissible by law, for
environmental claims arising from the operation of the Predecessor prior to the
consummation of the Acquisition, subject to certain exceptions and limitations.
Based on information currently available to the Company, the following provides
a summary of the investigatory and remedial work being undertaken at the various
properties owned or utilized by the Predecessor with respect to its operations.

PALO ALTO, CALIFORNIA. As a result of actual and threatened claims brought by
other property owners and the State of California with regard to contamination
present under and emanating from the Company's facilities located at the Palo
Alto, California property (which facilities are leased by way of assignment and
subleased by the Company and which serves as the Company's headquarters and one
of its principal manufacturing complexes containing two manufacturing
facilities), Varian has entered into a consent order (the "Palo Alto Consent
Order") with the California Environmental Protection Agency. In accordance with
the Palo Alto Consent Order, Varian has submitted, and the regulatory agencies
have approved, a Remedial Action Plan to investigate and remediate groundwater
and soil vapor contamination at the affected property to acceptable levels.
Varian has entered into an agreement with the master lessor of the property
pursuant to which it is obligated to comply with the remediation obligations
under the Palo Alto Consent Order. As a sublessee or assignee of the property,
the Company's right to continued occupancy of these premises will be dependent
upon Varian's fulfillment of its responsibilities to the master lessor,
including its obligation to comply with the Palo Alto Consent Order.

The Palo Alto, California facilities are also known to be within areas of
regional groundwater contamination, which contamination is being addressed by
federal and state environmental regulatory agencies. The Palo Alto, California
property is adjacent to the Hewlett-Packard 640 Page Mill Road National
Priorities List Site (the "HP Site") listed pursuant to the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended
("CERCLA"). As a result of allegations that contamination resulting from
Varian's historical operations, including its operations of the Predecessor, has
migrated from that property to the HP Site and elsewhere, the Company is aware
that Varian, as well as Hewlett-Packard and Stanford University, has been named
in an order issued by the San Francisco Bay Regional Water Quality Control
Board, and that Varian, together with Hewlett-Packard, is remediating a portion
of the HP Site known as the California-Olive-Emerson Operable Unit, principally
through the use of a groundwater treatment system, in response to that order.

The Palo Alto, California property is also adjacent to the Hillview-Porter State
Study Area ("Hillview-Porter Site") identified by the California Environmental
Protection Agency. Varian has not been named as a potentially responsible party
in connection with the Hillview-Porter Site, although the Company is aware that
allegations have been made that this property has impacted, and been impacted
by, the Hillview-Porter Site.

Although liability under environmental laws such as CERCLA is strict, there
often are a number of parties responsible for regional contamination, and such
parties often will allocate the remedial action costs among themselves, taking
into consideration equitable and other factors. Several potentially 


                                      -10-

<PAGE>   12
responsible parties, including Hewlett-Packard and Varian, have been identified
by the United States Environmental Protection Agency with respect to the HP
Site, and several potentially responsible parties, currently not including
Varian, have been identified by the California Environmental Protection Agency
with respect to the Hillview-Porter Site.

SALT LAKE CITY, UTAH. Prior to the acquisition and use by Varian of the Salt
Lake City, Utah property, such property was used for other industrial purposes,
including the manufacturing of munitions. As a result of actual and threatened
claims brought by other property owners and the State of Utah with regard to
groundwater contamination present under and emanating from the Salt Lake City
facility, Varian has entered into a consent order (the "Salt Lake City Consent
Order") with the State of Utah. Pursuant to the terms of the Salt Lake City
Consent Order, Varian has installed a groundwater remediation system to address
the groundwater and soil contamination conditions.

OTHER FACILITIES. The Company's other main manufacturing facilities, which are
located in San Carlos and Santa Clara, California, Beverly, Massachusetts, and
Georgetown, Ontario, Canada, all have soil and groundwater contamination which
either may or does require remediation. Pursuant to legal requirements, Varian
has installed a groundwater remediation system which is presently in operation
at the Beverly property. In addition, the Company is aware that an action has
been commenced against Varian by adjoining property owners and others, and that
other claims may be made, with respect to off-site contamination allegedly
emanating from the Beverly, Massachusetts facility.

RELATIONSHIP WITH VARIAN

The Company continues to maintain certain relationships with Varian arising from
the Predecessors' previous relationship with Varian and arising under the
Acquisition Agreement and the Ancillary Agreements (as defined below). The
descriptions of certain of such relationships set forth below are qualified in
their entirety by reference to the full texts of documents relating thereto,
copies of which are included as exhibits to this Annual Report on Form 10-K.

Acquisition Agreement. The Acquisition Agreement contains customary
representations, warranties and covenants. The Company and Varian agreed to
indemnify one another for breaches of representations and warranties contained
in the Acquisition Agreement or the ancillary agreements executed in connection
therewith (the "Ancillary Agreements"), provided claims with respect thereto are
asserted on or before December 31, 1996. With respect to such breaches of
representations and warranties, no claims under the indemnity may be asserted
against the Company or Varian by the other party unless such claims exceed $2.0
million in the aggregate, but the indemnitor is obligated to indemnify the
indemnitee for the full amount of all such claims once the $2.0 million
threshold is satisfied, up to a maximum liability of ten percent of the Purchase
Price.

In addition, pursuant to the terms of the Acquisition Agreement, Varian agreed
to indemnify and reimburse the Company for all losses arising from breaches of
covenants and agreements of Varian in the Acquisition Agreement and the
Ancillary Agreements, all Retained Liabilities (as defined in the Acquisition
Agreement), environmental claims arising from the pre-closing operation of the
Predecessor (as more fully described below), certain matters pertaining to
Varian's interest in its Palo Alto, California and Santa Clara, California
facilities, and certain other matters as specified in the Acquisition Agreement.
In turn, the Company agreed to indemnify and reimburse Varian for all losses
arising from breaches of covenants and agreements of the Company in the
Acquisition Agreement and the Ancillary Agreements, all Assumed Liabilities,
environmental claims arising from the post-closing operation of the Predecessor
(as more fully described below), and certain other matters as specified in the
Acquisition Agreement. As to such indemnification obligations of Varian and the
Company, there are no time or 


                                      -11-

<PAGE>   13
dollar limitations. The indemnification provisions in the Acquisition Agreement
and the Ancillary Agreements are generally intended to be the exclusive remedies
of the parties with respect to such agreements, subject to certain exceptions.

The environmental indemnification provisions of the Acquisition Agreement
provide generally that environmental liabilities of the Predecessor are retained
by Varian to the extent they arise from the pre-closing operation of the
Predecessor and are the obligations of the Company to the extent they arise from
the post-closing operation of the Predecessor, subject to certain exceptions.
Specifically, pursuant to the Acquisition Agreement, Varian agreed to indemnify
the Company for liabilities related to environmental claims arising from the
following: (i) Varian's possession or use of the acquired properties before the
closing, (ii) violations (or purported violations) of environmental laws
resulting from pre-closing conditions or activities at the acquired properties,
(iii) hazardous materials present at the acquired properties as of the closing,
(iv) disposal (other than by the Company or its agents) of hazardous materials
generated by Varian before the closing, and (v) post-closing releases of
hazardous materials by Varian resulting from the ongoing operation of Varian's
business. In addition to the foregoing and notwithstanding any other provision
of the Acquisition Agreement, Varian agreed to indemnify the Company against
third party claims arising out of, and to repair, subject to certain conditions,
pre-closing environmental conditions that constitute violations of environmental
laws, plus contamination arising from such conditions both before and after the
closing, to the extent the Company discovers such conditions within the six
months following the closing. The Acquisition Agreement provides that Varian
will have exclusive control of and sole discretion as to the investigation and
remediation of matters for which it is required to indemnify the Company. Varian
is required to undertake such actions in compliance with all applicable laws,
and without unreasonably interfering with the conduct of the Company.

In turn, the Company agreed to indemnify Varian for liabilities related to
environmental claims arising from the following: (i) the Company's possession or
use of the acquired properties after the closing, (ii) violations (or purported
violations) of environmental laws resulting from post-closing conditions or
activities at the acquired properties (subject to the Company's rights with
respect to conditions and related contamination discovered within the first six
months following the closing, as described above), (iii) any incremental costs
incurred by Varian as a result of the Company's introduction of hazardous
materials at the acquired properties after the closing, (iv) disposal of
hazardous materials by the Company or its agents after the closing, and (v) the
post-closing migration of hazardous materials that were present before the
closing or the post-closing exacerbation of environmental conditions existing
before the closing, but in each case only to the extent resulting from the
Company's active negligent conduct. In the event of post-closing releases, the
Company is required to respond to and remediate certain types of such releases
at its expense. However, in the event of post-closing releases which contribute
to existing groundwater contamination which is otherwise being remediated by
Varian, Varian agreed to treat such contaminated groundwater, to the extent
required and if it is feasible to do so, using its own treatment systems. The
Company will be required to reimburse Varian for Varian's incremental costs
related thereto.

With respect to Varian's duty to repair certain items identified by the Company
within six months following the closing, the Company reached an agreement and
settlement with Varian, effective October 1996, on such items identified. The
Company has, in turn, provided Varian with a release from its obligation to
handle the actual repair and a release from any fines and/or penalties which may
result from the Company's failure to complete the identified repairs.

Pursuant to the Acquisition Agreement, Varian's environmental indemnification
obligations do not extend to the following: (i) liabilities for certain building
materials, such as asbestos, and hazardous 


                                      -12-

<PAGE>   14
materials that are lawfully present, used or stored at the acquired properties
as of the closing (other than liabilities for personal injuries related
thereto), (ii) claims asserted by the Company or its successors for diminution
in property value or consequential damages caused by the presence of hazardous
materials at the acquired properties, or (iii) environmental response actions
other than those required by the Acquisition Agreement, governmental order or
self-executing environmental laws.

If a dispute arises as to whether and the extent to which a release of hazardous
materials occurred before or after the closing, Varian has agreed to bear the
burden of proof as to such matter by a preponderance of the evidence. In the
event that both Varian and the Company are partly responsible for a particular
environmental liability, such liability will be allocated between the parties in
accordance with their respective contributions to such liability.

If there is a dispute concerning the indemnification of only a portion of a
claim, the indemnitor is required to immediately assume full responsibility for
the undisputed portion of the claim. Any dispute between Varian and the Company
will be settled by arbitration. The arbitrator is authorized to allocate fees
and costs based upon the respective merits of the parties' respective positions
in the dispute.

Transitional Services Agreement. Pursuant to the terms of the Transitional
Services Agreement (the "Transitional Services Agreement") between Varian and
the Company, Varian provides certain services to the Company in order to
facilitate the transition of the Company to a stand-alone operation. Such
services include, among other things, training with respect to international
product orders, export license applications and general financial services,
certain management information services, payroll processing, and monitoring of
security systems and fire alarms. In addition, the Company provides transitional
services to Varian related to certain of Varian's non-United States operations.
Services will generally be provided for a period of two years following the
closing of the Acquisition (with shorter periods for certain services), subject
to the right of the party who receives such service to terminate any service it
receives upon 30 days' notice. In addition, in connection with the separation
and creation of independent utilities and systems at the Company's facilities,
the Transitional Services Agreement requires Varian to pay or reimburse the
Company (in some cases), subject to certain limitation.

Key Component Agreement. Pursuant to the Key Components Supply Agreement (the
"Key Component Agreement") between the Company and Varian, during the term
thereof, the Company is required to meet Varian's requirements for certain key
electron beam guns and key medical klystrons and any improvements thereto (the
"Key Components"), provided that the Company may discontinue production of any
Key Component as to which Varian fails to maintain certain specified purchase
levels. In addition, the Company is prohibited from selling any Key Component
that Varian continues to purchase from the Company to any third person for use
within the Varian Field of Use (as defined below). In turn, during the term of
the Key Component Agreement, Varian is required to purchase all of its
requirements for Key Components from the Company, except for certain specified
Key Components as to which Varian will be permitted to purchase a portion of its
requirements from other sources. The preceding provisions are effective as to
all Key Components for a period of five years following the closing of the
Acquisition and, at Varian's election with respect to any one or more of the Key
Components, for a period of five years thereafter.

Varian has the right to elect to purchase Key Components from sources other than
the Company and to enforce certain rights under the Cross License Agreement (as
defined below) in the event of failures in the quality, quantity or timely
delivery of Key Components produced by the Company or the obsolescence of the
Company's Key Components.

Cross License Agreement. Pursuant to the Cross License Agreement (the "Cross
License Agreement"), 


                                      -13-
<PAGE>   15
for a period of 10 years from the closing of the Acquisition, Varian has
exclusive rights relating to the Key Component Technology as it relates to
medical and industrial linear accelerators (the "Varian Field of Use"). In all
other areas, the Company retains the exclusive right to utilize the Key
Component Technology. At the end of the term of the Cross License Agreement,
Varian is obligated to transfer its entire interest in the Key Component
Technology to the Company, with Varian retaining only a non-exclusive license to
make, use or sell Key Component Technology for use in the Varian Field of Use.
The Company has the unrestricted and exclusive right to utilize the Key
Component Technology in fields other than the Varian Field of Use and the right
to utilize Key Component Technology in order to supply Key Components to Varian
for use within the Varian Field of Use pursuant to the Key Component Agreement.
See "- Key Component Agreement" The Cross License Agreement also grants mutual
non-exclusive licenses under Varian's and the Company's intellectual property
rights to the extent necessary to permit both the Company and Varian to continue
to conduct their respective businesses as they did as of the closing date.

Trademark License Agreement. Generally, under the terms of the Trademark License
Agreement, the Company is licensed to use Varian trademarks on its products for
a period of three years from the closing of the Acquisition (although during the
third year Varian trademarks may only be used in connection with the Company's
own trademarks), provided that such products either were manufactured by the
Predecessor as of the date of consummation of the Acquisition or are derivatives
or improvements thereof. After the third year, the Company may not use any
Varian trademarks alone, but for an additional seven years may identify such
products as "formerly made by Varian". At the expiration of ten year period, the
Company will not be permitted to utilize any Varian trademarks.


                                      -14-
<PAGE>   16
ITEM 2:       PROPERTIES

The Company owns, leases or subleases manufacturing, assembly, warehouse,
service and office properties having an aggregate floor space of approximately
1,300,000 square feet, of which approximately 123,000 are leased or subleased to
third parties. The table below provides summary information regarding principal
properties owned or leased by the Company:


<TABLE>
<CAPTION>
                                                 (square footage)
              Property(a)                     Owned            Leased/Subleased
              -----------                     -----            ----------------
<S>                                         <C>                 <C>
San Carlos, California................      320,000(b)
Beverly, Massachusetts................      251,000(c)
Georgetown, Ontario, Canada...........      126,000
Santa Clara, California...............            -             107,000(d)
Palo Alto, California.................            -             429,000(e)
Various locations.....................            -              15,400(f)
</TABLE>

         (a)      In addition to the properties listed, the Company also
                  utilizes approximately 44,000 square feet of space at Varian's
                  Salt Lake City, Utah facility, whose primary occupant is
                  Varian's Healthcare Systems business. The Company has
                  subleased its Salt Lake City facility from Varian for a period
                  not to extend beyond August 11, 1997.
         (b)      The San Carlos, California square footage includes
                  approximately 21,000 square feet leased to a tenant which
                  provides services to the Company and others.
         (c)      The Beverly, Massachusetts square footage includes
                  approximately 82,000 square feet leased to five tenants.
         (d)      This facility is leased by way of assignment of Varian's
                  lessee interest. The Santa Clara, California footage includes
                  approximately 4,000 square feet subleased to one tenant.
         (e)      This facility is primarily leased by way of assignment of
                  Varian's lessee interest with the remainder subleased from
                  Varian. The Palo Alto, California footage includes
                  approximately 10,000 square feet subleased back to Varian and
                  approximately 6,000 square feet subleased to another tenant.
         (f)      Includes both leased facilities occupied entirely by the
                  Company's field sales and service organizations and 5 foreign
                  shared use facilities which the Company is sharing for varying
                  periods of time with Varian pursuant to a shared use
                  agreement.

These facilities are currently not utilized to their full capacity. However,
consolidation efforts, expected to be completed in the first half of Fiscal
1997, will bring these facilities close to full capacity and will eliminate
approximately 150,000 square feet of leased space. Overall, the Company believes
its properties are adequate for the needs of the Company. The Company's lenders
under the Senior Credit Agreement have the right to a security interest in all
of the Company's interest in the real property that it owns and leases, and have
taken a security interest in the Company's real property located in Beverly,
Massachusetts and Georgetown, Ontario, Canada.

The Company's right to continued occupancy of the leased and subleased premises
is dependent upon Varian's compliance with its obligations to the master lessor.
In particular, the Company's headquarters and one principal complex, including
two of the Company's manufacturing facilities, located at the Palo Alto,
California site adjacent to Varian's world headquarters and primary
manufacturing facilities, are leased by way of assignment or subleased from
Varian. Therefore, the Company's occupancy rights are dependent on Varian's
fulfillment of its responsibilities to the master lessor, including its
obligation to continue environmental remediation activities under a consent
order with the California Environmental Protection Agency. The consequences of
the loss by the Company of such occupancy rights could include the loss of
valuable improvements and favorable lease terms, the incurrence of substantial
relocation expenses and the disruption of the Company's business operations.


                                      -15-


<PAGE>   17
ITEM 3:       LEGAL PROCEEDINGS

The Company is involved from time to time in various legal proceedings and is
the subject of various cost accounting and other government pricing claims.
Pursuant to the Acquisition Agreement, Varian has agreed to indemnify the
Company against liabilities arising from litigation and governmental claims
pertaining to the operation of the Predecessor prior to the consummation of the
Acquisition. Accordingly, management believes that litigation and governmental
claims pending against Varian and relating to the operation of the Predecessor
prior to the Acquisition will not have a material adverse effect on the
Company's financial condition or results of operations. See "Business -
Environmental Matters."

ITEM 4:       SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

There were no matters submitted to a vote of security holders during the fiscal
year ended September 27, 1996.


                                      -16-
<PAGE>   18
                                     PART II

ITEM 5: MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS.

CPI is a wholly-owned subsidiary of Holding. Neither CPI's nor Holding's common
stock is publicly traded. No cash dividends have been declared on the common
stock of the Company during the period ended September 27, 1996. Restrictive
covenants in the Senior Credit Agreement generally restrict the declaration or
payment of dividends on the Company's common stock. The Notes also restrict the
declaration and payment of dividends unless the Company satisfies certain
financial covenants, among other things.

ITEM 6: SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA

The historical and pro forma financial data set forth below for Fiscal 1992
through Fiscal 1994 has been derived from the historical audited financial
statements of the Predecessor audited by Coopers & Lybrand L.L.P., independent
public accountants, and for Fiscal 1995 and Fiscal 1996 by KPMG Peat Marwick
LLP, independent public accountants, whose reports appear elsewhere in this Form
10-K. The information contained in this table should be read in conjunction with
the information set forth in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" as well as the historical audited financial
statements of Holding and CPI (and the Predecessor) included elsewhere in this
Form 10-K. As a consequence of the Acquisition, effective August 11, 1995, each
of Holding and CPI is deemed for financial reporting purposes to have become a
new reporting entity ("Successor") on the following date and periods subsequent
to the August 11, 1995 date reflect the allocation of the costs of the
Acquisition to assets and liabilities based on estimates of fair values in
accordance with the purchase method of accounting. Accordingly, the results of
operations of Successor subsequent to August 11, 1995 are not fully comparable
to the results of the operations of the Company as constituted prior to such
date. In particular, operating results subsequent to August 11, 1995 reflect
decreases in operating expenses relating to Corporate allocations, incremental
depreciation and amortization relating to the purchase method adjustments
referred to above and other interest charges relating to new indebtedness
related to the Acquisition.


                                      -17-


<PAGE>   19
SELECTED FINANCIAL DATA


<TABLE>
<CAPTION>
                                                             Successor                                Predecessor
                                                    ---------------------------    ------------------------------------------------
(Dollars in Thousands)                               52 Weeks        7 Weeks       45 Weeks     52 Weeks      52 Weeks    53 Weeks
                                                       Ended          Ended         Ended         Ended        Ended       Ended
                                                    September 27,  September 29,   August 12,  September 30,  October 1,  October 2,
                                                        1996           1995          1995          1994         1993        1992
                                                     --------         ------       -------       -------      -------     -------
CPI AND HOLDING STATEMENT OF OPERATIONS DATA:
<S>                                                  <C>             <C>           <C>           <C>          <C>         <C>    
Sales                                                $257,449         36,398       214,677       246,890      255,295     270,160
Cost of sales                                         184,482         27,634       160,156       186,996      198,625     222,137
                                                     --------         ------       -------       -------      -------     -------
Gross profit                                           72,967          8,764        54,521        59,894       56,670      48,023
Marketing, general and administrative
     before corporate allocations                      35,354          6,013        26,071        25,583       27,068      28,997
Research and development                                8,308          1,198         7,429         7,619        7,565       7,796
Corporate allocations                                       -              -        11,160        11,273       11,776      11,961
Write-off of acquired in-process
     research and development                               -         31,363             -             -            -           0
                                                     --------         ------       -------       -------      -------     -------
Operating income (loss)                                29,305        (29,810)        9,861        15,419       10,261        (731)
Interest expense                                       18,894          2,497             -             -            -           0
Income tax expense (benefit)                            2,068         (2,709)        3,649         5,859        3,899        (278)
                                                     --------         ------       -------       -------      -------     -------
Net earnings (loss) before preferred                 $  8,343        (29,598)        6,212         9,560        6,362        (453)
     dividends                                       ========        =======         =====         =====        =====        ==== 
     
EBITDA (a)                                             38,736          4,894        21,026        27,814       21,806       9,403
Certain Non-Cash Charges:
    Depreciation and amortization                       7,731            941        11,165        12,395       11,545      10,134
    Inventory write-up related to purchase accounting   1,700          2,400             -             -            -
    In-process research & development write-off             -         31,363             -             -            -
    Amortization of deferred debt issue costs           1,962            199             -             -            -
Capital expenditures (b)                               12,501            880         6,063        10,698        7,278       8,173
Non-recurring capital (b)                                   -              -             -         4,115        2,536       1,653
</TABLE>


<TABLE>
<CAPTION>
                                                             Successor                                      Predecessor
                                                   -----------------------------              -------------------------------------
                                                   September 27,   September 29,              September 30,  October 1,  October 2,
CPI BALANCE SHEET DATA:                                1996           1995                         1994        1993         1992
                                                   -----------------------------              -------------------------------------
<S>                                                  <C>             <C>                         <C>          <C>         <C>   
Working capital                                      $ 34,576         35,204                      60,421       67,302      82,348
Total assets                                          228,142        214,902                     162,149      169,619     180,135
Total equity (deficit)                                  4,400         (1,538)                    119,854      125,657     137,115
Long-term debt and
  redeemable preferred stock                          150,472        151,260                           -            -           -
Holding Balance Sheet Data:
Working capital                                      $ 34,576         35,204                      60,421       67,302      82,348
Total assets                                          228,142        214,902                     162,149      169,619     180,135
Total equity (deficit)                                 (6,379)       (10,884)                    119,854      125,657     137,115
Long-term debt and
    redeemable preferred stock                        150,472        151,260                           -            -           -
</TABLE>

(a)   EBITDA represents earnings before provision for income taxes, interest
      expense, depreciation and amortization, the charge related to the purchase
      accounting write-up of inventory and the write-off of acquired in-process
      research and development.

(b)    Capital expenditures exclude the one-time costs of seismic retrofits,
       which are substantially completed, at certain of the Company's
       manufacturing facilities. These costs are presented separately as
       "Non-recurring Capital Expenditures".


                                      -18-
<PAGE>   20
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED INCOME STATEMENTS

The unaudited pro forma consolidated condensed income statements of Holding and
CPI have been prepared by the Company's management from historical income
statements included in this Form 10-K. The unaudited pro-forma consolidated
condensed income statements for Fiscal 1995 and Fiscal 1994 reflect adjustments
as if the Acquisition had occurred on September 30, 1994 and October 1, 1993,
respectively.

These unaudited pro forma financial statements should be read in conjunction
with the notes included herewith, the Predecessor's audited financial statements
and notes thereto for Fiscal 1995 and Fiscal 1994 and "Management's Discussion
and Analysis of Financial Condition and Results of Operations." included
elsewhere in this Form 10-K. These unaudited pro forma financial statements do
not purport to represent what Holding's or CPI's results of operations would
have been had the Acquisition and the financing therefor occurred on the date
specified, or to project Holding's or CPI's results of operations for any future
period or date. The pro forma adjustments described in the accompanying notes
are based upon certain assumptions that management of the Company believes are
reasonable in such circumstances. In the opinion of management, all adjustments
have been made that are necessary to present fairly the pro forma data.


                                      -19-

<PAGE>   21
          UNAUDITED PRO FORMA CONSOLIDATED CONDENSED INCOME STATEMENTS

The following pro forma financial statements were included by CPI in the
Registration Statement for the Exchange Offers filed in November, 1995, and were
based upon preliminary estimates of the fair values of the net assets acquired.
These pro forma statements have not been adjusted to reflect final values
because the effect of the finalization of the estimates does not materially
affect the amounts previously presented.

<TABLE>
<CAPTION>
                                                                          For the 52 Weeks Ended September 29, 1995
                                                         -------------------------------------------------------------------------
                                                           Predecessor           Successor                             ProForma
                                                         45 Weeks Ended        7 Weeks Ended                        52 Weeks Ended
           (Dollars in thousands)                           August 11,         September 29,      Pro Forma          September 29,
                                                               1995                1995          Adjustments            1995 (c)
                                                             --------            -------         ----------             --------
CONSOLIDATED STATEMENT OF OPERATIONS OF CPI:
<S>                                                          <C>                 <C>            <C>                    <C>    
     Sales                                                   $214,677             36,398          2,170 (i)            253,245
     Cost of sales                                            160,156             27,634            591 (i)            180,144
                                                                                                 (5,837)(ii)
                                                                                                 (2,400)(iii)
                                                             --------            -------         ------                 ------
     Gross profit                                              54,521              8,764          9,816                 73,101
     Research and development                                   7,429              1,198                                 8,627
     Marketing                                                 17,506              2,763                                20,269
     General and administrative                                19,725              3,250        (10,532)(iv)            13,162
                                                                                                    885 (v)
                                                                                                   (166)(vi)
     Write-off of acquired in-process
          research and development                                                31,363        (31,363)(viii)
                                                             --------            -------         ------                 ------
     Operating income (loss)                                    9,861            (29,810)        50,992                 31,043
     Interest expense                                               -              2,497         15,240 (vii)           19,077
                                                                                                  1,340 (vii)
                                                             --------            -------         ------                 ------
     Earnings (loss) before income taxes                        9,861            (32,307)        34,412                 11,966
     Provision (benefit) for income taxes                       3,649             (2,709)         3,847 (ix)             4,786
                                                             --------            -------         ------                 ------
     Net earnings (loss)                                        6,212            (29,598)        30,565                  7,180
     Dividends on preferred stock                                   -                  -          3,776 (x)              3,776
                                                             --------            -------         ------                 ------
     Earnings attributable to Common Stock                   $  6,212            (29,598)        26,789                  3,404
                                                             ========            =======         ======                 ======     
CERTAIN CONSOLIDATED STATEMENT OF OPERATIONS
     INFORMATION OF HOLDING:
     Operating income (loss) of Holding                         9,861            (29,810)        50,992                 31,043
     Interest expense                                               -              2,497         16,580 (vii)           19,077
     Preferred dividends of
          consolidated subsidiary                                   -                  -          3,776 (x)              3,776
                                                             --------            -------         ------                 ------
     Earnings (loss) before income taxes                        9,861            (32,307)        30,636                  8,190
     Provision (benefit) for income taxes                       3,649             (2,709)         3,847 (ix)             4,786
                                                             --------            -------         ------                 ------
     Net earnings (loss)                                        6,212            (29,598)        26,789                  3,404
                                                             ========            =======         ======                 ======     
OTHER FINANCIAL DATA OF CPI AND HOLDING:
     Depreciation and amortization(a)                        $ 11,165                941                                 6,988
     EBITDA (b) (c)                                            21,026              2,494                                38,031
     Cash interest expense (a)                                      -              2,497                                17,737
     Ratio of EBITDA to
          cash interest expense (b)                               N/A                N/A                                  2.14x
</TABLE>

(a)  Excludes amortization of deferred debt issuance costs.
(b)  EBITDA represents earnings before provision for income taxes, interest
     expense, depreciation and amortization and the write-off of acquired
     in-process research and development. EBITDA and the ratio of EBITDA to cash
     interest expense are presented because they may be used by some investors
     as a financial indicator of the ability to service or incur indebtedness.
     EBITDA should not be considered as an alternative to net income, as a
     measure of operating results, cash flows or liquidity.
(c)  As described in more detail in "Management's Discussion and Analysis of
     Financial Condition and Results of Operations" in this Form 10-K, certain
     events occurred during the fourth quarter of Fiscal 1995 which may not be
     indicative of future operating results.


                                      -20-

<PAGE>   22
     UNAUDITED PRO FORMA CONSOLIDATED CONDENSED INCOME STATEMENTS, continued

<TABLE>
<CAPTION>
                                         For the 52 Weeks Ended September 30, 1994
                                         -----------------------------------------
                                                                Pro Forma
                                        Historical             Adjustments         Pro Forma
                                        ----------             -----------         ---------
                                                          (Dollars in thousands)
<S>                                     <C>                     <C>                 <C>    
CONSOLIDATED STATEMENT OF OPERATIONS OF CPI:
Sales                                   $ 246,890                2,145 (i)          249,035
Cost of sales                             186,996                  412 (i)          182,038
                                                                (5,370)(ii)
                                        ---------               ------              ------- 
Gross profit                               59,894                7,103               66,997
Research and development                    7,619                                     7,619
Marketing                                  19,476                                    19,476
General and administrative                 17,380               (6,356)(iv)          12,457
                                                                 1,627 (v)
                                                                  (194)(vi)
                                        ---------               ------              ------- 
Operating income                           15,419               12,026               27,445
Interest expense                                -               17,737 (vii)         19,233
                                                                 1,496 (vii)
                                        ---------               ------              ------- 
Earnings before income taxes               15,419               (7,207)               8,212
Provision for income taxes                  5,859               (2,574)(ix)           3,285
                                        ---------               ------              ------- 
Net earnings                                9,560               (4,633)               4,927
Dividends on preferred stock                    -                3,776 (x)            3,776
                                        ---------               ------              ------- 
Earnings attributable to Common Stock   $   9,560               (8,409)               1,151
information of Holding:                 =========               ======              =======

CERTAIN CONSOLIDATED STATEMENT OF OPERATIONS
INFORMATION OF HOLDING:
Operating income (loss) of Holding         15,419               12,026               27,445
Interest expense                                -               19,233 (vii)         19,233
Preferred dividends of
     consolidated subsidiary                    -                3,776 (x)            3,776
                                        ---------               ------              ------- 
Earnings (loss) before income taxes        15,419              (10,983)               4,436
Provision (benefit) for income taxes        5,859               (2,574)(ix)           3,285
                                        ---------               ------              ------- 
Net earnings                                9,560               (8,409)               1,151
                                        =========               ======              =======
OTHER FINANCIAL DATA OF HOLDING AND CPI:
Depreciation and amortization(a)        $  12,395                                     8,458
EBITDA (b)                                 27,814                                    35,903
Cash interest expense (a)                       -                                    17,737
Ratio of EBITDA to
     cash interest expense (b)                N/A                                      2.02x
</TABLE>

----------------------
(a)  Excludes amortization of deferred debt issuance costs.
(b)  EBITDA represents earnings before provision for income taxes, interest
     expense, depreciation and amortization. EBITDA and the ratio of EBITDA to
     cash interest expense are presented because they may be used by some
     investors as a financial indicator of the ability to service or incur
     indebtedness. EBITDA should not be considered as an alternative to net
     income, as a measure of operating results, cash flows or liquidity.


                                      -21-

<PAGE>   23
      NOTES TO UNAUDITED PRO FORMA CONSOLIDATED CONDENSED INCOME STATEMENTS

(i)      Reflects the pro forma increase, under the terms of the product supply
         agreements between CPI and Varian entered into in connection with the
         consummation of the Acquisition, in the historical pricing of sales and
         purchases between CPI and Varian.

(ii)     Represents an adjustment to depreciation for the 45 week period ending
         August 11, 1995 and the 52 week period ending September 30, 1994 based
         on the estimated fair values of fixed assets acquired.

(iii)    Represents the portion of the purchase price allocated to inventory
         which was charged to cost of sales for the 7 week period ending
         September 29, 1995.

(iv)     Reflects pro forma adjustments relating to:

         (a)      the reduction in facility costs as a result of (i) the
                  difference between previously allocated corporate rent and the
                  estimated depreciation and facility cost on owned facilities,
                  and (ii) a purchase accounting adjustment to reflect
                  management's plan to eliminate certain excess space which is
                  currently vacant.

         (b)      the elimination of previously allocated costs for corporate
                  services no longer required on a stand alone basis,
                  principally representing allocations for environmental
                  remediation costs to be retained by Varian and for office
                  space at Varian's corporate headquarters.

         (c)      cost reductions from outsourcing corporate services calculated
                  as the difference between the amounts previously allocated for
                  management information systems, group insurance and legal
                  counsel and the agreed amounts with outside providers for
                  these services on a stand alone basis.

         (d)      the reduction of executive management compensation expense as
                  a result of the replacement of Varian management compensation
                  plans with revised compensation programs. This reduction is
                  primarily due to lower management bonuses as a result of
                  increased management ownership.

         (e)      non-recurring expenses incurred during the seven week period
                  ended September 29, 1995 as a direct result of the
                  Acquisition.

         The adjustments for each component are as follows:

<TABLE>
<CAPTION>
         52 weeks ended            52 weeks ended
       September 29, 1995        September 30, 1994
       ------------------        ------------------
<S>       <C>                         <C>    
(a)       $  3,279                    $ 2,152
(b)          1,176                        772
(c)          1,882                      1,235
(d)          3,347                      2,197
(e)            848                          0
          --------                    -------
          $ 10,532                    $ 6,356
          ========                    =======
</TABLE>

(v)      Represents the amortization of goodwill resulting from the Acquisition,
         calculated for the 45 week period ending August 11, 1995 and the 52
         week period ending September 30, 1994, over an estimated life of 25
         years.

(vi)     Represents the reduction in amortization due to the elimination of
         purchased goodwill.


                                      -22-
<PAGE>   24
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED CONDENSED INCOME STATEMENTS, CONTINUED

(vii)    Represents the estimated interest expense from the use of borrowings to
         finance the Acquisition and future working capital requirements, plus
         the amortization of deferred debt issuance costs.

(viii)   Represents the one-time write-off of acquired in-process research and
         development.

(ix)     The tax effect of using a 40% rate on pro forma income before taxes.

(x)      Preferred stock dividends include all dividends paid on the Senior
         Preferred Stock and Junior Preferred Stock. 

----------------


                                      -23-
<PAGE>   25
ITEM 7:  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

GENERAL

The Company serves the communication, radar, electronic countermeasures,
industrial, medical and scientific markets. In addition, the Company divides the
communication market into applications for ground-based satellite uplinks for
military and commercial uses ("SatCom") and broadcast sectors. While most of the
Company's sales to these markets have been relatively stable during the Fiscal
1992 through Fiscal 1994 timeframe, significant weakness in sales from the
Company's radar market resulted in an 8.6% decline in total sales, from $270.2
million to $246.9 million in this time period. This decrease was caused by the
U.S. Department of Defense's ("DoD") reduction in procurement of spare vacuum
electronic devices for U.S. Government inventories to support existing systems,
including the HAWK, Phalanx and HADR programs. In addition, a decline in the
level of government funds available for the development and installation of new
radar and electronic countermeasures systems also adversely affected sales.
However, for the two year period ended in Fiscal 1996, due to growth in the
Company's communication and industrial markets, the Company generated a 4.3%
increase in total sales, to $257.4 million.

The Company's products have applications among both commercial and government
customers. The commercial sector represents all sales for which the U.S.
Government is not the end-user. However, the end-user markets identified above
are not categorized based upon whether they consist entirely of sales into
commercial or government sectors. Therefore, sales in any one of the Company's
markets may consist of sales to either commercial customers, the U.S.
Government, or both. The government sector represents direct sales and original
equipment manufacturers ("OEM") sales to the U.S. Government, including sales to
the DoD, the Department of Energy, the Federal Aviation Administration (the
"FAA") and the National Aeronautics and Space Administration. The commercial
sector contributed $187.9 million, or 73.0%, of the Company's total sales for
Fiscal 1996. The Company's sales to the commercial sector increased by
approximately $24.0 million between Fiscal 1993 and Fiscal 1996, representing a
4.7% compound annual growth rate. In contrast, the Company's sales to the U.S.
Government sector during the same period experienced a 8.7% annual compounded
rate of decline due primarily to the aforementioned trends in the radar and
electronic countermeasures markets. However, comparing Fiscal 1996 to Fiscal
1995, sales to the U.S. Government sector did increase for the first time since
Fiscal 1989 from $65.2 million in Fiscal 1995 to $69.5 million in Fiscal 1996 or
6.6% growth. This increase reflects an increase in U.S. Government procurement
of communication products.

From Fiscal 1992 to Fiscal 1995, the Company demonstrated substantial increases
in profitability and EBITDA, as net earnings increased from a net loss $0.5
million in Fiscal 1992 to net earnings of $6.2 million for the 45 week period
ending August 11, 1995, and EBITDA increased over four times from a pro forma
$9.4 million in Fiscal 1992 to a pro forma $38.0 million in Fiscal 1995, despite
the decline in total sales. The Company experienced a loss of $29.6 million
during the seven weeks ended September 29, 1995, due primarily to the write-off
of acquired in-process research and development expenses. Fiscal 1996 reflects
the Company's first fiscal year on a stand-alone basis. Net earnings were $8.3
million and EBITDA improved to $38.7 million, excluding the $1.7 million charge
related to the purchase accounting write-up of inventory.

During Fiscal 1996, the Company began the process of relocating its Salt Lake
City, Utah plant to San Carlos, California. Costs associated with this
consolidation including travel and training expenses, temporary duplication of
labor and facility resources, and poor manufacturing yields on the moved product
lines negatively impacted EBITDA by approximately $2.4 million.


                                      -24-
<PAGE>   26
During the second half of Fiscal 1996, the Company also began to prepare its
Palo Alto, California facility to allow for relocation of one of its
manufacturing plants from a leased facility in Santa Clara, California. This
relocation is expected to be completed in the first quarter of Fiscal 1997. With
the exception of higher capital expenditures, this consolidation effort had
minimal impact on the Fiscal 1996 operating results.

EFFECT OF ACQUISITION ON RESULTS OF OPERATIONS

The consummation of the Acquisition has affected the Company's results of
operations in certain significant respects. As a result of the Acquisition, the
Company adjusted upwards the historical book value of certain assets in
accordance with GAAP relating to purchase accounting rules, which will
significantly impact the Company's results of operations subsequent to the
Acquisition and their comparability to operations of the Predecessor:

    *    The write-up of the inventory by $4.1 million was expensed to cost of
         goods sold during the periods following the Acquisition, which
         significantly affects gross margins. During the seven week period ended
         September 29, 1995, $2.4 million was expensed to cost of sales, which
         also impacted working capital, and $1.7 million was expensed in the
         first quarter of Fiscal 1996.

    *    The purchase accounting allocation of certain assets, such as property,
         plant and equipment, will significantly affect depreciation and
         amortization in the future. The portion of the purchase price allocated
         to in-process research and development was charged to operations
         immediately after consummation of the Acquisition. The in-process
         research and development activity of the Company involves the
         development of various classes of microwave vacuum electronic devices
         and microwave vacuum electronic device systems for communications and
         power applications, including significant extensions and improvements
         to existing products through fundamental physical and electrical
         research necessary to design new microwave vacuum electronic devices,
         control and power elements, and related systems. Projects are
         classified as in-process research and development if they have not
         demonstrated technological feasibility and have not resulted in
         commercial products and have no alternative future use. As of the date
         of the consummation of the Acquisition, the outcomes of these research
         and development projects were uncertain and involved technological
         risk.

    *    Certain corporate overhead and corporate services, including an
         allocation for occupied facilities, historically charged to the
         Predecessor by Varian, have been reduced due to outsourcing of certain
         services, elimination of services no longer required on a stand-alone
         basis, or eliminated due to the Company's ownership of certain of its
         facilities and the application of purchase accounting following the
         Acquisition. In addition, management compensation plans have been
         modified at a reduced cost. The structure of the transaction has also
         created certain tax benefits because of the Company's ability to
         write-up inventory, property, plant and equipment and intangible assets
         for tax purposes.


                                      -25-
<PAGE>   27

RESULTS OF OPERATIONS

The following table sets forth the Company's historical results of operations as
a percentage of sales for each of the periods indicated.

<TABLE>
<CAPTION>
                                                                                                            Predecessor
                                                                       Proforma             ----------------------------------------
                                             52 Weeks                  52 Weeks                 52 Weeks                  52 Weeks
                                               Ended                    Ended                    Ended                     Ended
                                        September 27, 1996       September 29, 1995         September 30, 1994       October 1, 1993
                                        ------------------       ------------------         ------------------       ---------------
<S>                                           <C>                       <C>                       <C>                       <C>   
Sales                                         100.0%                    100.0%                    100.0%                    100.0%
Cost of sales                                  71.7                      71.1                      75.7                      77.8
                                              -----                     -----                     -----                     -----
     Gross profit                              28.3                      28.9                      24.3                      22.2
Research and development                        3.2                       3.4                       3.1                       3.0
Marketing                                       7.7                       8.0                       7.9                       7.9
General and administrative                      6.0                       5.2                       7.0                       7.3
                                              -----                     -----                     -----                     -----
Operating income                               11.4                      12.3                       6.3                       4.0
Interest expense                                7.4                       7.6                       0.0                       0.0
                                              -----                     -----                     -----                     -----
     Earnings before taxes                      4.0                       4.7                       6.3                       4.0
Provision for income taxes                      0.8                       1.9                       2.4                       1.5
                                              -----                     -----                     -----                     -----
     Net earnings                               3.2%                      2.8%                      3.9%                      2.5%
                                              =====                     =====                     =====                     =====
Other Data:
     EBITDA (a)                                15.0%                     15.0%                     11.3%                      8.5%
     Preferred Dividends                        1.4%                       --                        --                        --
</TABLE>

--------------------------------

    (a)  EBITDA represents earnings before provision for income taxes, interest
         expense, depreciation and amortization, the charge related to the
         purchase accounting write-up of inventory and the write-off of acquired
         in-process research and development.


                                      -26-
<PAGE>   28

Fiscal 1996 Compared to Pro forma Fiscal 1995

SALES. Sales for Fiscal 1996 were approximately $257.4 million, an increase of
approximately $4.2 million, or 1.7%, as compared to pro forma sales of $253.2
million in Fiscal 1995 and an increase of approximately $6.4 million, or 2.5%,
as compared to historical sales of $251.1 million in Fiscal 1995. In terms of
markets, communication(1), and industrial sales(2) increased while CPI's four
other markets showed some decline. Communication sales(1) increased
approximately $7.9 million, or 7.1%, in Fiscal 1996 over pro forma Fiscal 1995,
primarily as a result of continued growth in Direct Broadcast Satellite (DBS)
requirements as well as growth in wireless communication product and small
terminal applications for private networks and emerging countries telephony
requirements. Industrial sales(2) rose approximately $4.6 million, or 20.4%,
over pro forma Fiscal 1995, primarily as a result of growth in the industrial
microwave market as well as an increase in demand for high power amplifiers
used for instrumentation. Offsetting these sales gains were a decline in
electronic countermeasures(1) and medical(2) sales of approximately $2.9
million, or 14.4%, and $1.1 million, or 6.3%, respectively below pro forma
Fiscal 1995, due primarily to the timing of customer shipment schedules.
Radar(1) sales declined approximately $2.3 million, or 3.0%, below pro forma
Fiscal 1995, due to DoD Acquisition Reform Initiatives reducing logistic
inventory levels. Scientific sales(1) declined approximately $2.0 million, or
35.1%, due to the slow down in development programs from the U.S. Department of
Energy.

COST OF SALES. Cost of sales, excluding a $1.7 million charge related to the
purchase accounting write-up of inventory, was $182.8 million in Fiscal 1996, an
increase of $2.7 million, as compared to pro forma cost of sales of $180.1
million for Fiscal 1995. Cost of sales, excluding the $1.7 million inventory
charge, was 71.0% of sales for Fiscal 1996 compared to the pro forma 71.1%
margin for Fiscal 1995. Cost of sales of the Predecessor on a historical basis
was 74.6% for the 45 weeks ended August 11, 1995. The Company's ongoing efforts
to reduce "cost of quality" (defined as the amount of scrap, rework,
manufacturing variance costs, warranty costs, inventory write-offs, quality
assistance and quality control costs and unscheduled downtime) were slowed in
Fiscal 1996 by the negative impact of efforts to consolidate its Salt Lake City,
Utah facility into its San Carlos, California facility.

RESEARCH AND DEVELOPMENT. Research and development expenses decreased in Fiscal
1996 to $8.3 million, or 3.2% of total sales, as compared to $8.6 million, or
3.4% of total pro forma sales, during Fiscal 1995. The decrease in research and
development expenses during Fiscal 1996 was primarily due to the Company's focus
on several customer-funded research and development projects. Overall, the 
Company continues its emphasis on delivering new products to the marketplace.

MARKETING, GENERAL AND ADMINISTRATIVE. Marketing, general and administrative
expenses were $35.4 million in Fiscal 1996, or 13.7% of sales, as compared to a
pro forma $33.4 million, or 13.2% of pro forma sales, for Fiscal 1995. Fiscal
1996 reflects the actual costs of CPI operating on a stand-alone basis. On a
historical basis, marketing, general and administrative expenses were 17.3% of
total sales for the 45 weeks ended August 11, 1995. The lower percentages in
Fiscal 1996 reflect the reduced overhead structure of the Successor.

----------

(1)   As there were no sales to Varian in these markets, pro forma sales
      comparisons do not differ from the historical sales comparisons.

(2)   There were sales to Varian in these markets. Pro forma Fiscal 1995 is used
      in this comparison so that both years appropriately reflect the markup
      agreed to under the terms of the product supply agreements between CPI and
      Varian.


                                      -27-
<PAGE>   29

EBITDA. EBITDA, excluding the $1.7 million charge related to the purchase
accounting write-up of inventory, was $38.7 million for Fiscal 1996, an increase
of $0.7 million, or 1.8%, as compared to $38.0 million on a pro forma basis for
Fiscal 1995. Both Fiscal 1996 and pro forma Fiscal 1995 were negatively impacted
by the Company's efforts to consolidate its Salt Lake City, Utah operation into
its San Carlos, California operation. In Fiscal 1996, costs associated with this
consolidation, including travel and training expenses, temporary duplication of
labor and facility resources, and poor manufacturing yields on the moved product
lines, negatively impacted EBITDA by approximately $2.4 million. In the fourth
quarter of Fiscal 1995, the initial relocation announcement had a significant
impact on the morale and productivity of the Salt Lake City employees. The
Company believes that the impact of the relocation announcement, along with
higher commissions earned by certain salespeople and sales representatives as a
result of a higher than normal rate of incoming orders in the fourth quarter
(which commissions are earned prior to the generation of sales), negatively
impacted pro forma Fiscal 1995 EBITDA by approximately $2.0 million.

EBITDA was 15.0% of sales in Fiscal 1996 which is flat compared to Fiscal 1995
pro forma EBITDA margin of 15.0% of total pro forma sales, but reflects the
earnings of the Company on a stand alone basis. Historical EBITDA, as a
percentage of sales, for the 45 weeks ended August 11, 1995 was 9.8%.

NET EARNINGS. Net earnings before preferred dividends were $8.3 for Fiscal 1996
an increase of $1.1 million, or 16.2%, as compared to pro forma net earnings of
$7.2 million for Fiscal 1995. In Fiscal 1995, in connection with the
Acquisition, the Company wrote off $31.4 million of acquired in-process research
and development, which significantly affected net income for the seven weeks
ended September 29, 1995.

Pro forma Fiscal 1995 Compared to Fiscal 1994

SALES. On a pro forma basis, sales for Fiscal 1995 were approximately $253.2
million, an increase of approximately $4.2 million, or 1.7% as compared to
Fiscal 1994. On a historical basis during fiscal 1995, communication(1),
electronic countermeasures(1) and industrial sales(2) increased while radar
sales(1) declined. Communication sales(1) increased approximately $8.7 million,
or 8.5%, in Fiscal 1995 over Fiscal 1994, primarily as a result of increased
demand for new international and domestic SatCom uplinks. Electronic
countermeasures sales(1) increased approximately $1.3 million, or 6.9%, over
Fiscal 1994, primarily as a result of DoD initiatives in low-cost decoys,
transmitters and unmanned aerial vehicle systems. Industrial sales(2) rose
approximately $6.4 million, or 41.0%, over Fiscal 1994, primarily as a result of
increased demand for power supplies used in semiconductor manufacturing
equipment and increased demand for vacuum electronic devices used for
instrumentation purposes in test equipment and process control equipment.
Offsetting these sales gains was a decline in radar sales(1) of approximately
$10.4 million, or 11.9%, below Fiscal 1994, due primarily to an overall decline
in defense-related spending.

COST OF SALES. On a pro forma basis, cost of sales was $180.1 million in Fiscal
1995, a decrease of $1.9 million, as compared to $182.0 million for Fiscal 1994.
Pro forma cost of sales were 71.1% of sales for Fiscal 1995 compared to pro
forma cost of sales margin of 73.1% for Fiscal 1994. Cost of sales of the
Predecessor on a historical basis was 74.6% and 75.7% for the 45 weeks ended
August 11, 1995 and the

----------

(1)   As there were no sales to Varian in these markets, pro forma sales
      comparisons do not differ from the historical sales comparisons.

(2)   In terms of dollars and percentage, comparison of historical sales 
      in this market, from Fiscal 1995 to Fiscal 1994, is not significantly 
      different than the comparison of pro forma sales during the same
      time periods.       

                                      -28-
<PAGE>   30

52 weeks ended September 30, 1994, respectively. The continued reduction in cost
of sales margin was largely due to the Company's strong focus on reducing its
"cost of quality" (defined as the amount of scrap, rework, manufacturing
variance costs, warranty costs, inventory write-offs, quality assistance and
quality control costs and unscheduled downtime) as a percentage of sales
including significant reductions in the levels of rework, scrap and warranty
costs.

RESEARCH AND DEVELOPMENT. Research and development expenses increased in Fiscal
1995 to approximately $8.6 million, or 3.4% of total pro forma sales, as
compared to $7.6 million, or 3.1% of total pro forma sales, during Fiscal 1994.
The increase in research and development expenses during Fiscal 1995 was
primarily due to increased levels of research and development spending related
to the development of the Company's microwave power module and a new product
introduction into the UHF broadcast market.

MARKETING, GENERAL AND ADMINISTRATIVE. On a pro forma basis, marketing, general
and administrative expenses were $33.4 million in Fiscal 1995, an increase of
$1.5 million, or 4.7%, as compared to $31.9 million for Fiscal 1994. On a
historical basis, marketing, general and administrative expenses were 17.3% and
14.9% of total sales for the 45 weeks ended August 11, 1995 and the 52 weeks
ended September 30, 1994, respectively. This increase in marketing, general and
administrative expenses from Fiscal 1994 to Fiscal 1995 was primarily due to
increased costs resulting from a higher allocation of Varian corporate
administrative costs, including accruals for performance-based incentive
programs, related to higher sales volume and improved profitability. For the
seven weeks ending September 29, 1995, marketing, general and administrative
expenses were 16.5% of sales and, on a pro forma basis for Fiscal 1995 were
13.2% of sales. These percentages reflect the reduced overhead structure of the
Successor.

EBITDA. On a pro forma basis, EBITDA was $38.0 million for Fiscal 1995, an
increase of $2.1 million, or 5.9%, as compared to $35.9 million for Fiscal 1994.
The Fiscal 1995 pro forma results reflect certain events which negatively
impacted the fourth quarter of Fiscal 1995 operating results:

    *    Operations at the Company's Salt Lake City plant were negatively
         impacted by the announcement that the Company's operations were being
         relocated to San Carlos, California, and that employees were either
         being relocated or terminated, and

    *    The Company experienced a higher than normal rate of incoming orders
         and, as a result, commissions earned by certain salespeople and sales
         representatives upon the receipt of the order increased without a
         corresponding increase in sales and gross profit.

The Company believes that these two items negatively impacted pro forma EBITDA
by approximately $2.0 million. Pro forma EBITDA was 15.0% of total sales in
Fiscal 1995 which represents an improvement from Fiscal 1994 pro forma EBITDA
margin of 14.4% of total pro forma sales. The increase in EBITDA for Fiscal 1995
was primarily due to the Company's ability to reduce its "cost of quality,"
offset by higher research and development and general and administrative
expenses. Historical EBITDA, as a percentage of sales, for the 45 weeks ended
August 11, 1995 and the 52 weeks ended September 29, 1994 was 9.8% and 11.3%,
respectively, which was affected by the significant increases in corporate
allocations from Varian.

NET EARNINGS. Net earnings of the Predecessor were $6.2 million for the 45 weeks
ended August 12, 1995 compared to $9.6 million for Fiscal 1994. In connection
with the Acquisition, the Company wrote off $31.4 million of acquired in-process
research and development, which significantly affected net income for the seven
weeks ended September 29, 1995. On a pro forma basis, net earnings would have
been $7.2 million for Fiscal 1995, an improvement of $2.3 million over pro forma
Fiscal 1994. Pro


                                      -29-
<PAGE>   31

forma net income would have been 2.8% of total pro forma sales in Fiscal 1995,
which represents an improvement from pro forma Fiscal 1994 of 0.8%.

Fiscal 1994 Compared to Fiscal 1993

SALES. Total sales for Fiscal 1994 were $246.9 million, a decrease of
approximately $8.4 million, or 3.3%, as compared to total sales of $255.3
million in Fiscal 1993. Total sales in Fiscal 1994 were primarily impacted by a
decline in radar and electronic countermeasures sales and relatively flat
performance in each of the other end-user markets. Radar sales decreased $7.7
million, or 8.1%, as compared to Fiscal 1993. This decline was primarily due to
the continued reductions in the level of DoD spending for new military platforms
and initiatives by the DoD to reduce the levels of spare parts in military
inventories. The Company's electronic countermeasures sales declined
approximately $3.2 million, or 14.5%, from Fiscal 1993. The decline was
primarily caused by the termination of, or substantial reduction in funding for,
several U.S. military programs.

COST OF SALES. Cost of sales were $187.0 million in Fiscal 1994, a decrease of
$11.6 million, or 5.9%, as compared to $198.6 million for Fiscal 1993. Cost of
sales were 75.7% of total sales for Fiscal 1994 compared to 77.8% of total sales
during Fiscal 1993. The decrease in cost of sales was substantially due to a
decline in sales volume at the Company and manufacturing process improvements
which served to reduce the Company's "cost of quality."

RESEARCH AND DEVELOPMENT. Research and development expenses were $7.6 million
for Fiscal 1994, approximately the same level as in Fiscal 1993. Research and
development expenses were 3.1% of total sales for Fiscal 1994 as compared to
3.0% of total sales for Fiscal 1993. The increase in research and development
expense margin was primarily due to the Company's lower total sales and the
Company's decision not to reduce new product development despite lower total
sales.

MARKETING, GENERAL AND ADMINISTRATIVE. Marketing, general and administrative
expenses were $36.9 million in Fiscal 1994, a decrease of $1.9 million, or 5.1%,
as compared to $38.8 million in Fiscal 1993. Marketing, general and
administrative expenses were 14.9% of total sales in Fiscal 1994 as compared to
15.2% in Fiscal 1993. The decrease in marketing, general and administrative
expenses was primarily due to the Company's cost reduction efforts commensurate
with anticipated declines in sales in selected markets in order to maintain the
Company's overall operating margins. Many of these savings were the result of
cost reduction actions taken by the Company in Fiscal 1993.

EBITDA. EBITDA was $27.8 million in Fiscal 1994, an increase of $6.0 million or
27.6% compared to $21.8 million for Fiscal 1993. EBITDA margin increased to
11.3% of total sales in 1994 as compared to 8.5% of total sales in Fiscal 1993.
The increase in EBITDA was primarily due to a reduction in the Company's cost of
sales from reduced "cost of quality" and lower general and administrative
expenses.

NET EARNINGS. Net earnings were $9.6 million for Fiscal 1994, an increase of
$3.2 million or 50.3% as compared to $6.4 million for Fiscal 1993. Net earnings
were 3.9% of total sales in Fiscal 1994 which represents an improvement from
Fiscal 1993 net earnings margin of 2.5%.


                                      -30-
<PAGE>   32

LIQUIDITY AND CAPITAL RESOURCES

The Company's continuing operating activities have provided adequate capital and
liquidity for the Company for the periods presented. Prior to the Acquisition,
the Predecessor's short-term cash requirements were provided by Varian through
an intercompany credit facility arrangement.

Cash flows provided by operating activities decreased to $11.3 million for the
52-week period ending September 27, 1996 from $14.8 million for the 7 weeks
ending September 29, 1995 and $4.1 million for the 45 weeks ending August 11,
1995 due principally to payment of interest on the Company's long term debt.
Cash flows provided by operating activities decreased to $4.1 million for the 45
weeks ending August 11, 1995 from $31.4 million in Fiscal 1994 due principally
to working capital changes resulting from the Acquisition.

Working capital at September 27, 1996 was $34.6 million as compared to $35.2
million at September 29, 1995. Excluding the impact of taxes, working capital
was $38.0 million at September 27, 1996 as compared to $35.2 million at
September 29, 1995. This increase of $3.4 million was due to an increase in
accounts receivable related to the high volume of shipments in the fourth
quarter and an increase in inventory related to the build-up of transition stock
during consolidation efforts, offset partially by advanced payments from
customers and higher accrued expenses. Reductions in cash during Fiscal 1996
were used to paydown both short term and long term debt and to reduce
outstanding accounts payable balances. Working capital, excluding the impact of
taxes, decreased from $48.5 million at September 30, 1994 to $35.2 million at
September 29, 1995, primarily as a result of the $22.8 million current portion
of long term debt resulting from the Acquisition.

Net cash used in investing activities was comprised principally of capital
expenditures for property, plant and equipment which amounted to $12.5 million
in Fiscal 1996, $6.9 million in Fiscal 1995 and $14.1 million in Fiscal 1994.
Investments in property, plant and equipment increased $5.6 million in Fiscal
1996, as compared to Fiscal 1995, primarily as a result of consolidation efforts
in the Company's San Carlos and Palo Alto facilities. Investments in property,
plant and equipment decreased $7.1 million in Fiscal 1995 as compared to Fiscal
1994 primarily due to the completion of seismic retrofitting of the Company's
facilities. In Fiscal 1995, net cash of $196.2 million was used as a result of
the Acquisition.

The Company's continuing operations typically do not have large capital
requirements. Excluding the one-time improvements made in connection with
consolidation activities, which will be completed during Fiscal 1997,
expenditures for the purchase of property plant and equipment in Fiscal 1996
would have been $8.7 million. Expenditures for Fiscal 1995 and Fiscal 1994,
excluding costs of seismic retrofits, were $6.9 million and $10.7 million,
respectively. Capital expenditures are generally made to replace existing
assets, increase productivity, facilitate cost reductions or meet regulatory
requirements.

During Fiscal 1996, cash used in financing activities related almost entirely to
repayments made against the Company's Senior Credit Agreement and during the 7
weeks ended September 29, 1995, cash flow was related almost entirely to the
financing raised in connection with the Acquisition. Cash flow from financing
activities of the Predecessor consisted entirely of repayment of intercompany
funding to Varian during the periods presented. During the 45 weeks ended August
11, 1995, the Company repaid $4.5 million of intercompany funding as compared to
$15.4 million in Fiscal 1994.

The Company's primary source of liquidity, other than funds generated from
operations or other sources of liquidity, is the $35.0 million revolving credit
facility provided by the Senior Credit Agreement. Of


                                      -31-
<PAGE>   33

this amount, $14.7 million was available for CPI to draw upon as of September
27, 1996. The Senior Credit Agreement does not require CPI, at any time, to
exchange any of its floating-rate obligations under the Senior Credit Agreement
into fixed-rate obligations.

Management believes that the Company will have adequate capital resources and
liquidity to meet its obligations, fund all required capital expenditures and
pursue its business strategy for the foreseeable future (and in any event for at
least the next twelve months). Such capital resources and liquidity are expected
to be available from the Company's cash flow provided by operations and
borrowings under CPI's Senior Credit Agreement.

Impact of Inflation

Generally, the Company has been able to pass on inflation-related cost
increases; consequently, inflation has not had a material impact on the
Company's historical operations or profitability.

Foreign Currency Exposure

Although the majority of the Company's net sales, including international sales,
are made pursuant to contracts denominated in U.S. dollars, a varying portion of
the Company's net sales are denominated in foreign currencies. In general, the
most significant foreign currencies for the Company are the British pound, the
German mark and the French franc. Although a decrease in the value of any of
these currencies compared to the U.S. dollar would have the effect of reducing
the Company's net sales (which are reported in U.S. dollars), the Company does
not believe that its exposure to such foreign currency rate fluctuations is
significant.


                                      -32-
<PAGE>   34

ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Information called for by this item is set forth in the consolidated financial
statements of Holding and CPI contained in this report. Specific financial
statements can be found at the pages listed in the following index:


<TABLE>
<CAPTION>
COMMUNICATIONS & POWER INDUSTRIES INC.                                                                   Page
                                                                                                         ----
<S>                                                                                                      <C>
Index to Financial Statements..........................................................................   F-1

Consolidated Balance Sheets as of September 27, 1996 (Successor) and September 29, 1995 (Successor)....   F-5

Consolidated Statements of Operations for the 52-week period ended September 27,
     1996 (Successor), the 7-week period ended September 29, 1995 (Successor),
     the 45-week period ended August 11, 1995 (Predecessor) and the 52-week
     period ended September 30, 1994 (Predecessor).....................................................   F-6

Consolidated Statements of Stockholders' Equity (Deficit) for the 52-week period
     ended September 27, 1996 (Successor), the 7-week period ended September 29,
     1995 (Successor), the 45-week period ended August 11, 1995 (Predecessor)
     and the 52-week period ended September 30, 1994
     (Predecessor).....................................................................................   F-7

Consolidated Statements of Cash Flows for the 52-week period ended September 27,
     1996 (Successor), the 7-week period ended September 29, 1995 (Successor),
     the 45-week period ended August 11, 1995 (Predecessor) and the 52-week
     period ended September 30, 1994 (Predecessor).....................................................   F-8

Notes to the Consolidated Financial Statements.........................................................  F-10

Financial Statement Schedule...........................................................................  F-61
</TABLE>


                                      -33-
<PAGE>   35

<TABLE>
<CAPTION>
COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION                                                    Page
                                                                                                         ----
<S>                                                                                                      <C> 
Consolidated Balance Sheets as of September 27, 1996 (Successor) and September 29, 1995 (Successor)....  F-34

Consolidated Statements of Operations for the 52-week period ended September 27,
     1996 (Successor), the 7-week period ended September 29, 1995 (Successor),
     the 45-week period ended August 11, 1995 (Predecessor) and the 52-week
     period ended September 30, 1994 (Predecessor).....................................................  F-35

Consolidated Statements of Stockholders' Equity (Deficit) for the 52-week period
     ended September 27, 1996 (Successor), the 7-week period ended September 29,
     1995 (Successor), the 45-week period ended August 11, 1995 (Predecessor)
     and the 52-week period ended September 30, 1994
     (Predecessor).....................................................................................  F-36

Consolidated Statements of Cash Flows for the 52-week period ended September 27,
     1996 (Successor), the 7-week period ended September 29, 1995 (Successor),
     the 45-week period ended August 11, 1995 (Predecessor) and the 52-week
     period ended September 30, 1994 (Predecessor).....................................................  F-37

Notes to the Consolidated Financial Statements.........................................................  F-39

Financial Statement Schedule...........................................................................  F-62
</TABLE>

ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.

In connection with the audit of the financial statements for the 52 weeks ended
September 27, 1996, the 7 weeks ended September 29, 1995, the 45 weeks ended
August 11, 1995 and the 52 weeks ended September 30, 1994, there were no
disagreements with either KPMG Peat Marwick LLP or Coopers & Lybrand, L.L.P. on
accounting or financial disclosure.


                                      -34-
<PAGE>   36

                                    PART III

ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS

DIRECTORS AND EXECUTIVE OFFICERS OF HOLDING

The following is a table setting forth certain information with respect to the
directors and executive officers of Holding. All directors serve for a period of
one year or until their successors are duly elected and qualified.



<TABLE>
<CAPTION>
               Name                  Age             Position
<S>                                  <C>  <C>                     
Al D. Wilunowski.................    50   Chief Executive Officer,
                                          President and Director
Alvin J. Ferreira................    52   Vice President and Assistant
                                          Secretary
Lynn E. Harvey...................    41   Chief Financial Officer,
                                          Treasurer and Secretary
Chester G. Lob...................    70   Vice President and Assistant
                                          Treasurer
Leonard I. Green.................    63   Director
John G. Danhakl..................    40   Director
Gregory J. Annick................    32   Director
</TABLE>

DIRECTORS AND EXECUTIVE OFFICERS OF CPI

The following is a table setting forth certain information with respect to the
individuals who are the directors and executive officers of CPI. All directors
serve for a period of one year or until their successors are duly elected and
qualified.

<TABLE>
<CAPTION>
               Name                  Age             Position
<S>                                  <C>  <C>                     
Al D. Wilunowski.................    50   Chief Executive Officer,
                                          President and Director
Joseph Caldarelli................    46   Vice President
James J. Commendatore............    53   Vice President
Alvin J. Ferreira................    52   Vice President
Dennis J. Gleason................    43   Vice President
Lynn E. Harvey...................    41   Chief Financial Officer
H. Frederick Koehler.............    61   Vice President
Chester G. Lob...................    70   Vice President
Armand Staprans..................    65   Vice President
Leonard I. Green.................    63   Director
John G. Danhakl..................    40   Director
Gregory J. Annick................    32   Director
</TABLE>


                                      -35-
<PAGE>   37

Al D. Wilunowski became Chief Executive Officer, President and a Director of
Holding and CPI in August 1995. Mr. Wilunowski was an Executive Vice President
of Varian and the Chief Operating Officer of the Predecessor from 1990 until
August 1995. Prior to May 1990, Mr. Wilunowski was a Corporate Vice President of
Varian and President of the Electron Devices Group since 1989. From 1986 until
April 1989, he was General Manager of Varian's Nuclear Magnetic Resonance
Instrument business. Mr. Wilunowski has also served as General Manager of three
of Varian's Semiconductor Equipment business units. Prior to joining Varian, Mr.
Wilunowski was Vice President and General Manager of Searle Analytic, a division
of G.D. Searle. Mr. Wilunowski received a B.S.B.A. degree from Northwestern
University and an M.B.A. from the University of Chicago.

Joseph Caldarelli became a Vice President of CPI in August 1995. Mr. Caldarelli
was Vice President and General Manager for Canada Microwave Products ("CMP"), an
operating unit of the Predecessor, from 1985 until August 1995 and has been
President and a director of Varian Canada, Inc. from 1992 until August, 1995.
From 1982 until 1985, Mr. Caldarelli was Marketing Manager of CMP and served as
its Equipment Operations Manager from 1979 until 1982. Prior to joining Varian,
Mr. Caldarelli served as Manufacturing Engineering Manager for Medtronic Canada,
Inc. Mr. Caldarelli holds a B.S. in Mechanical Engineering from the University
of Toronto.

James J. Commendatore became a Vice President of CPI in August 1995. Mr.
Commendatore was Vice President and General Manager of the Predecessor's
Microwave Equipment Products ("MEP") business unit from December 1994 until
August 1995. From October 1993 until December 1994, he served as MEP's Business
Support Process Manager, responsible for operations and administration, and as
Controller. He also served the Microwave Power Tube Products unit of the
Predecessor as Controller from August 1989 until October 1993. Mr.
Commendatore's background also includes various finance, supervisory, and
management posts with United Technology Center, Litton Industries, Inc.,
National Semiconductor, Advanced Memory Systems, and Amdahl Corporation. Mr.
Commendatore holds B.S. degrees in Business and Industrial Management and an
M.B.A. degree, all from California State University, San Jose.

Alvin J. Ferreira became a Vice President of CPI and Vice President and
Assistant Secretary of Holding in August 1995. Mr. Ferreira was Vice President
and General Manager of the Traveling Wave Tubes Products business unit of the
Predecessor from 1992 to August 1995. From 1990 until 1992, Mr. Ferreira was
Corporate Vice President of Operations for Varian and in 1989 served as
manufacturing manager of Varian's Instrument Division. Mr. Ferreira began his
career with Varian in 1965 and, between 1965 and 1989, held a number of
positions in production.

Dennis J. Gleason became a Vice President of CPI in August 1995. Mr. Gleason was
Vice President and General Manager of the Crossed Field & Receiver Protector
Products ("CFRPP") unit of the Predecessor from 1989 until August, 1995. From
1987 until 1989, Mr. Gleason served as Assistant General Manager of CFRPP. From
1982 until 1987, Mr. Gleason held a number of positions with the Predecessor,
including serving as Manufacturing Engineering Manager and Product Assurance
Manager at the then-Electro-Optical Sensors unit of the Predecessor. Prior to
being employed by Varian, Mr. Gleason served as an officer in the U.S. Navy
Nuclear Submarine Program. Mr. Gleason received B.S. and M.S. degrees in
Aerospace Engineering from the University of Notre Dame.

Lynn E. Harvey became Chief Financial Officer of Holding and CPI in August 1995.
Ms. Harvey was the Business Support Process Manager of the Power Grid Tube
Products unit of the Predecessor from 1993 to August 1995. From 1991 until 1993,
Ms. Harvey served as Controller of the Coupled Cavity Tube Products unit of the
Predecessor. From 1988 until 1991, Ms. Harvey served first as Cost Accounting
Manager and subsequently Budget Manager of the Power Grid Tube Products business
unit.


                                      -36-
<PAGE>   38

Ms. Harvey was also an analyst at Varian's Nuclear Magnetic Resonance Instrument
business from 1986 until 1988. Ms. Harvey joined Varian in 1984. Ms. Harvey
received a B.S. degree from the University of California, Berkeley.

H. Frederick Koehler became Vice President of CPI in August 1995. Mr. Koehler
was Vice President and General Manager of the Power Grid Tube Products unit of
the Predecessor from 1992 to August 1995. From 1989 until 1991, Mr. Koehler was
President and Chief Executive Officer of Trio-Tech International, an electronic
test equipment manufacturer. From 1985 until 1989, he served as President of
Leach Relay Group of Leach Corporation and from 1979 until 1985, he was a Vice
President at Memorex Corporation. Mr. Koehler received a B.S. from the U.S.
Military Academy, West Point and an M.S.E.E. from Syracuse University.

Chester G. Lob became Vice President of CPI and Vice President and Assistant
Treasurer of Holding in August 1995. Dr. Lob was Sales Manager of the
Predecessor from 1989 until August 1995. From 1986 until 1989, Dr. Lob was
manager of business development of the Predecessor. Previously, he served as
Vice President and Chief Engineer of the Predecessor from 1980 until 1986. Dr.
Lob joined Varian in 1965 with Varian's acquisition of the General Electric
Company's Microwave Laboratory at Stanford University, where Dr. Lob served as
General Manager. Dr. Lob holds a B.S. degree in electrical engineering from
Tulane University and was awarded M.S. and Ph.D. degrees in the same field from
the University of Illinois.

Armand Staprans became Vice President of CPI in August 1995. Dr. Staprans was
Vice President and General Manager of the Microwave Power Tube Products unit of
the Predecessor from 1991 until August 1995. Previously, he was Operations
Manager of the then-Coupled Cavity Tube unit of the Predecessor from 1986 until
1989, and became General Manager of that unit in 1989. From 1978 until 1986, Dr.
Staprans served as Chief Engineer for the then-Microwave Tube Division unit of
the Predecessor. Dr. Staprans joined Varian in 1957 as an engineer in its
microwave tube operations. He has held various other positions with Varian and
the Predecessor in engineering, development and management. Dr. Staprans
received his B.S., M.S. and Ph.D. degrees from the University of California,
Berkeley, and has been named as an inventor on seven patents.

Leonard I. Green has been an executive officer and an equity owner of LGP, a
merchant banking firm which manages GEI II, since the formation of LGP and GEI
II in 1994 by the principals of Leonard Green & Associates, L.P. ("LGA"). Mr.
Green has also been, individually or through a corporation, a partner in LGA, a
merchant banking firm, since its inception in 1989. Before forming LGA, Mr.
Green had been a partner of Gibbons, Green, van Amerongen for more than five
years. Mr. Green is also a director of Foodmaker, Inc., Horace Mann Educators
Corp., Carr-Gottstein Foods Co. and Big 5 Holdings, Inc.

John G. Danhakl has been an executive officer and an equity owner of LGP, a
merchant banking firm which manages GEI II, since 1995. Mr. Danhakl had
previously been a Managing Director at Donaldson, Lufkin & Jenrette Securities
Corporation ("DLJ") and had been with DLJ since 1990. Prior to 1990, Mr. Danhakl
was a Vice President at Drexel Burnham Lambert from 1985 to 1990. Mr. Danhakl is
also a director of The Arden Group, Inc. and Twin Laboratories, Inc.

Gregory J. Annick has been an executive officer and an equity owner, through a
trust, of LGP, a merchant banking firm which manages GEI II, since the formation
of LGP and GEI II in 1994 by the principals of LGA. He joined LGA as an
associate in 1989, became a principal in 1993, and through a corporation became
a partner of LGA in 1994. From 1988 to 1989, he was an associate with the
merchant banking firm of Gibbons, Green, van Amerongen. Before that time, Mr.
Annick was a


                                      -37-
<PAGE>   39

financial analyst in mergers and acquisitions with Goldman, Sachs & Co. Mr.
Annick is also a director of Carr-Gottstein Foods Co.

ITEM 11: EXECUTIVE COMPENSATION

The information set forth in the following table relates to the Chief Executive
Officer and President of both Holding and CPI (who formerly served at the
Predecessor's Chief Operating Officer) and the next four most highly compensated
executive officers of Holding and CPI (collectively, the "Named Executive
Officers"for Fiscal 1996 end for the 7-week period ending September 29, 1995.
For Fiscal 1994, the compensation shown was paid by Varian and is being provided
pursuant to the rules and regulations of the Securities and Exchange Commission.

<TABLE>
<CAPTION>
                                                       SUMMARY COMPENSATION TABLE

                                                              ANNUAL COMPENSATION               LONG TERM COMPENSATION AWARDS
                                                      -------------------------------- ---------------------------------------------
                                                                                                 SECURITIES
                                                                                      RESTRICTED UNDERLYING
             NAME AND                                                     OTHER ANNUAL  STOCK      OPTIONS/    LTIP      ALL OTHER
        PRINCIPAL POSITION                  FISCAL               BONUS($) COMPENSATION AWARDS($)   SARS(#)   PAYOUTS($) COMPENSATION
         WITH THE COMPANY                    YEAR     SALARY($)    (A)         (B)       (C)        (D)        (E)       ($) (F)
----------------------------------------   --------   --------   -------- ------------ --------  ----------- ---------- ------------

<S>                                         <C>        <C>        <C>         <C>      <C>        <C>        <C>        <C>     
         Al D. Wilunowski                   1996(1)   $302,744   $376,591   $ 34,672         --         --   $541,613   $ 17,195
Chief Executive Officer and President       1995(2)     40,754     63,365      2,314         --         --     78,062      2,077
                                            1994(3)    291,594    385,980     18,359   $258,563   $ 30,000    550,785     53,800

         Alvin J. Ferreira                  1996(1)    128,700     55,539      2,756         --         --     69,178      7,528
          Vice President                    1995(2)     17,325     16,066         --         --         --     17,421        932

         Dennis J. Gleason                  1996(1)    127,452    118,993      2,582         --         --     73,368      6,174
          Vice President                    1995(2)     17,157     15,272         --         --         --     17,252        833

        H. Frederick Koehler                1996(1)    129,688     55,587      2,575         --         --     59,343      6,661
          Vice President                    1995(2)     17,458     10,013         --         --         --     17,555        980

          Armand Staprans                   1996(1)    128,654    107,842      2,826         --         --     74,060     10,899
           Vice President                   1995(2)     17,318     16,448         --         --         --     17,415      1,086
</TABLE>

            1 COMPANY (52-weeks ending September 27, 1996):

            2 COMPANY (7-weeks ending September 29, 1995):

            3 PREDECESSOR (paid by Varian)

          (a) Consists of awards paid in Fiscal 1997 under CPI's Management
              Incentive Plan for Fiscal 1996. Data for the 7-week period ending
              September 29, 1995 represents the amount paid by the Company
              relating to the Varian plan for Fiscal 1995. Data for Fiscal 1994
              includes Varian's Management Incentive Plan and Cash
              Profit-Sharing Plan allocations.

          (b) Consists of amounts reimbursed for the payment of taxes on certain
              perquisites and personal benefits.

          (c) 1994 grants consist of two separate grants, one in November 1993
              before Varian established a performance-based measure (return on
              equity) for restricted stock grants, and a performance-based grant
              in November 1994 based on Varian's actual return on equity in
              Fiscal 1994. The November 1994 grant was made in Fiscal 1995, but
              was reported by Varian above for Fiscal 1994 as compensation
              relating to services rendered in that year. Reflects the value of
              Varian restricted stock awards granted during the year. 
              Restrictions relating to such Varian stock lapsed upon 
              consummation of the Acquisition.

          (d) All grants were of options to purchase Varian common stock under
              Varian's Omnibus Stock Plan. Unvested options became vested upon
              consummation of the Acquisition. No stock appreciation rights were
              granted. The shares reported are adjusted to reflect Varian's
              2-for-1 stock split in March 1994.


                                      -38-
<PAGE>   40

(e)      Consists of cash payouts (1) in Fiscal 1997 under the long-term
         incentive feature of CPI's Management Incentive Plan for a two year
         period ended Fiscal 1996; (2) in Fiscal 1996 under the long-term
         incentive feature of Varian's Omnibus Stock Plan for a three-year
         period ended with Fiscal 1995, paid by the Company for the 7-weeks
         ended September 29, 1995; (3) in Fiscal 1995 under the long-term
         incentive feature of Varian's Omnibus Stock Plan for a three-year
         period ended with Fiscal 1994.

(f)      Consists of CPI paid premiums for group life insurance for Fiscal 1996
         and, for Fiscal 1994, Varian contributions (including interest) of
         $52,579 to Varian's Retirement and Profit-Sharing Program and
         Supplemental Retirement Plan accounts and Varian-paid premiums for
         group term life insurance of $1,221.

The Company generally provides its executives with compensation (including cash
compensation and employee benefits) reasonably comparable to the compensation
provided to them as executives of the Predecessor, except that the Company does
not at this time contemplate that any of its executives will be provided with
stock options, restricted stock, SARs, phantom stock or similar equity benefits,
other than the shares purchased by the Management Investors (as defined below)
under Holding's 1995 Management Equity Plan, although the Company may consider
implementing plans or arrangements providing for one or more of such benefits in
the future. Employee benefit plans offered to the Company's Named Executive
Officers and the Company's other executives include health, life and disability
insurance and a defined contribution retirement plan and, in Mr. Wilunowski's
case, a supplemental executive retirement plan.

THE HOLDING EQUITY PLAN

The Named Executive Officer and certain of Holding's and CPI's other executive
officers are participants in Holding's 1995 Management Equity Plan (the "Holding
Equity Plan"). Under the Holding Equity Plan, participants may purchase shares
of Holding Common Stock ("Management Shares") at a price determined by Holding's
board of directors to be the fair market value of such Holding Common Stock on
the date the participant executes an agreement to purchase the shares. Holding
had reserved a total of 50,000 shares of Holding Common Stock for issuance under
the Holding Equity Plan, 45,870 of which were issued to the Company's Chief
Executive Officer, certain executive officers and key employees in Fiscal 1995 
and none in Fiscal 1996.


                                      -39-
<PAGE>   41


COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

Neither Holding nor CPI has a Compensation Committee. None of the directors of
Holding or CPI are officers or employees or former officers or employees of
Holding, CPI or any of their respective subsidiaries, other than Mr. Wilunowski,
or had any relationships which would require disclosure by the Company pursuant
to Item 404 of Regulation S-K ("Certain Relationships and Related
Transactions"), except as described below.

LGP is investment adviser to, and an affiliate of the general partner of, GEI
II, which holds approximately 71.8% of the outstanding shares of Holding.
Holding, in turn, owns all of the outstanding shares of common stock of CPI.
Messrs. Green, Danhakl and Annick, who are directors of Holding and CPI, are
also stockholders of the general partner of LGP. See "Directors and Executive
Officers." In connection with the Acquisition, Holding and CPI entered into a
Management Services Agreement with LGP pursuant to which LGP will receive an
annual fee of approximately $362,000 plus reasonable expenses for providing
management, consulting and financial planning services, including assistance in
strategic planning, providing market and financial analysis, negotiating and
structuring financing, and exploring, negotiating and arranging expansion and
capital market opportunities, in the future. The Management Services Agreement
has a term of up to twelve years. Holding and CPI believe that the contacts and
expertise provided by LGP in these areas enhance the Company's opportunities and
management's expertise in these matters and that the fees to be paid to LGP
fairly reflect the value of the services provided by LGP. In Fiscal 1996, LGP
received $397,000 pursuant to the terms of the Management Service Agreement. In
addition to an annual fee for such management consulting services, the
Management Services Agreement provides that LGP may receive reasonable and
customary fees and expenses from time to time for providing financial advisory
and investment banking services in connection with major financial transactions
that may be undertaken in the future. The Senior Credit Agreement and the
indenture governing the Notes (the "Indenture") also include certain provisions
regarding approval of affiliate transactions.


                                      -40-
<PAGE>   42

COMPENSATION OF DIRECTORS

Individuals who are officers of Holding and CPI, as well as Messrs. Green,
Danhakl and Annick, will not receive any compensation directly for their service
on Holding's and CPI's Boards of Directors. Holding and CPI have entered into a
management services agreement pursuant to which LGP will receive an annual fee
plus reasonable expenses for providing management, consulting and financial
planning services, including assistance in strategic planning, providing market
and financial analyses, negotiating and structuring financing and exploring
expansion opportunities, in the future. See "ITEM 13 - Certain Relationships and
Related Transactions." It is anticipated that other directors, if any, will
receive customary fees for service on Holding's and CPI's respective Boards of
Directors.

ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT All of
CPI's common stock is owned by Holding. The following table sets forth, as of
December 20, 1996, certain information with respect to the beneficial ownership
of Holding Common Stock by (i) each person known by Holding to own beneficially
5% or more of the outstanding shares of Holding Common Stock, (ii) each director
of Holding and CPI, (iii) the person named in the summary compensation table,
and (iv) all executive officers and directors as a group.

<TABLE>
<CAPTION>
                                                                                          Percent of
                                                              Amount and Nature of    Shares Outstanding
Name and Address of Beneficial Owner (a)                      Beneficial Ownership
------------------------------------------------------------ ---------------------------------------------
<S>                                                                    <C>                    <C>   
Green Equity Investors II, L.P.(b)............................         143,630                71.82%
333 S. Grand Avenue, Suite 5400
Los Angeles, California 90071

Leonard I. Green(b)...........................................         143,630                71.82%
333 S. Grand Avenue, Suite 5400
Los Angeles, California 90071

John G. Danhakl(b)............................................         143,630                71.82%
333 S. Grand Avenue, Suite 5400
Los Angeles, California 90071

Gregory J. Annick(b)..........................................         143,630                71.82%
333 S. Grand Avenue, Suite 5400
Los Angeles, California 90071

Al D. Wilunowski (c)..........................................          21,400                10.70%
607 Hansen Way
Palo Alto, California 94304

Alvin J. Ferreira.............................................           2,500                 1.25%

Dennis J. Gleason.............................................           2,000                 1.00%

H. Frederick Hoehler(d).......................................           3,000                 1.50%

Armand Staprans...............................................           2,500                 1.25%

Directors  and  Executive  Officers as a group (12 persons)(b)         182,080                91.04%
</TABLE>

---------

(a)      Addresses are given only for persons listed as beneficial owners of 5%
         or more of Holding Common Stock.

(b)      GEI II is a Delaware limited partnership managed by LGP, which is an
         affiliate of the general partner of GEI II. Each of Mr. Green, Jonathan
         D. Sokoloff, Mr. Danhakl, Mr. Annick and Jennifer Holden Dunbar, either
         directly (whether through ownership interest or position) or through
         one or more intermediaries, may be deemed to control LGP and such
         general partner. LGP and such general partner may be deemed to control
         the voting and disposition of the shares of Holding Common Stock owned
         by GEI II. Accordingly, for certain purposes, Messrs. Green, Sokoloff,
         Danhakl and Annick and Ms. Holden Dunbar may be deemed to be beneficial
         owners of the shares of Holding Common Stock held by GEI II. All of the
         shares of Holding Common Stock shown in the table as being beneficially
         owned by Messrs. Green, Danhakl and Annick are owned by GEI II.

(c)      Includes 400 shares originally acquired by Mr. Wilunowski and
         subsequently transferred to his child.

(d)      Includes 800 shares originally acquired by Mr. Koehler and subsequently
         transferred to his children.

                                      -41-
<PAGE>   43

Terms of Subscription and Stockholder Agreements

Holding Common Stock and Junior Preferred Stock purchased by GEI II was
purchased pursuant to a Stock Subscription Agreement between Holding, CPI and
GEI II. GEI II was also granted certain demand and "piggyback" registration
rights for any shares of Holding Common Stock it may own pursuant to the Holding
Common Stock Registration Rights Agreement dated as of August 11, 1995 among
Holding, GEI II and the initial purchaser of CPI's Series A Senior Preferred
Stock.

Holders of Holding Common Stock issued to qualified institutional buyers and/or
institutional accredited investors are entitled to the benefit of agreements
with Holding and CPI which contain certain demand and "piggyback" registration
rights, customary "tag-along" sale rights exercisable by the investor, and
customary "drag-along" sale rights exercisable by GEI II in certain
circumstances. In addition, the Management Investors have been granted certain
registration rights and "tag-along" rights and are subject to certain
"drag-along" obligations.

ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Management Agreements

LGP is investment adviser to, and an affiliate of the general partner of, GEI
II, which holds approximately 71.8% of the outstanding shares of Holding.
Holding, in turn, owns all of the outstanding shares of common stock of CPI.
Messrs. Green, Danhakl and Annick, who are directors of Holding and CPI, are
also stockholders of the general partner of LGP. In connection with the
Acquisition, Holding and CPI entered into a Management Services Agreement with
LGP pursuant to which LGP will receive an annual fee of approximately $362,000
plus reasonable expenses for providing management, consulting and financial
planning services, including assistance in strategic planning, providing market
and financial analysis, negotiating and structuring financing, and exploring,
negotiating and arranging expansion and capital market opportunities, in the
future. The Management Services Agreement has a term of up to twelve years.
Holding and CPI believe that the contacts and expertise provided by LGP in these
areas enhance the Company's opportunities and management's expertise in these
matters and that the fees to be paid to LGP fairly reflect the value of the
services provided by LGP. In Fiscal 1996, LGP received $397,000 pursuant to the
terms of the Management Services Agreement. In addition to an annual fee for
such management consulting services, the Management Services Agreement provides
that LGP may receive reasonable and customary fees and expenses from time to
time for providing financial advisory and investment banking services in
connection with major financial transactions that may be undertaken in the
future. The Senior Credit Agreement and the Indenture also include certain
provisions regarding approval of affiliate transactions.


                                      -42-
<PAGE>   44

                                     PART IV

ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8K

(a)  Financial Statement Schedule of CPI and Holding

     Schedule II - Valuation and Qualifying Accounts

(b)  Reports on Form 8-K

     None.

(c)  Schedule of Exhibits

Exhibit No.                                     Description
-----------                                     -----------

2.1(1)        Stock Sale Agreement between CPI (as successor by merger to CPII
              Acquisition Corp., then known as Communications & Power Industries
              Holding Corporation) and Varian dated as of June 9 ,1995.

2.2(1)        First Amendment to Stock Sale Agreement among Holding, CPI (as
              successor by merger to CPII Acquisition) and Varian dated as of
              August 11, 1995.

2.3(1)        Second Amendment to Stock Sale Agreement among Holding, CPI (as
              successor by merger to CPII Acquisition) and Varian dated as of
              August 11, 1995.

3.1(1)        Restated Certificate of Incorporation of CPI filed with the
              Delaware Secretary of State on August 11, 1995.

3.2(1)        Bylaws of CPI.

3.3(1)        Certificate of Incorporation of Holding.

3.4(1)        Bylaws of Holding.

4.1(1)        Indenture among CPII Acquisition, Holding, the other guarantors of
              the Notes (the "Guarantors") and U.S. Trust Company of California,
              N.A., relating to the Notes dated as of August 11, 1995.

4.2(1)        First Supplemental Indenture among CPI, Holding, the other
              Guarantors and U.S. Trust Company of California, N.A., relating to
              the Notes dated as of August 11, 1995.

4.3(1)        Form of Notes (included in Exhibit 4.1, Exhibit A).

4.4(1)        Form of Indenture between CPI and Shawmut Bank Connecticut,
              National Association, relating to the Exchange Notes.

4.5(1)        Form of Exchange Note (included in Exhibit 4.5, Exhibit A).


                                      -43-
<PAGE>   45

Exhibit No.                                     Description
-----------                                     -----------

4.6(2)        Form of Second Supplemental Indenture among CPI, Holding, the
              other Guarantors and U.S. Trust Company of California, N.A.,
              relating to the Notes.

10.1(1)       Credit Agreement among CPI, Holding, CPII Acquisition, the other
              obligors named therein, the lenders named therein and Bankers
              Trust Company, as Agent, dated as of August 11, 1995 (including
              Annex A (Definitions; Rules of Construction) and Annex F
              (Financial Covenants)).

10.2(1)       Term A Notes in the amount of $8,333,333.32, $4,166,666.67,
              $4,166,666.67, $4,166,666.67 and $4,166,666.76 made by CPI in
              favor of Bankers Trust Company, Dresdner Bank AG, First Bank
              National Association, The Nippon Credit Bank, Ltd. and Union Bank,
              respectively, dated as of August 11, 1995.

10.3(1)       Term B Notes in the amount of $11,666,666.68 and $5,666,666.67
              made by CPI in favor of Bankers Trust Company and Crescent/Mach I
              Partners, respectively, dated as of August 11, 1995.

10.4(1)       Revolving Credit Notes in the amount of $11,666,666.68,
              $5,833,333.33, $5,833,333.33, $5,833,333.33 and $5,833,333.33 made
              by CPI in favor of Bankers Trust Company, Dresdner Bank AG, First
              Bank National Association, The Nippon Credit Bank, Ltd, and Union
              Bank, respectively, dated as of August 11, 1995.

10.5(1)       Swingline Note in the amount of $5,000,000 made by CPI in favor of
              Bankers Trust Company dated as of August 11, 1995.

10.6(1)       Security Agreement among CPI, CPII Acquisition, the other
              assignors named therein and Bankers Trust Company, as Agent, dated
              as of August 11, 1995.

10.7(1)       Pledge Agreement made by CPI, Holding, CPII Acquisition, and CPI
              Subsidiary Holdings, Inc. in favor of Bankers Trust Company, as
              Agent, dated as of August 11, 1995.

10.8(1)       Continuing Guaranty made by each of the Guarantors in favor of the
              Lenders and Agent under the Senior Credit Agreement, dated as of
              August 11, 1995.

10.9(1)       Transitional Services Agreement between CPI and Varian dated as of
              August 10, 1995.

10.10(3)(+)   Key Components Supply Agreement between CPI and Varian dated as of
              August 10, 1995.

10.11(1)      Cross License Agreement between the CPI and Varian dated as of
              August 10, 1995.

10.12(1)      Trademark License Agreement between CPI and Varian dated as of
              August 10, 1995.

10.13(1)      Assignment and Assumption of Lessee's Interest in Lease (Units
              1-4, Palo Alto) and Covenants, Conditions and Restrictions on
              Leasehold Interests (Units 1-12, Palo Alto) dated as of August 10,
              1995 between Varian Realty Inc., Varian Associates, Inc. and CPI.

10.14(1)      Sublease (Portion of Building 2 Located on Unit 5, Palo Alto)
              dated as of August 10, 1995 between Varian Realty Inc. and CPI.


                                      -44-
<PAGE>   46

Exhibit No.                                     Description
-----------                                     -----------

10.15(1)      Sublease (Unit 8, Palo Alto) dated as of August 10, 1995 between
              Varian Realty Inc. and CPI.

10.16(1)      Sublease (Building 4, Palo Alto) .dated as of August 10, 1995
              between CPI, as Sublessee, Varian Associates, Inc., as Sublessor,
              and Varian Realty Inc., as Adjacent Property Sublessor.

10.17(1)      Assignment and Assumption of Tenant's Interest in Lease (Santa
              Clara, California) dated as of August 10, 1995 between Varian and
              CPI.

10.18(1)      Lease (Salt Lake City, Utah) dated as of August 10, 1995 between
              CPI and Varian Associates, Inc.

10.19(1)      Shared Use Agreement dated as of August 11, 1995 between Varian
              (on behalf of itself and its subsidiaries) and CPI (as successor
              by merger to CPII Acquisition Corp.) (on behalf of itself and its
              subsidiaries).

10.20(1)      Purchase Agreement among CPII Acquisition, Holding, the other
              Guarantors and the initial purchasers of the Series A Senior
              Subordinated Notes (the "Initial Notes Purchasers") dated as of
              August 11, 1995.

10.21(1)      Purchase Agreement among CPII Acquisition, Holding and the initial
              purchaser of the Series A Senior Preferred Stock (the "Initial
              Senior Preferred Stock Purchaser") dated as of August 11, 1995.

10.22(1)      A/B Exchange Registration Rights agreement among CPI (as successor
              by merger to CPII Acquisition), Holding, the other Guarantors and
              the Initial Notes Purchasers dated as of August 11, 1995.

10.23(1)      Amendment to A/B Exchange Registration Rights Agreement among CPI,
              Holding, the other Guarantors and the Initial Notes Purchasers
              dated as of August 11,1995.

10.24(1)      A/B Exchange Registration Rights Agreement between CPI (as
              successor by merger to CPII Acquisition) and the Initial Senior
              Preferred Stock Purchaser dated as of August 11, 1995.

10.25(1)      Amendment to A/B Exchange Registration Rights Agreement between
              CPI and the Initial Senior Preferred Stock Purchaser dated as of
              August 11, 1995.

10.26(1)      Holding Common Stock Registration Rights Agreement by and among
              Holding, GEI II and the Initial Senior Preferred Stock Purchaser
              dated as of August 11, 1995 relating to the Holding Common Stock
              sold with the Series A Senior Preferred Stock.

10.27(1)      Stockholders Agreement by and among Holding, GEI II and the
              Initial Senior Preferred Stock Purchaser dated as of August 11,
              1995 relating to the Holding Common Stock sold with the Series A
              Senior Preferred Stock.

10.28(1)      Stock Subscription Agreement among Holding, CPII Acquisition Corp.
              and GEI II dated as of August 11, 1995.


                                      -45-
<PAGE>   47

Exhibit No.                                     Description
-----------                                     -----------

10.29(1)      Management Services Agreement among CPI, Holding and Leonard Green
              & Partners, L.P. dated as of August 11, 1995.

10.30(1)      1995 Holding Management Equity Plan (including Form of Management
              Subscription and Stockholders Agreement).

10.31(1)      Letter from Holding to Al D. Wilunowski dated June 9, 1995
              relating to terms of employment.

10.32(1)      Letter from Holding to Alvin J. Ferreira dated June 9, 1995
              relating to terms of employment.

10.33(1)      Letter from Holding to Dennis J. Gleason dated June 9, 1995
              relating to terms of employment.

10.34(1)      Letter from Holding to H. Frederick Koehler dated June 9, 1995
              relating to terms of employment.

10.35(1)      Letter from Holding to Armand Staprans dated June 9, 1995 relating
              to terms of employment.

21(1)         Subsidiaries of CPI and Holding.

27            Financial Data Schedule
--------------

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

(2)           Incorporated by reference to Amendment No.3 to CPI's Registration
              Statement on Form S-1 (Registration No.33-96858), filed on
              November 9, 1995.

(3)           Incorporated by reference to Amendment No.1 to CPI's Registration
              Statement on Form S-1 (Registration Statement No.33-96858), filed
              on October 25, 1995.

(+)           Certain portions of this Exhibit have been omitted and filed
              separately under an application for confidential treatment with
              the Securities and Exchange Commission.


                                      -46-
<PAGE>   48

                                   SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

                                        COMMUNICATIONS & POWER INDUSTRIES, INC.

                                        By:         /s/ Al D. Wilunowski
                                           -------------------------------------
                                                      Al D. Wilunowski
                                           Chief Executive Officer and President
                                                  Date: December 20, 1996

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

<TABLE>
<CAPTION>
         Signature                                         Title                                        Date
         ---------                                         -----                                        ----
<S>                                  <C>                                                         <C>                
   /s/ Leonard I. Green                                   Director                                    12-20-96
----------------------------                                                                     -------------------

    /s/ John G. Danhakl                                   Director                                    12-20-96
----------------------------                                                                     -------------------

   /s/ Gregory J. Annick                                  Director                                    12-20-96
----------------------------                                                                     -------------------

                                     Chief Financial Officer, Treasurer and Secretary
    /s/ Lynn E. Harvey                  (Principal Financial and Accounting Officer)                  12-20-96
----------------------------                                                                     -------------------

                                      Director, Chief Executive Officer and President
   /s/ Al D. Wilunowski                        (Principal Executive Officer)                          12-20-96
----------------------------                                                                     -------------------
</TABLE>

Supplemental Information to be Furnished with Reports Filed Pursuant to Section
15(d) of the Securities Exchange Act of 1934 by Registrants which have not
Registered Securities Pursuant to Section 12 of the Securities Exchange Act of
1934:

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


                                      -47-
<PAGE>   49

                                   SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

                                       COMMUNICATIONS & POWER INDUSTRIES HOLDING
                                       CORPORATION

                                       By:         /s/ Al D. Wilunowski
                                          -------------------------------------
                                                     Al D. Wilunowski
                                          Chief Executive Officer and President
                                                 Date: December 20, 1996

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

<TABLE>
<CAPTION>
         Signature                                         Title                                        Date
         ---------                                         -----                                        ----
<S>                                  <C>                                                         <C>                
   /s/ Leonard I. Green                                   Director                                    12-20-96
----------------------------                                                                     -------------------

    /s/ John G. Danhakl                                   Director                                    12-20-96
----------------------------                                                                     -------------------

   /s/ Gregory J. Annick                                  Director                                    12-20-96
----------------------------                                                                     -------------------

                                     Chief Financial Officer, Treasurer and Secretary
    /s/ Lynn E. Harvey                  (Principal Financial and Accounting Officer)                  12-20-96
----------------------------                                                                     -------------------

                                      Director, Chief Executive Officer and President
   /s/ Al D. Wilunowski                        (Principal Executive Officer)                          12-20-96
----------------------------                                                                     -------------------
</TABLE>

Supplemental Information to be Furnished with Reports Filed Pursuant to Section
15(d) of the Securities Exchange Act of 1934 by Registrants which have not
Registered Securities Pursuant to Section 12 of the Securities Exchange Act of
1934:

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


                                      -48-
<PAGE>   50
                        COMMUNICATIONS & POWER INDUSTRIES
                               HOLDING CORPORATION
                                and subsidiaries

                    COMMUNICATIONS & POWER INDUSTRIES, INC.,
                                and subsidiaries
              (A wholly owned subsidiary of Communications & Power
                        Industries Holding Corporation)


                          INDEX TO FINANCIAL STATEMENTS


                     COMMUNICATIONS & POWER INDUSTRIES, INC.

<TABLE>
<CAPTION>
                                                                                                             Page
<S>                                                                                                       <C>
Independent Auditor's Report..............................................................................    F-3

Consolidated Balance Sheets as of September 27, 1996 (Successor) and September 29, 1995
     (Successor)..........................................................................................    F-5

Consolidated Statements of Operations for the 52-week period ended September 27,
     1996 (Successor), the 7-week period ended September 29, 1995 (Successor),
     the 45-week period ended August 11, 1995 (Predecessor) and the 52-week
     period ended September 30, 1994 (Predecessor) .......................................................    F-6

Consolidated Statements of Stockholders' Equity (Deficit) for the 52-week period
     ended September 27, 1996 (Successor), the 7-week period ended September 29,
     1995 (Successor), the 45-week period ended August 11, 1995 (Predecessor)
     and the 52-week period ended September 30, 1994 (Predecessor)........................................    F-7

Consolidated Statements of Cash Flows for the 52-week period ended September 27,
     1996 (Successor), the 7-week period ended September 29, 1995 (Successor),
     the 45-week period ended August 11, 1995 (Predecessor) and the 52-week
     period ended September 30, 1994 (Predecessor)........................................................    F-8

Notes to the Consolidated Financial Statements ...........................................................   F-10
</TABLE>


                                     -F-1-
<PAGE>   51
                    INDEX TO FINANCIAL STATEMENTS, continued


              COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION


<TABLE>
<S>                                                                                                      <C>
Independent Auditor's Report.............................................................................F-32

Consolidated Balance Sheets as of September 27, 1996 (Successor) and September 29, 1995
     (Successor).........................................................................................F-34

Consolidated Statements of Operations for the 52-week period ended September 27,
     1996 (Successor), the 7-week period ended September 29, 1995 (Successor),
     the 45-week period ended August 11, 1995 (Predecessor) and the 52-week
     period ended September 30, 1994 (Predecessor).......................................................F-35

Consolidated Statements of Stockholders' Equity (Deficit) for the 52-week period
     ended September 27, 1996 (Successor), the 7-week period ended September 29,
     1995 (Successor), the 45-week period ended August 11, 1995 (Predecessor)
     and the 52-week period ended September 30, 1994 (Predecessor).......................................F-36

Consolidated Statements of Cash Flows for the 52-week period ended September 27,
     1996 (Successor), the 7-week period ended September 29, 1995 (Successor),
     the 45-week period ended August 11, 1995 (Predecessor) and the 52-week
     period ended September 30, 1994 (Predecessor).......................................................F-37

Notes to the Consolidated Financial Statements...........................................................F-39

                                  FINANCIAL STATEMENT SCHEDULES

Communications & Power Industries, Inc...................................................................F-61

Communications & Power Industries Holding Corporation....................................................F-62
</TABLE>


                                     -F-2-
<PAGE>   52
                    COMMUNICATIONS & POWER INDUSTRIES, INC.,
                                and subsidiaries

                 (A wholly owned subsidiary of Communications &
                     Power Industries Holding Corporation)



                          INDEPENDENT AUDITOR'S REPORT


The Board of Directors and Stockholders
Communications & Power Industries, Inc.:

We have audited the accompanying consolidated balance sheets of Communications &
Power Industries, Inc. (a wholly owned subsidiary of Communications & Power
Industries Holding Corporation) and subsidiaries ( "CPI" or the "Successor") as
of September 27, 1996 and September 29, 1995, and the related consolidated
statements of operations, stockholders' equity (deficit), and cash flows for the
52-week period ended September 27, 1996 and the 7-week period ended September
29, 1995. We have also audited the related consolidated statements of
operations, stockholders' equity, and cash flows of CPI's predecessor, the
Electron Devices Business of Varian Associates, Inc. (the "Predecessor") for the
45-week period ended August 11, 1995. In connection with our audits of the
consolidated financial statements for the periods indicated above, we have also
audited the financial statement schedule as listed in the accompanying index.
These consolidated financial statements and financial statement schedule are the
responsibility of CPI's management. Our responsibility is to express an opinion
on these consolidated financial statements and financial statement schedule
based on our audits.

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

As described in the notes to the consolidated financial statements, CPI acquired
assets and assumed liabilities on August 11, 1995 in a transaction that was
accounted for as a purchase. Accordingly, the consolidated financial statements
of the Successor are presented on a different cost basis than the consolidated
financial statements of the Predecessor and, therefore, are not comparable.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Communications &
Power Industries, Inc. and subsidiaries as of September 27, 1996 and September
29, 1995, the results of their operations and their cash flows for the 52-week
period ended September 27, 1996 and the 7-week period ended September 29, 1995,
and the results of operations and cash flows of the Electron Devices Business of
Varian Associates, Inc. for the 45-week period ended August 11, 1995, in
conformity with generally accepted accounting principles. Also, in our opinion,
the related financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, presents fairly, in
all material respects, the information set forth therein.

                                                        s/KPMG Peat Marwick, LLP

San Jose, California
November 22, 1996


                                      -F-3-
<PAGE>   53
                    COMMUNICATIONS & POWER INDUSTRIES, INC.,
                                and subsidiaries

                 (A wholly owned subsidiary of Communications &
                     Power Industries Holding Corporation)



                        REPORT OF INDEPENDENT ACCOUNTANTS




To the Board of Directors and Stockholders of
Communications & Power Industries, Inc.:


We have audited the accompanying statements of operations, stockholders' equity
and cash flows of the Electron Devices Business, a segment of Varian Associates,
Inc. (excluding the segment's Tempe, Arizona operations) (the "Predecessor") for
fiscal year ended of September 30, 1994. In connection with our audit of the
consolidated financial statements for the year indicated above, we have also
audited the financial statement schedule as listed in the accompanying index.
These financial statements are the responsibility of CPI's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the the results of the Predecessor's operations and its
cash flows for the fiscal year ended September 30, 1994, in conformity with
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.

                                                      s/Coopers & Lybrand, L.L.P



San Jose, California
April 30, 1995


                                      -F-4
<PAGE>   54
                    COMMUNICATIONS & POWER INDUSTRIES, INC.,
                                and subsidiaries

                 (A wholly owned subsidiary of Communications &
                     Power Industries Holding Corporation)



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


<TABLE>
<CAPTION>
                                                                                   September 27,    September 29,
                            ASSETS                                                     1996             1995
                            ------                                                   ---------        ---------
<S>                                                                                  <C>                  <C>  
CURRENT ASSETS
    Cash and cash equivalents                                                        $   1,753            8,267
    Accounts receivable, net                                                            50,380           44,743
    Inventories                                                                         46,471           44,765
    Deferred taxes                                                                       7,109             --
    Other current assets                                                                 2,133            2,566
                                                                                     ---------        ---------
       Total current assets                                                            107,846          100,341
Property, plant, and equipment, net                                                     79,873           74,071
Goodwill, net                                                                           25,203           26,098
Debt issue costs, net                                                                    9,651           11,371
Deferred taxes                                                                           5,569            2,969
Other assets                                                                              --                 52
                                                                                     ---------        ---------
       Total assets                                                                  $ 228,142          214,902
                                                                                     =========        =========

LIABILITIES, SENIOR REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
    Revolving credit facility                                                        $  17,000           19,600
    Accounts payable - trade                                                            10,527           16,474
    Accrued expenses                                                                    22,371           19,786
    Product warranty                                                                     4,327            4,690
    Current portion of term loans                                                        3,950            3,200
    Income taxes payable                                                                10,560             --
    Advance payments from customers                                                      4,535            1,387
                                                                                     ---------        ---------
       Total current liabilities                                                        73,270           65,137
Senior term loans                                                                       35,650           38,800
Senior subordinated notes                                                              100,000          100,000
Deferred taxes                                                                            --                 43
                                                                                     ---------        ---------
       Total liabilities                                                               208,920          203,980
                                                                                     ---------        ---------
SENIOR REDEEMABLE PREFERRED STOCK ($.01 par value, 325,000 shares authorized;
    171,482 and 150,000 shares issued and outstanding as of
    1996 and 1995, respectively, liquidation preference $100 per share)                 14,822           12,460
                                                                                     ---------        ---------
Commitments and contingencies

STOCKHOLDERS' EQUITY (DEFICIT):
    Junior Preferred Stock ($.01 par value, 525,000 shares authorized; 114,321
       and 100,000 shares issued and outstanding as of 1996
       and 1995, respectively, liquidation preference $100 per share)                        1                1
    Common stock ($.01 par value, 400,000 shares authorized; 1 share
       issued and outstanding as of 1996 and 1995)                                        --               --
    Additional paid-in capital                                                          30,521           29,088
    Accumulated deficit                                                                (25,080)         (29,627)
    Stockholder loans                                                                   (1,042)          (1,000)
                                                                                     ---------        ---------
       Net stockholders' equity (deficit)                                                4,400           (1,538)
                                                                                     ---------        ---------
       Total liabilities, senior redeemable preferred stock and
         stockholders' equity                                                        $ 228,142          214,902
                                                                                     =========        =========
</TABLE>



See accompanying notes to the consolidated financial statements.


                                      -F-5-
<PAGE>   55
                    COMMUNICATIONS & POWER INDUSTRIES, INC.,
                                and subsidiaries
         (A wholly owned subsidiary of Communications & Power Industries
                              Holding Corporation)


                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                 (in thousands)

<TABLE>
<CAPTION>
                                                    Successor                        Predecessor
                                          ------------------------------     -----------------------------
                                            52-Week           7-Week           45-Week         52-Week
                                          period ended     period ended      period ended    period ended
                                          September 27,    September 29,      August 11,     September 30,
                                              1996             1995              1995            1994
                                          ------------------------------     ------------    -------------
<S>                                       <C>              <C>               <C>             <C>    
Sales                                       $257,449           36,398           214,677          246,890
                                                                                              
Cost of sales                                184,482           27,634           160,156          186,996
                                            --------         --------         ---------        ---------
Gross Profit                                  72,967            8,764            54,521           59,894
                                            --------         --------         ---------        ---------
Operating costs and expenses:                                                                 
     Research and development                  8,308            1,198             7,429            7,619
                                                                                              
     Marketing                                19,886            2,763            17,506           19,476
                                                                                              
     General and administrative               15,468            3,250            19,725           17,380
                                                                                              
     Write-off of acquired in-process                                                         
          research and development               --            31,363              --                --
                                            --------         --------         ---------        ---------
Total operating costs and expenses            43,662           38,574            44,660           44,475
                                            --------         --------         ---------        ---------
Operating income (loss)                       29,305          (29,810)            9,861           15,419
                                                                                              
Interest expense                              18,894            2,497               --               --
                                            --------         --------         ---------        ---------
Earnings (loss) before taxes                  10,411          (32,307)            9,861           15,419
                                                                                              
Income tax expense (benefit)                   2,068           (2,709)            3,649            5,859
                                            --------         --------         ---------        ---------
Net earnings (loss)                            8,343          (29,598)            6,212            9,560
                                                                                              
Preferred dividends:                                                                          
    Senior Redeemable Preferred Stock          2,148              --                --               --
    Junior Preferred Stock                     1,432              --                --               --
                                            --------         --------         ---------        ---------
Net earnings (loss) attributable                                                              
    to Common Stock                           $4,763          (29,598)            6,212            9,560
                                            ========         ========         =========        =========
</TABLE>




See accompanying notes to the consolidated financial statements.



                                      -F-6-
<PAGE>   56
                    COMMUNICATIONS & POWER INDUSTRIES, INC.,
                                and subsidiaries
         (A wholly owned subsidiary of Communications & Power Industries
                              Holding Corporation)


CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(in thousands, except share data)

<TABLE>
<CAPTION>
                                                                                                  
                                                      Junior              Additional              
                                                     Preferred   Common     Paid-in    Accumulated
                                                       Stock      Stock     Capital      Deficit  
                                                     ---------   ------   ----------   -----------
<S>                                                  <C>         <C>       <C>          <C>       
PREDECESSOR:
     Balances, October 1, 1993                       $    --        --         --            --   
          Net repayments to Varian                                                                
          Net earnings                                                                            
                                                     --------    ------    -------      --------  
     Balances, September 30, 1994                         --        --         --            --   
          Net repayments to Varian                                                                
          Net earnings                                                                            
                                                     --------    ------    -------      --------  
     Balances, August 11, 1995                            --        --         --            --   
                                                                                                  
SUCCESSOR:                                                                                        
     Elimination of business equity                                                               
     Issuance of stock in connection                                                              
       with the Acquisition:                                                                      
         10,500 shares of common stock                                                            
          of Holding issued in connection                                                         
          with the issuance of the Senior                                                         
          Redeemable Preferred Stock                                         1,050                
         Issuance of 100,000 shares                                                               
          of Junior Preferred Stock                         1                9,999                
          Less issue costs                                                    (654)               
         Issuance of 1 share of                                                                   
          Common stock to Holding                                           20,000                
          Less issue costs                                                  (1,307)               
          Less stockholder loans                                                                  
     Amortization of discount and                                                                 
       issue costs on Senior                                                                      
       Redeemable Preferred Stock                                                            (29) 
     Net loss for the period from                                                                 
       August 12, 1995 through                                                                    
       September 29, 1995                                                                (29,598) 
                                                     --------    ------    -------      --------  
     Balances, September 29, 1995                           1       --      29,088       (29,627) 
                                                                                                  
                                                                                                  
     Amortization of discount and issue costs                                                     
       on Senior Redeemable Preferred Stock                                                 (214) 
     Payment of dividends on Senior Preferred Stock                                       (2,149) 
     Payment of dividends on Junior Preferred Stock                          1,433        (1,433) 
     Net earnings                                                                          8,343  
     Repayment of stockholder loans                                                               
     Interest accrued on stockholder loans                                                        
                                                     --------    ------    -------      --------  
     Balances,                                                                                    
       September 27, 1996                            $      1       --      30,521       (25,080) 
                                                     ========    ======    =======      ========  
                                                                                                                              

<CAPTION>                                            
                                                                                      Total           
                                                                                  Stockholders'       
                                                        Stockholder    Business      Equity           
                                                           Loans        Equity      (deficit)         
                                                        -----------    --------   -------------       
<S>                                                       <C>          <C>          <C>               
PREDECESSOR:                                                                                          
     Balances, October 1, 1993                                --        125,657      125,657          
          Net repayments to Varian                                      (15,363)     (15,363)         
          Net earnings                                                    9,560        9,560          
                                                         --------      -------      --------          
     Balances, September 30, 1994                             --        119,854      119,854          
          Net repayments to Varian                                       (4,475)      (4,475)         
          Net earnings                                                    6,212        6,212          
                                                         --------      -------      --------          
     Balances, August 11, 1995                                --        121,591      121,591          
                                                                                                      
SUCCESSOR:                                                                                            
     Elimination of business equity                                    (121,591)    (121,591)         
     Issuance of stock in connection                                                                  
       with the Acquisition:                                                                          
         10,500 shares of common stock                                                                
          of Holding issued in connection                                                             
          with the issuance of the Senior                                                             
          Redeemable Preferred Stock                                                   1,050          
         Issuance of 100,000 shares                                                                   
          of Junior Preferred Stock                                                                   
          Less issue costs                                                             9,346          
         Issuance of 1 share of                                                                       
          Common stock to Holding                                                                     
          Less issue costs                                                                            
          Less stockholder loans                           (1,000)                    17,693          
     Amortization of discount and                                                                     
       issue costs on Senior                                                                          
       Redeemable Preferred Stock                                                        (29)         
     Net loss for the period from                                                                     
       August 12, 1995 through                                                                        
       September 29, 1995                                                            (29,598)         
                                                         --------      -------      --------          
     Balances, September 29, 1995                          (1,000)         --         (1,538)         
                                                                                                      
                                                                                                      
     Amortization of discount and issue costs                                                         
       on Senior Redeemable Preferred Stock                                             (214)         
     Payment of dividends on Senior Preferred Stock                                   (2,149)         
     Payment of dividends on Junior Preferred Stock                                      --           
     Net earnings                                                                      8,343          
     Repayment of stockholder loans                            25                         25          
     Interest accrued on stockholder loans                    (67)                       (67)         
                                                         --------      -------      --------          
     Balances,                                                                                        
       September 27, 1996                                  (1,042)         --          4,400          
                                                         ========      =======      ========          
</TABLE>



See accompanying notes to the consolidated financial statements



                                     -F-7-
<PAGE>   57
                    COMMUNICATIONS & POWER INDUSTRIES, INC.,
                                and subsidiaries
         (A wholly owned subsidiary of Communications & Power Industries
                              Holding Corporation)


                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (in thousands)

<TABLE>
<CAPTION>
                                                                            Successor                     Predecessor
                                                                  -----------------------------   -----------------------------
                                                                     52-Week         7-Week          45-Week         52-Week
                                                                  period ended    period ended    period ended    period ended
                                                                  September 27,   September 29,     August 11,    September 30,
                                                                      1996            1995            1995            1994
                                                                  -------------   -------------   ------------    -------------
<S>                                                             <C>              <C>             <C>             <C>
OPERATING ACTIVITIES
         Net cash provided by operating activities                  $ 11,290          14,823           4,083          31,351
                                                                    --------        --------        --------        --------
INVESTING ACTIVITIES
         Purchase of businesses, net of cash acquired                   --          (196,200)           --               250
         Proceeds from sale of
              property, plant and equipment                             --              --              --               655
         Purchase of property, plant, and equipment                  (12,472)           (880)         (6,063)        (14,813)
         Property, plant and equipment transfers out                    --              --              --               106
         (Increase) decrease in other non current assets                (114)            (27)            742             911
                                                                    --------        --------        --------        --------
         Net cash used in investing activities                       (12,586)       (197,107)         (5,321)        (12,891)
                                                                    --------        --------        --------        --------
FINANCING ACTIVITIES
         Repayment of intercompany funding to Varian                    --              --            (4,475)        (15,363)
         Net (Repayments)/Proceeds from revolving credit
              facility                                                (2,600)         19,600            --              --
         Net (Repayments)/Proceeds from the issuance of debt:
              Senior term loans                                       (2,400)         42,000            --              --
              Senior subordinated notes                                 --           100,000            --              --
              Debt issue costs                                          (243)        (11,570)           --              --
         (Repayments)/Proceeds from the sale of stock:
              Senior Redeemable Preferred Stock                         --            15,000            --              --
              Junior Preferred Stock                                    --            10,000            --              --
              Common stock                                              --            20,000            --              --
              Common and preferred stock issue costs                    --            (3,479)
              Stockholder loans                                           25          (1,000)           --              --
                                                                    --------        --------        --------        --------
         Net cash provided by (used in) financing activities          (5,218)        190,551          (4,475)        (15,363)
                                                                    --------        --------        --------        --------

NET INCREASE (DECREASE) IN
     CASH AND CASH EQUIVALENTS                                        (6,514)          8,267          (5,713)          3,097
Cash and cash equivalents at beginning of period                       8,267            --             5,713           2,616
                                                                    --------        --------        --------        --------

Cash and cash equivalents at end of period                          $  1,753           8,267            --             5,713
                                                                    ========        ========        ========        ========
</TABLE>



See accompanying notes to the consolidated financial statements.


                                     -F-8-
<PAGE>   58
                    COMMUNICATIONS & POWER INDUSTRIES, INC.,
                                and subsidiaries
         (A wholly owned subsidiary of Communications & Power Industries
                              Holding Corporation)


                CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
                                 (in thousands)

<TABLE>
<CAPTION>
                                                                       Successor                             Predecessor
                                                         ------------------------------------      --------------------------------
                                                           52-Week               7-Week              45-Week            52-Week
                                                         period ended         period ended         period ended       period ended
                                                         September 27,        September 29,         August 11,        September 30,
                                                            1996                  1995                1995                1994
                                                            ----                  ----                ----                ----
<S>                                                      <C>                  <C>                  <C>                <C>
DETAIL OF NET CASH PROVIDED                                                                                       
     BY OPERATING ACTIVITIES                                                                                      
Net earnings (loss)                                      $ 8,343                (29,598)              6,212               9,560
Adjustments to reconcile net earnings (loss) to
     net cash provided by operating activities:
         Write-off of acquired in-process
              research and development                      --                   31,363                --                  --
         Depreciation                                      6,670                    803              10,999              12,191
         Amortization of deferred debt issue costs         1,962                    199                --                  --
         Amortization of intangibles                       1,061                    138                 166                 204
         Deferred taxes - current                         (7,109)                  --                11,897                 492
         Deferred taxes - long-term                       (2,643)                (2,926)             (5,171)               (747)
         Interest accrued on stockholder loans               (67)
         Loss from sale of assets                           --                     --                  --                   165
         Changes in operating assets and liabilities:
              Accounts receivable                         (5,637)                (7,977)              3,051               3,413
              Inventories                                 (1,706)                 4,581              (6,109)              7,240
              Other current assets                           433                      7              (1,592)               (247)
              Accounts payable - trade                    (5,947)                 9,843                 462                (551)
              Accrued expenses                             2,585                  9,024             (13,716)               (252)
              Product warranty                              (363)                    95                 (40)               (537)
              Income tax payable                          10,560                   --                  --                  --
              Advance payments from customers              3,148                   (729)             (2,076)                420
                                                         -------                -------              ------              ------
Net cash provided by operating activities                $11,290                 14,823               4,083              31,351
                                                         =======                =======              ======              ======
                                                                                                             
</TABLE>



See accompanying notes to the consolidated financial statements.


                                     -F-9-
<PAGE>   59
                    COMMUNICATIONS & POWER INDUSTRIES, INC.,
                                and subsidiaries

         (A wholly owned subsidiary of Communications & Power Industries
                              Holding Corporation)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

         Background and the Acquisition

Prior to August 11, 1995, Communication and Power Industries Inc.'s ("CPI" or
"Successor") operations were the principal operations of the Electron Devices
Business (the "Predecessor"), a segment of Varian Associates, Inc. ("Varian"),
excluding the Tempe, Arizona operations. The Predecessor consisted of
substantially all of the assets of Varian and its affiliates that were used
primarily in developing, manufacturing and distributing microwave and power grid
vacuum electronic devices, microwave amplifiers, modulators and various other
power supply equipment and devices. On August 11, 1995, CPI acquired these
assets (the "Acquisition") from Varian and was then merged with a wholly owned
subsidiary of Communications & Power Industries Holding Corporation ("Holding"),
a corporation newly formed by a group of investors, including management of
Holding and CPI. References to CPI or its business for periods prior to August
11, 1995 shall be references to the Predecessor and its business, unless the
context otherwise requires.

A summary of the assets acquired and liabilities assumed at their fair values is
as follows (in thousands):

<TABLE>
<CAPTION>
<S>                                          <C>
ASSETS ACQUIRED:
     Accounts receivable                            36,766
     Inventories                                    49,346
     Other current assets                            2,573
     Property, plant and equipment                  73,994
     Goodwill                                       26,235
     Other assets                                       27
                                              ------------
        Total assets acquired                      188,941

                                              ------------
LIABILITIES ASSUMED:

     Accounts payable - trade                        6,631
     Accrued expenses                               10,762
     Advance payments from customers                 2,116
     Product warranty                                4,595
                                              ------------
        Total liabilities assumed                   24,104

                                              ------------
Purchase price allocated to in-process
     research and development                       31,363

                                              ============
        Purchase price paid to Varian              196,200
                                              ============
</TABLE>


The Acquisition has been accounted for as a purchase, and, accordingly, the
purchase price was allocated based upon the fair values of assets acquired and
liabilities assumed as of August 11, 1995.

In connection with the Acquisition, CPI entered into two senior term loans in
the aggregate amount of $42.0 million (the "Senior Term Loans") and a revolving
credit facility in a principal amount of up to $35.0 million (including a $5.0
million sub-facility for letters of credit) pursuant to the Credit 


                                     -F-10-
<PAGE>   60
                    COMMUNICATIONS & POWER INDUSTRIES, INC.,
                                and subsidiaries

         (A wholly owned subsidiary of Communications & Power Industries
                              Holding Corporation)

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED



Agreement with Bankers Trust Company, as agent, and the lenders thereunder (the
"Senior Credit Agreement"), of which approximately $23.0 million was drawn in
connection with the consummation of the Acquisition. Additional financing for
the Acquisition was obtained through the issuance of 12% Senior Subordinated
Notes due 2005 (the "Senior Subordinated Notes") of CPI in the aggregate
principal amount of $100.0 million, the issuance of Series A 14% Senior
Redeemable Exchangeable Cumulative Preferred Stock due 2007 (the "Senior
Redeemable Preferred Stock") of CPI and the issuance of Series A 14% Junior
Cumulative Preferred Stock (the "Junior Preferred Stock") of CPI and common
stock of Holding.

A summary of the Acquisition financing was as follows (in thousands):

<TABLE>
<S>                                         <C>  
     Bank borrowings                                 9,200
     Senior term loans                              42,000
     Senior subordinated debt                      100,000
     Senior Redeemable Preferred Stock               15,000
     Junior Preferred Stock                          10,000
     Holding common stock                            20,000
                                              -------------
                                                    196,200
                                              =============
</TABLE>


The accompanying consolidated financial statements include the results of the
Predecessor for the 45-week period ended August 11, 1995 and for the 52-week
period ended September 30, 1994. The accompanying consolidated financial
statements for the 52-week period ended September 27, 1996 and the 7-week period
ended September 29, 1995 include the results of CPI and its direct and indirect
wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation. In addition, significant
intercompany balances and transactions within the Predecessor have been
eliminated.

In connection with the Acquisition, Varian retained certain assets and
liabilities of the Predecessor. The retention of these assets and liabilities
reduced the Predecessor's cash flow from operating activities during the 45-week
period ending August 11, 1995. This was partially offset by an increase in CPI's
cash flow from operating activities during the 7-week period ended September 29,
1995.

The Predecessor's and Successor's fiscal years are the 52- or 53-week periods
which end on the Friday nearest September 30.

         SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

                  Cash and Cash Equivalents

Currency on hand, demand deposits, and all highly liquid investments with an
original maturity of three months or less are considered to be cash and cash
equivalents.


                                     -F-11-
<PAGE>   61
                    COMMUNICATIONS & POWER INDUSTRIES, INC.,
                                and subsidiaries

         (A wholly owned subsidiary of Communications & Power Industries
                              Holding Corporation)

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED



                  Goodwill

The excess of the purchase price over the fair value of the net assets acquired
is classified as goodwill and is being amortized over its estimated useful life
of 25 years on a straight-line basis. In March 1995, the Financial Accounting
Standards Board issued SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of." SFAS No. 121,
which the Company adopted in Fiscal Year 1996, requires long-lived assets to be
evaluated for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. CPI periodically
evaluates the ongoing profitability of the business to determine if impairment
in the value of this asset has occurred.

                  Warranty

CPI's products are generally warranted for a variety of periods, typically one
to five years or a predetermined product usage life. Estimated future costs of
repair, replacement or customer accommodations are reflected in the accompanying
consolidated financial statements.

                  Environmental Liabilities

Liabilities for environmental expenditures are recorded when it is probable that
obligations have been incurred and the amounts can be reasonably estimated.
There were no environmental liabilities established by CPI during the 52-week
period ended September 27, 1996 or the 7-week period ended September 29, 1995.
Environmental costs of the Predecessor were accumulated at the corporate level
within Varian and charged to the Predecessor through corporate allocations. In
connection with the Acquisition, Varian retained the environmental liabilities
of the Predecessor existing as of the closing date at the Predecessor's
facilities.

                  Deferred Debt Issue Costs

Costs incurred related to the issuance of CPI's long-term debt and other credit
facilities are capitalized and amortized over the estimated time the obligations
are expected to be outstanding using the effective interest method. The
amortization period used for the deferred costs associated with the revolving
credit facility, the Senior Term Loans, and the Senior Subordinated Notes is 3
years, 7 years and 10 years, respectively.

                  Senior Redeemable Preferred Stock

CPI's Senior Redeemable Preferred Stock was issued in units with an aggregate of
10,500 shares of common stock of Holding. The fair value of the shares of
Holding's common stock issued, and the issue costs associated with the issuance
of the Senior Redeemable Preferred Stock, have been reflected as a reduction of
the Senior Redeemable Preferred Stock issued and is being amortized via a charge
to retained earnings over the period until mandatory redemption, 12 years, using
the effective interest method.


                                     -F-12-
<PAGE>   62
                    COMMUNICATIONS & POWER INDUSTRIES, INC.,
                                and subsidiaries

         (A wholly owned subsidiary of Communications & Power Industries
                              Holding Corporation)

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED



                  Income Taxes

Income taxes are accounted for under the asset and liability method. CPI's
deferred tax assets and liabilities are recognized for the expected tax
consequences of temporary differences between the tax basis and the financial
reporting basis of assets and liabilities. The Predecessor's operations were
included in the consolidated income tax returns filed by Varian. However, for
purposes of the financial statements of the Predecessor, the provision for
income taxes was prepared using the effective tax rate of Varian's consolidated
financial statements on a separate entity basis. The provision for income taxes
of CPI and the Predecessor is based upon the differences between financial
reporting and tax basis of assets and liabilities measured using the enacted tax
rates and laws in effect when the differences are expected to reverse. The
effect on deferred tax assets and liabilities from a change in tax rates is
recognized in income in the period that includes the enactment date. The
computed amount of the current provision for income taxes of the Predecessor was
recorded to business equity.

                  Supplemental Cash Flow Information

For the 52-week period ended September 27, 1996, cash was paid for interest and
taxes in the amount of $16,932,000 and $524,000, respectively. There were no
interest payments or taxes paid during the 7-week period ended September 29,
1995, nor were there any cash payments made for interest or taxes by the
Predecessor (all cash payments relating to such matters were made by Varian)
during the period presented. Non-cash financing during the 52-week period ended
September 27, 1996 included the payment of preferred dividends by CPI on its
Senior Redeemable Preferred Stock and its Junior Preferred Stock through the
issuance of 21,482 additional shares of its Senior Redeemable Preferred Stock
and 14,321 shares of its Junior Preferred Stock, respectively. No dividends were
issued during the 7-week period ended September 29, 1995. Amortization of
discount and issue costs on the Senior Redeemable Preferred Stock was $214,000
and $29,000 during the 52-week period ending September 27, 1996 and the 7-week
period ended September 29, 1995, repectively.

                  Revenue Recognition

Sales and related cost of sales are recognized primarily upon shipment of
products. Sales and related cost of sales under long-term contracts to
commercial customers and the U.S. government are recognized primarily as units
are delivered.

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


                                     -F-13-
<PAGE>   63
                    COMMUNICATIONS & POWER INDUSTRIES, INC.,
                                and subsidiaries

         (A wholly owned subsidiary of Communications & Power Industries
                              Holding Corporation)

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED



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

                  Business Risks and Credit Concentrations

CPI develops, manufactures and distributes components for systems used to
generate, amplify and transmit high-power/high frequency microwave and radio
frequency signals. End use applications of these systems include the
transmission and amplification of voice, data and video signals for broadcasting
and telecommunications, transmission of radar signals for navigation and
location, transmission of false signals for electronic countermeasures and
various other uses in the industrial, medical and scientific markets.

Defense-related applications such as certain radar, electronic countermeasures
and military communications constitute a significant portion of CPI's sales. The
U.S. defense budget has been declining since the mid-1980s. Although management
believes that CPI has successfully responded to shrinking defense budgets by
refocusing its operations on commercial and other non-defense applications, a
significant further decline in U.S. or global military spending could have a
material adverse effect on CPI's sales and earnings. Additionally, companies
engaged in supplying defense-related equipment and services to government
agencies are subject to certain business risks, including the ability of the
U.S. government to suspend them from receiving new contracts or to terminate
existing contracts for the U.S. government's convenience or for the default of
the contractor. In addition, the U.S. government could terminate contracts due
to insufficient or terminated congressional appropriations. CPI's contracts with
foreign governmental defense agencies are subject to similar limitations and
risks as those encountered with U.S. government contracts.

CPI believes that both its customer and industry base is well diversified,
however, changes in the marketplace of any of the above named industries may
significantly affect management's estimates and CPI's performance.

CPI's customers are located throughout the United States, Europe and Asia. No
single customer accounted for more than 5% of CPI's sales in either of the
Successor or Predecessor periods and no accounts receivable balance from any
customer exceeded 5% of net accounts receivable. CPI estimates an allowance for
doubtful accounts based on the credit worthiness of its customers as well as
general economic conditions. Consequently, an adverse change in those factors
could effect CPI's estimate of its bad debts.

                  Foreign Currency Translation

The functional currency of the CPI's foreign subsidiaries is the U.S. dollar.
Accordingly, assets and liabilities of subsidiaries outside of the United States
representing cash, inventory and amounts receivable or payable are translated
into U.S. dollars at the exchange rates in effect at year-end. Other accounts
including property, plant and equipment are translated at historical exchange
rates, which for assets acquired in connection with the Acquisition represent
the rate as of August 11, 


                                     -F-14-
<PAGE>   64
                    COMMUNICATIONS & POWER INDUSTRIES, INC.,
                                and subsidiaries

         (A wholly owned subsidiary of Communications & Power Industries
                              Holding Corporation)

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED



1995. Revenue and expense items are translated at effective rates of exchange
prevailing during each year, except that depreciation is expensed at historical
exchange rates.

Varian entered into forward exchange contracts to mitigate the effects of the
Predecessor's balance sheet exposures to fluctuations in foreign currency
exchange rates. Because the impact of movements in currency exchange rates on
foreign exchange contracts generally offset the related impact on the underlying
items being hedged, these instruments did not subject Varian to risk that would
otherwise result from changes in currency exchange rates. The aggregate exchange
gain or loss, net of the gain or loss from the forward exchange contracts, was
accumulated at the corporate level within Varian and allocated to the
Predecessor based on its estimated proportionate share of international sales,
and is included in the corporate allocations described later in these notes.

During the 52-week period ended September 27, 1996, CPI entered into one foreign
exchange contract for 2,998,600 German Marks which is related to a specific
customer order. Gains or losses on this contract will be recorded consistent
with the hedged transaction. During the 7-week period ended September 29, 1995,
CPI did not enter into foreign exchange contracts.

The aggregate translation and exchange gains and losses was $296,000 loss for
the 52-week period ending September 27, 1996.

                  Fair Value of Financial Instruments

Financial instruments consist of accounts receivable, accounts payable and debt.
The carrying value of CPI's accounts receivable, accounts payable and debt
obligations approximate their fair values which, for debt, is based upon current
rates available to CPI for debt of the same maturities.

                  Use of Estimates

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the period. Actual results
could differ from those estimates.

         Accounts Receivable

Accounts receivable are stated net of allowances for doubtful accounts of $0.2
million as of September 27, 1996 and September 29, 1995.


                                     -F-15-
<PAGE>   65
                    COMMUNICATIONS & POWER INDUSTRIES, INC.,
                                and subsidiaries

         (A wholly owned subsidiary of Communications & Power Industries
                              Holding Corporation)

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED



         INVENTORIES

Inventories are stated at the lower of average cost or market (net realizable
value). The main components of inventories are as follows:

<TABLE>
<CAPTION>
                                            Fiscal Year
   (Dollars in thousands)             1996               1995
                                  -------------------------------
<S>                               <C>                <C>   
Raw materials and parts                  33,648            30,369
Work in process                           9,277             8,220
Finished goods                            3,546             6,176
                                  -------------       -----------
     Total inventories                   46,471            44,765
                                  =============       ===========
</TABLE>


In connection with the acquisition, CPI recorded inventory purchased at its
estimated fair value, which was $4.1 million in excess of the historical cost to
the Predecessor. Of this amount, none of the finished goods remains on the
balance sheet as of September 27, 1996 and approximately $1.7 million of
finished goods remained on the consolidated balance sheet as of September 29,
1995.

         PROPERTY, PLANT, AND EQUIPMENT

Property, plant, and equipment are stated at historical cost, which, for the
Successor, represents the fair value at the date of Acquisition. Major
improvements are capitalized, while maintenance and repairs are expensed
currently. Plant and equipment are depreciated over their estimated useful lives
using the straight line method for financial reporting purposes and accelerated
methods for tax purposes. Leasehold improvements are amortized using the
straight-line method over their estimated useful lives, or the remaining term of
the lease, whichever is less.


                                     -F-16-
<PAGE>   66
                       COMMUNICATIONS & POWER INDUSTRIES
                                and subsidiaries
                                        
                        VALUATION AND QUALIFYING ACCOUNTS
                    COMMUNICATIONS & POWER INDUSTRIES, INC.,
                                and subsidiaries

         (A wholly owned subsidiary of Communications & Power Industries
                              Holding Corporation)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Estimated useful lives of property, plant, and equipment are:

                   Land leaseholds                Life of the lease
                   Buildings                           40 years
                   Machinery and equipment           3 to 7 years

The main components of property, plant, and equipment are as follows:

<TABLE>
<CAPTION>
                                                Fiscal Year
                                         ------------------------
           (Dollars in thousands)          1996            1995
                                         --------        --------
<S>                                      <C>               <C>   
Land and land leaseholds                 $ 36,548          36,544
Buildings                                  13,682           7,817
Machinery and equipment                    31,470          28,363
Construction in progress                    5,581           2,118
                                         --------        --------
Subtotal                                   87,281          74,842
Less accumulated depreciation
     and amortization                      (7,408)           (771)
                                         --------        --------
Net property, plant, and equipment       $ 79,873          74,071
                                         ========        ========
</TABLE>



         ACCRUED EXPENSES

Accrued expenses are comprised of the following:

<TABLE>
<CAPTION>
                                         Fiscal Year
                                    ---------------------
         (Dollars in thousands)      1996          1995
                                    -------       -------
<S>                                 <C>               <C>
Taxes                               $   823           200
Payroll and employee benefits        13,436        11,900
Accrued exit costs                      775         1,259
Accrued interest                      2,392         2,497
Other                                 4,945         3,930
                                    -------       -------
Total accrued expenses              $22,371        19,786
                                    =======       =======
</TABLE>



         COSTS TO EXIT AN ACTIVITY OF THE PREDECESSOR

Prior to consummation of the Acquisition, management of the Predecessor had
begun to formulate plans to exit certain activities of the Predecessor, which
were finalized shortly after the Acquisition. These plans included two principal
costs: (a) the costs associated with the contractually required closing and
consolidating of CPI's Salt Lake City, Utah, operation into CPI's San Carlos,
California, facility, and (b) the costs associated with disposing of certain
excess plant capacity, which includes the consolidation, expected to be
completed during the first quarter of Fiscal 1997, of one of its leased
manufacturing facilities into its Palo Alto, California, facility.


                                     -F-17-
<PAGE>   67
                    COMMUNICATIONS & POWER INDUSTRIES, INC.,
                                and subsidiaries

         (A wholly owned subsidiary of Communications & Power Industries
                              Holding Corporation)

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


In connection with the Acquisition, CPI accrued $1,259,000, of which $775,000
remains on the balance sheet as of September 27, 1996, for the costs of
completing these plans. These costs are comprised principally of additional
severance cost, relocation expenses, and lease cost associated with excess
space.

         SENIOR CREDIT AGREEMENT

The Senior Credit Agreement provides for two term loans in the aggregate amount
of $42.0 million, comprised of a $25.0 million "Term Loan A" tranche and a $17.0
million "Term Loan B" tranche, and a $35.0 million revolving credit facility
(which includes a $5.0 million sub-facility for letters of credit (the
"Revolving Credit Facility"). Availability of advances under the Revolving
Credit Facility is subject to a borrowing base test. CPI's obligations under the
Senior Credit Agreement are secured by substantially all of its assets
(including the issued and outstanding capital stock of its direct and indirect
subsidiaries) and are guaranteed by Holding and all of CPI's subsidiaries. As of
September 27, 1996, CPI had $1.7 million available under the sub-facility for
issuance of letters of credit.

Borrowings under the Revolving Credit Facility and Term Loan A bear interest at
a rate equal to the Eurodollar Rate (approximately 5.50% as of September 27,
1996) plus 2.5% per annum or the Base Rate (8.25% as of September 27, 1996) plus
1.0% per annum and borrowings under Term Loan B bear interest at a rate equal to
the Eurodollar Rate plus 3.0% per annum or Base Rate plus 1.5% per annum, in
each case as selected by CPI. Applicable interest rates on Term Loan A and the
Revolving Credit Facility will be reduced after the first anniversary of the
consummation of the Acquisition by up to 0.5% per annum if CPI meets and
continues to meet certain financial tests. In addition to customary fronting and
other fees, CPI will pay a fee equal to 1.5% per annum on undrawn amounts of
letters of credit and a commitment fee of 0.5% per annum on unused facilities
under the Revolving Credit Facility. The Senior Credit Agreement also provides
for a prepayment premium in the event that it is voluntarily prepaid within two
years of the establishment of the Senior Credit Agreement unless such prepayment
is made with funds raised through an initial public offering of Holding's stock.


                                     -F-18-
<PAGE>   68
                    COMMUNICATIONS & POWER INDUSTRIES, INC.,
                                and subsidiaries

         (A wholly owned subsidiary of Communications & Power Industries
                              Holding Corporation)

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED



The Term Loans are subject to quarterly payments in the aggregate annual amounts
as follows (in thousands):

<TABLE>
<CAPTION>
                                Term         Term       
            Fiscal Year         Loan A       Loan B
           --------------     ----------   ----------
<S>        <C>               <C>           <C>
               1997           $    3,750          200
               1998                5,500          200
               1999                6,000          200
               2000                7,500          200
               2001                    -        6,050
               2002                    -       10,000
                              ==========   ==========
                              $   22,750       16,850
                              ==========   ==========
</TABLE>


As of September 27, 1996, CPI had made payments of $2,250,000 against Term Loan
A and $150,000 against Term Loan B.

The Revolving Credit Facility matures on the date five years after the closing
of the Acquisition. CPI is required to make prepayments on the Senior Facility
with 75% of Excess Cash Flow (as defined in the Senior Credit Agreement), 75% of
the net proceeds of certain stock issuances and 100% of the net proceeds from
certain asset sales. Such prepayments will be applied to remaining principal
installments of the Term Loans allocated on a pro rata basis and following
repayment of the Term Loans, to reduce permanently the Revolving Credit
Facility.

In addition, CPI is subject to certain affirmative and negative covenants
customarily contained in agreements of this type, including, without limitation,
covenants that restrict, subject to specified exceptions: (i) incurrence of
additional indebtedness and other obligations; (ii) mergers or consolidations;
(iii) asset sales; (iv) changes of control and corporate structure; (v) granting
or incurrence of liens to secure any other indebtedness (including the Notes or
the notes for which the Senior Preferred Stock is exchangeable (the "Exchange
Notes")); (vi) prepayment or modification of the terms of other indebtedness
(including the Notes and the Exchange Notes); (vii) engaging in transactions
with affiliates; (viii) declaration or payment of dividends or distributions on
CPI's capital stock; (ix) capital expenditures; and (x) other acquisition and
investment activities. In addition, the Senior Credit Agreement requires that
CPI, on a consolidated basis, maintain certain specified financial covenants,
including a minimum fixed charge coverage ratio, minimum net worth and minimum
EBITDA. As of September 27, 1996, CPI was in compliance with all covenants
except that related to capital expenditures, for which a waiver has been
obtained.

         SENIOR SUBORDINATED NOTES

The $100 million principal amount of Senior Subordinated Notes mature in 2005
and bear interest at 12% per annum, payable semiannually. On or before August 1,
2000, interest may, at the option of CPI, be paid in cash or by issuing
additional notes in a principal amount equal to the amount of such interest. The
payment of principal of, premium and interest on, and other obligations
evidenced by 


                                     -F-19-
<PAGE>   69
                    COMMUNICATIONS & POWER INDUSTRIES, INC.,
                                and subsidiaries

         (A wholly owned subsidiary of Communications & Power Industries
                              Holding Corporation)

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED



the Notes is subordinated in right of payment, as set forth in the indenture
governing the Senior Subordinated Notes (the "Indenture"), to the prior payment
in full of all senior indebtedness (as defined), including indebtedness under
the Senior Credit Agreement, whether outstanding on the date of the Indenture or
thereafter incurred. CPI's payment obligations under the Notes are jointly and
severally guaranteed by Holding and CPI's subsidiaries.

The Notes are not redeemable at CPI's option prior to August 1, 2000.
Thereafter, the Notes are subject to redemption at the option of CPI, in whole
or in part, upon not less than 30 nor more than 60 days' notice, at the
redemption prices (expressed as percentages of principal amount) set forth below
plus accrued and unpaid interest, if any, thereon to the applicable redemption
date, if redeemed during the 12-month period beginning on August 1 of the years
indicated below:

                          Year                Percentage  

                          2000                  106.0%
                          2001                  104.5%
                          2002                  103.0%
                          2003                  101.5%
            
                   2004 and thereafter          100.0%

Notwithstanding the foregoing, prior to August 1, 1998, CPI may redeem up to 35%
of the aggregate principal amount of the Notes originally outstanding at a
redemption price of 112% of the principal amount thereof, plus accrued and
unpaid interest, if any, thereon to the redemption date, with the net proceeds
of one or more public offerings of common stock of Holding.

Upon the occurrence of a change of control, each holder of Notes will have the
right to require CPI to offer to repurchase all or any part of such holder's
Notes. The Senior Credit Agreement currently prohibits CPI from making such an
offer. In addition, the Indenture covering the Notes provides for various
restrictions, including restrictions on mergers or the sales of CPI's assets,
dividend payments, purchase, redemption, acquisition or retirement of equity
interests of CPI or its affiliates, principal payment on any indebtedness of CPI
or guarantors that is subordinated to the Notes, the incurrence of certain
indebtedness, or the making of any restricted investment, as defined.

         SENIOR REDEEMABLE PREFERRED STOCK

CPI is authorized to issue up to 325,000 shares of nonvoting Series A 14% Senior
Redeemable Exchangeable Cumulative Preferred Stock due 2007 (the "Senior
Preferred Stock"), including shares of Senior Preferred Stock which may be used
to pay dividends on the Senior Preferred Stock if CPI so elects. Dividends on
the Senior Preferred Stock accrue at the rate of 14% per annum and are payable
quarterly, commencing on November 1, 1995. On or before August 1, 2000, CPI may,
at its option and subject to debt covenant restrictions, pay dividends in cash
or in shares of Senior Preferred Stock having an aggregate liquidation
preference equal to the amount of such dividends. After August 1, 2000,
dividends may be paid only in cash.


                                     -F-20-
<PAGE>   70
                    COMMUNICATIONS & POWER INDUSTRIES, INC.,
                                and subsidiaries

         (A wholly owned subsidiary of Communications & Power Industries
                              Holding Corporation)

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


During the year ended September 27, 1996, CPI paid preferred dividends through
the issuance of 21,482 shares of its Senior Redeemable Preferred Stock.

The Senior Preferred Stock is not redeemable prior to August 1, 2000.
Thereafter, the Senior Preferred Stock will be redeemable at the option of CPI,
in whole or in part from time to time, initially at 107% of the liquidation
preference thereof and at decreasing prices thereafter to and including August
1, 2004 and thereafter at 100% of the liquidation preference thereof, together
in each case with accumulated and unpaid dividends thereon. In addition, on or
prior to August 1, 1998, CPI may, on one or more occasions, redeem any or all of
the shares of Senior Preferred Stock then outstanding at a redemption price
equal to 114% of the liquidation preference thereof plus accumulated and unpaid
dividends thereon, with the proceeds of one or more public offerings of
Holding's common stock. The Senior Preferred Stock is subject to mandatory
redemption in whole on August 1, 2007 at a price equal to the liquidation
preference thereof, plus accumulated and unpaid dividends.

In the event of a change of control, CPI will be required to make an offer to
each holder of shares of Senior Preferred Stock to repurchase all or a portion
of such holder's Senior Preferred Stock at a price equal to 101% of the
liquidation preference thereof, plus accumulated and unpaid dividends. The
Senior Credit Agreement currently prohibits and the Indenture currently
restricts CPI from making such an offer. In addition, CPI will be required to
use the proceeds from certain asset sales to permanently reduce senior
indebtedness of CPI, to invest in certain related assets or businesses or to
offer to repurchase Senior Preferred Stock. Any such repurchases shall be
effected at an offer price equal to 100% of the liquidation preference of the
shares of Senior Preferred Stock purchased, plus accumulated and unpaid
dividends.

The Certificate of Designation covering the Senior Preferred Stock contains
certain provisions that, among other things, limit the ability of CPI to incur
indebtedness, pay dividends, incur liens, make loans or investments, transact
with affiliates and engage in mergers and consolidations.

CPI may, at its option, on any dividend payment date, exchange all, but not less
than all, of the outstanding shares of Senior Preferred Stock into 14% Junior
Subordinated Notes due 2007 (the "Exchange Notes"), so long as such exchange is
permitted by the Senior Credit Agreement and the Indenture, in an aggregate
principal amount not to exceed the aggregate liquidation preference, plus
accumulated and unpaid dividends on the date of exchange. The Exchange Notes
will be general unsecured obligations of CPI and will be subordinated to all
existing and future senior indebtedness of CPI, including indebtedness under the
Senior Credit Agreement and the Indenture. Except for terms relating to these
subordination provisions, payment of interest on a quarterly basis, the option
to issue additional Exchange Notes on or prior to August 1, 2000 in lieu of
paying cash interest, optional redemption and the date on which repayment is
mandatory (all of which terms would be similar to the terms of Senior Preferred
Stock), the terms of the Exchange Notes will be generally identical to the
Notes.


                                     -F-21-
<PAGE>   71
                    COMMUNICATIONS & POWER INDUSTRIES, INC.,
                                and subsidiaries

         (A wholly owned subsidiary of Communications & Power Industries
                              Holding Corporation)

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED



         JUNIOR PREFERRED STOCK

CPI is authorized to issue up to 525,000 shares of nonvoting Series A 14% Junior
Cumulative Preferred Stock (the "Junior Preferred Stock") including shares of
Junior Preferred Stock which may be used to pay dividends on the Junior
Preferred Stock if CPI elects to pay dividends in shares of Junior Preferred
Stock. The aggregate liquidation preference of the Junior Preferred Stock issued
in connection with the consummation of the Acquisition was $10.0 million.
Dividends on the Junior Preferred Stock accrue at the rate of 14% per annum and
are payable quarterly, commencing on November 1, 1995. On or before the
redemption of the Senior Preferred Stock or the exchange of Senior Preferred
Stock into Exchange Notes, CPI is required to pay dividends on the Junior
Preferred Stock in additional fully paid and non-assessable shares of Junior
Preferred Stock having an aggregate liquidation preference equal to the amount
of such dividends. After such redemption or exchange, CPI may, at its option and
subject to debt and senior preferred stock covenant restrictions, pay dividends
on the Junior Preferred Stock in cash or in additional fully paid and
non-assessable shares of Junior Preferred Stock having an aggregate liquidation
preference equal to the amount of such dividends.

During the year ended September 27, 1996, CPI paid preferred dividends through
the issuance of 14,321 shares of its Junior Preferred Stock.

The Junior Preferred Stock ranks junior in right of payment to all liabilities
of CPI and to any preferred stock, including Senior Preferred Stock, that is
senior in right of payment to the Junior Preferred Stock and ranks senior in
right of payment to any additional preferred stock which does not expressly
provide that it ranks senior to or on a parity with the Junior Preferred Stock
and CPI's common stock.

         LEASE COMMITMENTS

At September 27, 1996, CPI was committed to minimum rentals under noncancellable
operating leases as follows (in thousands):

<TABLE>
<CAPTION>
                   Fiscal Year
                   -----------
<S>            <C>              <C>   
                      1997       $1,321
                      1998        1,207
                      1999          608
                      2000          390
                      2001           72
                Thereafter        5,410
                                 ------
                
                Total            $9,008
                                 ======
</TABLE>



Rental expense for the 52-week period ended September 27, 1996 amounted to
$777,000 and for the 7-week period ended September 29, 1995 amounted to
$257,000. Rental expense of the Predecessor 


                                     -F-22-
<PAGE>   72
                    COMMUNICATIONS & POWER INDUSTRIES, INC.,
                                and subsidiaries

         (A wholly owned subsidiary of Communications & Power Industries
                              Holding Corporation)

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED



for the 45-week period ended August 11, 1995 and for the 52-week period ended
September 30, 1994 was $1,242,000 and $1,900,000, respectively.

         CONTINGENCIES

Varian is currently a defendant in certain legal actions relating to the
Predecessor and could incur an uninsured liability in one or more of them. The
agreement for the sale of the Predecessor provides for Varian's retention of
liability arising out of the above referenced litigation. Accordingly, in the
opinion of management, the outcome of that litigation will not have a material
adverse effect on the financial condition, results of operations or cash flows
of CPI.

Varian has also been named by the Environmental Protection Agency or third
parties as a potentially responsible party under the Comprehensive Environmental
Response Compensation and Liability Act of 1980, as amended, at sites to which
Varian (including in some cases the Predecessor) is alleged to have shipped
manufacturing waste for disposal. Varian is also involved in various stages of
environmental investigation and/or remediation under the direction of, or in
consultation with, local and/or state agencies at certain facilities of CPI.
Uncertainty as to (a) the extent to which Varian caused, if at all, the
conditions being investigated; (b) the extent of environmental contamination and
risks; (c) the applicability of changing and complex environmental laws; (d) the
number and financial viability of other potentially responsible parties; (e) the
stage of the investigation and/or remediation; (f) the unpredictability of
investigation and/or remediation costs (including as to when they will be
incurred); (g) applicable clean-up standards; (h) the remediation (if any) which
will ultimately be required; and (i) available technology make it difficult to
assess the likelihood and scope of further investigation or remediation
activities or to estimate the future costs of such activities if undertaken.

The agreement for the sale of the Predecessor provides for Varian's retention of
liability arising out of investigative and remedial action and environmental
claims for conditions existing as of the closing date at the above-referenced
facilities. Accordingly, based on information currently available, management
believes that the costs of these matters are not likely to have a material
adverse effect on the financial condition, results of operations and cash flows
of CPI.

From time to time, the Company may be subject to other claims that arise in the
ordinary course of business. In the opinion of management, all such matters
involve amounts which would not have a material adverse effect on the Company's
consolidated financial position if unfavorably resolved. There are currently no
such matters.

         INDUSTRY SEGMENTS AND SALES

CPI operates in a single business segment. CPI covers and is engaged in the
development, manufacture and sale of a broad line of electron devices used in
broadcasting, communications, and other commercial and military applications.

CPI's operations outside of North America consist of sales offices in certain
foreign countries. North America operations are responsible for the design and
development of all products as well as 


                                     -F-23-
<PAGE>   73
                    COMMUNICATIONS & POWER INDUSTRIES, INC.,
                                and subsidiaries

         (A wholly owned subsidiary of Communications & Power Industries
                              Holding Corporation)

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED



shipping to meet worldwide customer commitments. Accordingly, for financial
statement purposes, it is not meaningful to segregate revenues or operating
profits for the foreign operations. Identifiable assets outside of North America
are less than 10% of total consolidated assets. Export sales to unaffiliated
customers located outside of North America, mainly in South America and Asia are
as follows:


<TABLE>
<CAPTION>
                                                         Export
                (Dollars in thousands)                    Sales
                                                      --------------
<S>                                                <C>
 SUCCESSOR:
    52-week period ended September 27, 1996                  27,602
    7-week period ended September 29, 1995                    3,204
 PREDECESSOR:
    45-week period ended August 11, 1995                     16,300
    52-week period ended September 30, 1994                  17,500
</TABLE>



The following table summarizes sales under prime contracts from the U.S.
government for the periods presented in the accompanying consolidated financial
statements:


<TABLE>
<CAPTION>
                                                         Sales under prime
                                                         contracts from the
                (Dollars in thousands)                   U.S. Government
                                                        ------------------
<S>                                                     <C>
 SUCCESSOR:
    52-week period ended September 27, 1996             $             41,927
    7-week period ended September 29, 1995                             5,915
 PREDECESSOR:
    45-week period ended August 11, 1995                              34,700
    52-week period ended September 30, 1994                           42,700
</TABLE>



         RESEARCH AND DEVELOPMENT

CPI-sponsored research and development costs related to both present and future
products are expensed currently. Total expenditures incurred by CPI on research
and development are summarized as follows:

<TABLE>
<CAPTION>
                                                   Total         Funded by
                (Dollars in thousands)            Incurred       Customers
                ----------------------            --------       ---------
<S>                                              <C>             <C>
 SUCCESSOR:
    52-week period ended September 27, 1996       $15,558         7,250
    7-week period ended September 29, 1995          2,551         1,353
 PREDECESSOR:
    45-week period ended August 11, 1995           16,200         8,800
    52-week period ended September 30, 1994        18,400        10,800
</TABLE>


                                     -F-24-
<PAGE>   74
                    COMMUNICATIONS & POWER INDUSTRIES, INC.,
                                and subsidiaries

         (A wholly owned subsidiary of Communications & Power Industries
                              Holding Corporation)

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED



In connection with the Acquisition, a portion of the purchase price was
allocated to the value of in-process research and development projects. These
projects involved the research and development of new products and significant
extensions and improvements to existing products which had not demonstrated
their technological feasibility as of the acquisition date and did not have an
alternative future use. Accordingly, immediately upon consummation of the
acquisition, the value associated with these projects were charged to expense in
accordance with Statement of Financial Accounting Standards No.2.

         PROVISION FOR INCOME TAXES

Earnings (loss) before income taxes for domestic and non-U.S.
operations is as follows:


<TABLE>
<CAPTION>
                                         Successor                          Predecessor
                              --------------------------------     ------------------------------
                                 52-week           7-week            45-week           52-week      
                              period ended       period ended      period ended      period ended
                              September 27,      September 29,       August 11,      September 30,
  (Dollars in thousands)          1996              1995               1995             1994
                                -------           -------              -----            ------  
<S>                           <C>               <C>                <C>              <C>   
                   Domestic     $ 7,750           (32,713)             6,867            13,372
                   Non-U.S        2,661               406              2,994             2,047
                                -------           -------            -------           -------
                   Total        $10,411           (32,307)             9,861            15,419
                                =======           =======            =======           =======
</TABLE>



The provision (benefit) for income taxes is comprised of the following:


<TABLE>
<CAPTION>
                                                   Successor                   Predecessor
                                          ----------------------------    ------------------------------
                                             52-week       7-week          45-week         52-week
                                          period ended   period ended     period ended    period ended
                                          September 27,  September 29,     August 11,     September 30,
          (Dollars in thousands)              1996          1995             1995            1994
                                           --------        --------        --------        --------
<S>                                        <C>             <C>            <C>             <C>  
Current
   U.S. federal                            $  9,257            --             2,934           3,363
   State                                      1,957               5             545             856
   Non-U.S                                      606             212             712           1,895
                                           --------        --------        --------        --------
     Total Current                           11,820             217           4,191           6,114
                                           --------        --------        --------        --------
Deferred
   U.S. federal                              (8,844)         (2,926)           (531)           (270)
   State                                     (1,154)           --              --              --
   Non-U.S                                      246            --               (11)             15
                                           --------        --------        --------        --------
     Total Deferred                          (9,752)         (2,926)           (542)           (255)
                                           --------        --------        --------        --------

Provision (benefit) for income taxes       $  2,068          (2,709)          3,649           5,859
                                           ========        ========        ========        ========
</TABLE>


                                     -F-25-
<PAGE>   75
                    COMMUNICATIONS & POWER INDUSTRIES, INC.,
                                and subsidiaries

         (A wholly owned subsidiary of Communications & Power Industries
                              Holding Corporation)

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED



Significant items making up deferred tax assets and liabilities are as follows:

<TABLE>
<CAPTION>
                                                     Fiscal Year
                                              ------------------------
               (Dollars in thousands)           1996           1995
                                              --------        --------
<S>                                           <C>             <C>
Deferred tax assets:
   Inventory adjustments                      $  3,716             274
   Product warranty                              1,577             243
   Accrued vacation                              2,120              40
   Deferred compensation                           841              11
   Depreciation                                   --               185
   Excess Purchase Price                        11,541          11,979
   Foreign tax credits                           1,184             142
   Other                                         1,033              95
                                              --------        --------
                                                22,012          12,969
   Less:  Valuation allowance                   (8,000)        (10,000)
                                              --------        --------
                                                14,012           2,969
Deferred tax liabilities:
   Accelerated depreciation                     (1,059)           --
   Foreign jurisdictions deferreds, net           (246)           --
   Other                                           (29)            (43)
                                              --------        --------
Net deferred tax asset                        $ 12,678           2,926
                                              ========        ========
</TABLE>



Foreign tax credits of $1,184,000 in 1996 and $142,000 in 1995 will expire
beginning in 2000 and are dependent on the company earning sufficient foreign
source income. Management has established a valuation allowance based on the
uncertainty of the amount and timing of taxable income in future accounting
periods. California manufacturing investment tax credits of $130,000 expire in
2004.


                                     -F-26-
<PAGE>   76
                    COMMUNICATIONS & POWER INDUSTRIES, INC.,
                                and subsidiaries

         (A wholly owned subsidiary of Communications & Power Industries
                              Holding Corporation)

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED



The reconciliation between the effective tax rates and the statutory federal
income tax rates applicable to the Predecessor and the Successor is shown in the
following schedule:

<TABLE>
<CAPTION>
                                                    Successor                  Predecessor
                                           -----------------------------      -------------
                                              52-week          7-week           45-week
                                           period ended     period ended      period ended
                                           September 27,   September 29,       August 11,
                                                1996            1995              1995
                                            -----------     ------------      ------------
<S>                                       <C>              <C>                <C>  
Statutory federal income tax rate                  35.0%           (35.0%)            35.0%
State and local income tax, net of
     federal tax benefit                            4.9%            (4.7%)             5.0%
Rate differential on foreign income tax
     expense (benefit) and
     withholding tax                                 .2%              .2%              (.1%)
Foreign sales corporation                          (2.8%)              -              (1.9%)
Losses and credits for which no
     benefit has been recorded                        -             31.0%                -
Change to the beginning of
     year valuation allowance                     (19.2%)
Other                                               1.8%              .1%             (1.0%)
                                            -----------     ------------      ------------
Effective tax rate                                 19.9%            (8.4%)            37.0%
                                            ===========     ============      ============
</TABLE>



The effective tax rate experienced by the Predecessor reflects the tax effect of
being included in the consolidated tax return of Varian and may not be
representative of effective tax rates to be experienced by the Successor in the
future.

         RETIREMENT AND PROFIT SHARING PLANS

Effective August 12, 1995, CPI adopted a qualified 401(k) plan covering
substantially all its domestic and Canadian employees. CPI's major obligation is
to contribute an amount based on a percentage of each participant's base pay.

The Predecessor participated in defined contribution plans sponsored by Varian
covering substantially all of CPI's domestic and Canadian employees with
substantially similar benefits. The Predecessor also made a contribution for its
share of Varian's retirement plan profit sharing based on a percentage of
consolidated earnings from continuing operations before taxes, as adjusted for
discretionary items. Upon consummation of the Acquisition, participants received
their portion of the retirement fund assets which were held by a third-party
trustee. In addition, a number of CPI's foreign employees participated in
Varian's defined benefit retirement plans for regular full-time employees.

Total contributions to these plans by the CPI was $2.6 million for the 52-week
period ended September 27, 1996 and $247,000 for the 7-week period ended
September 29, 1995. Total 


                                     -F-27-
<PAGE>   77
                    COMMUNICATIONS & POWER INDUSTRIES, INC.,
                                and subsidiaries

         (A wholly owned subsidiary of Communications & Power Industries
                              Holding Corporation)

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED



contributions of the Predecessor for all plans amounted to $4.3 million and $4.6
million for the 45-week period ended August 11, 1995 and the 52-week period
ended September 30, 1994, respectively.

CPI has instituted a bonus program that provides incentive bonuses to senior
management if certain performance goals are achieved and to employees if these
goals are exceeded. Such performance goals are measured based upon earnings
before interest, taxes, depreciation and amortization, return on sales and asset
utilization.

         TRANSACTIONS WITH VARIAN

Sales to, and purchases from, other Varian lines of business as follows:


<TABLE>
<CAPTION>
                                         Successor                             Predecessor
                              ------------------------------------   ---------------------------------
                                 52-week              7-week             45-week          52-week
                              period ended         period ended       period ended     period ended
                               September 27,       September 29,       August 11,      September 30,
  (Dollars in thousands)          1996                 1995               1995             1994
                              --------------      ----------------   ---------------- ----------------
<S>                         <C>                   <C>                <C>             <C>  
Sales to Varian             $12,809                   1,014              8,800            7,700
Purchases from Varian       $ 5,171                     315              3,700            2,700
</TABLE>                                                         



Sales and purchases of the Predecessor have been recorded at cost to the
originating business unit, so that no profit margin is recognized on transfer.

In connection with the Acquisition, CPI entered into various agreements with
Varian that provide for various services to be performed by or for Varian or for
products to be purchased from or provided to Varian. These agreements are as
follows:

Transitional Services Agreement. Under the Transitional Services Agreement,
Varian provides certain services to CPI in order to facilitate the transition of
CPI to a stand-alone operation. In addition, CPI provides transitional services
to Varian related to certain of Varian's non-United States operations. Services
will generally be provided through August 12, 1997 (with shorter periods for
certain services), subject to the right of the party who receives such service
to terminate any service it receives upon 30 days' notice. In addition, in
connection with the separation and creation of independent utilities and systems
at CPI's facilities, the Transitional Services Agreement requires Varian to pay
or reimburse CPI (in some cases), subject to certain limitations.

Supply Agreements. CPI and Varian entered into four product supply agreements
which contain certain customary provisions pertaining to, among other things,
pricing, shipment, delivery, acceptance and payment of certain products. Such
terms will vary to a certain degree among the Supply Agreements in order to
reflect differences in the types of products subject to the particular Supply
Agreement and the arrangements between the parties with respect to such
products. These agreements cover periods ranging from one to five years from the
date of the Acquisition and, in the case of certain "Key Components," Varian has
the right to extend the term of the agreement for an additional five 


                                     -F-28-
<PAGE>   78
                    COMMUNICATIONS & POWER INDUSTRIES, INC.,
                                and subsidiaries

         (A wholly owned subsidiary of Communications & Power Industries
                              Holding Corporation)

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED



years. The supply agreements generally impose upon CPI and Varian certain
minimum purchase quantities and generally restrict CPI's ability to market
certain specific products to third parties. Management believes that the terms
of these supply agreements are no less favorable to CPI than that which would be
obtained from independent third parties for the purchase or supply of similar
products.

Trademark License Agreement Generally, under the terms of the Trademark License
Agreement, CPI is licensed to use Varian trademarks on its products for a period
of three years (although during the third year Varian trademarks may only be
used in connection with CPI's own trademarks). After the third year, CPI may not
use any Varian trademarks alone, but for an additional seven years may identify
its products as "formerly made by Varian". At the expiration of the 10-year
period, CPI will not be permitted to utilize any Varian trademarks.

CPI and Varian have also entered into certain other agreements covering access
to certain of CPI's facilities as well as subleased and shared facilities.

         CORPORATE ALLOCATIONS

Operating earnings of the Predecessor include allocations of costs accumulated
at the corporate level within Varian. Where it was possible to specifically
identify corporate amounts with the activities of the Predecessor, these amounts
have been charged or credited directly to the Predecessor without allocation or
apportionment. Costs of a wholly corporate nature (i.e. those that are
considered to relate purely to the support of Varian's centralized corporate
structure) were not allocated. Shared or common costs have been allocated to the
Predecessor on the basis which is considered to most fairly and reasonably
reflect the utilization of the services provided to, or benefit obtained by, the
Predecessor. Typical measures and activity indicators used for apportionment
purposes include sales revenues, headcount and facility area measurements.
Management believes that the cost allocations are reasonable and reflect the
costs incurred to support the operations of the Predecessor. Additionally,
management believes that the costs for such services would have been less on a
stand alone basis, although determination as to specific amounts is not
practicable.

Allocations of corporate expenses included in the consolidated statements of
operations for the 45-week period ended August 11, 1995 and for fiscal year 1994
were $11.2 million and $11.3 million, respectively.

         RELATED PARTY TRANSACTIONS

Holding and CPI have entered into an agreement to pay $362,000, plus
out-of-pocket expenses, annually to an advisor group of Holding's majority
shareholder. Certain individuals of the investor's advisor group are members of
Holding's and CPI's respective Boards of Directors. In addition, on August 11,
1995, CPI paid this advisor group a fee of $3,330,000 for services rendered in
connection with the Acquisition.

         PARENT COMPANY DATA

Holding has guaranteed CPI's senior debt obligations. Holding has no operations
other than its ownership of CPI. The consolidated balance sheets of Holding as
of September 27, 1996 and 


                                     -F-29-
<PAGE>   79
                    COMMUNICATIONS & POWER INDUSTRIES, INC.,
                                and subsidiaries

         (A wholly owned subsidiary of Communications & Power Industries
                              Holding Corporation)

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED



September 29, 1995 are substantially identical to that of CPI and its
subsidiaries, other than the presentation of CPI's preferred stock as minority
interest and the components of stockholders' equity of Holding and is summarized
as follows (in thousands, except per share amounts):


<TABLE>
<CAPTION>
                                                                   September 27,   September 29,
                         ASSETS                                        1996            1995
                         ------                                    -------------   -------------
<S>                                                                <C>             <C>    
 Current Assets                                                     $ 107,846         100,341
 Long-term Assets                                                     120,296         114,561
                                                                    ---------       ---------
                                                                    $ 228,142         214,902
                                                                    =========       =========
             LIABILITIES AND STOCKHOLDERS' EQUITY

 Current Liabilities                                                $  73,270          65,137
 Long-term debt and deferred taxes                                    135,650         138,843
                                                                    ---------       ---------
                                                                      208,920         203,980
 Senior Redeemable Preferred Stock of subsidiary                       14,822          12,460
 Junior Preferred Stock of subsidiary                                  10,779           9,346
 Stockholders' Equity:

       Common stock ($.01 par value, 400,000 shares
            authorized, 200,000 shares issued and outstanding
              as of 1996 and 1995)                                          2               2
        Additional paid-in capital                                     19,741          19,741
        Accumulated deficit                                           (25,080)        (29,627)
        Less stockholder loans                                         (1,042)         (1,000)
                                                                    ---------       ---------
                                                                    $ 228,142         214,902
                                                                    =========       =========
</TABLE>


Separate financial statements of CPI's direct and indirect subsidiaries, all of
which guarantee the Notes, are not included because (i) these subsidiaries are
jointly and severally liable and (ii) the separate financial statements and
other disclosures concerning these subsidiaries are not deemed by CPI to be
material to investors.

         BUSINESS EQUITY

Business equity is comprised of intercompany balances arising in the ordinary
course of business between the Predecessor and other Varian entities, together
with various adjustments resulting from the carve-out of the Predecessor as
presented in these consolidated financial statements.

         PRO FORMA COMBINED STATEMENT OF OPERATIONS INFORMATION
         (UNAUDITED)

Pro forma operating results give effect to the acquisition and related financing
as if consummated at the beginning of the 1995 and 1994 fiscal year. Significant
adjustments include (a) increase in sales 


<PAGE>   80
                    COMMUNICATIONS & POWER INDUSTRIES, INC.,
                                and subsidiaries

         (A wholly owned subsidiary of Communications & Power Industries
                              Holding Corporation)

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED



and cost of sales in the historical pricing of purchases from and sales to
Varian resulting from the terms of the product supply agreements; (b) adjustment
to cost of sales, depreciation and amortization relating to the write-up of
assets in connection with the application of purchase accounting; (c) reduction
in certain overhead and other costs as a result of being a stand-alone entity
rather than a subsidiary of Varian; and (d) interest cost associated with the
borrowings resulting from the Acquisition. Such information is not fully
comparable to the historical statement of earnings.

<TABLE>
<CAPTION>
                           Pro forma results
                      --------------------------
                      Fiscal 1995    Fiscal 1994
                      -----------    -----------
<S>                  <C>            <C>    
Sales                  $253,245        249,035
Gross profit             73,101         66,997
Interest expense         19,077         19,233
Net income                7,180          4,927
</TABLE>


                                     -F-31-
<PAGE>   81
                        COMMUNICATIONS & POWER INDUSTRIES
                               HOLDING CORPORATION
                                and subsidiaries


                          INDEPENDENT AUDITOR'S REPORT


The Board of Directors and Stockholders
Communications & Power Industries Holding Corporation:

We have audited the accompanying consolidated balance sheets of Communications &
Power Industries Holding Corporation and subsidiaries ("Holding" or the
"Successor") as of September 27, 1996 and September 29, 1995, and the related
consolidated statements of operations, stockholders' equity (deficit), and cash
flows for the 52-week period ended September 27, 1996 and the 7-week period
ended September 29, 1995. We have also audited the related consolidated
statements of operations, stockholders' equity, and cash flows of Holding's
predecessor, the Electron Devices Business of Varian Associates, Inc. (the
"Predecessor") for the 45-week period ended August 11, 1995. In connection with
our audits of the consolidated financial statements for the periods indicated
above, we have also audited the financial statement schedule as listed in the
accompanying index. These consolidated financial statements and financial
statement schedule are the responsibility of Holding's management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule based on our audits.

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

As described in the notes to the consolidated financial statements, Holding
acquired assets and assumed liabilities on August 11, 1995 in a transaction
which was accounted for as a purchase. Accordingly, the consolidated financial
statements of the Successor are presented on a different cost basis than the
consolidated financial statements of the Predecessor and, therefore, are not
comparable.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Communications &
Power Industries Holding Corporation and subsidiaries as of September 27, 1996
and September 29, 1995, the results of their operations and their cash flows for
the 52-week period ended September 27, 1996 and the 7-week period ended
September 29, 1995, and the results of operations and cash flows of the Electron
Devices Business of Varian Associates, Inc. for the 45-week period ended August
11, 1995, in conformity with generally accepted accounting principles. Also, in
our opinion, the related financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.

                                                      /s/ KPMG PEAT MARWICK, LLP
San Jose, California
November 22, 1996


                                     -F-32-
<PAGE>   82
                        COMMUNICATIONS & POWER INDUSTRIES
                               HOLDING CORPORATION
                                and subsidiaries


                        REPORT OF INDEPENDENT ACCOUNTANTS


To the Board of Directors and Stockholders of
Communications & Power Industries Holding Corporation:


We have audited the accompanying statements of operations, stockholders' equity
and cash flows of the Electron Devices Business, a segment of Varian Associates,
Inc. (excluding the segment's Tempe, Arizona operations) (the "Predecessor") for
the fiscal year ended September 30, 1994. In connection with our audit of the
consolidated financial statements for the periods indicated above, we have also
audited the financial statement schedule as listed in the accompanying index.
These financial statements are the responsibility of Holding's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of the Predecessor's operations and its cash
flows for the fiscal year ended September 30, 1994, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.


                                                   /s/ COOPERS & LYBRAND, L.L.P


San Jose, California
April 30, 1995


                                     -F-33-
<PAGE>   83
                        COMMUNICATIONS & POWER INDUSTRIES
                               HOLDING CORPORATION
                                and subsidiaries


                           CONSOLIDATED BALANCE SHEETS
                      (IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
                                                                                 September 27, September 29,
                                ASSETS                                               1996          1995  
                                ------                                           ------------- -------------  
<S>                                                                              <C>           <C>
CURRENT ASSETS
    Cash and cash equivalents                                                      $  1,753        8,267                         
    Accounts receivable, net                                                         50,380       44,743 
    Inventories                                                                      46,471       44,765 
    Deferred taxes                                                                    7,109            - 
    Other current assets                                                              2,133        2,566 
                                                                                   --------     --------    
       Total current assets                                                         107,846      100,341 
                                                                                                            
Property, plant, and equipment, net                                                  79,873       74,071 
Goodwill, net                                                                        25,203       26,098 
Debt issue costs, net                                                                 9,651       11,371 
Deferred taxes                                                                        5,569        2,969 
Other assets                                                                              -           52 
                                                                                   --------     --------    
       Total assets                                                                $228,142      214,902    
                                                                                   ========     ========    
LIABILITIES, SENIOR REDEEMABLE PREFERRED STOCK,                                                          
PREFERRED STOCK OF SUBSIDIARY AND STOCKHOLDERS' EQUITY (DEFICIT)                                         
CURRENT LIABILITIES                                                                                     
    Revolving credit facility                                                      $ 17,000       19,600    
    Accounts payable - trade                                                         10,527       16,474 
    Accrued expenses                                                                 22,371       19,786 
    Product warranty                                                                  4,327        4,690 
    Current portion of term loans                                                     3,950        3,200 
    Income taxes payable                                                             10,560            - 
    Advance payments from customers                                                   4,535        1,387 
                                                                                   --------     --------    
       Total current liabilities                                                     73,270       65,137 
                                                                                                            
Senior term loans                                                                    35,650       38,800 
Senior subordinated notes                                                           100,000      100,000 
Deferred taxes                                                                            -           43 
                                                                                   --------     --------    
       Total liabilities                                                            208,920      203,980 
                                                                                   --------     --------    
SENIOR REDEEMABLE PREFERRED STOCK OF SUBSIDIARY ($.01 par value, 325,000 shares                          
    authorized; 171,482 and 150,000 shares issued and outstanding as of 1996 and                         
    1995, respectively, liquidation preference $100 per share)                       14,822       12,460 
                                                                                   --------     --------    
                                                                                                           
JUNIOR PREFERRED STOCK OF SUBSIDIARY ($.01 par value, 525,000 shares authorized;                        
    114,321 and 100,000 shares issued and outstanding as of 1996 and 1995,                       
    respectively, liquidation preference $100 per share)                             10,779        9,346
                                                                                   --------     --------
Commitments and contingencies                                                                                  

STOCKHOLDERS' EQUITY (DEFICIT):                                                                         
                                                                                                        
Common stock ($.01 par value, 400,000 shares authorized; 200,000 shares                                 
    issued and outstanding as of 1996 and 1995)                                           2            2 
                                                                                                           
Additional paid-in capital                                                           19,741       19,741 
Accumulated deficit                                                                 (25,080)     (29,627)
Stockholder loans                                                                    (1,042)      (1,000)
                                                                                   --------     --------    
       Net Stockholders' equity (deficit)                                            (6,379)     (10,884)
                                                                                   --------     --------    
       Total liabilities, senior redeemable preferred stock of                     $228,142      214,902    
       subsidiary and stockholders' equity                                         ========     ========    

</TABLE>



See accompanying notes to the consolidated financial statements.


                                     -F-34-
<PAGE>   84
                        COMMUNICATIONS & POWER INDUSTRIES
                               HOLDING CORPORATION
                                and subsidiaries


                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                             Successor      Successor              Predecessor
                                           -------------  -------------   ----------------------------
                                              52-Week        7-Week         45-Week        52-Week
                                           period ended   period ended    period ended    period ended
                                           September 27,  September 29,     August 11,   September 30,
                                               1996           1995            1995           1994
                                           -------------  -------------   ------------   -------------
<S>                                          <C>            <C>             <C>            <C>    
Sales                                        $257,449         36,398         214,677        246,890
Cost of sales                                 184,482         27,634         160,156        186,996
                                             --------       --------        --------       --------
Gross Profit                                   72,967          8,764          54,521         59,894
                                             --------       --------        --------       --------
Operating costs and expenses:
     Research and development                   8,308          1,198           7,429          7,619
     Marketing                                 19,886          2,763          17,506         19,476
     General and administrative                15,468          3,250          19,725         17,380
     Write-off of acquired in-process
          research and development                 --         31,363              --             --
                                             --------       --------        --------       --------
Total operating costs and expenses             43,662         38,574          44,660         44,475
                                             --------       --------        --------       --------
Operating income (loss)                        29,305        (29,810)          9,861         15,419
Interest expense                               18,894          2,497              --             --
                                             --------       --------        --------       --------
Earnings (loss) before taxes                   10,411        (32,307)          9,861         15,419
Income tax expense (benefit)                    2,068         (2,709)          3,649          5,859
                                             --------       --------        --------       --------
Net earnings (loss) before preferred            8,343        (29,598)          6,212          9,560
     dividends of subsidiary

Preferred dividends of subsidiary:
     Senior Redeemable Preferred Stock          2,148             --              --             --
     Junior Preferred Stock                     1,432             --              --             --
                                             --------       --------        --------       --------
Net earnings (loss) attributable
     to Common Stock                         $  4,763        (29,598)          6,212          9,560
                                             ========       ========        ========       ========
</TABLE>



See accompanying notes to the consolidated financial statements.
                                

                                     -F-35-
<PAGE>   85
                        COMMUNICATIONS & POWER INDUSTRIES
                               HOLDING CORPORATION
                                and subsidiaries


            CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
                        (IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
                                                                                                                           Total
                                                                       Additional                                      Stockholders'
                                                           Common       Paid-in    Accumulated  Stockholder   Business     Equity
                                                            Stock       Capital      Deficit       Loans       Equity     (deficit)
                                                          ---------    ---------    ---------    ---------    ---------   ---------
<S>                                                       <C>          <C>          <C>          <C>          <C>         <C>
PREDECESSOR:
  Balances, October 1, 1993                               $      --           --           --           --      125,657     125,657
      Net repayments to Varian                                                                                  (15,363)    (15,363)
      Net earnings                                                                                                9,560       9,560
                                                          ---------    ---------    ---------    ---------    ---------   ---------
  Balances, September 30, 1994                                   --           --           --           --      119,854     119,854
      Net repayments to Varian                                                                                   (4,475)     (4,475)
      Net earnings                                                                                                6,212       6,212
                                                          ---------    ---------    ---------    ---------    ---------   ---------
  Balances, August 11, 1995                                      --           --           --           --      121,591     121,591
SUCCESSOR:
  Elimination of business equity                                                                               (121,591)   (121,591)
  Issuance of stock in connection with the Acquisition:
    10,500 shares of Common Stock issued in
      connection with the issuance of the Senior
      Redeemable Preferred Stock of subsidiary                             1,050                                              1,050
    Issuance of 200,000 shares
      of Common Stock                                             2       19,998
      Less issue costs                                                    (1,307)
      Less stockholder loans                                                                        (1,000)                  17,693
  Amortization of discount and
    issue costs on Senior Redeemable
    Preferred Stock of subsidiary                                                         (29)                                  (29)
  Net loss for the period from
    August 12, 1995 through
    September 29, 1995                                                                (29,598)                              (29,598)
                                                          ---------    ---------    ---------    ---------    ---------   ---------
  Balances, September 29, 1995                                    2       19,741      (29,627)      (1,000)           -     (10,884)

    Amortization of discount and issue costs                                                                                      -
      on Senior Redeemable Preferred Stock                                               (214)                                 (214)
    Payment of dividends on Senior Preferred Stock                                     (2,149)                               (2,149)
    Payment of dividends on Junior Preferred Stock                                     (1,433)                               (1,433)
    Net earnings                                                                        8,343                                 8,343
    Repayment of stockholder loans                                                                      25                       25
    Interest accrued on stockholder loans                                                              (67)                     (67)
                                                          ---------    ---------    ---------    ---------    ---------   ---------
  Balances, September 27, 1996                            $       2       19,741      (25,080)      (1,042)           -      (6,379)
                                                          =========    =========    =========    =========    =========   =========
</TABLE>
              

        See accompanying Notes to the Consolidated Financial Statements.


                                     -F-36-
<PAGE>   86
                        COMMUNICATIONS & POWER INDUSTRIES
                               HOLDING CORPORATION
                                and subsidiaries


                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (in thousands)

<TABLE>
<CAPTION>
                                                                              Successor                     Predecessor
                                                                    -----------------------------  -----------------------------
                                                                      52-Week          7-Week        45-Week         52-Week
                                                                    period ended    period ended   period ended    period ended
                                                                    September 27,   September 29,   August 11,     September 30,
                                                                       1996            1995            1995            1994
                                                                    -------------   -------------  ------------    -------------
<S>                                                                  <C>             <C>             <C>             <C>   
OPERATING ACTIVITIES
      Net cash provided by operating activities                      $ 11,290          14,823           4,083          31,351
                                                                     --------        --------        --------        --------
INVESTING ACTIVITIES
      Purchase of businesses, net of cash acquired                         --        (196,200)             --             250
      Proceeds from sale of
           property, plant and equipment                                   --              --              --             655
      Purchase of property, plant, and equipment                      (12,472)           (880)         (6,063)        (14,813)
      Property, plant and equipment transfers out                          --              --              --             106
      (Increase) decrease in other non current assets                    (114)            (27)            742             911
                                                                     --------        --------        --------        --------
      Net cash used in investing activities                           (12,586)       (197,107)         (5,321)        (12,891)
                                                                     --------        --------        --------        --------
FINANCING ACTIVITIES
      Repayment of intercompany funding to Varian                          --              --          (4,475)        (15,363)
      Net (Repayments)/Proceeds from revolving credit facility         (2,600)         19,600              --              --
      Net (Repayments)/Proceeds from the issuance of debt:
           Senior term loans                                           (2,400)         42,000              --              --
           Senior subordinated notes                                       --         100,000              --              --
           Debt issue costs                                              (243)        (11,570)             --              --
      (Repayments)/Proceeds from the sale of stock:
           Senior Redeemable Preferred Stock of subsidiary                 --          15,000              --              --
           Junior Preferred Stock of subsidiary                            --          10,000              --              --
           Common stock                                                    --          20,000              --              --
           Common and preferred stock issue costs                          --          (3,479)
           Stockholder loans                                               25          (1,000)             --              --
                                                                     --------        --------        --------        --------
      Net cash provided by (used in) financing activities              (5,218)        190,551          (4,475)        (15,363)
                                                                     --------        --------        --------        --------
NET INCREASE (DECREASE) IN
   CASH AND CASH EQUIVALENTS                                           (6,514)          8,267          (5,713)          3,097
Cash and cash equivalents at beginning of period                        8,267              --           5,713           2,616
                                                                     ========        ========        ========        ========
Cash and cash equivalents at end of period                           $  1,753           8,267              --           5,713
                                                                     ========        ========        ========        ========
</TABLE>



See accompanying notes to the consolidated financial statements.


                                     -F-37-
<PAGE>   87
                        COMMUNICATIONS & POWER INDUSTRIES
                               HOLDING CORPORATION
                                and subsidiaries


                CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
                                 (in thousands)

<TABLE>
<CAPTION>
                                                                Successor                       Predecessor
                                                       -----------------------------   -----------------------------
                                                         52-Week          7-Week         45-Week         52-Week
                                                       period ended    period ended    period ended    period ended
                                                       September 27,   September 29,    August 11,     September 30,
                                                           1996            1995            1995            1994
                                                       -------------   -------------   ------------    -------------
<S>                                                      <C>             <C>             <C>             <C>   
DETAIL OF NET CASH PROVIDED
    BY OPERATING ACTIVITIES
Net earnings (loss) before preferred
    dividends of subsidiary                              $  8,343         (29,598)          6,212           9,560
Adjustments to reconcile net earnings (loss) to
    net cash provided by operating activities:
      Write-off of acquired in-process
           research and development                            --          31,363              --              --
      Depreciation                                          6,670             803          10,999          12,191
      Amortization of deferred debt issue costs             1,962             199              --              --
      Amortization of intangibles                           1,061             138             166             204
      Interest accrued on stockholder loans                   (67)             --              --              --
      Deferred taxes - current                             (7,109)             --          11,897             492
      Deferred taxes - long-term                           (2,643)         (2,926)         (5,171)           (747)
      Loss from sale of assets                                 --              --              --             165
      Changes in operating assets and liabilities:
           Accounts receivable                             (5,637)         (7,977)          3,051           3,413
           Inventories                                     (1,706)          4,581          (6,109)          7,240
           Other current assets                               433               7          (1,592)           (247)
           Accounts payable - trade                        (5,947)          9,843             462            (551)
           Accrued expenses                                 2,585           9,024         (13,716)           (252)
           Product warranty                                  (363)             95             (40)           (537)
           Income tax payable                              10,560
           Advance payments from customers                  3,148            (729)         (2,076)            420
                                                         --------        --------        --------        --------
Net cash provided by operating activities                $ 11,290          14,823           4,083          31,351
                                                         ========        ========        ========        ========
</TABLE>


                               
See accompanying notes to the consolidated financial statements.


                                     -F-38-
<PAGE>   88
                        COMMUNICATIONS & POWER INDUSTRIES
                               HOLDING CORPORATION
                                and subsidiaries

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


         BACKGROUND AND THE ACQUISITION

Prior to August 11, 1995, Communication and Power Industries Inc.'s ("CPI")
operations were the principal operations of the Electron Devices Business (the
"Predecessor"), a segment of Varian Associates, Inc. ("Varian"), excluding the
Tempe, Arizona operations. The Predecessor consisted of substantially all of the
assets of Varian and its affiliates that were used primarily in developing,
manufacturing and distributing microwave and power grid vacuum electronic
devices, microwave amplifiers, modulators and various other power supply
equipment and devices. On August 11, 1995, CPI acquired these assets (the
"Acquisition") from Varian and was then merged with a wholly owned subsidiary of
Communications & Power Industries Holding Corporation ("Holding" or
"Successor"), a corporation newly formed by a group of investors, including
management of Holding and CPI. Holding and its consolidated subsidiaries is
sometimes referred to herein as the "Company". References to the Company or its
business for periods prior to August 11, 1995 shall be references to the
Predecessor and its business, unless the context otherwise requires.

A summary of the assets acquired and liabilities assumed at their fair values is
as follows (in thousands):

<TABLE>
<S>                                               <C>
          ASSETS ACQUIRED:                                   
               Accounts receivable                $   36,766
               Inventories                            49,346
               Other current assets                    2,573
               Property, plant and equipment          73,994
               Goodwill                               26,235
               Other assets                               27
                                                  ----------
                  Total assets acquired              188,941
                                                  ----------
          LIABILITIES ASSUMED:
               Accounts payable - trade                6,631
               Accrued expenses                       10,762
               Advance payments from customers         2,116
               Product warranty                        4,595
                                                  ----------
                  Total liabilities assumed           24,104
                                                  ----------
          Purchase price allocated to in-process
               research and development               31,363
                                                  ----------
                  Purchase price paid to Varian   $  196,200
                                                  ==========
</TABLE>

The Acquisition has been accounted for as a purchase, and, accordingly, the
purchase price was allocated based upon the fair values of assets acquired and
liabilities assumed as of August 11, 1995.

In connection with the Acquisition, CPI, a wholly-owned subsidiary of Holding,
entered into two senior term loans in the aggregate amount of $42.0 million (the
"Senior Term Loans") and a revolving credit facility in a principal amount of up
to $35.0 million (including a $5.0 million sub-facility for


                                     -F-39-
<PAGE>   89
                        COMMUNICATIONS & POWER INDUSTRIES
                               HOLDING CORPORATION
                                and subsidiaries

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued

letters of credit) pursuant to the Credit Agreement with Bankers Trust Company,
as agent, and the lenders thereunder (the "Senior Credit Agreement"), of which
approximately $23.0 million was drawn in connection with the consummation of the
Acquisition. Additional financing for the Acquisition was obtained through the
issuance of 12% Senior Subordinated Notes due 2005 (the "Senior Subordinated
Notes") of CPI in the aggregate principal amount of $100.0 million, the issuance
of Series A 14% Senior Redeemable Exchangeable Cumulative Preferred Stock due
2007 (the "Senior Redeemable Preferred Stock") of CPI and the issuance of Series
A 14% Junior Cumulative Preferred Stock (the "Junior Preferred Stock") of CPI
and common stock of Holding.

A summary of the Acquisition financing was as follows (in thousands):

<TABLE>
<S>                                                          <C>       
            Bank borrowings                                  $    9,200
            Senior term loans                                    42,000
            Senior subordinated debt                            100,000
            Senior Redeemable Preferred Stock of subsidiary      15,000
            Junior Preferred Stock of subsidiary                 10,000
            Holding common stock                                 20,000
                                                             ----------
                                                             $  196,200
                                                             ==========
</TABLE>

The accompanying consolidated financial statements include the results of the
Predecessor for the 45-week period ended August 11, 1995 and for the 52-week
period ended September 30, 1994. The accompanying consolidated financial
statements for the 52-week period ended September 27, 1996 and the 7-week period
ended September 29, 1995 include the results of Holding and its direct and
indirect wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation. In addition, significant
intercompany balances and transactions within the Predecessor have been
eliminated.

In connection with the Acquisition, Varian retained certain assets and
liabilities of the Predecessor. The retention of these assets and liabilities
reduced the Predecessor's cash flow from operating activities during the 45-week
period ending August 11, 1995. This was partially offset by an increase in
Holding's cash flow from operating activities during the 7-week period ended
September 29, 1995.

The Predecessor's and Successor's fiscal years are the 52- or 53-week periods
which end on the Friday nearest September 30.

         SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

                  Cash and Cash Equivalents

Currency on hand, demand deposits, and all highly liquid investments with an
original maturity of three months or less are considered to be cash and cash
equivalents.


                                     -F-40-
<PAGE>   90
                        COMMUNICATIONS & POWER INDUSTRIES
                               HOLDING CORPORATION
                                and subsidiaries

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued

                  Goodwill

The excess of the purchase price over the fair value of the net assets acquired
is classified as goodwill and is being amortized over its estimated useful life
of 25 years on a straight-line basis. In March 1995, the Financial Accounting
Standards Board issued SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of." SFAS No. 121,
which the Company adopted in Fiscal Year 1996, requires long-lived assets to be
evaluated for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. The Company
periodically evaluates the ongoing profitability of the business to determine if
impairment in the value of this asset has occurred.

                  Warranty

The Company's products are generally warranted for a variety of periods,
typically one to five years or a predetermined product usage life. Estimated
future costs of repair, replacement or customer accommodations are reflected in
the accompanying consolidated financial statements.

                  Environmental Liabilities

Liabilities for environmental expenditures are recorded when it is probable that
obligations have been incurred and the amounts can be reasonably estimated.
There were no environmental liabilities established by CPI during the 52-week
period ended September 27, 1996 or the 7-week period ended September 29, 1995.
Environmental costs of the Predecessor were accumulated at the corporate level
within Varian and charged to the Predecessor through corporate allocations. In
connection with the Acquisition, Varian retained the environmental liabilities
of the Predecessor existing as of the closing date at the Predecessor's
facilities.

                  Deferred Debt Issue Costs

Costs incurred related to the issuance of the CPI's long-term debt and other
credit facilities are capitalized and amortized over the estimated time the
obligations are expected to be outstanding using the effective interest method.
The amortization period used for the deferred costs associated with the
revolving credit facility, the Senior Term Loans, and the Senior Subordinated
Notes is 3 years, 7 years and 10 years, respectively.

                  Senior Redeemable Preferred Stock

CPI's Senior Redeemable Preferred Stock was issued in units with an aggregate of
10,500 shares of common stock of Holding. The fair value of the shares of
Holding's common stock issued, and the issue costs associated with the issuance
of the Senior Redeemable Preferred Stock, have been reflected as a reduction of
the Senior Redeemable Preferred Stock issued and is being amortized via a charge
to retained earnings over the period until mandatory redemption, 12 years, using
the effective interest method.


                                     -F-41-
<PAGE>   91
                        COMMUNICATIONS & POWER INDUSTRIES
                               HOLDING CORPORATION
                                and subsidiaries

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued

                  Income Taxes

Income taxes are accounted for under the asset and liability method. Holding's
deferred tax assets and liabilities are recognized for the expected tax
consequences of temporary differences between the tax basis and the financial
reporting basis of assets and liabilities. The Predecessor's operations were
included in the consolidated income tax returns filed by Varian. However, for
purposes of the financial statements of the Predecessor, the provision for
income taxes was prepared using the effective tax rate of Varian's consolidated
financial statements on a separate entity basis. The provision for income taxes
of Holding and the Predecessor is based upon the differences between financial
reporting and tax basis of assets and liabilities measured using the enacted tax
rates and laws in effect when the differences are expected to reverse. The
effect on deferred tax assets and liabilities from a change in tax rates is
recognized in income in the period that includes the enactment date. The
computed amount of the current provision for income taxes of the Predecessor was
recorded to business equity.

                  Supplemental Cash Flow Information

For the 52-week period ended September 27, 1996, cash was paid for interest and
taxes in the amount of $16,932,000 and $524,000, respectively. There were no
interest payments or taxes paid during the 7-week period ended September 29,
1995, nor were there any cash payments made for interest or taxes by the
Predecessor (all cash payments relating to such matters were made by Varian)
during the period presented. Non-cash financing during the 52-week period ended
September 27, 1996 included the payment of preferred dividends by CPI on its
Senior Redeemable Preferred Stock and its Junior Preferred Stock through the
issuance of 21,482 additional shares of its Senior Redeemable Preferred Stock
and 14,321 shares of its Junior Preferred Stock, respectively. No dividends were
issued during the 7-week period ended September 29, 1995. Amortization of
discount and issue costs on the Senior Redeemable Preferred Stock was $214,000
and $29,000 during the 52-week period ending September 27, 1996 and the 7-week
period ended September 29, 1995, respectively.

                  Revenue Recognition

Sales and related cost of sales are recognized primarily upon shipment of
products. Sales and related cost of sales under long-term contracts to
commercial customers and the U. S. government are recognized primarily as units
are delivered.

The estimated sales values of performance under certain U. S. government
fixed-price and fixed-price incentive contracts in process are recognized under
the percentage of completion method of accounting where the sales value is
determined on the basis of costs incurred. Provisions for anticipated losses are
made in the period in which they first become determinable. Sales under
cost-reimbursement contracts, primarily research and development contracts, are
recorded as costs are incurred and include estimated earned fees in the
proportion that costs incurred to date bear to total estimated costs. The fees
under certain U.S. government contracts may be increased or decreased in
accordance with cost or performance incentive provisions which measure actual
performance against established 


                                     -F-42-
<PAGE>   92
                        COMMUNICATIONS & POWER INDUSTRIES
                               HOLDING CORPORATION
                                and subsidiaries

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued

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

                  Business Risks and Credit Concentrations

The Company develops, manufactures and distributes components for systems used
to generate, amplify and transmit high-power/high frequency microwave and radio
frequency signals. End use applications of these systems include the
transmission and amplification of voice, data and video signals for broadcasting
and telecommunications, transmission of radar signals for navigation and
location, transmission of false signals for electronic countermeasures and
various other uses in the industrial, medical and scientific markets.

Defense-related applications such as certain radar, electronic countermeasures
and military communications constitute a significant portion of the Company's
sales. The U.S. defense budget has been declining since the mid-1980s. Although
management believes that the Company has successfully responded to shrinking
defense budgets by refocusing its operations on commercial and other non-defense
applications, a significant further decline in U.S. or global military spending
could have a material adverse effect on the Company's sales and earnings.
Additionally, companies engaged in supplying defense-related equipment and
services to government agencies are subject to certain business risks, including
the ability of the U.S. government to suspend them from receiving new contracts
or to terminate existing contracts for the U.S. government's convenience or for
the default of the contractor. In addition, the U.S. government could terminate
contracts due to insufficient or terminated congressional appropriations. The
Company's contracts with foreign governmental defense agencies are subject to
similar limitations and risks as those encountered with U.S. government
contracts.

The Company believes that both its customer and industry base is well
diversified, however, changes in the marketplace of any of the above named
industries may significantly affect management's estimates and the Company's
performance.

The Company's customers are located throughout the United States, Europe and
Asia. No single customer accounted for more than 5% of the Company's sales in
either of the Successor or Predecessor periods and no accounts receivable
balance from any customer exceeded 5% of net accounts receivable. The Company
estimates an allowance for doubtful accounts based on the credit worthiness of
its customers as well as general economic conditions. Consequently, an adverse
change in those factors could effect the Company's estimate of its bad debts.

                  Foreign Currency Translation

The functional currency of the Company's foreign subsidiaries is the U.S.
dollar. Accordingly, assets and liabilities of subsidiaries outside of the
United States representing cash, inventory and amounts receivable or payable are
translated into U.S. dollars at the exchange rates in effect at year-end. Other
accounts including property, plant and equipment are translated at historical
exchange rates, which for assets acquired in connection with the Acquisition
represent the rate as of August 11, 1995. Revenue 


                                     -F-43-
<PAGE>   93
                        COMMUNICATIONS & POWER INDUSTRIES
                               HOLDING CORPORATION
                                and subsidiaries

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued

and expense items are translated at effective rates of exchange prevailing
during each year, except that depreciation is expensed at historical exchange
rates.

Varian entered into forward exchange contracts to mitigate the effects of the
Predecessor's balance sheet exposures to fluctuations in foreign currency
exchange rates. Because the impact of movements in currency exchange rates on
foreign exchange contracts generally offset the related impact on the underlying
items being hedged, these instruments did not subject Varian to risk that would
otherwise result from changes in currency exchange rates. The aggregate exchange
gain or loss, net of the gain or loss from the forward exchange contracts, was
accumulated at the corporate level within Varian and allocated to the
Predecessor based on its estimated proportionate share of international sales,
and is included in the corporate allocations described later in these notes.

During the year ended September 27, 1996, CPI entered into one foreign exchange
contract for 2,998,600 German Marks which is related to a specific customer
order. Gains or losses on this contract will be recorded consistent with the
hedged transaction. During the 7-week period ended September 29, 1995, CPI did
not enter into foreign exchange contracts.

The aggregate translation and exchange gains and losses was $296,000 loss for
the 52-week period ending September 27, 1996.

                  Fair Value of Financial Instruments

Financial instruments consist of accounts receivable, accounts payable and debt.
The carrying value of the Company's accounts receivable, accounts payable and
debt obligations approximate their fair values which, for debt, is based upon
current rates available to the Company for debt of the same maturities.

                  Use of Estimates

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the period. Actual results
could differ from those estimates.

         ACCOUNTS RECEIVABLE

Accounts receivable are stated net of allowances for doubtful accounts of $0.2
million as of September 27, 1996 and September 29, 1995.


                                     -F-44-
<PAGE>   94
                        COMMUNICATIONS & POWER INDUSTRIES
                               HOLDING CORPORATION
                                and subsidiaries

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued

         INVENTORIES

Inventories are stated at the lower of average cost or market (net realizable
value). The main components of inventories are as follows:

<TABLE>
<CAPTION>
                                                   Fiscal Year   
                      (Dollars in thousands)     1996      1995
                                              ---------  --------
<S>                                           <C>        <C>   
                  Raw materials and parts     $  33,648    30,369
                  Work in process                 9,277     8,220
                  Finished goods                  3,546     6,176
                                              ---------  --------
                     Total inventories        $  46,471    44,765
                                              =========  ========
</TABLE>

In connection with the acquisition, Holding recorded inventory purchased at its
estimated fair value, which was $4.1 million in excess of the historical cost to
the Predecessor. Of this amount, none of the finished goods remains on the
balance sheet as of September 27, 1996 and approximately $1.7 million of
finished goods remains on the consolidated balance sheet as of September 29,
1995.

         PROPERTY, PLANT, AND EQUIPMENT

Property, plant, and equipment are stated at historical cost, which, for the
Successor, represents the fair value at the date of Acquisition. Major
improvements are capitalized, while maintenance and repairs are expensed
currently. Plant and equipment are depreciated over their estimated useful lives
using the straight line method for financial reporting purposes and accelerated
methods for tax purposes. Leasehold improvements are amortized using the
straight-line method over their estimated useful lives, or the remaining term of
the lease, whichever is less.


                                     -F-45-
<PAGE>   95
                        COMMUNICATIONS & POWER INDUSTRIES
                               HOLDING CORPORATION
                                and subsidiaries

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued

Estimated useful lives of property, plant, and equipment are:

                   Land leaseholds          Life of the lease
                   Buildings                     40 years
                   Machinery and equipment     3 to 7 years

The main components of property, plant, and equipment are as follows:

<TABLE>
<CAPTION>
                                                Fiscal Year          
                                           --------------------
                  (Dollars in thousands)      1996       1995    
                                           ---------   --------
<S>                                        <C>         <C>   
       Land and land leaseholds            $  36,548     36,544
       Buildings                              13,682      7,817
       Machinery and equipment                31,470     28,363
       Construction in progress                5,581      2,118
                                           ---------   --------
       Subtotal                               87,281     74,842
       Less accumulated depreciation                  
            and amortization                  (7,408)      (771)
                                           =========   ========
       Net property, plant, and equipment  $  79,873     74,071
                                           =========   ========
</TABLE>                                             

      ACCRUED EXPENSES

Accrued expenses are comprised of the following:
                      
<TABLE>
<CAPTION>
                                                         Fiscal Year
                                                       ---------------
                               (Dollars in thousands)    1996    1995
                                                       -------  ------
<S>                                                    <C>      <C>
                      Taxes                            $   823     200
                      Payroll and employee benefits     13,436  11,900
                      Accrued exit costs                   775   1,259
                      Accrued interest                   2,392   2,497
                      Other                              4,945   3,930
                                                       -------  ------
                      Total accrued expenses           $22,371  19,786
                                                       =======  ======
</TABLE>
                                            
      COSTS TO EXIT AN ACTIVITY OF THE PREDECESSOR

Prior to consummation of the Acquisition, management of the Predecessor had
begun to formulate plans to exit certain activities of the Predecessor, which
were finalized shortly after the Acquisition. These plans included two principal
costs: (a) the costs associated with the contractually required closing and
consolidating of the Company's Salt Lake City, Utah, operation into the
Company's San Carlos, California, facility, and (b) the costs associated with
disposing of certain excess plant capacity, which includes the consolidation,
expected to be completed in the first quarter of Fiscal 1997, of one of its
leased manufacturing facilities into its Palo Alto, California, facility.


                                     -F-46-
<PAGE>   96
                        COMMUNICATIONS & POWER INDUSTRIES
                               HOLDING CORPORATION
                                and subsidiaries

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued

In connection with the Acquisition, CPI accrued $1,259,000, of which $775,000
remains on the balance sheet as of September 27, 1996, for the costs of
completing these plans. These costs are comprised principally of additional
severance cost, relocation expenses, and lease cost associated with excess
space.

         SENIOR CREDIT AGREEMENT

The Senior Credit Agreement provides for two term loans in the aggregate amount
of $42.0 million, comprised of a $25.0 million "Term Loan A" tranche and a $17.0
million "Term Loan B" tranche, and a $35.0 million revolving credit facility
(which includes a $5.0 million sub-facility for letters of credit (the
"Revolving Credit Facility"). Availability of advances under the Revolving
Credit Facility is subject to a borrowing base test. CPI's obligations under the
Senior Credit Agreement are secured by substantially all of its assets
(including the issued and outstanding capital stock of its direct and indirect
subsidiaries) and are guaranteed by Holding and all of CPI's subsidiaries. As of
September 27, 1996, CPI had $1.70 million available under the sub-facility for
issuance of letters of credit.

Borrowings under the Revolving Credit Facility and Term Loan A bear interest at
a rate equal to the Eurodollar Rate (approximately 5.50%, as of September 27,
1996) plus 2.5% per annum or the Base Rate (8.25% as of September 27, 1996) plus
1.0% per annum and borrowings under Term Loan B bear interest at a rate equal to
the Eurodollar Rate plus 3.0% per annum or Base Rate plus 1.5% per annum, in
each case as selected by CPI. Applicable interest rates on Term Loan A and the
Revolving Credit Facility will be reduced after the first anniversary of the
consummation of the Acquisition by up to 0.5% per annum if CPI meets and
continues to meet certain financial tests. In addition to customary fronting and
other fees, CPI will pay a fee equal to 1.5% per annum on undrawn amounts of
letters of credit and a commitment fee of 0.5% per annum on unused facilities
under the Revolving Credit Facility. The Senior Credit Agreement also provides
for a prepayment premium in the event that it is voluntarily prepaid within two
years of the establishment of the Senior Credit Agreement unless such prepayment
is made with funds raised through an initial public offering of Holding's stock.


                                     -F-47-
<PAGE>   97
                        COMMUNICATIONS & POWER INDUSTRIES
                               HOLDING CORPORATION
                                and subsidiaries

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued

The Term Loans are subject to quarterly payments in the aggregate annual amounts
as follows (in thousands):

<TABLE>
<CAPTION>
                                Term      Term     
               Fiscal Year     Loan A    Loan B
              -------------  ---------  --------
<S>                          <C>        <C>
                  1997       $   3,750       200
                  1998           5,500       200
                  1999           6,000       200
                  2000           7,500       200
                  2001               -     6,050
                  2002               -    10,000
                             ---------  --------
                             $  22,750    16,850
                             =========  ========
</TABLE>                                 

As of September 27, 1996, CPI had made payments of $2,250,000 against Term Loan
A and $150,000 against Term Loan B.

The Revolving Credit Facility matures on the date five years after the closing
of the Acquisition. CPI is required to make prepayments on the Senior Facility
with 75% of Excess Cash Flow (as defined in the Senior Credit Agreement), 75% of
the net proceeds of certain stock issuances and 100% of the net proceeds from
certain asset sales. Such prepayments will be applied to remaining principal
installments of the Term Loans allocated on a pro rata basis and following
repayment of the Term Loans, to reduce permanently the Revolving Credit
Facility.

In addition, CPI is subject to certain affirmative and negative covenants
customarily contained in agreements of this type, including, without limitation,
covenants that restrict, subject to specified exceptions: (i) incurrence of
additional indebtedness and other obligations; (ii) mergers or consolidations;
(iii) asset sales; (iv) changes of control and corporate structure; (v) granting
or incurrence of liens to secure any other indebtedness (including the Notes or
the notes for which the Senior Preferred Stock is exchangeable (the "Exchange
Notes")); (vi) prepayment or modification of the terms of other indebtedness
(including the Notes and the Exchange Notes); (vii) engaging in transactions
with affiliates; (viii) declaration or payment of dividends or distributions on
Holding and CPI's capital stock; (ix) capital expenditures; and (x) other
acquisition and investment activities. In addition, the Senior Credit Agreement
requires that CPI, on a consolidated basis, maintain certain specified financial
covenants, including a minimum fixed charge coverage ratio, minimum net worth
and minimum EBITDA. As of September 27, 1996, CPI was in compliance with all
covenants except that related to capital expenditures, for which a waiver has
been obtained.

         SENIOR SUBORDINATED NOTES OF CPI

The $100 million principal amount of Senior Subordinated Notes mature in 2005
and bear interest at 12% per annum, payable semiannually. On or before August 1,
2000, interest may, at the option of CPI, be paid in cash or by issuing
additional notes in a principal amount equal to the amount of such 


                                     -F-48-
<PAGE>   98
                        COMMUNICATIONS & POWER INDUSTRIES
                               HOLDING CORPORATION
                                and subsidiaries

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued

interest. The payment of principal of, premium and interest on, and other
obligations evidenced by the Notes is subordinated in right of payment, as set
forth in the indenture governing the Senior Subordinated Notes (the
"Indenture"), to the prior payment in full of all senior indebtedness (as
defined), including indebtedness under the Senior Credit Agreement, whether
outstanding on the date of the Indenture or thereafter incurred. CPI's payment
obligations under the Notes are jointly and severally guaranteed by Holding and
CPI's subsidiaries.

The Notes are not redeemable at CPI's option prior to August 1, 2000.
Thereafter, the Notes are subject to redemption at the option of CPI, in whole
or in part, upon not less than 30 nor more than 60 days' notice, at the
redemption prices (expressed as percentages of principal amount) set forth below
plus accrued and unpaid interest, if any, thereon to the applicable redemption
date, if redeemed during the 12-month period beginning on August 1 of the years
indicated below:

<TABLE>
<CAPTION>
                      Year          Percentage
                      ----          ----------
<S>                                 <C>   
                      2000             106.0%
                      2001             104.5%
                      2002             103.0%
                      2003             101.5%
               2004 and thereafter     100.0%
</TABLE>
    
Notwithstanding the foregoing, prior to August 1, 1998, CPI may redeem up to 35%
of the aggregate principal amount of the Notes originally outstanding at a
redemption price of 112% of the principal amount thereof, plus accrued and
unpaid interest, if any, thereon to the redemption date, with the net proceeds
of one or more public offerings of common stock of Holding.

Upon the occurrence of a change of control, each holder of Notes will have the
right to require CPI to offer to repurchase all or any part of such holder's
Notes. The Senior Credit Agreement currently prohibits CPI from making such an
offer. In addition, the Indenture covering the Notes provides for various
restrictions, including restrictions on mergers or the sales of CPI's assets,
dividend payments, purchase, redemption, acquisition or retirement of equity
interests of CPI or its affiliates, principal payment on any indebtedness of CPI
or guarantors that is subordinated to the Notes, the incurrence of certain
indebtedness, or the making of any restricted investment, as defined.

         SENIOR REDEEMABLE PREFERRED STOCK OF CPI

CPI is authorized to issue up to 325,000 shares of nonvoting Series A 14% Senior
Redeemable Exchangeable Cumulative Preferred Stock due 2007 (the "Senior
Preferred Stock"), including shares of Senior Preferred Stock which may be used
to pay dividends on the Senior Preferred Stock if the Company so elects.
Dividends on the Senior Preferred Stock accrue at the rate of 14% per annum and
are payable quarterly, commencing on November 1, 1995. On or before August 1,
2000, CPI may, at its option and subject to debt covenant restrictions, pay
dividends in cash or in shares of Senior Preferred Stock having an aggregate
liquidation preference equal to the amount of such dividends. After August 1,
2000, dividends may be paid only in cash.


                                     -F-49-
<PAGE>   99
                        COMMUNICATIONS & POWER INDUSTRIES
                               HOLDING CORPORATION
                                and subsidiaries

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued

During the year ended September 27, 1996, CPI paid preferred dividends through
the issuance of 21,482 shares of its Senior Redeemable Preferred Stock.

The Senior Preferred Stock is not redeemable prior to August 1, 2000.
Thereafter, the Senior Preferred Stock will be redeemable at the option of CPI,
in whole or in part from time to time, initially at 107% of the liquidation
preference thereof and at decreasing prices thereafter to and including August
1, 2004 and thereafter at 100% of the liquidation preference thereof, together
in each case with accumulated and unpaid dividends thereon. In addition, on or
prior to August 1, 1998, CPI may, on one or more occasions, redeem any or all of
the shares of Senior Preferred Stock then outstanding at a redemption price
equal to 114% of the liquidation preference thereof plus accumulated and unpaid
dividends thereon, with the proceeds of one or more public offerings of
Holding's common stock. The Senior Preferred Stock is subject to mandatory
redemption in whole on August 1, 2007 at a price equal to the liquidation
preference thereof, plus accumulated and unpaid dividends.

In the event of a change of control, CPI will be required to make an offer to
each holder of shares of Senior Preferred Stock to repurchase all or a portion
of such holder's Senior Preferred Stock at a price equal to 101% of the
liquidation preference thereof, plus accumulated and unpaid dividends. The
Senior Credit Agreement currently prohibits and the Indenture currently
restricts CPI from making such an offer. In addition, CPI will be required to
use the proceeds from certain asset sales to permanently reduce senior
indebtedness of CPI, to invest in certain related assets or businesses or to
offer to repurchase Senior Preferred Stock. Any such repurchases shall be
effected at an offer price equal to 100% of the liquidation preference of the
shares of Senior Preferred Stock purchased, plus accumulated and unpaid
dividends.

The Certificate of Designation covering the Senior Preferred Stock contains
certain provisions that, among other things, limit the ability of CPI to incur
indebtedness, pay dividends, incur liens, make loans or investments, transact
with affiliates and engage in mergers and consolidations.

CPI may, at its option, on any dividend payment date, exchange all, but not less
than all, of the outstanding shares of Senior Preferred Stock into 14% Junior
Subordinated Notes due 2007 (the "Exchange Notes"), so long as such exchange is
permitted by the Senior Credit Agreement and the Indenture, in an aggregate
principal amount not to exceed the aggregate liquidation preference, plus
accumulated and unpaid dividends on the date of exchange. The Exchange Notes
will be general unsecured obligations of CPI and will be subordinated to all
existing and future senior indebtedness of CPI, including indebtedness under the
Senior Credit Agreement and the Indenture. Except for terms relating to these
subordination provisions, payment of interest on a quarterly basis, the option
to issue additional Exchange Notes on or prior to August 1, 2000 in lieu of
paying cash interest, optional redemption and the date on which repayment is
mandatory (all of which terms would be similar to the terms of Senior Preferred
Stock), the terms of the Exchange Notes will be generally identical to the
Notes.


                                     -F-50-
<PAGE>   100
                        COMMUNICATIONS & POWER INDUSTRIES
                               HOLDING CORPORATION
                                and subsidiaries

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued

         JUNIOR PREFERRED STOCK OF CPI

CPI is authorized to issue up to 525,000 shares of nonvoting Series A 14% Junior
Cumulative Preferred Stock (the "Junior Preferred Stock") including shares of
Junior Preferred Stock which may be used to pay dividends on the Junior
Preferred Stock if CPI elects to pay dividends in shares of Junior Preferred
Stock. The aggregate liquidation preference of the Junior Preferred Stock issued
in connection with the consummation of the Acquisition was $10.0 million.
Dividends on the Junior Preferred Stock accrue at the rate of 14% per annum and
are payable quarterly, commencing on November 1, 1995. On or before the
redemption of the Senior Preferred Stock or the exchange of Senior Preferred
Stock into Exchange Notes, CPI is required to pay dividends on the Junior
Preferred Stock in additional fully paid and non-assessable shares of Junior
Preferred Stock having an aggregate liquidation preference equal to the amount
of such dividends. After such redemption or exchange, CPI may, at its option and
subject to debt and senior preferred stock covenant restrictions, pay dividends
on the Junior Preferred Stock in cash or in additional fully paid and
non-assessable shares of Junior Preferred Stock having an aggregate liquidation
preference equal to the amount of such dividends.

During the year ended September 27, 1996, CPI paid preferred dividends through
the issuance of 14,321 shares of its Junior Preferred Stock.

The Junior Preferred Stock ranks junior in right of payment to all liabilities
of CPI and to any preferred stock, including Senior Preferred Stock, that is
senior in right of payment to the Junior Preferred Stock and ranks senior in
right of payment to any additional preferred stock which does not expressly
provide that it ranks senior to or on a parity with the Junior Preferred Stock
and CPI's common stock.


                                     -F-51-
<PAGE>   101
                        COMMUNICATIONS & POWER INDUSTRIES
                               HOLDING CORPORATION
                                and subsidiaries

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued

LEASE COMMITMENTS

At September 27, 1996, the Company was committed to minimum rentals under
noncancellable operating leases as follows (in thousands):

<TABLE>
<CAPTION>
                        FISCAL YEAR            
                        -----------
<S>                                  <C>     
                           1997      $  1,321
                           1998         1,207
                           1999           608
                           2000           390
                           2001            72
                        Thereafter      5,410
                                     --------
                      
                           Total     $  9,008
                                     ========
</TABLE>
  
Rental expense for the 52-week period ended September 27, 1996 amounted to
$777,000 and for the 7-week period ended September 29, 1995 amounted to
$257,000. Rental expense of the Predecessor for the 45-week period ended August
11, 1995 and for the 52-week period ending September 30, 1994 was $1,242,000 and
$1,900,000, respectively.

         CONTINGENCIES

Varian is currently a defendant in certain legal actions relating to the
Predecessor and could incur an uninsured liability in one or more of them. The
agreement for the sale of the Predecessor provides for Varian's retention of
liability arising out of the above referenced litigation. Accordingly, in the
opinion of management, the outcome of that litigation will not have a material
adverse effect on the financial condition, results of operations or cash flows
of the Company.

Varian has also been named by the Environmental Protection Agency or third
parties as a potentially responsible party under the Comprehensive Environmental
Response Compensation and Liability Act of 1980, as amended, at sites to which
Varian (including in some cases the Predecessor) is alleged to have shipped
manufacturing waste for disposal. Varian is also involved in various stages of
environmental investigation and/or remediation under the direction of, or in
consultation with, local and/or state agencies at certain facilities of the
Company. Uncertainty as to (a) the extent to which Varian caused, if at all, the
conditions being investigated; (b) the extent of environmental contamination and
risks; (c) the applicability of changing and complex environmental laws; (d) the
number and financial viability of other potentially responsible parties; (e) the
stage of the investigation and/or remediation; (f) the unpredictability of
investigation and/or remediation costs (including as to when they will be
incurred); (g) applicable clean-up standards; (h) the remediation (if any) which
will ultimately be required; and (i) available technology make it difficult to
assess the likelihood and scope of further investigation or remediation
activities or to estimate the future costs of such activities if undertaken.


                                     -F-52-
<PAGE>   102
                        COMMUNICATIONS & POWER INDUSTRIES
                               HOLDING CORPORATION
                                and subsidiaries

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued

The agreement for the sale of the Predecessor provides for Varian's retention of
liability arising out of investigative and remedial action and environmental
claims for conditions existing as of the closing date at the above-referenced
facilities. Accordingly, based on information currently available, management
believes that the costs of these matters are not likely to have a material
adverse effect on the financial condition, results of operations and cash flows
of the Company.

From time to time, the Company may be subject to other claims that arise in the
ordinary course of business. In the opinion of management, all such matters
involve amounts which would not have a material adverse effect on the Company's
consolidated financial position if unfavorably resolved. There are currently no
such matters.

         INDUSTRY SEGMENTS AND SALES

The Company operates in a single business segment. The Company covers and is
engaged in the development, manufacture and sale of a broad line of electron
devices used in broadcasting, communications, and other commercial and military
applications.

CPI's operations outside of North America consist of sales offices in certain
foreign countries. North America operations are responsible for the design and
development of all products as well as shipping to meet worldwide customer
commitments. Accordingly, for financial statement purposes, it is not meaningful
to segregate revenues or operating profits for the foreign operations.
Identifiable assets outside of North America are less than 10% of total
consolidated assets. Export sales to unaffiliated customers located outside of
North America, mainly in South America and Asia are as follows:

<TABLE>
<CAPTION>
                                                           Export                                 
                            (Dollars in thousands)         Sales  
                                                         ---------
<S>                                                      <C>
             SUCCESSOR:                                           
                52-week period ended September 27, 1996  $  27,602
                7-week period ended September 29, 1995       3,204
             PREDECESSOR:                                        
                45-week period ended August 11, 1995        16,300
                52-week period ended September 30, 1994     17,500
</TABLE>


                                     -F-53-
<PAGE>   103
                        COMMUNICATIONS & POWER INDUSTRIES
                               HOLDING CORPORATION
                                and subsidiaries

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued

The following table summarizes sales under prime contracts from the U.S.
government for the periods presented in the accompanying consolidated financial
statements:

<TABLE>
<CAPTION>
                                                               Sales under prime
                                                              contracts from the
                                 (Dollars in thousands)         U.S. Government
                                                              ------------------
<S>                                                           <C>
                  SUCCESSOR:
                     52-week period ended September 27, 1996     $  41,927
                     7-week period ended September 29, 1995          5,915
                  PREDECESSOR:
                     45-week period ended August 11, 1995           34,700
                     52-week period ended September 30, 1994        42,700
</TABLE> 

         RESEARCH AND DEVELOPMENT

Company-sponsored research and development costs related to both present and
future products are expensed currently. Total expenditures incurred by the
Company on research and development are summarized as follows:

<TABLE>
<CAPTION>
                                                            Total         Funded by   
                           (Dollars in thousands)          Incurred       Customers
                                                        --------------  --------------
<S>                                                     <C>             <C>
            SUCCESSOR:
               52-week period ended September 27, 1996    $  15,558         7,250
               7-week period ended September 29, 1995         2,551         1,353
            PREDECESSOR:
               45-week period ended August 11, 1995          16,200         8,800
               52-week period ended September 30, 1994       18,400        10,800
</TABLE>
    
In connection with the Acquisition, a portion of the purchase price was
allocated to the value of in-process research and development projects. These
projects involved the research and development of new products and significant
extensions and improvements to existing products which had not demonstrated
their technological feasibility as of the acquisition date and did not have an
alternative future use. Accordingly, immediately upon consummation of the
acquisition, the value associated with these projects were charged to expense in
accordance with Statement of Financial Accounting Standards No.2.


                                     -F-54-
<PAGE>   104
                        COMMUNICATIONS & POWER INDUSTRIES
                               HOLDING CORPORATION
                                and subsidiaries

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued

         PROVISION FOR INCOME TAXES

Earnings (loss) before income taxes for domestic and non-U.S. operations is as
follows:

<TABLE>
<CAPTION>
                                      Successor                   Predecessor
                           -----------------------------  ----------------------------
                               52-week        7-week         45-week       52-week
                            period ended   period ended   period ended   period ended
                            September 27,  September 29,   August 11,   September 30,
(Dollars in thousands)          1996           1995           1995           1994
                           -------------- --------------  ------------  --------------
<S>                            <C>           <C>              <C>           <C>   
Domestic                       $ 7,750       (32,713)         6,867         13,372
Non-U.S                          2,661           406          2,994          2,047
                               -------       -------        -------        -------
Total                          $10,411       (32,307)         9,861         15,419
                               =======       =======        =======        =======
</TABLE>
                                
The provision (benefit) for income taxes is comprised of the following:

<TABLE>
<CAPTION>
                                                    Successor                      Predecessor
                                         ------------------------------   -----------------------------
                                             52-week         7-week          45-week         52-week
                                          period ended    period ended     period ended   period ended
                                          September 27,   September 29,     August 11,    September 30,
     (Dollars in thousands)                   1996            1995             1995           1994
                                         --------------  --------------   --------------- -------------
<S>                                        <C>             <C>             <C>              <C>  
Current
   U.S. federal                            $  9,257              --           2,934           3,363
   State                                      1,957               5             545             856
   Non-U.S                                      606             212             712           1,895
                                           --------        --------        --------        --------
     Total Current                           11,820             217           4,191           6,114
                                           --------        --------        --------        --------
Deferred
   U.S. federal                              (8,844)         (2,926)           (531)           (270)
   State                                     (1,154)             --              --              --
   Non-U.S                                      246              --             (11)             15
                                           --------        --------        --------        --------
     Total Deferred                          (9,752)         (2,926)           (542)           (255)
                                           --------        --------        --------        --------
Provision (benefit) for income taxes       $  2,068          (2,709)          3,649           5,859
                                           ========        ========        ========        ========
</TABLE>
                                


                                     -F-55-
<PAGE>   105
                        COMMUNICATIONS & POWER INDUSTRIES
                               HOLDING CORPORATION
                                and subsidiaries

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued

Significant items making up deferred tax assets and liabilities are as follows:

<TABLE>
<CAPTION>
                                                      Fiscal Year     
                                                  ------------------
                        (Dollars in thousands)      1996      1995
                                                  --------   -------
<S>                                               <C>        <C>
         DEFERRED TAX ASSETS:
            Inventory adjustments                 $  3,716       274
            Product warranty                         1,577       243
            Accrued vacation                         2,120        40
            Deferred compensation                      841        11
            Depreciation                                 -       185
            Excess Purchase Price                   11,541    11,979
            Foreign tax credits                      1,184       142
            Other                                    1,033        95
                                                  --------   -------
                                                    22,012    12,969
            Less:  Valuation allowance              (8,000)  (10,000)
                                                  --------   -------
                                                    14,012     2,969
         DEFERRED TAX LIABILITIES:
            Accelerated depreciation                (1,059)        -
            Foreign jurisdictions deferreds, net      (246)        -
            Other                                      (29)      (43)
                                                  ========   =======
         Net deferred tax asset                   $ 12,678     2,926
                                                  ========   =======
</TABLE>

Foreign tax credits of $1,184,000 in 1996 and $142,000 in 1995 will expire
beginning in 2000 and are dependent on the company earning sufficient foreign
source income. Management has established a valuation allowance based on the
uncertainty of the amount and timing of taxable income in future accounting
periods. California manufacturing investment tax credits of $130,000 expire in
2004.


                                     -F-56-
<PAGE>   106
                        COMMUNICATIONS & POWER INDUSTRIES
                               HOLDING CORPORATION
                                and subsidiaries

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued

The reconciliation between the effective tax rates and the statutory federal
income tax rates applicable to the Predecessor and the Successor is shown in the
following schedule:

<TABLE>
<CAPTION>
                                                      Successor            Predecessor  
                                             ----------------------------  ------------
                                                52-week        7-week        45-week
                                             period ended   period ended   period ended
                                             September 27,  September 29,   August 11,
                                                 1996           1995           1995
                                             -------------  -------------  ------------
<S>                                          <C>            <C>            <C>  
    Statutory federal income tax rate             35.0%         (35.0%)        35.0%
    State and local income tax, net of      
         federal tax benefit                       4.9%          (4.7%)         5.0%
    Rate differential on foreign income tax 
         expense (benefit) and              
         withholding tax                            .2%            .2%          (.1%)
    Foreign sales corporation                     (2.8%)            -          (1.9%)
    Losses and credits for which no         
         benefit has been recorded                   -           31.0%            -
    Change to the beginning of              
         year valuation allowance                (19.2%)
    Other                                          1.8%            .1%         (1.0%)
                                             =============  =============  ============
    Effective tax rate                            19.9%          (8.4%)        37.0%
                                             =============  =============  ============
</TABLE>
                                       
The effective tax rate experienced by the Predecessor reflects the tax effect of
being included in the consolidated tax return of Varian and may not be
representative of effective tax rates to be experienced by the Successor in the
future.

    RETIREMENT AND PROFIT SHARING PLANS

Effective August 12, 1995, CPI adopted a qualified 401(k) plan covering
substantially all its domestic and Canadian employees. CPI's major obligation is
to contribute an amount based on a percentage of each participant's base pay.

The Predecessor participated in defined retirement plans sponsored by Varian
covering substantially all of the Company's domestic and Canadian employees with
substantially similar benefits. The Predecessor also made a contribution for its
share of Varian's retirement plan profit sharing based on a percentage of
consolidated earnings from continuing operations before taxes, as adjusted for
discretionary items. Upon consummation of the Acquisition, participants received
their portion of the retirement fund assets which were held by a third-party
trustee. In addition, a number of the Company's foreign employees participated
in Varian's defined benefit retirement plans for regular full-time employees.


                                     -F-57-
<PAGE>   107
                        COMMUNICATIONS & POWER INDUSTRIES
                               HOLDING CORPORATION
                                and subsidiaries

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued

Total contributions to these plans by the Company was $2.6 million for the
52-week period ended September 27, 1996 and $247,000 for the 7-week period ended
September 29, 1995. Total contributions of the Predecessor for all plans
amounted to $4.3 million and $4.6 million for the 45-week period ended August
11, 1995 and the 52-week period ended September 30, 1994, respectively.

CPI has instituted a bonus program that provides incentive bonuses to senior
management if certain performance goals are achieved and to employees if these
goals are exceeded. Such performance goals are measured based upon earnings
before interest, taxes, depreciation and amortization, return on sales and asset
utilization.

         TRANSACTIONS WITH VARIAN

Sales to, and purchases from, other Varian lines of business as follows:       
          
<TABLE>
<CAPTION>
                                             Successor                    Predecessor
                                    ----------------------------  ---------------------------
                                       52-week        7-week         45-week      52-week
                                    period ended   period ended   period ended  period ended
                                    September 27,  September 29,    August 11,  September 30,
            (Dollars in thousands)      1996           1995           1995         1994
                                    -------------  -------------  ------------  -------------
<S>                                 <C>               <C>         <C>           <C>  
          Sales to Varian              $  12,809       1,014         8,800         7,700
          Purchases from Varian        $   5,171         315         3,700         2,700
</TABLE>

Sales and purchases of the Predecessor have been recorded at cost to the
originating business unit, so that no profit margin is recognized on transfer.

In connection with the Acquisition, CPI entered into various agreements with
Varian that provide for various services to be performed by or for Varian or for
products to be purchased from or provided to Varian. These agreements are as
follows:

Transitional Services Agreement. Under the Transitional Services Agreement,
Varian provides certain services to CPI in order to facilitate the transition of
CPI to a stand-alone operation. In addition, CPI provides transitional services
to Varian related to certain of Varian's non-United States operations. Services
will generally be provided through August 12, 1997 (with shorter periods for
certain services), subject to the right of the party who receives such service
to terminate any service it receives upon 30 days' notice. In addition, in
connection with the separation and creation of independent utilities and systems
at CPI's facilities, the Transitional Services Agreement requires Varian to pay
or reimburse CPI (in some cases), subject to certain limitations.

Supply Agreements. CPI and Varian entered into four product supply agreements
which contain certain customary provisions pertaining to, among other things,
pricing, shipment, delivery, acceptance and payment of certain products. Such
terms will vary to a certain degree among the Supply Agreements in order to
reflect differences in the types of products subject to the particular Supply
Agreement and the arrangements between the parties with respect to such
products. These agreements cover periods ranging from one to five years from the
date of the Acquisition and, in the


                                     -F-58-
<PAGE>   108
                        COMMUNICATIONS & POWER INDUSTRIES
                               HOLDING CORPORATION
                                and subsidiaries

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued

case of certain "Key Components," Varian has the right to extend the term of the
agreement for an additional five years. The supply agreements generally impose
upon CPI and Varian certain minimum purchase quantities and generally restrict
CPI's ability to market certain specific products to third parties. Management
believes that the terms of these supply agreements are no less favorable to CPI
than that which would be obtained from independent third parties for the
purchase or supply of similar products.

Trademark License Agreement Generally, under the terms of the Trademark License
Agreement, CPI is licensed to use Varian trademarks on its products for a period
of three years (although during the third year Varian trademarks may only be
used in connection with CPI's own trademarks). After the third year, CPI may not
use any Varian trademarks alone, but for an additional seven years may identify
its products as "formerly made by Varian". At the expiration of the 10-year
period, CPI will not be permitted to utilize any Varian trademarks.

CPI and Varian have also entered into certain other agreements covering access
to certain of CPI's facilities as well as subleased and shared facilities.

         CORPORATE ALLOCATIONS

Operating earnings of the Predecessor include allocations of costs accumulated
at the corporate level within Varian. Where it was possible to specifically
identify corporate amounts with the activities of the Predecessor, these amounts
have been charged or credited directly to the Predecessor without allocation or
apportionment. Costs of a wholly corporate nature (i.e. those that are
considered to relate purely to the support of Varian's centralized corporate
structure) were not allocated. Shared or common costs have been allocated to the
Predecessor on the basis which is considered to most fairly and reasonably
reflect the utilization of the services provided to, or benefit obtained by, the
Predecessor. Typical measures and activity indicators used for apportionment
purposes include sales revenues, headcount and facility area measurements.
Management believes that the cost allocations are reasonable and reflect the
costs incurred to support the operations of the Predecessor. Additionally,
management believes that the costs for such services would have been less on a
stand alone basis, although determination as to specific amounts is not
practicable.

Allocations of corporate expenses included in the consolidated statements of
operations for the 45-week period ended August 11, 1995 and for fiscal year 1994
were $11.2 million and $11.3 million, respectively.

         RELATED PARTY TRANSACTIONS

Holding and CPI have entered into an agreement to pay $362,000, plus
out-of-pocket expenses, annually to an advisor group of Holding's majority
shareholder. Certain individuals of the investor's advisor group are members of
Holding's and CPI's respective Boards of Directors. In addition, on August 11,
1995, CPI paid this advisor group a fee of $3,330,000 for services rendered in
connection with the Acquisition.


                                     -F-59-
<PAGE>   109
                        COMMUNICATIONS & POWER INDUSTRIES
                               HOLDING CORPORATION
                                and subsidiaries

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued

         GUARANTEES

Holding has guaranteed CPI's senior debt obligations. Holding has no operations
other than its ownership of CPI. The consolidated balance sheets of CPI as of
September 27, 1996 and September 29, 1995 are substantially identical to that of
Holding and its subsidiaries.

         BUSINESS EQUITY

Business equity is comprised of intercompany balances arising in the ordinary
course of business between the Predecessor and other Varian entities, together
with various adjustments resulting from the carve-out of the Predecessor as
presented in these consolidated financial statements.

         PRO FORMA COMBINED STATEMENT OF OPERATIONS INFORMATION (UNAUDITED)

Pro forma operating results give effect to the acquisition and related financing
as if consummated at the beginning of the 1995 and 1994 fiscal year. Significant
adjustments include (a) increase in sales and cost of sales in the historical
pricing of purchases from and sales to Varian resulting from the terms of the
product supply agreements; (b) adjustment to cost of sales, depreciation and
amortization relating to the write-up of assets in connection with the
application of purchase accounting; (c) reduction in certain overhead and other
costs as a result of being a stand-alone entity rather than a subsidiary of
Varian; and (d) interest cost associated with the borrowings resulting from the
Acquisition. Such information is not fully comparable to the historical
statement of earnings.

<TABLE>
<CAPTION>
                                                Fiscal 1995    Fiscal 1994 
                                               -------------  -------------
<S>                                            <C>            <C>    
            Sales                               $  253,245       249,035
            Gross profit                            73,101        66,997
            Interest expense                        19,077        19,233
            Preferred Dividends of subsidiary        3,776         3,776
            Net income                               3,404         1,151
</TABLE>



                                     -F-60-
<PAGE>   110
                                                                     SCHEDULE II

                    COMMUNICATIONS & POWER INDUSTRIES, INC.,
                                and subsidiaries
         (A wholly owned subsidiary of Communications & Power Industries
                              Holding Corporation)


                        VALUATION AND QUALIFYING ACCOUNTS
                                 (in thousands)

<TABLE>
<CAPTION>
                                                     BALANCE AT   CHARGED TO              BALANCE AT
                                                    BEGINNING OF  COSTS AND                 END OF
                           DESCRIPTION                 PERIOD      EXPENSES   DEDUCTIONS    PERIOD
                           -----------                 ------      --------   ----------    ------
<S>                                                 <C>           <C>         <C>         <C>
PREDECESSOR:
     Year ended September 30, 1994:
        Allowance for doubtful accounts receivable   $  1,000        177       (177)         1,000
     45-week period ended August 11, 1995:
        Allowance for doubtful accounts receivable      1,000         80       (880)(1)        200
SUCCESSOR:
     7-week period ended September 29, 1995:
        Allowance for doubtful accounts receivable        200          -          -            200

     52-week period ended September 27, 1996:
        Allowance for doubtful accounts receivable        200          -         (4)           196
</TABLE>

----------

(1) The reduction in the allowance account is principally due to the retention
of certain accounts receivable by Varian and their related allowances in
accordance with the Acquisition Agreement.


                                     -F-61-
<PAGE>   111
                                                                     SCHEDULE II
              COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION
                                and subsidiaries

                        VALUATION AND QUALIFYING ACCOUNTS
                                 (in thousands)

<TABLE>
<CAPTION>
                                                     BALANCE AT   CHARGED TO              BALANCE AT
                                                    BEGINNING OF  COSTS AND                 END OF
                           DESCRIPTION                 PERIOD      EXPENSES   DEDUCTIONS    PERIOD
                           -----------                 ------      --------   ----------    ------
<S>                                                 <C>           <C>         <C>         <C>
PREDECESSOR:
     Year ended September 30, 1994:
        Allowance for doubtful accounts receivable    $  1,000       177        (177)        1,000
     45-week period ended August 11, 1995:
        Allowance for doubtful accounts receivable       1,000        80        (880)(1)       200
SUCCESSOR:
     7-week period ended September 29, 1995:
        Allowance for doubtful accounts receivable         200         -           -           200

     52-week period ended September 27, 1996:
        Allowance for doubtful accounts receivable         200         -          (4)          196
</TABLE>

----------

(1) The reduction in the allowance account is principally due to the retention 
of certain accounts receivable by Varian and their related allowances in
accordance with the Acquisition Agreement.


                                     -F-62-
<PAGE>   112
                                 EXHIBIT INDEX


Exhibit No.                                     Description
-----------                                     -----------

2.1(1)        Stock Sale Agreement between CPI (as successor by merger to CPII
              Acquisition Corp., then known as Communications & Power Industries
              Holding Corporation) and Varian dated as of June 9 ,1995.

2.2(1)        First Amendment to Stock Sale Agreement among Holding, CPI (as
              successor by merger to CPII Acquisition) and Varian dated as of
              August 11, 1995.

2.3(1)        Second Amendment to Stock Sale Agreement among Holding, CPI (as
              successor by merger to CPII Acquisition) and Varian dated as of
              August 11, 1995.

3.1(1)        Restated Certificate of Incorporation of CPI filed with the
              Delaware Secretary of State on August 11, 1995.

3.2(1)        Bylaws of CPI.

3.3(1)        Certificate of Incorporation of Holding.

3.4(1)        Bylaws of Holding.

4.1(1)        Indenture among CPII Acquisition, Holding, the other guarantors of
              the Notes (the "Guarantors") and U.S. Trust Company of California,
              N.A., relating to the Notes dated as of August 11, 1995.

4.2(1)        First Supplemental Indenture among CPI, Holding, the other
              Guarantors and U.S. Trust Company of California, N.A., relating to
              the Notes dated as of August 11, 1995.

4.3(1)        Form of Notes (included in Exhibit 4.1, Exhibit A).

4.4(1)        Form of Indenture between CPI and Shawmut Bank Connecticut,
              National Association, relating to the Exchange Notes.

4.5(1)        Form of Exchange Note (included in Exhibit 4.5, Exhibit A).


                       
<PAGE>   113

Exhibit No.                                     Description
-----------                                     -----------

4.6(2)        Form of Second Supplemental Indenture among CPI, Holding, the
              other Guarantors and U.S. Trust Company of California, N.A.,
              relating to the Notes.

10.1(1)       Credit Agreement among CPI, Holding, CPII Acquisition, the other
              obligors named therein, the lenders named therein and Bankers
              Trust Company, as Agent, dated as of August 11, 1995 (including
              Annex A (Definitions; Rules of Construction) and Annex F
              (Financial Covenants)).

10.2(1)       Term A Notes in the amount of $8,333,333.32, $4,166,666.67,
              $4,166,666.67, $4,166,666.67 and $4,166,666.76 made by CPI in
              favor of Bankers Trust Company, Dresdner Bank AG, First Bank
              National Association, The Nippon Credit Bank, Ltd. and Union Bank,
              respectively, dated as of August 11, 1995.

10.3(1)       Term B Notes in the amount of $11,666,666.68 and $5,666,666.67
              made by CPI in favor of Bankers Trust Company and Crescent/Mach I
              Partners, respectively, dated as of August 11, 1995.

10.4(1)       Revolving Credit Notes in the amount of $11,666,666.68,
              $5,833,333.33, $5,833,333.33, $5,833,333.33 and $5,833,333.33 made
              by CPI in favor of Bankers Trust Company, Dresdner Bank AG, First
              Bank National Association, The Nippon Credit Bank, Ltd, and Union
              Bank, respectively, dated as of August 11, 1995.

10.5(1)       Swingline Note in the amount of $5,000,000 made by CPI in favor of
              Bankers Trust Company dated as of August 11, 1995.

10.6(1)       Security Agreement among CPI, CPII Acquisition, the other
              assignors named therein and Bankers Trust Company, as Agent, dated
              as of August 11, 1995.

10.7(1)       Pledge Agreement made by CPI, Holding, CPII Acquisition, and CPI
              Subsidiary Holdings, Inc. in favor of Bankers Trust Company, as
              Agent, dated as of August 11, 1995.

10.8(1)       Continuing Guaranty made by each of the Guarantors in favor of the
              Lenders and Agent under the Senior Credit Agreement, dated as of
              August 11, 1995.

10.9(1)       Transitional Services Agreement between CPI and Varian dated as of
              August 10, 1995.

10.10(3)(+)   Key Components Supply Agreement between CPI and Varian dated as of
              August 10, 1995.

10.11(1)      Cross License Agreement between the CPI and Varian dated as of
              August 10, 1995.

10.12(1)      Trademark License Agreement between CPI and Varian dated as of
              August 10, 1995.

10.13(1)      Assignment and Assumption of Lessee's Interest in Lease (Units
              1-4, Palo Alto) and Covenants, Conditions and Restrictions on
              Leasehold Interests (Units 1-12, Palo Alto) dated as of August 10,
              1995 between Varian Realty Inc., Varian Associates, Inc. and CPI.

10.14(1)      Sublease (Portion of Building 2 Located on Unit 5, Palo Alto)
              dated as of August 10, 1995 between Varian Realty Inc. and CPI.



<PAGE>   114

Exhibit No.                                     Description
-----------                                     -----------

10.15(1)      Sublease (Unit 8, Palo Alto) dated as of August 10, 1995 between
              Varian Realty Inc. and CPI.

10.16(1)      Sublease (Building 4, Palo Alto) .dated as of August 10, 1995
              between CPI, as Sublessee, Varian Associates, Inc., as Sublessor,
              and Varian Realty Inc., as Adjacent Property Sublessor.

10.17(1)      Assignment and Assumption of Tenant's Interest in Lease (Santa
              Clara, California) dated as of August 10, 1995 between Varian and
              CPI.

10.18(1)      Lease (Salt Lake City, Utah) dated as of August 10, 1995 between
              CPI and Varian Associates, Inc.

10.19(1)      Shared Use Agreement dated as of August 11, 1995 between Varian
              (on behalf of itself and its subsidiaries) and CPI (as successor
              by merger to CPII Acquisition Corp.) (on behalf of itself and its
              subsidiaries).

10.20(1)      Purchase Agreement among CPII Acquisition, Holding, the other
              Guarantors and the initial purchasers of the Series A Senior
              Subordinated Notes (the "Initial Notes Purchasers") dated as of
              August 11, 1995.

10.21(1)      Purchase Agreement among CPII Acquisition, Holding and the initial
              purchaser of the Series A Senior Preferred Stock (the "Initial
              Senior Preferred Stock Purchaser") dated as of August 11, 1995.

10.22(1)      A/B Exchange Registration Rights agreement among CPI (as successor
              by merger to CPII Acquisition), Holding, the other Guarantors and
              the Initial Notes Purchasers dated as of August 11, 1995.

10.23(1)      Amendment to A/B Exchange Registration Rights Agreement among CPI,
              Holding, the other Guarantors and the Initial Notes Purchasers
              dated as of August 11,1995.

10.24(1)      A/B Exchange Registration Rights Agreement between CPI (as
              successor by merger to CPII Acquisition) and the Initial Senior
              Preferred Stock Purchaser dated as of August 11, 1995.

10.25(1)      Amendment to A/B Exchange Registration Rights Agreement between
              CPI and the Initial Senior Preferred Stock Purchaser dated as of
              August 11, 1995.

10.26(1)      Holding Common Stock Registration Rights Agreement by and among
              Holding, GEI II and the Initial Senior Preferred Stock Purchaser
              dated as of August 11, 1995 relating to the Holding Common Stock
              sold with the Series A Senior Preferred Stock.

10.27(1)      Stockholders Agreement by and among Holding, GEI II and the
              Initial Senior Preferred Stock Purchaser dated as of August 11,
              1995 relating to the Holding Common Stock sold with the Series A
              Senior Preferred Stock.

10.28(1)      Stock Subscription Agreement among Holding, CPII Acquisition Corp.
              and GEI II dated as of August 11, 1995.


                                     
<PAGE>   115

Exhibit No.                                     Description
-----------                                     -----------

10.29(1)      Management Services Agreement among CPI, Holding and Leonard Green
              & Partners, L.P. dated as of August 11, 1995.

10.30(1)      1995 Holding Management Equity Plan (including Form of Management
              Subscription and Stockholders Agreement).

10.31(1)      Letter from Holding to Al D. Wilunowski dated June 9, 1995
              relating to terms of employment.

10.32(1)      Letter from Holding to Alvin J. Ferreira dated June 9, 1995
              relating to terms of employment.

10.33(1)      Letter from Holding to Dennis J. Gleason dated June 9, 1995
              relating to terms of employment.

10.34(1)      Letter from Holding to H. Frederick Koehler dated June 9, 1995
              relating to terms of employment.

10.35(1)      Letter from Holding to Armand Staprans dated June 9, 1995 relating
              to terms of employment.

21(1)         Subsidiaries of CPI and Holding.

27            Financial Data Schedule
--------------

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

(2)           Incorporated by reference to Amendment No.3 to CPI's Registration
              Statement on Form S-1 (Registration No.33-96858), filed on
              November 9, 1995.

(3)           Incorporated by reference to Amendment No.1 to CPI's Registration
              Statement on Form S-1 (Registration Statement No.33-96858), filed
              on October 25, 1995.

(+)           Certain portions of this Exhibit have been omitted and filed
              separately under an application for confidential treatment with
              the Securities and Exchange Commission.