<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 October 2, 1998

                                       OR

[ ]     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
        EXCHANGE ACT OF 1934

         For the transition period from _____________ to ______________

<TABLE>
<S>                                              <C>     
      Commission File Number: 33-96858-01            Commission File Number: 33-96858
   COMMUNICATIONS & POWER INDUSTRIES HOLDING                   COMMUNICATIONS &
                  CORPORATION                              POWER INDUSTRIES, INC.
 (Exact name of registrant as specified in its    (Exact name of registrant as specified in
                   charter)                                      its charter)

                   DELAWARE                                        DELAWARE

           (State of Incorporation)                        (State of Incorporation)
                  77-0407395                                      77-0405693
     (IRS employer identification number)            (IRS employer identification number)
                607 HANSEN WAY                                  607 HANSEN WAY
       PALO ALTO, CALIFORNIA 94303-1110                PALO ALTO, CALIFORNIA 94303-1110
                (650) 846-2900                                  (650) 846-2900
  (Address, including zip code, and telephone    (Address, including zip code, and telephone
         number, including area code, of               number, including area code, of
   registrant's principal executive offices)      registrant's principal executive offices)
   Securities registered pursuant to Section      Securities registered pursuant to Section
               12(b) of the Act:                              12(b) of the Act:

                     NONE                                            NONE

   Securities registered pursuant to Section      Securities registered pursuant to Section
               12(g) of the Act:                              12(g) of 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: 196,420 SHARES OF COMMON STOCK, $.01 PAR VALUE,
AT DECEMBER 1, 1998. COMMUNICATIONS & POWER INDUSTRIES, INC.: 1 SHARE OF COMMON
STOCK, $.01 PAR VALUE, AT DECEMBER 1, 1998.

                      DOCUMENTS INCORPORATED BY REFERENCE:
                                     (None)



<PAGE>   2


                                     PART 1

ITEM 1:    BUSINESS

GENERAL

Communications & Power Industries Holding Corporation ("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 consumable 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. Prior to August 11, 1995, the Company's
operations were part of the Electron Devices Business division (the
"Predecessor") of Varian Associates, Inc. ("Varian") and, except as the context
may otherwise require, the term the "Company" as used in this Annual Report on
Form 10-K refers to both the Company and the Predecessor. The principal
executive offices of Holding and CPI are located at 607 Hansen Way, Palo Alto,
California 94303 and their telephone number is (650) 846-2900.

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, electronic
countermeasures, industrial, medical and scientific markets. The Company offers
over 6,800 products that generally have selling prices from $2,000 to $50,000,
with certain products ranging in price up to $1,000,000. These products are
consumable 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 that 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.



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      -    AMPLIFIERS. Satellite communication amplifiers, instrumentation
           amplifiers, traveling wave vacuum electronic device transmitters, FET
           modulators, magnetron modulators, test sets, X-ray generators, Heat
           Wave(TM) products, microwave power modules, microwave power boosters,
           traveling wave vacuum electronic device 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 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 in the
    communications market were $118.8 million in Fiscal 1998 compared to $122.5
    million in Fiscal 1997 and $118.4 million in Fiscal 1996.

-   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 five decades. Sales in the
    radar market were $87.4 million in Fiscal 1998 compared to $75.4 million in
    Fiscal 1997 and $74.6 million for Fiscal 1996.

-   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 in the electronic countermeasures market were
    $12.1 million, $11.8 million, and $17.2 million in Fiscal 1998, Fiscal 1997,
    and Fiscal 1996, 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 $19.4 million, $21.9 million and $27.2
    million in Fiscal 1998, Fiscal 1997 and Fiscal 1996, 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 $18.8 million, $17.6 million and $16.3 million in Fiscal 1998,
    Fiscal 1997 and Fiscal 1996, 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 in the scientific
    market were $4.2 million, $4.2 million and $3.7 million in Fiscal 1998,
    Fiscal 1997 and Fiscal 1996.

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 commercial sector contributed approximately $201.4
million, or 77.3%, of the Company's total sales in Fiscal 1998 



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<PAGE>   4

compared to approximately $190.1 million, or 75.0%, in Fiscal 1997 and $187.9
million, or 73.0%, in Fiscal 1996. U.S. Government sales, both direct and
through original equipment manufacturers ("OEMs"), contributed approximately
$59.3 million, or 22.7%, of the Company's total sales in Fiscal 1998 compared to
approximately $63.3 million, or 25.0%, in Fiscal 1997 and $69.5 million, or
27.0%, in Fiscal 1996. These percentages reflect the Company's development of
products for the commercial marketplace. Since the late 1980s, the United States
defense budget has been shrinking; however, based on a stable trend of order
receipts for spares and upgrades from Fiscal 1995 to Fiscal 1998, management
expects that U.S. Government and defense-related end-users will continue to
provide a steady source of revenue.

In Fiscal 1998, approximately 61.5% of sales were derived from U.S. customers,
while approximately 38.5% were derived from international customers compared to
Fiscal 1997 where approximately 68.4% of sales were derived from the U.S. and
approximately 31.6% were from international customers. However, many domestic
OEMs, primarily those in the satellite communications market, export their
products, and management believes that some percentage of the Company's sales to
U.S. customers ultimately have international end-users. Excluding sales to the
U.S. Government, no single customer accounted for more than 5% of the Company's
total sales in Fiscal 1998, Fiscal 1997 or Fiscal 1996.

SALES, MARKETING AND SERVICE

As of October 2, 1998, the Company has over 150 direct sales, marketing and
technical support professionals representing 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 nine factory service centers for
the satcom replacement market. These service centers are located in California,
New Jersey, Amsterdam, Moscow, Tokyo, Singapore, Nanjing, Jakarta and Calcutta,
India.

MANUFACTURING

The Company manufactures over 6,800 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.

Generally, each of the Company's manufacturing units uses similar production
processes consisting of product development, purchasing, high level assembly and
test. The Company utilizes contract manufacturers whenever possible primarily
for its Amplifier products. For vacuum electronic devices, the process starts
with procurement of raw material and sub-assemblies from qualified suppliers,
who 



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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.

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 Litton Industries, Inc., English Electric
Valve Company (General Electric Company plc), MCL 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 affect 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 that 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 October 2, 1998, the Company had an order backlog of $160.8 million,
representing approximately seven months of sales compared to order backlog of
$169.0 million as of October 3, 1997 and $153.4 million as of September 27,
1996. 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.

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 



                                       -4-
<PAGE>   6

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 (see "Business - 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 Acquisition, the Company and Varian entered
into a Trademark License Agreement that allows the Company to identify its
products as "formerly made by Varian" for a period of ten years.

RESEARCH AND DEVELOPMENT

Company-sponsored research and development expense was approximately $7.5
million, $7.7 million and $8.3 million during Fiscal 1998, Fiscal 1997 and
Fiscal 1996, respectively. Customer-sponsored research and development was
approximately $6.0 million, $5.9 million and $7.3 million during Fiscal 1998,
Fiscal 1997 and Fiscal 1996, respectively. For customer-sponsored research and
development, the costs were charged to cost of sales to match revenue received.

EMPLOYEES

As of October 2, 1998, the Company had approximately 1,690 employees compared to
1,658 employees as of October 3, 1997. 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.



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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 94% of the Company's U.S. Government sales in Fiscal 1998 and
cost-plus contracts accounted for approximately 6%. In Fiscal 1997 and Fiscal
1996, fixed-price contracts accounted for approximately 92% and cost-plus
contracts accounted for approximately 8% of the Company's U.S. Government sales.

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.

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



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financial condition and results of operations.

Similar to other companies that 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 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 



                                      -7-
<PAGE>   9

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 three manufacturing units),
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
continue 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 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.

OTHER FACILITIES. The Company's other main manufacturing facilities, which are
located in San Carlos, 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 that 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.



                                      -8-
<PAGE>   10

THE ACQUISITION

Prior to August 11, 1995, the Company's operations were part of the Electron
Devices Business division of 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 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 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 entered into
two senior term loans 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, and subsequently increased to $7.5
million) pursuant to a Senior Credit Agreement. The Company also issued the
following: 

        (1)     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),

        (2)     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,

        (3)     100,000 shares of 14% Junior Cumulative Preferred Stock (the
                "Junior Preferred Stock") of CPI for $10.0 million, and

        (4)     Shares of Holding Common Stock to Green Equity Investors II,
                L.P., a Delaware limited partnership ("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 73.1% 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



                                      -9-
<PAGE>   11

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."

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. 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
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



                                      -10-
<PAGE>   12

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.

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 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.

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.



                                      -11-
<PAGE>   13

Cross License Agreement. Pursuant to the Cross License Agreement (the "Cross
License Agreement"), for a period of ten 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. 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 identify its products as "formerly made by
Varian" for a period of ten years from the closing of the Acquisition. At the
expiration of the ten year period, the Company will not be permitted to utilize
any Varian trademarks.

ITEM 2:    PROPERTIES

The Company owns, leases or subleases manufacturing, assembly, warehouse,
service and office properties having an aggregate floor space of approximately
1,212,300 square feet, of which approximately 203,700 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                 Owned             Leased/Subleased
            --------                 -----             ----------------
<S>                                  <C>               <C>
San Carlos, California.........       320,000(a)              
Beverly, Massachusetts.........       213,000(b)              
Georgetown, Ontario, Canada....       126,000    
Santa Clara, California........           -              107,000(c)
Palo Alto, California..........           -              429,000(d)
Various locations..............           -               17,300(e) 
</TABLE>

    (a) The San Carlos, California square footage includes approximately 42,000
        square feet leased to two tenants who provide services to the Company
        and others.

    (b) The Beverly, Massachusetts square footage includes approximately 42,000
        square feet leased to four tenants.

    (c) This facility is leased by way of assignment of Varian's lessee
        interest. The entire facility is being subleased to one tenant until
        December 31, 1998, the date of expiration of the Master Lease.

    (d) This facility is primarily leased by way of assignment of Varian's
        lessee interest with the remainder subleased from Varian. The Palo Alto,
        California square footage includes approximately 12,700 square feet
        leased to two tenants.

    (e) Includes both leased facilities occupied entirely by the Company's field
        sales and service organizations and four foreign shared use facilities
        which the Company is sharing for varying periods of time under rental
        agreements with Varian.

Based on lease and sublease arrangements mentioned above, the Company has
eliminated most of its excess space. Overall, the Company believes its
properties are adequate for the needs of the Company for the foreseeable future
and, in any event, for at least the next twelve months. 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.



                                      -12-
<PAGE>   14

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
three 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.

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 Fiscal
1998.



                                      -13-
<PAGE>   15


                                     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 52-week period ended October 2, 1998.
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 FINANCIAL DATA

The historical financial data set forth below for Fiscal 1994 has been derived
from the historical audited financial statements of the Predecessor audited by
Coopers & Lybrand L.L.P., independent public accountants. For Fiscal 1995
through Fiscal 1998, historical consolidated financial data has been derived
from the historical audited financial statements audited by KPMG Peat Marwick
LLP, independent public accountants. 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 included
elsewhere in this Annual Report on 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.



                                      -14-
<PAGE>   16



SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
                                                                      Successor                                  Predecessor
                                               --------------------------------------------------------   --------------------------
              (Dollars in Thousands)           52 Weeks      53 Weeks       52 Weeks        7 Weeks       45 Weeks       52 Weeks
                                                 Ended        Ended          Ended           Ended          Ended         Ended  
                                               October 2,    October 3,   September 27,   September 29,   August 12,   September 30,
                                                  1998          1997          1996            1995           1995          1994
                                               ----------    ----------   -------------   -------------   ----------   -------------
<S>                                            <C>           <C>          <C>             <C>             <C>          <C>    
CPI AND HOLDING STATEMENT OF OPERATIONS DATA:
 Sales                                           $260,688     253,439        257,449          36,398        214,677        246,890
 Cost of sales                                    194,410     183,678        184,482          27,634        160,156        186,996
                                                 --------    --------       --------        --------       --------       --------
 Gross profit                                      66,278      69,761         72,967           8,764         54,521         59,894
 Marketing, general and administrative
      before corporate allocations                 32,103      32,269         35,354           6,013         26,071         25,583
 Research and development                           7,455       7,681          8,308           1,198          7,429          7,619
 Corporate allocations                                 --          --             --              --         11,160         11,273
 Write-off of acquired in-process
      research and development                         --          --             --          31,363             --             --
                                                 --------    --------       --------        --------       --------       --------
 Operating income (loss)                           26,720      29,811         29,305         (29,810)         9,861         15,419
 Interest expense                                  17,793      19,039         18,894           2,497             --             --
 Income tax expense (benefit)                       3,750      (3,000)         2,068          (2,709)         3,649          5,859
                                                 ========    ========       ========        ========       ========       ========
 Net earnings (loss) before preferred            $  5,177      13,772          8,343         (29,598)         6,212          9,560
                                                 ========    ========       ========        ========       ========       ========
      dividends
 EBITDA (a)                                        38,021      39,432         38,736           4,894         21,026         27,814
 Certain Non-Cash Charges:
     Depreciation and amortization                 11,301       9,621          7,731             941         11,165         12,395
     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      1,372       1,952          1,962             199             --             --
 Capital expenditures (b)                           8,204      10,767         12,501             880          6,063         10,698
 Non-recurring capital (b)                             --          --             --              --             --          4,115
</TABLE>

<TABLE>
<CAPTION>
                                                       Successor                                Predecessor
                                   ----------------------------------------------------       --------------
                                   October 2,  October 3,  September 27,  September 29,        September 30,
CPI BALANCE SHEET DATA:              1998        1997        1996            1995                  1994
                                   --------    --------    --------        --------              --------
<S>                                <C>         <C>         <C>            <C>                  <C>   
 Working capital                   $ 45,957      40,467      34,576          35,204                60,421
 Total assets                       229,212     237,396     228,142         214,902               162,149
 Total equity (deficit)              16,912      15,306       4,400          (1,538)              119,854
 Long-term debt and                                                                           
   redeemable preferred stock       146,981     149,100     150,472         151,260                    --
HOLDING BALANCE SHEET DATA:                                                                   
 Working capital                   $ 45,957      40,467      34,576          35,204                60,421
 Total assets                       229,212     237,396     228,142         214,902               162,149
 Total equity (deficit)               2,512       2,841      (6,379)        (10,884)              119,854
 Long-term debt and                                                                           
     redeemable preferred stock     146,981     149,100     150,472         151,260                    --
</TABLE>



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

 (a)    EBITDA represents earnings before provision for income taxes, interest
        expense, depreciation and amortization and excludes any 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". For Fiscal 1998 and Fiscal 1997
        capital expenditures includes $1,545,000 and $1,584,000, repectively, of
        equipment acquired under a capital lease.



                                      -15-
<PAGE>   17

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 has impacted
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 affected
        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, has and will continue to significantly affect
        depreciation and amortization. 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.




                                      -16-
<PAGE>   18



ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

OVERVIEW

The Company serves the communications, radar, electronic countermeasures,
industrial, medical and scientific markets. In addition, the Company divides the
communications market into applications for ground-based satellite uplinks for
military and commercial uses ("satcom") and broadcast sectors. This diverse
marketplace combined with a broad range of products and a stable volume of
replacement business has helped the Company to maintain a level of consistency
in its sales and EBITDA performance for Fiscal 1998 compared to prior years in
spite of economic weakness in the Far East and embargo issues with India. The
Company has continued its strategic focus on releasing new products in spite of
lower margin expectations and has supplemented its product offerings through two
small product line acquisitions completed in early Fiscal 1998. The Company has
also maintained a focus on commercial applications for its products and their
long-term growth strategies. Finally, infrastructure improvements, including the
completion of facility consolidation efforts in Fiscal 1997, a streamlined
corporate organization and unique global distribution capabilities, have
established the basis for the Company's operating effectiveness.

Orders for Fiscal 1998 were $258.9 million compared to orders of $275.8 million
in Fiscal 1997 and $267.3 million in Fiscal 1996. CPI's market share remained
relatively consistent between Fiscal 1998 and Fiscal 1997, as the total market
was negatively impacted by economic conditions in the Far East that slowed
direct procurement and had an associated impact on procurement from domestic
OEM's. The most significant decline, in terms of dollars, occurred in the
communications market where orders for Fiscal 1998 decreased by $6.6 million, or
5.5%, from Fiscal 1997 primarily due to a delay on Far East satcom business.
Industrial orders declined by $0.9 million, or 5.0%, primarily due to
semiconductor market conditions. Orders for products sold in the radar,
electronic countermeasures and scientific markets also declined by $5.7 million,
$5.6 million and $1.7 million, respectively, but the decline was related more to
the timing of order receipts including several large multi-year orders that were
received in Fiscal 1997 than to economic issues. These decreases were partially
offset by an increase in orders for products sold to the medical market of $3.5
million, or 18.5%, due primarily to increased demand for high end, high power
linear accelerators for cancer treatment and increased business in international
x-ray markets as other countries continue to build their medical infrastructure.
Nevertheless, incoming order levels fluctuate significantly on a quarterly basis
and a particular year's order rate may not be indicative of future order levels.
In addition, the Company's sales are highly dependent upon manufacturing
scheduling and performance and, accordingly, it is not possible to accurately
predict when orders will be recognized as sales.

Sales for Fiscal 1998 of $260.7 million were approximately 2.9% above the prior
year level of $253.4 million due to strong demand for products used in radar
applications offset partially by declines in both the communications and
industrial markets. The Company's growth expectations for Fiscal 1998,
particularly in the satcom portion of its communications market, were
significantly hindered by the economic changes in the Far East. Management
estimates that orders and sales to Far East customers, both direct and through
domestic OEM's, were negatively impacted by $38.9 million and $19.3 million,
respectively. This negative impact was mitigated, however, by the Company's
focus on, and release of, several new products including solid state amplifiers,
radio frequency transceivers ("RFT's") and transmitters, along with increased
demands for the Company's Klystrode(R) IOT device that is addressing the FCC's
digital signal mandate for all U.S. broadcast stations. The Company also
broadened its product base by acquiring two small product lines from Hughes in
the first quarter of Fiscal 1998 that 



                                      -17-
<PAGE>   19

added approximately $2.2 million of sales during the year.

Looking forward, the Company is anticipating that Far East economic conditions
will continue into Fiscal 1999 and will hinder growth in the communications and
industrial markets. A stable replacement business along with increased market
acceptance of the Company's new products will help offset this somewhat and
management will continue to control expenses.

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>
                                   52 Weeks     53 Weeks      52 Weeks
                                    Ended        Ended         Ended
                                  October 2,    October 3,   September 27, 
                                    1998          1997         1996
                                  ---------     --------      --------
<S>                               <C>           <C>          <C>    
Sales                              100.0%       100.0%        100.0%
Cost of sales                       74.6         72.5          71.7
                                    ----         ----          ----
      Gross profit                  25.4         27.5          28.3
Research and development             2.9          3.0           3.2
Marketing                            7.3          7.8           7.7
General and administrative           5.0          5.0           6.0
                                    ----         ----          ----
Operating income                    10.2         11.7          11.4
Interest expense                     6.8          7.5           7.4
                                    ----         ----          ----
      Earnings before taxes          3.4          4.2           4.0
Provision for income taxes           1.4         (1.2)          0.8
                                    ====         ====          ====
      Net earnings                   2.0%         5.4%          3.2%
                                    ====         ====          ====
Other Data:
      EBITDA (a)                    14.6%        15.6%         15.0%
      Preferred Dividends            1.9%         1.7%          1.4
</TABLE>

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

(a)   EBITDA represents earnings before provision for income taxes, interest
      expense, depreciation and amortization and the charge related to the
      purchase accounting write-up of inventory that impacted the first quarter
      of Fiscal 1996.


Fiscal 1998 Compared to Fiscal 1997

SALES. Sales for Fiscal 1998 were approximately $260.7 million, an increase of
approximately $7.2 million, or 2.9%, as compared to sales of $253.4 million in
Fiscal 1997. The Company's sales increased due to strong demand for products
used in radar applications offset partially by declines in both communications
and industrial markets that were primarily driven by softness in the Asian
economy. Sales to the radar market increased to $87.4 million in Fiscal 1998
from $75.4 million in Fiscal 1997, an increase of $12.0 million, or 15.9%. Sales
to the communications market decreased to $118.8 million in Fiscal 1998 from
$122.5 million in Fiscal 1997, a decline of $3.7 million, or 3.1%. Industrial
sales declined to $19.4 million in Fiscal 1998 from $21.9 million in Fiscal
1997, a decrease of $2.5 million, or 11.4%. Sales to the Company's other three
markets (medical, electronic countermeasures and scientific) combined increased
to $35.1 million in Fiscal 1998 from $33.5 million in Fiscal 1997, an increase
of approximately $1.5 million, or 4.5% primarily due to increase demand for the
Company's medical products.

COST OF SALES. Cost of sales in Fiscal 1998 were $194.4 million or 74.6% of
sales compared to $183.7 million, or 72.5% of sales in Fiscal 1997. This
increase in costs of $10.7 million, or 5.8%, was due to higher sales volume
($5.2 million), unfavorable product mix ($4.4 million) and higher depreciation
costs 



                                      -18-
<PAGE>   20

($1.1 million). Unfavorable product mix was directly related to the Company's
focus on releasing new products to the communications, electronic
countermeasures and scientific markets. Although this has enhanced the Company's
technological capability and its ability to service customers, new products have
historically generated higher costs and, therefore, lower margins as a result of
start-up issues including small lot production volumes, lower yields and higher
engineering labor content. These costs were minimized somewhat in the current
fiscal year by a change in accounting estimate for disposal costs that lowered
management's calculation of cost-to-complete reserves by approximately $1
million. Also unfavorably impacting product mix was the completion of a high
margin U.S. military satcom program that ran the full year in Fiscal 1997 and
was substantially completed early in Fiscal 1998. Depreciation costs were higher
in Fiscal 1998 as compared to Fiscal 1997 due to new capital equipment purchases
that have been added to a fixed depreciation base that resulted from the
revaluation of all property, plant and equipment as of the Acquisition date. The
Company expects to have an increase in depreciation through the year 2000 since
most of its acquired assets were identified as having at least a five year
depreciation life.

RESEARCH AND DEVELOPMENT. Research and development expenses decreased slightly
in Fiscal 1998 to approximately $7.5 million, or 2.9% of total sales, as
compared to approximately $7.7 million, or 3.0% of total sales, during Fiscal
1997. The Company continues to focus on new product development both through
Company-sponsored funds as well as Customer-sponsored funds that are reported as
revenue. Customer-sponsored R&D was approximately $6.0 million in Fiscal 1998
compared to approximately $5.9 million in Fiscal 1997.

MARKETING, GENERAL AND ADMINISTRATIVE. Marketing, general and administrative
expenses were $32.1 million in Fiscal 1998, or 12.3% of sales, as compared to
$32.3 million, or 12.8% of sales, in Fiscal 1997. Overall, marketing costs were
lower in Fiscal 1998 by approximately $0.6 million due to favorable currency
valuation rates impacting Europe but this was partially offset by general and
administrative costs that were higher by $0.4 million due to additional goodwill
amortization that resulted from two product line acquisitions completed in the
first quarter of Fiscal 1998.

EBITDA. EBITDA was $38.0 million, or 14.6% of sales, for Fiscal 1998 compared to
EBITDA of $39.4 million, or 15.6% of sales, for Fiscal 1997. As mentioned above,
product mix with a focus on new products was the main reason for the EBITDA
decline in spite of higher sales volume and significant progress in improving
yields on product lines that were moved from Salt Lake City, Utah during the
Company's Fiscal 1997 consolidation effort.

NET EARNINGS. Net earnings before preferred dividends were $5.2 million for
Fiscal 1998, a decrease of $8.6 million from Fiscal 1997 primarily due to an
increase in the Company's effective tax rate. This tax rate change resulted in
lower earnings of $6.8 million and was due to the fact that, in Fiscal 1997, the
Company fully recognized its deferred tax assets and eliminated the valuation
allowance established in connection with the acquisition, thereby incurring a
tax benefit that was not repeated in Fiscal 1998. The balance of the earnings
decline was due to lower gross margins of $3.5 million that resulted from
changes in product mix, partially offset by lower interest expense of $1.2
million that resulted primarily from a decrease in debt of $15.2 million.

Fiscal 1997 Compared to Fiscal 1996

SALES. Sales for Fiscal 1997 were approximately $253.4 million, a decrease of
approximately $4.0 million, or 1.6%, as compared to sales of $257.4 million in
Fiscal 1996. This decline was due in part to the divestiture of a single product
line accounting for $2.6 million in sales, which was done in conjunction with
the Company's relocation of two other product lines from Salt Lake City, Utah to
San Carlos, California. Also, even though shippable orders were on hand that
would have allowed the Company to exceed its prior fiscal year sales, the
Company was unable to fully ramp-up the production 



                                      -19-
<PAGE>   21

of relocated product lines and the production of new products for the satcom
market to meet its scheduled delivery dates. In terms of markets, communications
sales were $122.5 million in Fiscal 1997 which represents an increase of
approximately $4.1 million, or 3.4%, from Fiscal 1996 primarily as a result of
new product releases. Radar sales increased approximately $.9 million, or 1.2%,
to $75.4 million in Fiscal 1997 as a result of a 19.6% increase in order
receipts (most of which are shippable in Fiscal 1998). Medical sales increased
by approximately $1.3 million, or 8.2%, to $17.6 million due to increased demand
from Varian. Scientific sales were $4.2 million which represents an increase of
approximately $.5 million, or 12.9%, from the prior fiscal year due to new
energy research as well as a specific development project related to the
Accelerator Production of Tritium. Offsetting the $6.8 million increase in these
four markets were lower sales of products sold to the industrial and electronic
countermeasures markets. Industrial sales decreased by $5.3 million, or 19.5%,
to $21.9 million in Fiscal 1997 due to the timing of customer defined delivery
schedules combined with the slowdown in demand for high power amplifiers used
for instrumentation and power supplies used in semiconductor applications.
Electronic countermeasure sales declined by $5.5 million, or 31.8%, to $ 11.8
million as a result of completing several military programs early in the fiscal
year and was compounded by product development delays in a new transmitter
application.

COST OF SALES. Cost of sales in Fiscal 1997 of $183.7 million decreased by $.8
million from Fiscal 1996 primarily due to higher depreciation costs. Cost of
sales as a percentage of sales was 72.5% in Fiscal 1997 compared to 71.7% in
Fiscal 1996. The purchase accounting allocation of certain assets, specifically
property, plant and equipment that was revalued as of the date of the
Acquisition, has had a significant effect on depreciation which, as an element
of cost of sales, was approximately $1.7 million higher in Fiscal 1997 compared
to Fiscal 1996.

RESEARCH AND DEVELOPMENT. Research and development expenses decreased in Fiscal
1997 to $7.7 million, or 3.0% of total sales, as compared to $8.3 million, or
3.2% of total sales, during Fiscal 1996 as a higher proportion of engineering
resources were expensed to cost of sales in conjunction with the ramp-up of new
products.

MARKETING, GENERAL AND ADMINISTRATIVE. Marketing, general and administrative
expenses were $32.3 million in Fiscal 1997, or 12.8% of sales, as compared to
$35.3 million, or 13.7% of sales, in Fiscal 1996. Marketing costs were
relatively consistent between the two periods but general and administrative
expenses decreased by $2.9 million in Fiscal 1997 primarily due to lower
management incentive accruals and the gain on the sale of certain assets.

EBITDA. EBITDA was $39.4 million for Fiscal 1997, an increase of $0.7 million,
or 2.5%, as compared to EBITDA, excluding the $1.7 million charge related to the
purchase accounting write-up of inventory, of $38.7 million for Fiscal 1996.
Both Fiscal 1997 and Fiscal 1996 were negatively impacted by the Company's
efforts to consolidate its Salt Lake City, Utah operation into its San Carlos,
California operation. In Fiscal 1997, 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 $2.0 million compared to $2.4
million in Fiscal 1996. However, due to the completion of these consolidation
efforts in the first half of Fiscal 1997, these costs are not expected to
continue. EBITDA was approximately 15.6% of sales in Fiscal 1997 compared to
approximately 15.0% in Fiscal 1996 which reflects the partial year improvements
from the completion of consolidation efforts.

NET EARNINGS. Net earnings before preferred dividends were $13.8 million for
Fiscal 1997, an increase of $5.4 million, as compared to $8.3 million for Fiscal
1996. In Fiscal 1997, the Company has fully recognized its deferred tax assets
and has eliminated the valuation allowance established in connection with the
Acquisition, recognizing a resultant $3.0 million tax benefit.



                                      -20-
<PAGE>   22

FINANCIAL CONDITION

The Company's continuing operating activities have provided adequate capital and
liquidity for the Company for the periods presented.

Cash flow from operating activities was $23.3 million in Fiscal 1998 as compared
to $5.3 million in Fiscal 1997. This change of $18.0 million was primarily
related to changes in operating assets and liabilities that resulted in an
increase in cash of $1.6 million in Fiscal 1998 as compared to a decrease in
cash of $13.1 million in Fiscal 1997. A consistent level of accrued liabilities,
a lower level of accounts receivable, and better timing between inventory usage
and accounts payable levels were the main factors. Lower accounts receivable
resulted from a Company-wide focus on collections that improved days sales
outstanding ("DSO") to 65 DSO at the end of Fiscal 1998 as compared to 69 DSO at
the end of Fiscal 1997. Inventory levels increased in Fiscal 1998 but this was
offset by a similar increase in accounts payable.

Investing activities were comprised principally of investment in property, plant
and equipment totaling $6.6 million in Fiscal 1998, $9.2 million in Fiscal 1997
and $12.5 million in Fiscal 1996. Also, in Fiscal 1998, the Company invested
$2.7 million in two small product line acquisitions to add to products currently
being manufactured in the Company's Beverly, Massachusetts and Palo Alto,
California facilities.

The Company's continuing operations typically do not have large capital
requirements. Excluding one-time improvements made in both Fiscal 1997 and
Fiscal 1996 in connection with facility consolidation efforts, capital spending
was $6.6 million, $6.6 million and $8.7 million in Fiscal 1998, Fiscal 1997 and
Fiscal 1996, respectively. Capital expenditures are generally made to replace
existing assets, increase productivity, facilitate cost reductions or meet
regulatory requirements. The Company expects the level of capital expenditures
in Fiscal 1999 to be relatively consistent with the recurring level in Fiscal
1998.

Financing activities during the three-year period were related almost entirely
to repayments of, or proceeds from, the Company's Senior Credit Agreement.
Non-cash financing activities during Fiscal 1998 and Fiscal 1997 included $1.5
million and $1.6 million, respectively, of purchases under capital leases. These
purchases were related to the implementation of a new business enterprise system
that is part of the Company's overall plan to address "Year 2000" issues, to
improve efficiency and to reduce dependency on aging Varian legacy systems.

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 this amount, $16.4 million
was available for CPI to draw upon as of October 2, 1998. 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. As of October 6, 1998, the Company amended this Agreement and
increased the Revolving Credit Facility by $10.0 million to allow CPI to operate
with a similar level of liquidity as it had prior to its acquisition of the
Microwave Components Division of Aydin Corporation that was also completed on
October 6, 1998.

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.



                                      -21-
<PAGE>   23

Market Risk

The Company is exposed to interest rate risk on its outstanding debt, as well as
foreign currency exchange rate risk inherent in its sales commitments, and
non-U.S. dollar denominated assets and liabilities. The Company regularly
assesses the potential impact of these risks and therefore does not anticipate
any material losses in these areas. The Company does not use derivative
financial instruments for speculative or trading purposes.

The Company has outstanding debt associated with the Acquisition, the majority
of which relates to the Senior Subordinated Notes, which mature in 2005 and bear
a fixed interest rate of 12 percent per annum. The remaining debt, with a
carrying value of approximately $43.3 million at October 2, 1998, is subject to
changes in the Prime or LIBOR Rates. To reduce the Company's exposure to
interest rate risk, the Company consistently monitors available money rates and
uses various short-term instruments.

The majority of the Company's revenue and expense activities are transacted in
U.S. dollars. However, CPI does enter into these transactions in other
currencies, primarily the British pound, the German mark, the Australian dollar
and the French and Swiss franc. The Company limits its foreign currency exposure
primarily through natural hedging, but may enter into forward contracts if
necessary. These efforts reduce, but do not eliminate the impact of foreign
currency rate movements.

The Company performed a sensitivity analysis in which it assessed the potential
loss in future earnings from the impact of a 10 percent adverse movement in
interest and foreign currency exchange rates on outstanding debt and non-U.S.
dollar denominated assets and liabilities. The impact was determined based on
the hypothetical change from shifts in the market rates over a period of one
year. Other market sensitive financial instruments were not included in the
analysis as they were not material. In terms of interest rate risk, a 10 percent
adverse movement in the Base Rate or Effective Rate on the Company's variable
rate debt would result in a decrease in future earnings of approximately $0.3
million. In terms of foreign currency exchange rate risk, a 10 percent adverse
movement in the levels of foreign currency exchange rates against the U.S.
dollar with all other variables held constant would result in a decrease in
future earnings of less than $0.1 million. Actual results, however, could differ
materially.

Recent Accounting Pronouncements

In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income".
SFAS No. 130 establishes standards for reporting and displaying comprehensive
income and its components in the financial statements. It requires
classification of other comprehensive income, as defined by the standard, by
their nature (e.g., unrealized gains or losses on securities) in a financial
statement, but does not require a specific format for that statement. The
accumulated balance of other comprehensive income is to be displayed separately
from retained earnings and additional paid-in capital in the equity section of
the balance sheet. This statement is effective for financial statements issued
for fiscal years beginning after December 15, 1997 and reclassification of
financial statements for earlier periods provided for comparative purposes is
required. Adoption of this pronouncement in Fiscal 1999 is not expected to have
a material impact on the Company's financial statements as the Company has no
items of other comprehensive income at this time.

In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information". The statement requires that a public
business enterprise report financial and descriptive information about its
reportable operating segments on the basis that is used internally for
evaluating segment performance and deciding how to allocate resources to
segments. This statement is effective for financial statements issued for fiscal
years beginning after December 15, 1997 and will be adopted by the Company in
Fiscal 1999. Adoption of this pronouncement is not expected to have a material
effect on the Company's financial statements except that there may be certain
modifications in 



                                      -22-
<PAGE>   24

segment disclosures.

In June 1998, the Financial Accounting Standards Board issued SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities". SFAS No. 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts,
(collectively referred to as derivatives) and for hedging activities. It
requires that derivatives be recognized in the statement of financial position
at fair value. If certain conditions are met, a derivative may be specifically
designated and accounted for as (a) a hedge of the exposure to changes in the
fair value of a recognized asset or liability or an unrecognized firm
commitment, (b) a hedge of the exposure to variable cash flows of a forecasted
transaction, or (c) a hedge of the foreign currency exposure of a net investment
in a foreign operation, an unrecognized firm commitment, an available-for-sale
security, or a foreign-currency-denominated forecasted transaction. For a
derivative not designated as a hedging instrument, changes in the fair value of
the derivative are recognized in earnings in the period of change. This
statement will be effective for all fiscal quarters of fiscal years beginning
after June 15, 1999 and will be adopted by the Company beginning the first
quarter of Fiscal 2000. Management does not believe the adoption of SFAS No. 133
will have a material effect on the financial position of the Company.

Year 2000

The Company has conducted a comprehensive review of its computer systems and
applications to identify systems that could be affected by the "Year 2000" issue
and has developed a remediation plan. All systems that are considered to be
mission critical have been identified and addressed in this plan. The Company
has also reviewed its products, process equipment and facilities systems as part
of its overall Year 2000 readiness.

The Company's focus is first on products and business critical systems and
equipment. Evaluation of products is substantially complete as only a few CPI
products contain microprocessors or microcode. To date, no significant problems
have been found in existing CPI products. Also, CPI is contacting its suppliers
to ensure that they have appropriate plans in place to adequately address the
century change issue. CPI's goals for the Year 2000 project are to have all
business critical process Year 2000 conversions, corrective actions, work
arounds and tests completed by October 31, 1999. To date, two of the Company's
six Divisions have successfully modified or replaced Enterprise Resource
Planning ("ERP") systems. The other four are scheduled to "go-live" on a new ERP
system starting in February 1999 and being completed in June 1999.

Timely completion of its Year 2000 project is a priority of the Company and the
remediation plan, along with the timetable for its completion and budgeted
remediation costs, have been approved by the Company's Year 2000 project team,
management, and the Board of Directors. Management currently estimates that it
will spend approximately $5.0 million primarily through a capital lease program
to replace outdated Varian legacy systems. To date, approximately $3.9 million
has been incurred. Other remediation efforts completed in Fiscal 1998 have
included a mix of capital expenditures and operating expense costs totaling $0.8
million and an estimated $1.5 million is planned for Fiscal 1999. The Company's
estimated timetable and budgeted remediation costs are based on assumptions
which management believes are reasonable and appropriate. Management is
committing and will continue to commit necessary human and financial resources
to complete its remediation plans on a timely basis.

To date, based on both written and verbal discussions, management has no
information that indicates a significant vendor or service provider may be
unable to sell goods or provide services to the Company or that any significant
customer may be unable to purchase from the Company because of Year 2000 issues.
Further, the Company has not received any notifications from regulatory agencies
to which it is subject indicating that the Company must achieve compliance by a
specific date or significant regulatory 



                                      -23-
<PAGE>   25

action will be taken.

The Company presently believes that, with modifications to existing software and
conversion to new software, the Year 2000 problem will not pose significant
operational problems for the Company's systems as modified and converted.
However, if such modifications and conversions are not completed timely, the
Year 2000 problem could have a material impact on the operations of the Company.
Management is still in the process of developing contingency plans but expects
that manual processing procedures to maintain accurate processing of information
and data are available. Contingency plans are expected to be completed by June
1999.

Forward-Looking Information

Except for historical information, this Management's Discussion and Analysis
contains forward-looking statements that involve risks and uncertainties that
could cause actual results to differ materially from those projected. Such risks
and uncertainties include: product demand and market acceptance risks; the
effect of general economic conditions; the impact of competitive products and
pricing; new product development and commercialization; technological
difficulties and the ability to increase margins; the timing of renewed growth
in the Far East; U.S. Government export policies; and other risks detailed from
time to time in the Company's filings with the Securities and Exchange
Commission.



                                      -24-
<PAGE>   26


ITEM 8:    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Information called for by this item is set forth in the consolidated financial
statements of CPI and Holding 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

Independent Auditors' Report...............................................................F-3

Consolidated Balance Sheets as of October 2, 1998 and October 3, 1997......................F-4

Consolidated Statements of Operations for the 52-week period ended October 2,
    1998 the 53-week period ended October 3, 1997 and the 52-week period ended
    September 27, 1996.....................................................................F-5

Consolidated Statements of Stockholders' Equity for the 52-week period ended
    October  2, 1998,  the  53-week  period  ended  October  3, 1997 and the  52-week
    period ended September 27, 1996........................................................F-6

Consolidated Statements of Cash Flows for the 52-week period ended October 2,
    1998, the 53-week period ended October 3, 1997 and the 52-week period ended
    September 27, 1996.....................................................................F-7

Notes to the Consolidated Financial Statements.............................................F-9

Financial Statement Schedule..............................................................F-50


COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION                                     Page 

Independent Auditor's Report..............................................................F-28

Consolidated Balance Sheets as of October 2, 1998 and October 3, 1997.....................F-29

Consolidated Statements of Operations for the 52-week period ended October 2,
    1998, the 53-week period ended October 3, 1997 and the 52-week period ended
    September 27, 1996....................................................................F-30

Consolidated  Statements of  Stockholders'  Equity  (Deficit) for the 52-week  period
    ended October 2, 1998,  the 53-week  period ended October 3, 1997 and the 52-week
    period ended September 27, 1996.......................................................F-31

Consolidated Statements of Cash Flows for the 52-week period ended October 2,
    1998, the 53-week period ended October 3, 1997 and the 52-week period ended
    September 27, 1996....................................................................F-32

Notes to the Consolidated Financial Statements............................................F-34

Financial Statement Schedule..............................................................F-51

</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
October 2, 1998, the 53-weeks ended October 3, 1997 and the 52-weeks ended
September 27, 1996, there were no disagreements with KPMG Peat Marwick LLP on
accounting or financial disclosure.



                                      -25-
<PAGE>   27

                                    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...........   52  Chief Executive Officer,
                                  President and Director
Alvin J. Ferreira..........   54  Vice President and
                                  Assistant Secretary
Lynn E. Harvey.............   43  Chief Financial Officer,
                                  Treasurer and Secretary
Leonard I. Green...........   65  Director
John G. Danhakl............   42  Director
Gregory J. Annick..........   34  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...........   52  Chief Executive Officer,
                                  President and Director
Lynn E. Harvey.............   43  Chief Financial Officer
John R. Beighley...........   45  Vice President
O. Joseph Caldarelli.......   48  Vice President
Alvin J. Ferreira..........   54  Vice President
Robert A. Fickett..........   38  Vice President
Dennis J. Gleason..........   45  Vice President
H. Frederick Koehler.......   63  Vice President
Richard A. Schaffzin.......   54  Vice President
Leonard I. Green...........   65  Director
John G. Danhakl............   42  Director
Gregory J. Annick..........   34  Director
</TABLE>


                                      -26-
<PAGE>   28

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.

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

O. Joseph Caldarelli became a Vice President of CPI and Division President of
the Communications and Medical Products ("CMP") Division in August 1995. Mr.
Caldarelli was Vice President and General Manager for this same operating unit
under the Predecessor, from 1985 until August 1995 and was President and a
director of Varian Canada, Inc. from 1992 until August 1995. From 1982 until
1985, Mr. Caldarelli was Marketing Manager of 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.

Alvin J. Ferreira became a Vice President of CPI, Vice President and Assistant
Secretary of Holding and Division President of the Traveling Wave Technology
("TWT") Division in August 1995. Mr. Ferreira was Vice President and General
Manager of this same operating unit under 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.

Robert A. Fickett became a Vice President of CPI in April 1998 and currently
heads the Company's Microwave Power Tube Products ("MPTP") Division. From
January 1996 to April 1998, Mr. Fickett was Vice President of Operations for
MPTP. From 1993 until January 1996, he was President and Chief Executive Officer
of Altair Technologies, Inc., a contract manufacturer. From 1982 until 1993, Mr.
Fickett held a number of positions with CPI's predecessor, Varian, including
Engineering Manager of MPP's Klystron Engineering Group, which he was promoted
to in 1989. Mr. Fickett received a B.S. degree in Mechanical Engineering from
the University of California, Berkeley.

Dennis J. Gleason became a Vice President of CPI and Division President of the
Beverly Microwave Division ("BMD") in August 1995. Mr. Gleason was Vice
President and General Manager of this same operating unit under the Predecessor
from 1989 until August 1995. From 1987 until 1989, Mr. Gleason served as
Assistant General Manager of BMD. 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.



                                      -27-
<PAGE>   29

Lynn E. Harvey became Chief Financial Officer of Holding and CPI in August 1995.
Ms. Harvey was the Business Support Process Manager and Controller of the Power
Grid Tube Products unit of the Predecessor from 1993 to August 1995. From 1984
until 1993, Ms. Harvey held various finance, supervisory and management
positions with Varian Associates. Ms. Harvey received a B.S. degree from the
University of California, Berkeley.

H. Frederick Koehler became Vice President of CPI and Division President of the
Eimac Division in August 1995. Mr. Koehler was Vice President and General
Manager of this same operating unit under 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.

Richard A. Schaffzin became a Vice President of CPI in April 1998 and currently
heads the Company's Satcom Division. Dr. Schaffzin was President and CEO of
Paradise Electronics Corporation, a start-up company developing a single chip
interface between CPUs and flat panel displays, beginning in 1997. From 1990 to
1996, Dr. Schaffzin served as Chairman, President and CEO of IC Sensors, Inc., a
silicon micromachining sensor company serving the medical, automotive, military
and commercial markets. He orchestrated the sale of IC Sensors to a Fortune 500
company in 1994. Prior to that, Dr. Schaffzin has held various operations,
business development and engineering positions at EG&G Reticon, National
Semiconductor and Fairchild Semiconductor. Dr. Schaffzin holds a B.S.E.E. and an
M.E.E degree from Cornell University, an M.S.E.E. degree from MIT and a Ph.D.
degree in Finance and Business Management from Santa Clara University.

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 Rite Aid Corporation, Carr-Gottstein
Foods Co., Hechinger Company, and Liberty Group Publishing, Inc.

John G. Danhakl has been an executive officer and an equity owner of LGP, a
merchant banking firm that 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., Twin Laboratories, Inc., Leslie's
Poolmart, Inc., Big 5 Corp., Hechinger Company and Liberty Group Publishing,
Inc.

Gregory J. Annick has been an executive officer and an equity owner, through a
trust, of LGP, a merchant banking firm that 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 financial analyst in mergers and acquisitions with Goldman, Sachs &
Co. Mr. Annick is also a director of Carr-Gottstein Foods Co., Leslie's
Poolmart, Inc., Hechinger Company, and Liberty Group Publishing, Inc.


                                      -28-
<PAGE>   30


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 and the next four most highly
compensated executive officers of Holding and CPI (collectively, the "Named
Executive Officers") for Fiscal 1998, Fiscal 1997 and Fiscal 1996.

<TABLE>
<CAPTION>
                                       SUMMARY COMPENSATION TABLE
                                                 ANNUAL                   LONG TERM
                                              COMPENSATION               COMPENSATION
                                    -----------------------------------  ------------
        NAME AND                                              OTHER          LTIP        ALL OTHER
   PRINCIPAL POSITION     FISCAL                  BONUS($)  ANNUAL COMP-   PAYOUTS($)   COMPENSATION
    WITH THE COMPANY       YEAR     SALARY($)       (A)     ENSATION (B)      (C)        ($) (D)
------------------------  ------    ---------    ---------  ------------   ----------   -------------
<S>                       <C>       <C>          <C>        <C>            <C>          <C>     
Al D. Wilunowski           1998     $302,744     $     --     $ 35,482     $     --     $ 48,866
 Chief Executive
 Officer and President     1997      302,744      186,821       38,041      409,568       71,467

                           1996      302,744      376,591       34,672      541,613       39,302

John R. Beighley           1998     $119,677       14,463       13,621           --        6,799
  Vice President           1997      116,717       48,738        1,851           --        5,982
                           1996      104,358       33,103          486           --        5,164

Alvin J. Ferreira          1998      128,700           --       11,901           --        9,255
  Vice President           1997      128,700       43,818       12,055       34,823       10,642
                           1996      128,700       55,539        2,756       69,178       10,751

Dennis J. Gleason          1998      127,452           --       14,449           --        9,334
  Vice President           1997      127,452       81,390       12,843       66,697        9,328
                           1996      127,452      118,993        2,582       73,368        9,338

H. Frederick Koehler       1998      127,378           --       11,603           --        9,544
  Vice President           1997      126,695       16,006       13,553       29,569        9,934
                           1996      129,688       55,587        2,575       59,343        9,931
</TABLE>

(a) Consists of awards paid in Fiscal 1998 and Fiscal 1997 under CPI's
    Management Incentive Plan for Fiscal 1997 and Fiscal 1996, respectively. No
    awards are to be paid in Fiscal 1999 under CPI's Management Incentive Plan
    for Fiscal 1998. For Mr. Beighley, consists of awards paid in Fiscal 1999,
    Fiscal 1998 and Fiscal 1997 under CPI's Sales Incentive Plan for Fiscal
    1998, Fiscal 1997 and Fiscal 1996, respectively.

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

(c) Consists of cash payouts (1) in Fiscal 1998 under the long-term incentive
    feature of CPI's Management Incentive Plan for the three year period ended
    Fiscal 1997; and (2) in Fiscal 1997 under the long-term incentive feature of
    CPI's Management Incentive Plan for the two year period ended Fiscal 1996.
    No awards are to be paid in Fiscal 1999 under this plan for Fiscal 1998.

(d) Consists of (1) Company contributions to CPI's 401(k) plan and Non-Qualified
    Deferred Compensation Plan and (2) Company paid premiums for group life
    insurance for Fiscal 1998, Fiscal 1997 and Fiscal 1996.

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 both a qualified 401(k) investment plan and a non-qualified
deferred compensation plan.



                                      -29-
<PAGE>   31

THE HOLDING EQUITY PLAN

The Named Executive Officers 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
has 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 (collectively,
any executive officers and key employees who may acquire Management Shares are
referred to as the "Management Investors") in Fiscal 1995. No additional shares
were issued in Fiscal 1996 and 650 shares were repurchased in Fiscal 1997. In
Fiscal 1998, based on retirements and changes in management, 5,850 shares were
repurchased and 2,920 shares were sold.

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 73.1% 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 1998, LGP
received $375,000 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.

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



                                      -30-
<PAGE>   32

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 1, 1998 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) each 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
Name and Address of Beneficial Owner (a)           Beneficial Ownership    Outstanding
----------------------------------------           --------------------    -----------
<S>                                                <C>                     <C>

Green Equity Investors II, L.P.(b)..............          143,630             73.12%
11111 Santa Monica Boulevard, Suite 2000
Los Angeles, California 90025

Leonard I. Green (b)............................          143,630             73.12%
11111 Santa Monica Boulevard, Suite 2000
Los Angeles, California 90025

John G. Danhakl (b).............................          143,630             73.12%
11111 Santa Monica Boulevard, Suite 2000
Los Angeles, California 90025

Gregory J. Annick (b)...........................          143,630             73.12%
11111 Santa Monica Boulevard, Suite 2000
Los Angeles, California 90025

Al D. Wilunowski (c)............................           21,400             10.90%
607 Hansen Way
Palo Alto, California 94303

H. Frederick Koehler (d)........................            3,000              1.53%

Alvin J. Ferreira...............................            2,500              1.27%

Dennis J. Gleason...............................            2,000              1.02%

John R. Beighley................................              450               .23%

Directors and  Executive  Officers as a group (12         
persons)(b) ....................................          180,500             91.89%
</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, Jennifer Holden Dunbar and Peter
        J. Nolan, 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, Annick and Nolan 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 800 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.



                                      -31-
<PAGE>   33

Terms of Subscription and Stockholder Agreements

Holding Common Stock and Junior Preferred Stock purchased by GEI II were
purchased pursuant to a Stock Subscription Agreement among 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. GEI
II subsequently sold its shares of CPI Junior Preferred Stock in June 1997.

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 73.1% 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 1998, LGP received $375,000 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.



                                      -32-
<PAGE>   34


Exhibit No.                            Description



                                     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


<TABLE>
<CAPTION>
Exhibit 
   No.                            Description
---------                         -----------
<S>              <C>

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).

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.
</TABLE>


                                      -33-
<PAGE>   35

<TABLE>
<CAPTION>
Exhibit 
   No.                            Description
---------                         -----------
<S>              <C>

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)).

10.1.1(4)        First Amendment to Credit Agreement among CPI, Holding, the
                 other obligors named therein, the lenders named therein and
                 Bankers Trust Company, as Agent, dated as of December 31, 1996.

10.1.2(4)        Second Amendment to Credit Agreement among CPI, Holding, the
                 other obligors named therein, the lenders named therein and
                 Bankers Trust Company, as Agent, dated as of April 1, 1997.

10.1.3(4)        Third Amendment to Credit Agreement among CPI, Holding, the
                 other obligors named therein, the lenders named therein and
                 Bankers Trust Company, as Agent, dated as of June 27, 1997.

10.1.4           Fourth Amendment to Credit Agreement among CPI, Holding, the
                 other obligors named therein, the lenders named therein and
                 Bankers Trust Company as Agent, dated as of October 6, 1998.

10.2(1)          Term A Notes in the amounts 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 amounts 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 amounts 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.

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

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

</TABLE>


                                      -34-
<PAGE>   36

<TABLE>
<CAPTION>
Exhibit 
   No.                            Description
---------                         -----------
<S>              <C>
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.

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.

10.19(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.
</TABLE>



                                      -35-
<PAGE>   37

<TABLE>
<CAPTION>
Exhibit 
   No.                            Description
---------                         -----------
<S>              <C>

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

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.

21(1)            Subsidiaries of CPI and Holding.

27.1             Financial Data Schedule (Communications & Power Industries,
                 Inc.)

27.2             Financial Data Schedule (Communications & Power Industries
                 Holding Corporation)
</TABLE>

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

(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.

(4)     Incorporated by reference to CPI's Annual Report on Form 10-K, filed on
        January 2, 1998.

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



                                      -36-
<PAGE>   38


                                   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 23, 1998

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                       December 23, 1998
-----------------------                                                  ----------------------


 /s/ John G. Danhakl                        Director                       December 23, 1998
-----------------------                                                  ----------------------


/s/ Gregory J. Annick                       Director                       December 23, 1998
-----------------------                                                  ----------------------

                             Chief Financial Officer, Treasurer and
  /s/ Lynn E. Harvey           Secretary (Principal Financial and          December 23, 1998
                                      Accounting Officer)
-----------------------                                                  ----------------------

                             Director, Chief Executive Officer and
 /s/ Al D. Wilunowski       President (Principal Executive Officer)        December 23, 1998
-----------------------                                                  ----------------------
</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.



                                      -37-
<PAGE>   39

                                          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 23, 1998

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                        December 23, 1998
-----------------------                                                  ----------------------


 /s/ John G. Danhakl                       Director                        December 23, 1998
-----------------------                                                  ----------------------


/s/ Gregory J. Annick                      Director                        December 23, 1998
-----------------------                                                  ----------------------

                              Chief Financial Officer, Treasurer
  /s/ Lynn E. Harvey          and Secretary (Principal Financial           December 23, 1998
                                   and Accounting Officer)
-----------------------                                                  ----------------------

                            Director, Chief Executive Officer and
 /s/ Al D. Wilunowski           President (Principal Executive             December 23, 1998
                                           Officer)
-----------------------                                                  ----------------------
</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.


                                      -38-

<PAGE>   40
                    COMMUNICATIONS & POWER INDUSTRIES, INC.,
                                and subsidiaries
                 (A wholly owned subsidiary of Communications &
                     Power Industries Holding Corporation)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


                          INDEX TO FINANCIAL STATEMENTS


                     COMMUNICATIONS & POWER INDUSTRIES, INC.

<TABLE>
<CAPTION>
                                                                                        Page 
                                                                                        ---- 
<S>                                                                                     <C>

Independent Auditors' Report..............................................................F-3

Consolidated Balance Sheets as of October 2, 1998 and October 3, 1997 ....................F-4

Consolidated Statements of Operations for the 52-week period ended 
      October 2, 1998 , the 53-week period ended October
      3, 1997 and the 52-week period ended September 27, 1996 ............................F-5

Consolidated Statements of Stockholders' Equity for the 52-week period ended
      October 2, 1998, the 53-week period ended October 3, 1997 and the 
      52-week period ended September 27, 1996 ............................................F-6

Consolidated Statements of Cash Flows for the 52-week period ended 
      October 2, 1998, the 53-week period ended October 3,
      1997 and the 52-week period ended
      September 27, 1996..................................................................F-7

Notes to the Consolidated Financial Statements............................................F-9

</TABLE>



                                     -F-1-
<PAGE>   41


                    INDEX TO FINANCIAL STATEMENTS, CONTINUED


              COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION


<TABLE>
<S>                                                                               <C>
Independent Auditors' Report.......................................................F-28

Consolidated Balance Sheets as of October 2, 1998 and October 3, 1997 .............F-29

Consolidated Statements of Operations for the 52-week period ended 
      October 2, 1998, the 53-week period ended October 3,
      1997 and the 52-week period ended September 27, 1996 ........................F-30

Consolidated Statements of Stockholders' Equity (Deficit) for the 
      52-week period ended October 2, 1998, the 53-week period ended 
      October 3, 1997 and the 52-week period ended September 27, 1996..............F-31

Consolidated Statements of Cash Flows for the 52-week period 
      ended October 2, 1998, the 53-week period ended October 3,
      1997 and the 52-week period ended September 27, 1996 ........................F-32

Notes to the Consolidated Financial Statements.....................................F-34

                           FINANCIAL STATEMENT SCHEDULES

Communications & Power Industries, Inc.............................................F-50

Communications & Power Industries Holding Corporation..............................F-51
</TABLE>



                                     -F-2-
<PAGE>   42

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


                          INDEPENDENT AUDITORS' 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") as of October 2, 1998
and October 3, 1997, and the related consolidated statements of operations,
stockholders' equity, and cash flows for the 52-week period ended October 2,
1998, the 53-week period ended October 3, 1997 and the 52-week period ended
September 27, 1996. 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.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Communications &
Power Industries, Inc. and subsidiaries as of October 2, 1998 and October 3,
1997, the results of their operations and their cash flows for the 52- week
period ended October 2, 1998, the 53-week period ended October 3, 1997 and the
52-week period ended September 27, 1996, 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

Mountain View, California
November 13, 1998



                                     -F-3-
<PAGE>   43



                    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>
                                                                                        October 2,      October 3,
                              ASSETS                                                       1998           1997
                              ------                                                    ---------        -------
<S>                                                                                     <C>                <C>  
CURRENT ASSETS
   Cash and cash equivalents                                                            $     448          2,027
   Accounts receivable, net                                                                49,484         52,326
   Inventories                                                                             52,923         50,750
   Deferred taxes                                                                           6,981          7,133
   Other current assets                                                                     1,440          1,221
                                                                                        ---------        -------
      Total current assets                                                                111,276        113,457

Property, plant, and equipment, net                                                        78,099         79,994
Goodwill and other intangibles, net                                                        25,147         24,144
Debt issue costs, net                                                                       6,522          7,893
Deferred taxes                                                                              8,168         11,908
                                                                                        ---------        -------
      Total assets                                                                      $ 229,212        237,396
                                                                                        =========        =======

LIABILITIES, SENIOR REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
-----------------------------------------------------------------------
CURRENT LIABILITIES
   Revolving credit facility                                                            $  13,300         22,800
   Current portion of term loans                                                            6,200          5,700
   Current portion of capital leases                                                          541             --
   Accounts payable - trade                                                                13,140         10,419
   Accrued expenses                                                                        15,612         15,088
   Product warranty                                                                         3,734          4,211
   Income taxes payable                                                                    10,259         11,975
   Advance payments from customers                                                          2,533          2,797
                                                                                        ---------        -------
      Total current liabilities                                                            65,319         72,990

Senior term loans                                                                          23,750         29,950
Senior subordinated notes                                                                 100,000        100,000
Obligations under capital leases                                                            2,548          1,584
                                                                                        ---------        -------
      Total liabilities                                                                   191,617        204,524
                                                                                        ---------        -------

SENIOR REDEEMABLE PREFERRED STOCK ($.01 par value, 325,000 shares
   authorized; 225,808 and 196,779 shares issued and outstanding as of
   1998 and 1997, respectively, liquidation preference $100 per share)                     20,683         17,566
                                                                                        ---------        -------
Commitments and contingencies
STOCKHOLDERS' EQUITY
   Junior Preferred Stock ($.01 par value, 525,000 shares authorized; 150,540
      and 131,186 shares issued and outstanding as of 1998
      and 1997, respectively, liquidation preference $100 per share)                            1              1
   Common stock  ($.01 par value, 400,000 shares authorized; 1 share
      issued and outstanding as of 1998 and 1997)                                              --             --
   Additional paid-in capital                                                              33,582         32,143
   Accumulated deficit                                                                    (15,614)       (15,738)
   Stockholder loans                                                                       (1,057)        (1,100)

                                                                                        ---------        -------
      Net stockholders' equity                                                             16,912         15,306
                                                                                        ---------        -------
      Total liabilities, senior redeemable preferred stock and stockholders' equity     $ 229,212        237,396
                                                                                        =========        =======
</TABLE>

See accompanying notes to the consolidated financial statements.

                                     - F-4 -

<PAGE>   44



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

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                 (in thousands)

<TABLE>
<CAPTION>
                                              52-Week       53-Week       52-Week
                                            period ended  period ended  period ended
                                              October 2,    October 3,   September 27,
                                                1998         1997         1996
                                              --------     --------      --------
<S>                                         <C>           <C>           <C>    
Sales                                         $260,688      253,439       257,449
Cost of sales                                  194,410      183,678       184,482
                                              --------     --------      --------
Gross profit                                    66,278       69,761        72,967
                                              --------     --------      --------
Operating costs and expenses:
   Research and development                      7,455        7,681         8,308
   Selling and marketing                        19,168       19,701        19,886
   General and administrative                   12,935       12,568        15,468
                                              --------     --------      --------
Total operating costs and expenses              39,558       39,950        43,662
                                              --------     --------      --------
Operating income                                26,720       29,811        29,305
Interest expense                                17,793       19,039        18,894
                                              --------     --------      --------
Earnings before taxes                            8,927       10,772        10,411
Income tax expense (benefit)                     3,750       (3,000)        2,068
                                              --------     --------      --------
Net earnings                                     5,177       13,772         8,343
Preferred dividends:
  Senior Redeemable Preferred Stock              2,904        2,530         2,148
  Junior Preferred Stock                         1,935        1,686         1,432
                                              --------     --------      --------
Net earnings attributable to Common Stock     $    338        9,556         4,763
                                              ========     ========      ========
</TABLE>

See accompanying notes to the consolidated financial statements.

                                     -F-5-


<PAGE>   45


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

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

<TABLE>
<CAPTION>
                                                                                                                    Total
                                               Junior                    Additional                             Stockholders'
                                             Preferred      Common       Paid-in     Accumulated   Stockholder    Equity
                                               Stock        Stock        Capital       Deficit        Loans      (Deficit)
                                             --------      --------      --------    -----------   -----------  -------------
<S>                                          <C>           <C>           <C>         <C>           <C>          <C>
Balances, September 29, 1995                        1            --        29,088      (29,627)       (1,000)       (1,538)

Amortization of discount and issue costs
   on Senior Redeemable Preferred Stock                                                   (214)                       (214)
Payment of dividends on Senior
   Redeemable 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                        1            --        30,521      (25,080)       (1,042)        4,400

Amortization of discount and issue costs
   on Senior Redeemable Preferred Stock                                                   (214)                       (214)
Payment of dividends on Senior
   Redeemable Preferred Stock                                                           (2,530)                     (2,530)
Payment of dividends on Junior
   Preferred Stock                                                          1,686       (1,686)                         --
Net earnings                                                                            13,772                      13,772
Interest accrued on stockholder loans                                                                    (58)          (58)
Purchase of Treasury Stock                                                   (64)                                      (64)
                                             --------      --------      --------     --------      --------      --------
Balances, October 3, 1997                           1            --        32,143      (15,738)       (1,100)       15,306

Amortization of discount and issue costs
   on Senior Redeemable Preferred Stock                                                   (214)                       (214)
Payment of dividends on Senior
   Redeemable Preferred Stock                                                           (2,904)                     (2,904)
Payment of dividends on Junior
   Preferred Stock                                                          1,935       (1,935)                         --
Net earnings                                                                             5,177                       5,177
Repayment of stockholder loans                                                                            80            80
Interest accrued on stockholder loans                                                                    (37)          (37)
Issuance of Treasury Stock                                                    696                                      696
Purchase of Treasury Stock                                                 (1,192)                                  (1,192)
                                             --------      --------      --------     --------      --------      --------
Balances, October 2, 1998                    $      1            --        33,582      (15,614)       (1,057)       16,912
                                             ========      ========      ========     ========      ========      ========
</TABLE>

See accompanying notes to the consolidated financial statements.


                                      -F-6-

<PAGE>   46


                    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>
                                                            52-Week        53-Week        52-Week
                                                          period ended   period ended   period ended
                                                            October 2,     October 3,   September 27,
                                                              1998           1997          1996
                                                          ------------   ------------   ------------
<S>                                                       <C>            <C>            <C>   

OPERATING ACTIVITIES
    Net cash provided by operating activities               $ 23,309         5,320        11,290
                                                            --------      --------      --------
INVESTING ACTIVITIES
    Proceeds from sale of
         property, plant and equipment                            61         2,545            --
    Purchase of property, plant, and equipment                (6,565)       (9,183)      (12,472)
    Product line acquisitions                                 (2,730)           --            --
    Other investing activities                                    --            --          (114)
                                                            --------      --------      --------
    Net cash used in investing activities                     (9,234)       (6,638)      (12,586)
                                                            --------      --------      --------
FINANCING ACTIVITIES
    Repayments on capital leases                                 (38)           --            --
    Net (Repayments)/Proceeds from revolving credit
         facility                                             (9,500)        5,800        (2,600)
    Repayments on Senior term loans                           (5,700)       (3,950)       (2,400)
    Payment of debt issuance costs                                --          (194)         (243)
      Issuance of treasury stock                                 696            --            --
    Purchases of treasury stock                               (1,192)          (64)           --
    Repayments of stockholder loans                               80            --            25
                                                            --------      --------      --------
    Net cash provided by (used in) financing activities      (15,654)        1,592        (5,218)
                                                            --------      --------      --------
NET INCREASE (DECREASE) IN
   CASH AND CASH EQUIVALENTS                                  (1,579)          274        (6,514)
    Cash and cash equivalents at beginning of period           2,027         1,753         8,267
                                                            --------      --------      --------
    Cash and cash equivalents at end of period              $    448         2,027         1,753
                                                            ========      ========      ========
</TABLE>



See accompanying notes to the consolidated financial statements.

                                      -F-7-

<PAGE>   47


                    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>
                                                          52-Week          53-Week            52-Week
                                                        period ended     period ended      period ended
                                                         October 2,       October 3,       September 27,
                                                           1998              1997              1996
                                                        ------------     ------------      -------------
<S>                                                     <C>              <C>               <C>

DETAIL OF NET CASH PROVIDED
  BY OPERATING ACTIVITIES
 Net earnings                                            $  5,177            13,772             8,343
 Adjustments to reconcile net earnings to
  net cash provided by operating activities:
    Depreciation                                            9,981             8,572             6,670
    Amortization of deferred debt issue costs               1,372             1,952             1,962
    Amortization of goodwill and intangibles                1,316             1,058             1,061
    Deferred taxes                                          3,892            (6,363)           (9,752)
    Interest accrued on stockholder loans                     (37)              (58)              (67)
    (Gain)/Loss on the disposition of assets                   32              (471)               --
    Changes in operating assets and liabilities:
         Accounts receivable                                2,842            (1,946)           (5,637)
         Inventories                                       (1,863)           (4,279)           (1,706)
         Other current assets                                (219)              913               433
         Accounts payable - trade                           2,721              (108)           (5,947)
         Accrued expenses                                     552            (7,283)            2,585
         Product warranty                                    (477)             (116)             (363)
         Income tax payable                                (1,716)            1,415            10,560
         Advance payments from customers                     (264)           (1,738)            3,148
                                                         --------          --------          --------

 Net cash provided by operating activities               $ 23,309             5,320            11,290
                                                         ========          ========          ========
</TABLE>

See accompanying notes to the consolidated financial statements.


                                      -F-8-

<PAGE>   48




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

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.  NATURE OF OPERATIONS

Communications & Power Industries, Inc. ("CPI") develops, manufactures and
distributes microwave and power grid vacuum electronic devices, microwave
amplifiers, modulators and various other power supply equipment and devices. The
Company operates six manufacturing locations in North America, and sells and
services its products and customers worldwide primarily through a direct sales
force.

In August 1995, CPI acquired substantially all of the assets of Varian
Associates, Inc.'s (Varian's) Electron Device business ("the Acquisition") and
then was 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. The Acquisition was
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. 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.

2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

                     Basis of Presentation

The accompanying consolidated financial statements include the accounts of CPI
and its wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.

The Company's fiscal years are the 52- or 53-week periods which end on the
Friday nearest September 30. All references to years in these notes to
consolidated financial statements represent fiscal year unless otherwise noted.

                     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.

                     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-9-
<PAGE>   49

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

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


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

                     Property, Plant, and Equipment

Property, plant, and equipment acquired by CPI at the date of the Acquisition
are carried at fair value as of the date of acquisition. Property, plant and
equipment are stated at cost. Major improvements are capitalized, while
maintenance and repairs are expensed currently. Plant and equipment are
depreciated over their estimated useful lives using the straight-line method.
Leasehold improvements are amortized using the straight-line method over their
estimated useful lives, or the remaining term of the lease, whichever is
shorter. Estimated useful lives of property, plant, and equipment are as
follows: land leaseholds, the life of the lease; buildings, 20 to 40 years;
machinery and equipment, 3 to 7 years.

                     Accounting for Long-Lived Assets

In accordance with Statement of Financial Accounting Standards ("SFAS") No. 121,
CPI reviews long-lived assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of long-lived assets is measured by comparison of
its carrying amount to future net cash flows expected to be generated from the
operation and sale of long-lived assets. If such assets are considered to be
impaired, the Company's carrying value is reduced to its estimated fair value.

Goodwill represents the excess of the purchase price over the fair value of the
net assets acquired. The Company assesses the recoverability of the carrying
amount of goodwill by determining whether the carrying amount of goodwill can be
recovered through undiscounted net cash flows of the acquired operation over the
remaining amortization period. If determined to be impaired, the carrying amount
is reduced to its estimated fair value which is based on an estimate of
discounted future net cash flows. Goodwill is being amortized on a straight-line
basis over estimated useful 



                                     -F-10-
<PAGE>   50

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

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

lives ranging from 15 to 25 years. Accumulated amortization was $3.6 million and
$2.3 million as of October 2, 1998 and October 3, 1997, respectively.

During Fiscal 1998, CPI acquired two product lines with net assets of
approximately $0.4 million for a purchase price of approximately $2.7 million.
The $2.3 million difference between the purchase price and the fair value of the
net assets acquired was allocated to goodwill and other intangibles and will be
amortized over estimated useful lives ranging from 3 to 15 years. These product
line acquisitions were accounted for as a purchase.

                     Warranty

CPI's products are generally warranted for a variety of periods, typically one
to five years or a predetermined product usage life. A provision for 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 Fiscal 1998,
Fiscal 1997 or Fiscal 1996. Varian retained the environmental liabilities
existing at the time of the Acquisition.

                     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 accumulated deficit over the period until mandatory redemption, 12 years,
using the effective interest method.

                     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 provision for income taxes is



                                     -F-11-
<PAGE>   51

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

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


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.

                     Business Risks and Credit Concentrations

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 and/or
volatility in the world's industrial economies may significantly affect
management's estimates and CPI's performance.

Generally, CPI requires no collateral from its customers and 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 affect CPI's estimate of its bad debts. Historical credit losses
have been within management's expectations and most transactions to third world
economies are backed by letters of credit.

                     Foreign Currency Translation

The functional currency of CPI's foreign subsidiaries is the U.S. dollar. Gains
or losses resulting from the translation into U.S. dollars of amounts
denominated in foreign currencies are included in the determination of net
income.

The aggregate transaction and exchange gains and losses were a $263,000 gain, a
$463,000 loss and a $296,000 loss for Fiscal 1998, Fiscal 1997 and Fiscal 1996,
respectively.

                     Fair Value of Financial Instruments

Financial instruments consist of cash and cash equivalents, accounts receivable,
accounts payable and long-term debt. The carrying value of CPI's cash and cash
equivalents, accounts receivable, 


                                     -F-12-
<PAGE>   52

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

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

and accounts payable approximate their fair values due to the relatively short
period to maturity of the instruments. The fair value of CPI's Senior
Subordinated Notes, based on quoted market prices or pricing models using
current market rates, has been quoted at a level of 105 1/4 as of December 1998.

                     Change in Accounting Estimate

During Fiscal 1998, CPI reviewed and revised downward its estimate of disposal
costs used in its calculation of lower of cost or market write-downs for
long-term contracts to more closely reflect its cost structure versus the
assumptions carried forward from the predecessor's operations for sales related
expenses. The change resulted in an increase to net income of approximately $1
million.

3.  BALANCE SHEET COMPONENTS

                     Accounts Receivable

Accounts receivable are stated net of allowances for doubtful accounts of
$636,000 and $282,000 as of October 2, 1998 and October 3, 1997, respectively.

                     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)                  1998            1997
                                            -------         -------
<S>                                         <C>             <C>    
Raw materials and parts                     $38,327         $36,814
Work in process                              13,572          12,274
Finished goods                                1,024           1,662
                                            -------         -------
Total inventories                           $52,923         $50,750
                                            =======         =======
</TABLE>



                                     -F-13-
<PAGE>   53


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

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


                     Property, Plant, and Equipment

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

<TABLE>
<CAPTION>
                                                  Fiscal Year
                                          ----------------------------
      (Dollars in thousands)                 1998               1997
                                          ---------          ---------
<S>                                       <C>                <C>      
Land and land leaseholds                  $  36,408          $  36,284
Buildings                                    18,732             17,989
Machinery and equipment                      42,556             38,121
Leased equipment                              3,129              1,584
Construction in progress                      2,808              1,736
                                          ---------          ---------
Subtotal                                    103,633             95,714
Less accumulated depreciation
        and amortization                    (25,534)           (15,720)
                                          ---------          ---------
Net property, plant and equipment         $  78,099          $  79,994
                                          =========          =========
</TABLE>


Accumulated amortization of equipment under capital lease arrangements was
$547,000 and $33,000 as of October 2, 1998 and October 3, 1997, respectively,
and is included in depreciation expense on the statement of cash flows.

                     Accrued Expenses

Accrued expenses are comprised of the following:


<TABLE>
<CAPTION>
                                             Fiscal Year
                                      -----------------------
      (Dollars in thousands)            1998            1997
                                      -------         -------
<S>                                   <C>             <C>    
Taxes                                 $   818         $   586
Payroll and employee benefits           9,417           9,939
Accrued interest                        2,520           2,483
Other                                   2,857           2,080
                                      -------         -------
Total accrued expenses                $15,612         $15,088
                                      =======         =======
</TABLE>

4.   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 sub-facility for letters of credit. This sub-facility was
increased from $5.0 million to $7.5 million effective June 27, 1997.
Availability of advances under the Revolving Credit Facility is subject to a
borrowing base test. CPI's obligations 



                                     -F-14-
<PAGE>   54

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

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


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
October 2, 1998, CPI had $16.4 million available under the Revolving Credit
Facility of which $2.2 million was available for issuance of letters of credit.
As of October 6, 1998, the Company amended this Agreement and increased the
Revolving Credit Facility by $10.0 million to allow CPI to operate with a
similar level of liquidity as it had prior to its acquisition of the Microwave
Components Division of Aydin Corporation that was also completed on October 6,
1998.

Borrowings under the Revolving Credit Facility and Term Loan A bear interest at
a rate equal to the Eurodollar Rate (approximately 5.65% as of October 2, 1998)
plus 2.5% per annum or the Base Rate (8.25% as of October 2, 1998) 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 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 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>    
     1999         $ 6,000         $   200
     2000           7,500             200
     2001              --           6,050
     2002              --          10,000
     2003              --              --
                  -------         -------
                  $13,500         $16,450
                  =======         =======
</TABLE>

As of October 2, 1998, CPI had made payments of $11.5 million against Term Loan
A and $0.55 million against Term Loan B, of which, $5.5 million and $0.2 million
were paid in Fiscal 1998 against Term Loan A and Term Loan B, respectively.

The Revolving Credit Facility matures on August 11, 2000. 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 



                                     -F-15-
<PAGE>   55

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

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


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 October 2, 1998, CPI was in
compliance with all covenants.

5.  SENIOR SUBORDINATED NOTES

The $100 million principal amount of Senior Subordinated Notes mature in 2005
and bear interest at 12% per annum, payable semiannually. 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, 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>

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.



                                     -F-16-
<PAGE>   56

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

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


6.  SENIOR REDEEMABLE PREFERRED STOCK

CPI is authorized to issue up to 325,000 shares of nonvoting Series B 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.

During the year ended October 2, 1998, CPI paid preferred dividends through the
issuance of 29,029 shares of its Senior Redeemable Preferred Stock at a value of
$100 per share.

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. 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



                                     -F-17-
<PAGE>   57

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

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


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.

7.  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 October 2, 1998, CPI paid preferred dividends through the
issuance of 19,354 shares of its Junior Preferred Stock at a value of $100 per
share .

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.

8. SUPPLEMENTAL CASH FLOW INFORMATION

Cash paid for interest was $16.4 million, $17.1 million, and $16.9 million in
Fiscal 1998, Fiscal 1997, and Fiscal 1996, respectively. Cash paid for taxes was
$1.1 million, $1.7 million, and $524,000 in Fiscal 1998, Fiscal 1997 and Fiscal
1996, respectively.

Non-cash financing activities included the payment of preferred dividends by CPI
on its Senior Redeemable Preferred Stock and its Junior Preferred Stock through
the issuance of 29,029, 25,297 and 21,482 additional shares of its Senior
Redeemable Preferred Stock and 19,354, 16,865 and 14,321 additional shares of
its Junior Preferred Stock during Fiscal 1998, Fiscal 1997 and Fiscal 1996,
respectively. Amortization of discount and issue costs on the Senior Redeemable
Preferred Stock was $214,000 for each of the three years Fiscal 1998, Fiscal
1997, and Fiscal 1996. 



                                     -F-18-
<PAGE>   58

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

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


Equipment of $1.5 million and $1.6 million was acquired under capital leases for
Fiscal 1998 and Fiscal 1997, respectively.

9.  LEASE COMMITMENTS
At October 2, 1998, CPI was committed to minimum rentals under noncancellable
operating lease agreements primarily for land and facility space. CPI also
leases certain computer equipment under capital leases that expire in 2003. As
collateral for these capital leases, CPI has issued letters of credit totalling
$1.5 million. A summary of future minimum lease payments (in thousands) follows:

<TABLE>
<CAPTION>
                                                                             Capital        Operating            Sublease
     Fiscal Year                                                              Leases           Leases              Income
     -----------                                                             -------        ---------            --------
<S>                                                                          <C>            <C>                  <C>      
     1999                                                                       $972            1,053            $     487
     2000                                                                        989              376                   -
     2001                                                                        989              296                   -
     2002                                                                        841              147                   -
     2003                                                                        104               62                   -
     Thereafter                                                                   -                 5                   -
                                                                             -------        ---------            --------
     Total future minimum lease payments                                       3,895        $   1,939            $    487
                                                                             =======        =========            ========
     Less amount representing interest, sales tax
       and additional obligations                                                806
                                                                             -------
     Present value of future minimum lease                                     3,089
       payments
     Less current portion of obligations under
       capital leases                                                            541
                                                                             -------
     Obligations under capital leases, less current
       portion                                                                $2,548
                                                                              ======
</TABLE>


Real estate taxes, insurance, and maintenance are also obligations of CPI.
Rental expense under noncancellable operating leases amounted to $721,000,
$734,000, and $777,000 for Fiscal 1998, Fiscal 1997, and Fiscal 1996,
respectively.

10.  CONTINGENCIES

The amount of outstanding letters of credit provided for under CPI's Senior
Credit Agreement was approximately $5.3 million as of October 2, 1998. These
outstanding obligations are comprised of the following: $2.0 million to one
foreign customer related to an advance payment guarantee, $1.5 million to two
lenders related to capital lease arrangements and $1.8 million to various other
beneficiaries related primarily to insurance needs and performance bond
guarantees.

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



                                     -F-19-
<PAGE>   59

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

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


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, CPI 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.

11.  SEGMENTS AND RELATED INFORMATION

CPI operates in a single business segment under the guidance of SFAS No. 14. 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 North American operations (in the United States and Canada) are
responsible for the design and development of all products as well as
manufacturing and shipping to meet worldwide customer commitments. CPI's
operations outside of North America consist of sales offices in certain foreign
countries. Accordingly, for financial statement purposes, it is not meaningful
to segregate operating profits for the foreign operations. Identifiable assets
outside of North America are less than 10% of total consolidated assets.
Information about CPI's sales to geographical regions are presented in the table
below. Sales to unaffiliated customers is based on the location of the customer.



                                     -F-20-
<PAGE>   60

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

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

<TABLE>
<CAPTION>
                                                 Net Sales
                                 ------------------------------------------
(Dollars in thousands)            Fiscal           Fiscal           Fiscal
                                   1998             1997             1996
                                 --------         --------         --------
<S>                              <C>              <C>              <C>     
United States & Canada           $163,472         $173,593         $171,656
Europe & Territories (1)           70,811           57,368           54,733
Other                              26,405           22,478           31,060
                                 --------         --------         --------
Total CPI Sales                  $260,688         $253,439         $257,449
                                 ========         ========         ========
</TABLE>

(1)  Includes primarily Europe, Russia, Middle East and India.

Export sales to unaffiliated customers located outside of North America,
including Japan, Asia, Australia and South America, were $31.5 million, $24.2
million, and $27.6 million for Fiscal 1998, Fiscal 1997 and Fiscal 1996,
respectively.

The U.S. Government is the only customer who accounted for 10% or more of
consolidated net sales in Fiscal 1998, Fiscal 1997 and Fiscal 1996. Sales under
prime contracts to the U.S. Government accounted for approximately $35.5
million, $34.0 million and $41.9 million of the Company's consolidated revenues
for Fiscal 1998, Fiscal 1997 and Fiscal 1996, respectively.


12.  RESEARCH AND DEVELOPMENT

CPI-sponsored research and development costs related to both present and future
products are expensed currently. Customer-sponsored research and developments
costs are charged to cost of sales to match revenue received. Total expenditures
incurred by CPI on research and development are summarized as follows:


<TABLE>
<CAPTION>
                                                  CPI          Customer         Total
   (Dollars in thousands)                      Sponsored       Sponsored        Incurred
                                               ---------       ---------       ---------
<S>                                            <C>             <C>             <C>    
52-week period ended October 2, 1998            $ 7,455         $ 5,973         $13,428
53-week period ended October 3, 1997              7,681           5,897          13,578
52-week period ended September 27, 1996           8,308           7,250          15,558
</TABLE>




                                     -F-21-
<PAGE>   61

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

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


13.  PROVISION FOR INCOME TAXES

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


<TABLE>
<CAPTION>
                                  52-week        53-week         52-week
                                period ended   period ended     period ended
                                  October 2,    October 3,      September 27,
  (Dollars in thousands)           1998            1997            1996
                                ------------   ------------     -------------
<S>                              <C>             <C>             <C>    
Domestic                         $ 3,360         $ 7,381         $ 7,750
Non-U.S                            5,567           3,391           2,661
                                 -------         -------         -------
Total                            $ 8,927         $10,772         $10,411
                                 =======         =======         =======
</TABLE>


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


<TABLE>
<CAPTION>
                                              52-week           53-week          52-week
                                            period ended      period ended      period ended
                                             October 2,        October 3,       September 27,
         (Dollars in thousands)                1998              1997              1996
                                            ------------      ------------      -------------
<S>                                         <C>               <C>               <C>     
CURRENT
  U.S. federal                               $     80          $  1,677          $  9,257
  State                                          (571)              573             1,957
  Non-U.S                                         632             1,113               606
                                             --------          --------          --------
    Total Current                                 141             3,363            11,820
                                             --------          --------          --------
DEFERRED
  U.S. federal                                  3,677            (5,699)           (8,844)
  State                                          (545)           (1,098)           (1,154)
  Non-U.S                                         477               434               246
                                             --------          --------          --------
    Total Deferred                              3,609            (6,363)           (9,752)
                                             --------          --------          --------
Provision (benefit) for income taxes         $  3,750          $ (3,000)         $  2,068
                                             ========          ========          ========
</TABLE>



                                     -F-22-
<PAGE>   62

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

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


The significant components of the CPI's deferred tax assets and liabilities are
as follows:


<TABLE>
<CAPTION>
                                                   Fiscal Year
          (Dollars in thousands)             1998              1997
                                           --------          --------
<S>                                        <C>               <C>     
DEFERRED TAX ASSETS:
  Inventory                                $  4,724          $  4,770
  Product warranty                            3,945             2,523
  Accrued vacation                            2,193             1,999
  Deferred compensation                          62               525
  Excess purchase price                      10,359            10,426
  Foreign tax credits                         1,193                --
  Other                                          --             2,124
                                           --------          --------
    Total deferred tax assets                22,476            22,367
DEFERRED TAX LIABILITIES:
  Accelerated depreciation                   (4,983)           (2,645)
  Foreign jurisdictions, net                 (1,158)             (681)
  Other                                      (1,186)               --
                                           --------          --------
    Total deferred tax liabilities           (7,327)           (3,326)

Net deferred tax asset                     $ 15,149          $ 19,041
                                           ========          ========
</TABLE>


CPI has unutilized U.S. Federal foreign tax credits of $1,193,000 at the end of
Fiscal 1998. The Federal foreign tax credits may be carried back two years and
forward five years.

Based upon the level of historical taxable income and projections for future
taxable income, management believes that no valuation allowance is necessary at
the end of Fiscal 1998 and Fiscal 1997.



                                     -F-23-
<PAGE>   63

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

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


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


<TABLE>
<CAPTION>
                                                  52-week          53-week            52-week
                                                period ended     period ended       period ended
                                                  October 2,       October 3,       September 27,
                                                    1998             1997              1996
                                                ------------     ------------       -------------
<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                                --              6.4%              4.9%
Rate differential on foreign income tax
    expense (benefit) and withholding tax             2.0%             3.0%               .2%
Foreign sales corporation                              --               --              (2.8%)
Change to the beginning of year
    valuation allowance                                --            (74.3%)           (19.2%)
Other                                                 5.0%             2.0%              1.8%
                                                   ------           ------            ------
Effective tax rate                                   42.0%           (27.9%)            19.9%
                                                   ======           ======            ======
</TABLE>


14.  RETIREMENT AND PROFIT SHARING PLANS

CPI provides a qualified 401(k) investment plan covering substantially all of
its domestic and Canadian employees. The plan provides for CPI to contribute an
amount based on a percentage of each participant's base pay. CPI also has a
Non-Qualified Deferred Compensation Plan (the "Non-Qualified Plan") that allows
eligible executives and directors to defer a portion of their compensation.
Participant contributions and CPI matching contributions to the Non-Qualified
Plan are always 100% vested. The deferred compensation liability amounted to
approximately $434,000 and $314,000 as of October 2, 1998 and October 3, 1997,
respectively.

Total contributions to these plans by CPI was $2.6 million for Fiscal 1998, $2.5
million for Fiscal 1997, and $2.6 million for Fiscal 1996.

CPI's bonus program 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.




                                     -F-24-
<PAGE>   64

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

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


15.  TRANSACTIONS WITH VARIAN

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

<TABLE>
<CAPTION>
                                                 52-week                  53-week                    52-week
                                              period ended             period ended                period ended
            (Dollars in thousands)           October 2, 1998          October 3, 1997           September 27, 1996
                                             ---------------          ---------------           ------------------
<S>                                          <C>                      <C>                       <C>    
       Sales to Varian                           $9,652                    $9,234                     $12,809
       Purchases from Varian                      5,054                     5,742                       5,171
</TABLE>


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. A summary of the
significant agreements still in effect at the end of Fiscal 1998 are as follows:

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 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 identify its products as "formerly made by Varian"
for a period of ten years from the closing of the Acquisition. 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.

16.  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.



                                     -F-25-
<PAGE>   65

                    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 Holding's 1995 Management Equity Plan, certain executive
officers of CPI and Holding elected to pay a portion of the purchase price for
their Management Shares by delivery of a secured promissory note to Holding. The
aggregate principle amount of such Management Notes was $895,376 as of October
2, 1998. Of this amount, $700,000 is secured by a pledge of a portion (from 50%
to 75%) of the Management Shares issued to each executive officer and is
guaranteed by Varian. The balance of $195,376 is secured by a pledge of
approximately 91% of the Management Shares issued, but is not guaranteed by
Varian. Outstanding principal under each type of Management Note bears interest
at an annually adjustable rate equal to the "Applicable Federal Rate" in effect
under Internal Revenue Code Section 1274(d) for obligations of a term equal to
the then-remaining term of such note. Recourse by Holding under both types of
Management Notes is limited to the Management Shares pledged to secure the
applicable note.

17.  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 October 2, 1998 and October 3, 1997 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>
                                                                                     October 2,          October 3,
                  ASSETS                                                               1998                1997
                                                                                     ---------           ---------
<S>                                                                                  <C>                   <C>    
Current Assets                                                                       $ 111,276             113,457
Long-term Assets                                                                       117,936             123,939
                                                                                     ---------           ---------

   Total assets                                                                      $ 229,212             237,396
                                                                                     =========           =========

           LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities                                                                  $  65,319              72,990
Long-term debt and deferred taxes                                                      126,298             131,534
                                                                                     ---------           ---------

   Total liabilities                                                                   191,617             204,524

Senior Redeemable Preferred Stock of subsidiary                                         20,683              17,566
Junior Preferred Stock of subsidiary                                                    14,400              12,465
Stockholders' Equity:
  Common stock ($.01 par value, 400,000 shares authorized,
      197,270 and 199,350 shares issued and outstanding as of 1998 and 1997                  2                   2
   Additional paid-in capital                                                           19,181              19,677
   Accumulated deficit                                                                 (15,614)            (15,738)
   Less stockholder loans                                                               (1,057)             (1,100)
                                                                                     ---------           ---------

        Total Liabilities and stockholders' equity                                   $ 229,212             237,396
                                                                                     =========           =========
</TABLE>



                                     -F-26-
<PAGE>   66

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

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


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.

18.  SUBSEQUENT EVENTS

On October 6, 1998, CPI completed the acquisition of the Microwave Components
Division ("MCD") of Aydin Corporation for approximately $8.8 million. The
purchase was based on MCD net assets of approximately $2.4 million and is
subject to adjustment based on a final closing balance sheet. In the future,
this acquisition will be identified as the Solid State Products Division of CPI.




                                     -F-27-

<PAGE>   67
                        COMMUNICATIONS & POWER INDUSTRIES
                               HOLDING CORPORATION
                                and subsidiaries

                          INDEPENDENT AUDITORS' 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") as of October
2, 1998 and October 3, 1997, and the related consolidated statements of
operations, stockholders' equity (deficit), and cash flows for the 52-week
period ended October 2, 1998, the 53-week period ended October 3, 1997 and the
52-week period ended September 27, 1996. 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.

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 October 2, 1998 and
October 3, 1997, the results of their operations and their cash flows for the
52-week period ended October 2, 1998, the 53-week period ended October 3, 1997,
and the 52-week period ended September 27, 1996, 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
Mountain View, California
November 13, 1998





                                     -F-28-
<PAGE>   68


                       COMMUNICATIONS & POWER INDUSTRIES
                              HOLDING CORPORATION
                                and subsidiaries
                           CONSOLIDATED BALANCE SHEETS
                      (in thousands, except per share data)

<TABLE>
<CAPTION>

                                                                                       October 2,        October 3,
                                   ASSETS                                                  1998              1997
                                                                                        ---------         ---------
<S>                                                                                     <C>                   <C>  
CURRENT ASSETS
     Cash and cash equivalents                                                          $     448             2,027
     Accounts receivable, net                                                              49,484            52,326
     Inventories                                                                           52,923            50,750
     Deferred taxes                                                                         6,981             7,133
     Other current assets                                                                   1,440             1,221
                                                                                        ---------         ---------
        Total current assets                                                              111,276           113,457

Property, plant, and equipment, net                                                        78,099            79,994
Goodwill and other intangibles, net                                                        25,147            24,144
Debt issue costs, net                                                                       6,522             7,893
Deferred taxes                                                                              8,168            11,908
                                                                                        ---------         ---------
        Total assets                                                                    $ 229,212           237,396
                                                                                        =========         =========
LIABILITIES, SENIOR REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES
     Revolving credit facility                                                          $  13,300            22,800
     Current portion of term loans                                                          6,200             5,700
     Current portion of capital leases                                                        541                --
     Accounts payable - trade                                                              13,140            10,419
     Accrued expenses                                                                      15,612            15,088
     Product warranty                                                                       3,734             4,211
     Income taxes payable                                                                  10,259            11,975
     Advance payments from customers                                                        2,533             2,797
                                                                                        ---------         ---------
        Total current liabilities                                                          65,319            72,990

Senior term loans                                                                          23,750            29,950
Senior subordinated notes                                                                 100,000           100,000
Obligations under capital leases                                                            2,548             1,584
                                                                                        ---------         ---------
        Total liabilities                                                                 191,617           204,524
                                                                                        ---------         ---------
SENIOR REDEEMABLE PREFERRED STOCK ($.01 par value, 325,000 shares authorized;
     225,808 and 196,779 shares issued and outstanding as of 1998 an 1997,
     respecively, liquidiation preference $100 per share)                                  20,683            17,566
                                                                                        ---------         ---------
JUNIOR PREFERRED STOCK OF SUBSIDIARY ($.01 par value, 525,000 shares authorized:
     150,540 and 131,186 shares issued and outstanding as of 1998 and 1997,
     respectively, liquidiation preference $100 per share)
Commitments and contingencies                                                              14,400            12,465
                                                                                        ---------         ---------
STOCKHOLDERS' EQUITY
     Common stock ($.01 par value, 400,000 shares authorized; 197,270 and 199,350
        shares issued and outstanding as of 1998 and 1997, respectively)                        2                 2
     Additional paid-in capital                                                            19,181            19,677
     Accumulated deficit                                                                  (15,614)          (15,738)
     Stockholder loans                                                                     (1,057)           (1,100)
                                                                                        ---------         ---------
        Net stockholders' equity                                                            2,512             2,841
        Total liabilities, senior redeemable preferred stock and stockholders' equity   $ 229,212           237,396
                                                                                        =========         =========
</TABLE>
See accompanying notes to the consolidated financial statements.

                                     -F-29-
<PAGE>   69

                        COMMUNICATIONS & POWER INDUSTRIES
                               HOLDING CORPORATION
                                and subsidiaries
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                 (in thousands)
<TABLE>
<CAPTION>

                                                       52-Week            53-Week           52-Week
                                                     period ended      period ended       period ended
                                                      October 2,        October 3,        September 27,
                                                         1998              1997               1996
                                                       --------          --------           --------

<S>                                                  <C>                <C>                <C>    
Sales                                                  $260,688           253,439            257,449
Cost of sales                                           194,410           183,678            184,482
                                                       --------          --------           --------

Gross profit                                             66,278            69,761             72,967
                                                       --------          --------           --------

Operating costs and expenses:
  Research and development                                7,455             7,681              8,308
  Selling and marketing                                  19,168            19,701             19,886
  General and administrative                             12,935            12,568             15,468
                                                       --------          --------           --------
Total operating costs and expenses                       39,558            39,950             43,662
                                                       --------          --------           --------

Operating income                                         26,720            29,811             29,305

Interest expense                                         17,793            19,039             18,894
                                                       --------          --------           --------
Earnings before taxes                                     8,927            10,772             10,411

Income tax expense (benefit)                              3,750            (3,000)             2,068
                                                       --------          --------           --------

Net earnings before preferred stock dividends             5,177            13,772              8,343
   of subsidiary

Preferred dividends:
  Senior Redeemable Preferred Stock                       2,904             2,530              2,148
  Junior Preferred Stock                                  1,935             1,686              1,432
                                                       --------          --------           --------
Net earnings attributable to Common Stock              $    338             9,556              4,763
                                                       --------          --------           --------
</TABLE>

See accompanying notes to the consolidated financial statements.


                                     -F-30-


<PAGE>   70
                        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     Equity
                                                Stock       Capital        Deficit        Loans        (Deficit)
                                              --------      --------      --------      --------      --------

<S>                                           <C>          <C>           <C>           <C>           <C>     
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
   Redeemable 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)

Amortization of discount and issue costs
 on Senior Redeemable Preferred Stock                                         (214)                       (214)
Payment of dividends on Senior
   Redeemable Preferred Stock                                               (2,530)                     (2,530)
Payment of dividends on Junior
   Preferred Stock                                                          (1,686)                     (1,686)
Net earnings                                                                13,772                      13,772
Interest accrued on stockholder loans                                                        (58)          (58)
Purchase of Treasury Stock                                       (64)                                      (64)
                                              --------      --------      --------      --------      --------
Balances, October 3, 1997                            2        19,677       (15,738)       (1,100)        2,841

Amortization of discount and issue costs
   on Senior Redeemable Preferred Stock                                       (214)                       (214)
Payment of dividends on Senior
   Redeemable Preferred Stock                                               (2,904)                     (2,904)
Payment of dividends on Junior
   Preferred Stock                                                          (1,935)                     (1,935)
Net earnings                                                                 5,177                       5,177
Repayment of stockholder loans                                                                80            80
Interest accrued on stockholder loans                                                        (37)          (37)
Issuance of Treasury Stock                                       696                                       696
Purchase of Treasury Stock                                    (1,192)                                   (1,192)
                                              --------      --------      --------      --------      --------

Balances, October 2, 1998                     $      2        19,181       (15,614)       (1,057)        2,512
                                              ========      ========      ========      ========      ========
</TABLE>

See accompanying notes to the consolidated financial statements 


                                     -F-31-

<PAGE>   71

                        COMMUNICATIONS & POWER INDUSTRIES
                               HOLDING CORPORATION
                                and subsidiaries
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (in thousands)
<TABLE>
<CAPTION>

                                                              52-Week          53-Week        52-Week
                                                           period ended     period ended    period ended
                                                            October 2,       October 3,      September 27,
                                                                1998            1997            1996
                                                              --------        --------        --------
<S>                                                        <C>              <C>             <C>   
OPERATING ACTIVITIES
    Net cash provided by operating activities                 $ 23,309           5,320          11,290
                                                              --------        --------        --------

INVESTING ACTIVITIES
    Proceeds from sale of
         property, plant and equipment                              61           2,545              --
    Purchase of property, plant, and equipment                  (6,565)         (9,183)        (12,472)
    Product line acquisitions                                   (2,730)             --              --
    Other investing activities                                      --              --            (114)
                                                              --------        --------        --------
    Net cash used in investing activities                       (9,234)         (6,638)        (12,586)
                                                              --------        --------        --------

FINANCING ACTIVITIES
    Repayments on capital leases                                   (38)             --              --
    Net (Repayments)/Proceeds from revolving credit
         facility                                               (9,500)          5,800          (2,600)
    Repayments on Senior term loans                             (5,700)         (3,950)         (2,400)
    Repayments on debt issuance costs                               --            (194)           (243)
    Issuance of treasury stock                                     696              --              --
    Purchases on treasury stock                                 (1,192)            (64)             --
    Repayments of stockholder loans                                 80              --              25
                                                              --------        --------        --------
    Net cash provided by (used in) financing activities        (15,654)          1,592          (5,218)
                                                              --------        --------        --------

NET INCREASE (DECREASE) IN
  CASH AND CASH EQUIVALENTS                                     (1,579)            274          (6,514)
Cash and cash equivalents at beginning of period                 2,027           1,753           8,267
                                                              --------        --------        --------

Cash and cash equivalents at end of period                    $    448           2,027           1,753
                                                              ========        ========        ========
</TABLE>


See accompanying notes to the consolidated financial statements.



                                     -F-32-

<PAGE>   72

                        COMMUNICATIONS & POWER INDUSTRIES
                               HOLDING CORPORATION
                                and subsidiaries
                CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
                                 (in thousands)
<TABLE>
<CAPTION>

                                                       52-Week         53-Week         52-Week
                                                    period ended    period ended     period ended
                                                      October 2,      October 3,     September 27,
                                                         1998            1997            1996
                                                       --------        --------        --------

<S>                                                  <C>            <C>              <C>  
DETAIL OF NET CASH PROVIDED
  BY OPERATING ACTIVITIES
Net earnings before preferred                          $  5,177          13,772           8,343
  dividends of subsidiary
Adjustments to reconcile net earnings to
  net cash provided by operating activities:
    Depreciation                                          9,981           8,572           6,670
    Amortization of deferred debt issue costs             1,372           1,952           1,962
    Amortization of goodwill and intangibles              1,316           1,058           1,061
    Deferred taxes                                        3,892          (6,363)         (9,752)
    Interest accrued on stockholder loans                   (37)            (58)            (67)
    (Gain)/Loss on the disposition of assets                 32            (471)             --
    Changes in operating assets and liabilities:
         Accounts receivable                              2,842          (1,946)         (5,637)
         Inventories                                     (1,863)         (4,279)         (1,706)
         Other current assets                              (219)            913             433
         Accounts payable - trade                         2,721            (108)         (5,947)
         Accrued expenses                                   552          (7,283)          2,585
         Product warranty                                  (477)           (116)           (363)
         Income tax payable                              (1,716)          1,415          10,560
         Advance payments from customers                   (264)         (1,738)          3,148
                                                       --------        --------        --------
Net cash provided by operating activities              $ 23,309           5,320          11,290
                                                       ========        ========        ========
</TABLE>


See accompanying notes to the consolidated financial statements.


                                     -F-33-



<PAGE>   73



                        COMMUNICATIONS & POWER INDUSTRIES
                               HOLDING CORPORATION
                                and subsidiaries

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED



1.  NATURE OF OPERATIONS

Communications & Power Industries Holding Corporation ("Holding"), through its
wholly owned subsidiary, Communications & Power Industries, Inc. ("CPI", both
companies together referred to as "the Company") develops, manufactures and
distributes microwave and power grid vacuum electronic devices, microwave
amplifiers, modulators and various other power supply equipment and devices. The
Company operates six manufacturing locations in North America, and sells and
services its products and customers worldwide primarily through a direct sales
force.

In August 1995, CPI acquired substantially all of the assets of Varian
Associates, Inc.'s ("Varian's") Electron Device business ("the Acquisition") and
then was merged with a wholly owned subsidiary of Communications & Power
Industries Holding Corporation, a corporation newly formed by a group of
investors, including management of Holding and CPI. The Acquisition was
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. 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.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

                  Basis of Presentation

The accompanying consolidated financial statements include the accounts of
Holding and its direct and indirect wholly owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.

The Company's fiscal years are the 52- or 53-week periods which end on the
Friday nearest September 30. All references to years in these notes to
consolidated financial statements represent fiscal year unless otherwise noted.

                  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.

                  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-34-
<PAGE>   74



                        COMMUNICATIONS & POWER INDUSTRIES
                               HOLDING CORPORATION
                                and subsidiaries

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED



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

                  Property, Plant, and Equipment

Property, plant, and equipment acquired by the Company at the date of the
Acquisition are carried at fair value as of the date of acquisition. Property,
plant and equipment are stated at cost. Major improvements are capitalized,
while maintenance and repairs are expensed currently. Plant and equipment are
depreciated over their estimated useful lives using the straight-line method.
Leasehold improvements are amortized using the straight-line method over their
estimated useful lives, or the remaining term of the lease, whichever is
shorter. Estimated useful lives of property, plant, and equipment are as
follows: land leaseholds, the life of the lease; buildings, 20 to 40 years;
machinery and equipment, 3 to 7 years.

                  Accounting for Long-Lived Assets

In accordance with Statement of Financial Accounting Standards ("SFAS") No. 121,
the Company reviews long-lived assets for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of long-lived assets is measured by comparison of
its carrying amount to future net cash flows expected to be generated from the
operation and sale of long-lived assets. If such assets are considered to be
impaired, the Company's carrying value is reduced to its estimated fair value.

Goodwill represents the excess of the purchase price over the fair value of the
net assets acquired. The Company assesses the recoverability of the carrying
amount of goodwill by determining whether the carrying amount of goodwill can be
recovered through undiscounted net cash flows of the acquired operation over the
remaining amortization period. If determined to be impaired, the carrying amount
is reduced to its estimated fair value which is based on an estimate of
discounted future net cash flows. Goodwill is being amortized on a straight-line
basis over estimated useful 


                                     -F-35-

<PAGE>   75

                        COMMUNICATIONS & POWER INDUSTRIES
                               HOLDING CORPORATION
                                and subsidiaries

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED



lives ranging from 15 to 25 years. Accumulated amortization was $3.6 million and
$2.3 million as of October 2, 1998 and October 3, 1997, respectively.

During Fiscal 1998, CPI acquired two product lines with net assets of
approximately $0.4 million for a purchase price of approximately $2.7 million.
The $2.3 million difference between the purchase price and the fair value of the
net assets acquired was allocated to goodwill and other intangibles and will be
amortized over estimated useful lives ranging from 3 to 15 years. These product
line acquisitions were accounted for as a purchase.

                  Warranty

The Company's products are generally warranted for a variety of periods,
typically one to five years or a predetermined product usage life. A provision
for 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 the Company during Fiscal
1998, Fiscal 1997 or Fiscal 1996. Varian retained the environmental liabilites
existing at the time of the Acquisition

                  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 accumulated deficit over the period until mandatory redemption, 12 years,
using the effective interest method.

                  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 provision for income taxes 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. 

                                     -F-36-


<PAGE>   76



                        COMMUNICATIONS & POWER INDUSTRIES
                               HOLDING CORPORATION
                                and subsidiaries

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED



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.

                  Business Risks and Credit Concentrations

Defense-related applications such as certain radar, electronic countermeasures
and military communications constitute a significant portion of the Company's
sales. 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 and/or volatility in the world's industrial economies may
significantly affect management's estimates and the Company's performance.

Generally, the Company requires no collateral from its customers and 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 affect the Company's estimate of its bad debts.
Historical credit losses have been within management's expectations and most
transactions to third world economies are backed by letters of credit.

                  Foreign Currency Translation

The functional currency of the Company's foreign subsidiaries is the U.S.
dollar. Gains or losses resulting from the translation into U.S. dollars of
amounts denominated in foreign currencies are included in the determination of
net income.

The aggregate transaction and exchange gains and losses were a $263,000 gain, a
$463,000 loss and a $296,000 loss for Fiscal 1998, Fiscal 1997 and Fiscal 1996,
respectively.

                  Fair Value of Financial Instruments

Financial instruments consist of cash and cash equivalents, accounts receivable,
accounts payable and long-term debt. The carrying value of the Company's cash
and cash equivalents, accounts receivable and accounts payable approximate their
fair values due to the relatively short period to maturity of the instruments.
The fair value of CPI's Senior Subordinated Notes, based on quoted market prices
or pricing models using current market rates, has been quoted at a level of 105
1/4 as of December 1998.


                                     -F-37-


<PAGE>   77



                        COMMUNICATIONS & POWER INDUSTRIES
                               HOLDING CORPORATION
                                and subsidiaries

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED




                  Change in Accounting Estimate

During Fiscal 1998, the Company reviewed and revised downward its estimate of
disposal costs used in its calculation of lower of cost or market write-downs
for long-term contracts to more closely reflect its cost structure versus the
assumptions carried forward from the predecessor's operations for sales related
expenses. The change resulted in an increase to net income of approximately $1
million.

3.  BALANCE SHEET COMPONENTS

                  Accounts Receivable

Accounts receivable are stated net of allowances for doubtful accounts of
$636,000 and $282,000 as of October 2, 1998 and October 3, 1997, respectively.

                  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)        1998        1997
                            -------     -------
<S>                         <C>         <C>    
Raw materials and parts     $38,327     $36,814
Work in process              13,572      12,274
Finished goods                1,024       1,662
                            -------     -------
Total inventories           $52,923     $50,750
                            =======     =======
</TABLE>


                  Property, Plant, and Equipment

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


<TABLE>
<CAPTION>

                                              Fiscal Year
         (Dollars in thousands)            1998           1997
                                      ---------      ---------
<S>                                   <C>               <C>   
Land and land leaseholds              $  36,408         36,284
Buildings                                18,732         17,989
Machinery and equipment                  42,556         38,121
Leased equipment                          3,129          1,584
Construction in progress                  2,808          1,736
                                      ---------      ---------
Subtotal                                103,633         95,714
Less accumulated depreciation
        and amortization                (25,534)       (15,720)
                                      ---------      ---------
Net property, plant and equipment     $  78,099         79,994
                                      =========      =========
</TABLE>

                                      F-38
<PAGE>   78

                        COMMUNICATIONS & POWER INDUSTRIES
                               HOLDING CORPORATION
                                and subsidiaries

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


Accumulated amortization of equipment under capital lease arrangements was
$547,000 and $33,000 as of October 2, 1998 and October 3, 1997, respectively,
and is included in depreciation expense on the statement of cash flows.

                  Accrued Expenses

Accrued expenses are comprised of the following:
<TABLE>
<CAPTION>

                                         Fiscal Year
         (Dollars in thousands)        1998        1997
                                    -------     -------

<S>                                 <C>         <C>    
Taxes                               $   818     $   586
Payroll and employee benefits         9,417       9,939
Accrued interest                      2,520       2,483
Other                                 2,857       2,080
                                    -------     -------
Total accrued expenses              $15,612     $15,088
                                    =======     =======
</TABLE>


4.  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 sub-facility for letters of credit. This sub-facility was
increased from $5.0 million to $7.5 million effective June 27, 1997.
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 October 2, 1998, CPI had $16.4
million available under the Revolving Credit Facility of which $2.2 million was
available for issuance of letters of credit. As of October 6, 1998, the Company
amended this Agreement and increased the Revolving Credit Facility by $10.0
million to allow CPI to operate with a similar level of liquidity as it had
prior to its acquisition of the Microwave Components Division of Aydin
Corporation that was also completed on October 6, 1998.

Borrowings under the Revolving Credit Facility and Term Loan A bear interest at
a rate equal to the Eurodollar Rate (approximately 5.65% as of October 2, 1998)
plus 2.5% per annum or the Base Rate (8.25% as of October 2, 1998) 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 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.


                                     -F-39-

<PAGE>   79

                        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>    
       1999         $ 6,000     $   200
       2000           7,500         200
       2001              --       6,050
       2002              --      10,000
       2003              --          --
                    -------     -------
                    $13,500     $16,450
                    =======     =======
</TABLE>

As of October 2, 1998, CPI had made payments of $11.5 million against Term Loan
A and $0.55 million against Term Loan B, of which, $5.5 million and $0.2 million
were paid in Fiscal 1998 against Term Loan A and Term Loan B, respectively.

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 October 2, 1998, CPI was in compliance with all covenants.

5.  SENIOR SUBORDINATED NOTES

The $100 million principal amount of Senior Subordinated Notes mature in 2005
and bear interest at 12% per annum, payable semiannually. 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, 


                                     -F-40-

<PAGE>   80

                        COMMUNICATIONS & POWER INDUSTRIES
                               HOLDING CORPORATION
                                and subsidiaries

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED



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, 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>

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.

6.  SENIOR REDEEMABLE PREFERRED STOCK

CPI is authorized to issue up to 325,000 shares of nonvoting Series B 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.

During the year ended October 2, 1998, CPI paid preferred dividends through the
issuance of 29,029 shares of its Senior Redeemable Preferred Stock at a value of
$100 per share.

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. 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.


                                     -F-41-

<PAGE>   81

                        COMMUNICATIONS & POWER INDUSTRIES
                               HOLDING CORPORATION
                                and subsidiaries

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


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.

7.  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 October 2, 1998, CPI paid preferred dividends through the
issuance of 19,354 shares of its Junior Preferred Stock at a value of $100 per
share.


                                     -F-42-
<PAGE>   82

                        COMMUNICATIONS & POWER INDUSTRIES
                               HOLDING CORPORATION
                                and subsidiaries

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED



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.

8.  SUPPLEMENTAL CASH FLOW INFORMATION

Cash paid for interest was $16.4 million, $17.1 million, and $16.9 million in
Fiscal 1998, Fiscal 1997, and Fiscal 1996, respectively. Cash paid for taxes was
$1.1 million, $1.7 million, and $524,000 in Fiscal 1998, Fiscal 1997 and Fiscal
1996, respectively.

Non-cash financing activities included the payment of preferred dividends by CPI
on its Senior Redeemable Preferred Stock and its Junior Preferred Stock through
the issuance of 29,029, 25,297 and 21,482 additional shares of its Senior
Redeemable Preferred Stock and 19,354, 16,865 and 14,321 additional shares of
its Junior Preferred Stock during Fiscal 1998, Fiscal 1997 and Fiscal 1996,
respectively. Amortization of discount and issue costs on the Senior Redeemable
Preferred Stock was $214,000 for each of the three years Fiscal 1998, Fiscal
1997 and Fiscal 1996. Equipment of $1.5 million and $1.6 million was acquired
under capital leases for Fiscal 1998 and Fiscal 1997, respectively.


9.  LEASE COMMITMENTS

At October 2, 1998, the Company was committed to minimum rentals under
noncancellable operating lease agreements primarily for land and facility space.
The Company also leases certain computer equipment under capital leases that
expire in 2003. As collateral for these capital leases, the Company has issued
letters of credit totalling $1.5 million. A summary of future minimum lease
payments (in thousands) follows:
<TABLE>
<CAPTION>

                                                                    Capital    Operating    Sublease
         Fiscal Year                                                 Leases       Leases      Income
         -----------                                                 ------       ------      ------
<S>                                                              <C>          <C>          <C> 
         1999                                                          $972       $1,053        $487
         2000                                                           989          376          --
         2001                                                           989          296          --
         2002                                                           841          147          --
         2003                                                           104           62          --
         Thereafter                                                      --            5          --
                                                                 ----------  -----------  ----------
         Total future minimum lease payments                          3,895       $1,939        $487
                                                                             ===========  ==========
         Less amount representing interest, sales tax and
             additional obligations                                    806
                                                                 ---------
         Present value of future minimum lease  payments             3,089
         Less current portion of obligations under capital
             leases                                                    541
                                                                 ---------
         Obligations under capital leases, less current portion  $   2,548
                                                                 =========
</TABLE>
                                     -F-43-
<PAGE>   83

                        COMMUNICATIONS & POWER INDUSTRIES
                               HOLDING CORPORATION
                                and subsidiaries

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED



Real estate taxes, insurance, and maintenance are also obligations of the
Company. Rental expense under noncancellable operating leases amounted to
$721,000, $734,000, and $777,000 for Fiscal 1998, Fiscal 1997, and Fiscal 1996,
respectively.

10.  CONTINGENCIES

The amount of outstanding letters of credit provided for under CPI's Senior
Credit Agreement was approximately $5.3 million as of October 2, 1998. These
outstanding obligations are comprised of the following: $2.0 million to one
foreign customer related to an advance payment guarantee, $1.5 million to two
lenders related to capital lease arrangements and $1.8 million to various other
beneficiaries related primarily to insurance needs and performance bond
guarantees.

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.

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.


                                     -F-44-
<PAGE>   84

                        COMMUNICATIONS & POWER INDUSTRIES
                               HOLDING CORPORATION
                                and subsidiaries

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED



11.  SEGMENTS AND RELATED INFORMATION

The Company operates in a single business segment under the guidance of SFAS No.
14. 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 North American operations (in the United States and Canada) are
responsible for the design and development of all products as well as
manufacturing and shipping to meet worldwide customer commitments. CPI's
operations outside of North America consist of sales offices in certain foreign
countries. Accordingly, for financial statement purposes, it is not meaningful
to segregate operating profits for the foreign operations. Identifiable assets
outside of North America are less than 10% of total consolidated assets.
Information about CPI's sales to geographical regions are presented in the table
below. Sales to unaffiliated customers is based on the location of the customer.
<TABLE>
<CAPTION>

(Dollars in thousands)                    Net Sales
----------------------      ---------------------------------------
                               1998          1997          1996
                            ---------     ----------      ---------

<S>                         <C>            <C>           <C>      
United States & Canada      $ 163,472      $ 173,593     $ 171,656
Europe & Territories(1)        70,811        57,368        54,733
Other                          26,405         22,478        31,060
                            =========     ==========     =========
Total CPI Sales             $ 260,688      $ 253,439     $ 257,449
                            =========     ==========     =========
</TABLE>

(1) Includes primarily Europe, Russia, Middle East and India.


Export sales to unaffiliated customers located outside of North America,
including Japan, Asia, Australia and South America, were $ 31.5 million, $24.2
million, and $27.6 million for Fiscal 1998, Fiscal 1997, Fiscal 1996,
respectively.

The U.S. Government is the only customer who accounted for 10% or more of
consolidated net sales in Fiscal 1998, Fiscal 1997 and Fiscal 1996. Sales under
prime contracts to the U.S. Government accounted for approximately $35.5
million, $34.0 million and $41.9 million of the Company's consolidated revenues
for Fiscal 1998, Fiscal 1997 and Fiscal 1996, respectively.

12.  RESEARCH AND DEVELOPMENT

Company-sponsored research and development costs related to both present and
future products are expensed currently. Customer-sponsored research and
development costs are charged to cost of sales to match revenue received. Total
expenditures incurred by the Company on research and development are summarized
as follows:
<TABLE>
<CAPTION>

                                                              CPI          Customer       Total
                   (Dollars in thousands)                    Sponsored      Sponsored     Incurred
                   ----------------------                    ---------   ------------  -----------
<S>                                                          <C>         <C>           <C>    
      52-week period ended October 2, 1998                       $7,455        $5,973      $13,428
      53-week period ended October 3, 1997                        7,681         5,897       13,578
      52-week period ended September 27, 1996                     8,308         7,250       15,558
</TABLE>

                                     -F-45-
<PAGE>   85

                        COMMUNICATIONS & POWER INDUSTRIES
                               HOLDING CORPORATION
                                and subsidiaries

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED



13.  PROVISION FOR INCOME TAXES

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

                                         52-week          53-week           52-week
                                      period ended      period ended      period ended
           (Dollars in thousands)       October 2,       October 3,      September 27,
           ----------------------         1998             1997              1996
                                     ---------------  ---------------   ----------------
<S>                                  <C>              <C>               <C>             
          Domestic                   $         3,360  $          7,381  $          7,750
          Non-U.S.                             5,567            3,391              2,661
                                     ---------------  ---------------   ----------------
          Total                       $        8,927   $       10,772     $       10,411
                                     ===============  ===============   ================

</TABLE>


The provision (benefit) for income taxes is comprised of the following:
<TABLE>
<CAPTION>

                                            52-week          53-week            52-week
                                          period ended    period ended        Period ended
(Dollars in thousands)                     October 2,      October 3,         September 27,
----------------------                        1998             1997              1996
                                             -------          -------          -------
<S>                                      <C>              <C>              <C>    
CURRENT
    U.S. federal                             $    80          $ 1,677          $ 9,257
    State                                       (571)             573            1,957
    Non-U.S.                                     632            1,113              606
                                             -------          -------          -------
        Total Current                            141            3,363           11,820
DEFERRED
    U.S. federal                               3,677           (5,699)          (8,844)
    State                                       (545)          (1,098)          (1,154)
    Non-U.S.                                     477              434              246
                                             -------          -------          -------
        Total Deferred                         3,609           (6,363)          (9,752)
                                             -------          -------          -------
Provision (benefit) for income taxes         $ 3,750          $(3,000)         $ 2,068
                                             =======          =======          =======

</TABLE>



                                     -F-46-
<PAGE>   86


                        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)              1998             1997
      ----------------------           --------          --------
<S>                                    <C>               <C>     
DEFERRED TAX ASSETS:
    Inventory                          $  4,724          $  4,770
    Product warranty                      3,945             2,523
    Accrued vacation                      2,193             1,999
    Deferred compensation                    62               525
    Excess purchase price                10,359            10,426
    Foreign tax credits                   1,193                --
    Other                                    --             2,124
                                       --------          --------
                                         22,476            22,367
DEFERRED TAX LIABILITIES:
    Accelerated depreciation             (4,983)           (2,645)
    Foreign jurisdictions, net           (1,158)             (681)
    Other                                (1,186)               --
                                       --------          --------
        Total deferred tax               (7,327)           (3,326)
liabilities

Net deferred tax asset                 $ 15,149          $ 19,041
                                       ========          ========
</TABLE>

CPI has unutilized U.S. Federal foreign tax credits of $1,193,000 at the end of
Fiscal 1998. The Federal foreign tax credits may be carried back two years and
forward five years.

Based upon the level of historical taxable income and projections for future
taxable income, management believes that no valuation allowance is necessary at
the end of Fiscal 1998 and Fiscal 1997.

The differences between the effective income tax rate and the statutory federal
income tax rate is as follows:
<TABLE>
<CAPTION>

                                                            52-week          53-week           52-week
                                                          period ended     period ended     period ended
                                                           October 2,       October 3,      September 27,
                                                               1998             1997            1996
                                                         -------------      ----------       -----------

<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                                                    --                6.4%              4.9%
Rate differential on foreign income tax expense
  (benefit) and withholding tax                               2.0%             3.0%               .2%
Foreign sales corporation                                    --               --                (2.8%)
Change to the beginning of year valuation
  allowance                                                  --              (74.3%)           (19.2%)
Other                                                         5.0%             2.0%              1.8%
                                                           ------           ------            ------
Effective tax rate                                           42.0%           (27.9%)            19.9%
                                                           ======           ======            ======
</TABLE>


                                     -F-47-
<PAGE>   87

                        COMMUNICATIONS & POWER INDUSTRIES
                               HOLDING CORPORATION
                                and subsidiaries

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED



14.  RETIREMENT AND PROFIT SHARING PLANS

CPI provides a qualified 401(k) investment plan covering substantially all of
its domestic and Canadian employees. The plan provides for CPI to contribute an
amount based on a percentage of each participant's base pay. CPI also has a
Non-Qualified Deferred Compensation Plan (the "Non-Qualified Plan") that allows
eligible executives and directors to defer a portion of their compensation.
Participant contributions and Company matching contributions are always 100%
vested. The deferred compensation liability amounted to approximately $434,000
and $314,000 as of October 2, 1998 and October 3, 1997, respectively.

Total contributions to these plans by CPI was $2.6 million for Fiscal 1998, $2.5
million for Fiscal 1997, and $2.6 million for Fiscal 1996 .

CPI's bonus program 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.

15.  TRANSACTIONS WITH VARIAN

Sales to, and purchases from, Varian lines of business were as follows:
<TABLE>
<CAPTION>

                                         52-week               53-week                52-week
                                       period ended         period ended           period ended
        (Dollars in thousands)       October 2, 1998       October 3, 1997      September 27, 1996
        ----------------------       ---------------       ---------------      ------------------
<S>                                  <C>                   <C>                  <C>    
      Sales to Varian                    $9,652                 $9,234                 $12,809
      Purchases from Varian               5,054                  5,742                   5,171
</TABLE>


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. A summary of the
significant agreements are as follows:

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 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.


                                     -F-48-

<PAGE>   88

                        COMMUNICATIONS & POWER INDUSTRIES
                               HOLDING CORPORATION
                                and subsidiaries

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


Trademark License Agreement Generally, under the terms of the Trademark License
Agreement, CPI is licensed to identify its products as "formerly made by Varian"
for a period of ten years from the closing of the Acquisition. 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.

16.  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 connection with Holding's 1995 Management Equity Plan, certain executive
officers of CPI and Holding elected to pay a portion of the purchase price for
their Management Shares by delivery of a secured promissory note to Holding. The
aggregate principle amount of such Management Notes was $895,376 as of October
2, 1998. Of this amount, $700,000 is secured by a pledge of a portion (from 50%
to 75%) of the Management Shares issued to each executive officer and is
guaranteed by Varian. The balance of $195,376 is secured by a pledge of
approximately 91% of the Management Shares issued, but is not guaranteed by
Varian. Outstanding principal under each type of Management Note bears interest
at an annually adjustable rate equal to the "Applicable Federal Rate" in effect
under Internal Revenue Code Section 1274(d) for obligations of a term equal to
the then-remaining term of such note. Recourse by Holding under both types of
Management Notes is limited to the Management Shares pledged to secure the
applicable note. 

17.   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
October 2, 1998 and October 3, 1997 are substantially identical to that of
Holding and its subsidiaries.

18.   SUBSEQUENT EVENTS

On October 6, 1998, CPI completed the acquisition of the Microwave Components
Division ("MCD") of Aydin Corporation for approximately $8.8 million. The
purchase was based on MCD net assets of approximately $2.4 million and is
subject to adjustment based on a final closing balance sheet. Going forward,
this acquisition will be identified as the Solid State Products Division of CPI.




                                     -F-49-
<PAGE>   89



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

53-week period ended October 3, 1997:
   Allowance for doubtful accounts receivable            196            178            (92)            282

52-week period ended October 2, 1998:
   Allowance for doubtful accounts receivable            282            383            (29)            636
</TABLE>


                                     -F-50-
<PAGE>   90



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

53-week period ended October 3, 1997:
   Allowance for doubtful accounts receivable            196            178            (92)            282

 53-week period ended October 2, 1998:
   Allowance for doubtful accounts receivable            282            383            (29)            636


</TABLE>


                                     -F-51-


<PAGE>   91
                               INDEX TO EXHIBITS

<TABLE>
<CAPTION>
Exhibit No.                            Description
-----------                            -----------

<S>               <C>
10.1.4            Fourth Amendment to Credit Agreement among CPI, Holding, the
                  other obligors named therein, the lenders named therein and
                  Bankers Trust Company as Agent, dated as of October 6, 1998.

27.1             Financial Data Schedule (Communications & Power Industries,
                 Inc.)

27.2             Financial Data Schedule (Communications & Power Industries
                 Holding Corporation)
</TABLE>