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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-K

FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO
SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

(Mark One)x
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended October 3, 2003ORo
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934


For the transition period from __________ to __________

Commission File Number: 33-96858-01
    
    Commission File Number: 33-96858COMMUNICATIONS & POWER
INDUSTRIES HOLDING
CORPORATION
    
    COMMUNICATIONS & POWER
INDUSTRIES, INC.(Exact Name of Registrant as Specified in Its Charter)
    
    (Exact Name of Registrant as Specified in Its Charter)Delaware
    
    Delaware(State or Other Jurisdiction of Incorporation or Organization)
    
    (State or Other Jurisdiction of Incorporation or Organization)77-0407395
    
    77-0405693(IRS Employer Identification No.)
    
    (IRS Employer Identification No.)811 Hansen Way
    
    811 Hansen WayPalo Alto, California 94303-1110
    
    Palo Alto, California 94303-1110(650) 846-2900
    
    (650) 846-2900(Address of Principal Executive Offices and telephone number,
including area code,)
    
    (Address of Principal Executive Offices and telephone number,
including area code)Securities registered pursuant to Section 12(b) of the Act:
    
    Securities registered pursuant to Section 12(b) of the Act:None
    
    NoneSecurities registered pursuant to Section 12(g) of the Act:
    
    Securities registered pursuant to Section 12(g) of the Act:None
    
    None


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 )

Indicate by checkmark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes  No X

The aggregate market value of voting stock of Communications & Power
Industries Holding Corporation held by non-affiliates is $288,750, based upon
the price at which it was last sold. 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: 5,008,172 shares of Common Stock, $.01
par value, at December 8, 2003. Communications & Power Industries, Inc.: 1
share of Common Stock, $.01 par value, at December 8, 2003.

DOCUMENTS INCORPORATED BY REFERENCE:
(None)





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|                              |                                                                                                          |                                                  |  |  |  |  |  | 
|----------------------------- | -------------------------------------------------------------------------------------------------------- | ------------------------------------------------ |  |  |  |  |  | 
|PART 1                       
|                              | Item 1: Business                                                                                        
|                              | Item 2: Properties                                                                                      
|                              | Item 3: Legal Proceedings                                                                               
|                              | Item 4: Submission of Matters to a Vote of Security Holders                                             
|PART II                      
|                              | Item 5: Market for the Registrants Common Equity and Related Shareholder Matters                       
|                              | Item 6: Selected Financial Data                                                                         
|                              | Item 7: Managements Discussion and Analysis of Financial Condition and Results of operations           
|                              | Item 7A: Quantitative and Qualitative Disclosures About Market Risk                                     
|                              | Item 8: Financial Statements and Supplementary Data                                                     
|                              | Item 9: Changes In and Disagreements with Accountants on Accounting and Financial Disclosure            
|                              | Item 9a: Controls and Procedures                                                                        
|PART III                     
|                              | Item 10: Directors and Executive Officers                                                               
|                              | Item 11: Executive Compensation                                                                         
|                              | Item 12: Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
|                              | Item 13: Certain Relationships and Related Transactions                                                 
|PART IV                      
|                              | Item 15: Exhibits, Financial Statement Schedules, and Reports on Form 8-K                               
|SIGNATURES                   
|INDEX TO FINANCIAL STATEMENTS
|                              | COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION AND SUBSIDIARIES                                  
|                              |                                                                                                          | Independent Auditors Report                    
|                              |                                                                                                          | CONSOLIDATED BALANCE SHEETS                     
|                              |                                                                                                          | CONSOLIDATED STATEMENTS OF OPERATIONS           
|                              |                                                                                                          | CONSOLIDATED STATEMENTS OF STOCKHOLDERS DEFICIT
|                              |                                                                                                          | CONSOLIDATED STATEMENTS OF CASH FLOWS           
|                              |                                                                                                          | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS      
|                              | COMMUNICATIONS & POWER INDUSTRIES, INC. and subsidiaries                                                
|                              |                                                                                                          | Independent Auditors Report                    
|                              |                                                                                                          | CONSOLIDATED BALANCE SHEETS                     
|                              |                                                                                                          | CONSOLIDATED STATEMENTS OF OPERATIONS           
|                              |                                                                                                          | CONSOLIDATED STATEMENTS OF STOCKHOLDERS DEFICIT
|                              |                                                                                                          | CONSOLIDATED STATEMENTS OF CASH FLOWS           
|                              |                                                                                                          | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS      
|                              | SCHEDULE II COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION AND SUBSIDIARIES                      
|                              | SCHEDULE II COMMUNICATIONS & POWER INDUSTRIES, INC. and subsidiaries                                    
|Exhibit Index                
|EXHIBIT 2.4                  
|EXHIBIT 10.1.2               
|EXHIBIT 10.40                
|EXHIBIT 10.41                
|EXHIBIT 10.42                
|EXHIBIT 10.43                
|EXHIBIT 31                   
|EXHIBIT 32                   



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Forward-Looking Statements

This document contains forward-looking statements. These statements
relate to future events or the Companys future financial performance. In some
cases, you can identify forward-looking statements by terminology such as
may, will, should, expect, plan, anticipate, believe, estimate,
predict, potential or continue, the negative of such terms or other
comparable terminology. These statements are only predictions. Actual events
or results may differ materially.

Although the Company believes that the expectations reflected in the
forward-looking statements are reasonable, the Company cannot guarantee future
results, levels of activity, performance or achievements. Moreover, neither
the Company nor any other person assumes responsibility for the accuracy and
completeness of the forward-looking statements. All written and oral
forward-looking statements made in connection with this report which are
attributable to the Company or persons acting on the Companys behalf are
expressly qualified in their entirety by the risk factors and other
cautionary statements included herein. The Company is under no duty to update
any of the forward-looking statements after the date of this report to conform
such statements to actual results or to changes in the Companys expectations.

You should read the following discussion and analysis in conjunction with
the Financial Statements and related Notes thereto contained elsewhere in this
report. The information in this report is not a complete description of the
Companys business or the risks associated with an investment in the Companys
securities. We urge you to carefully review and consider the various
disclosures made by the Company in this report and in the Companys other
reports filed with the Securities and Exchange Commission (the SEC).




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, control and transmit high-power/high-frequency microwave
and radio frequency signals. End-use applications of these systems include the
transmission of radar signals for location and tracking of threats and
navigation; transmitting decoy and jamming signals for electronic warfare; the
transmission and amplification of voice, data and video signals for
broadcasting, internet and telecommunications; providing power and control for
medical diagnostic imaging and generating microwave energy for radiation
therapy in the treatment of cancer; and various other uses in the industrial
and scientific markets.

The Companys products include microwave and power grid vacuum electron
devices, microwave amplifiers, modulators, and various other power supply
equipment and devices. The majority of the Companys products are consumable
and have a finite life. The Company operates four manufacturing facilities in
North America, and sells and services its products and customers worldwide
primarily through a direct sales force.

CPI is a wholly owned subsidiary of Holding. 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 of Varian Associates,
Inc., as the predecessor of Varian Medical Systems, Inc. (Varian). The
principal executive offices of Holding and CPI are located at 811 Hansen Way,
Palo Alto, California 94303, and their telephone number is (650) 846-2900.

Recent Events

Merger Agreement

On November 17, 2003, the Company entered into an Agreement and Plan of
Merger (the Merger Agreement), under which a corporation (Acquiror) owned
by The Cypress Group L.L.C., a New York-based private equity firm, agreed to
acquire the Company in a cash-for-stock transaction with a total value of
approximately $300 million. As more fully described in Item 12 Security
Ownership of Certain Beneficial

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Owners and Management and Related Stockholder Matters, the acquirer has
entered into a Voting and Indemnification Agreement with stockholders of
Holding to vote in favor of the Merger Agreement.

Pursuant to the Merger Agreement, a wholly owned subsidiary of Acquiror
will merge with and into the Company (the Merger), with the Company as the
surviving corporation. In connection with the Merger, it is anticipated that
all outstanding debt of the Company will be refinanced. Consummation of the
merger is subject to customary conditions, including a condition that Acquiror
obtain the requisite debt financing. Subject to satisfaction of the applicable
conditions, it is currently anticipated that the Merger will close in the
second quarter of fiscal year 2004.

Redemption of 12% Senior Subordinated Notes of CPI

On December 4, 2003, CPI instructed the trustee under the Indenture (the
Indenture) relating to CPIs 12% Senior Subordinated Notes (the Notes) to
send a notice to all of the registered holders of the Notes, notifying them
that CPI has elected to redeem $26,000,000 in principal amount of the Notes on
January 5, 2004, pursuant to and in accordance with the terms of the Indenture.
The redemption will occur at a price equal to 101.5% of the principal amount
of such notes plus accrued and unpaid interest to January 5, 2004. In
connection with the redemption, CPI and Holding entered into an amendment to
the Companys credit facility that, among other things, permits CPI to redeem
up to an aggregate maximum amount of $30,000,000 of the Notes in any fiscal
year.

Products

The Company offers a comprehensive range of microwave and power grid
vacuum electron devices, microwave amplifiers, modulators and various other
power supply equipment and devices for use in the radar, electronic
countermeasures, medical, communications, industrial and scientific markets.
The Company offers over 6,000 products that generally have selling prices from
$2,000 to $50,000, with certain products ranging in price up to $1,000,000.
Most of 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 electron device will be located.

Markets

The Company operates in six different markets:



| |  | Radar Market- The radar market utilizes microwave and power grid
vacuum electron devices, amplifiers, receiver protectors and related
equipment for air, ground and shipboard radar systems. The Companys
vacuum electron devices have been an integral component of radar
systems for over five decades. Sales in the radar market were $102.6
million in fiscal year 2003, compared to $93.2 million in fiscal year
2002 and $87.9 million in fiscal year 2001.
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Electronic Countermeasures Market- The electronic countermeasures
market utilizes microwave vacuum electron 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 $22.5 million in fiscal year 2003,
compared to $21.7 million in fiscal year 2002 and $21.8 million in
fiscal year 2001.
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | 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
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 $38.2 million in fiscal
year 2003, compared to $29.3 million in fiscal year 2002 and $27.4
million in fiscal year 2001.
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Communications Market- The communications market is comprised of
applications for satellite communications (satcom), wireless
point-to-point and point-to-multipoint radio 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 $82.5 million in fiscal year 2003 compared
to $84.8 million in fiscal year 2002 and $109.9 million in fiscal year
2001.
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| |  | 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 $11.3 million in
fiscal year 2003, compared to $15.5 million in fiscal year 2002, and
$20.0 million in fiscal year 2001.
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | 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 $8.3 million in fiscal year 2003, compared
to $6.7 million in fiscal year 2002, and $5.5 million in fiscal year
2001.
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The Companys products have applications among 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 commercial customers, the U.S. Government, or
both. The commercial sector contributed approximately $174.9 million, or
65.9%, of the Companys total sales in fiscal year 2003, compared to $187.0
million, or 74.4%, of the Companys total sales in fiscal year 2002, and $212.1
million, or 77.8%, of the Companys total sales in fiscal year 2001. U.S.
Government sales, both direct and through original equipment manufacturers
(OEMs), contributed approximately $90.5 million, or 34.1%, of the Companys
total sales in fiscal year 2003 compared to $64.2 million, or 25.6%, of the
Companys total sales in fiscal year 2002 and $60.4 million, or 22.2%, in
fiscal year 2001.The Company believes the fiscal year 2003 increase in U.S.
Government sales reflects the Department of Defenses recent expanded emphasis
on addressing terrorism and homeland security. Based on a stable trend of order
receipts for spares and upgrades from fiscal year 1995 to fiscal year 2003,
management expects that U.S. Government and defense-related end-users will
continue to provide a steady source of revenue. Segment data is included in
Note 13 of the Notes to Consolidated Financial Statements.

In fiscal year 2003, approximately 66.3% of sales were derived from U.S.
customers, while approximately 33.7% of sales were derived from international
customers, compared to fiscal year 2002 when approximately 69.7% of sales were
derived from U.S. customers and approximately 30.3% of sales were derived from
international customers and fiscal year 2001 when approximately 67.0% of sales
were derived from U.S. customers and approximately 33.0% of sales were derived
from international customers. However, many domestic OEMs, primarily those in
the satcom 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 directly to the U.S. Government,
which accounted for 19.3% of sales in fiscal year 2003, 17.5% of sales in
fiscal year 2002 and 15.7% of sales in fiscal year 2001, no single customer
accounted for more than 5% of the Companys total sales in fiscal years 2003,
2002, or 2001.

Sales, Marketing and Service

As of October 3, 2003, the Company had over 100 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.
Most of the Companys sales professionals are 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 over 35
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 that the Company utilizes are located outside
the U.S. and focus primarily on customers in South America, Southeast 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 thirteen service centers for
the satcom replacement market. These service centers are located in the United
States (California and New Jersey), Amsterdam, Brazil, China (2), India (2),
Taiwan, Japan, Russia, Singapore and South Africa.

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Manufacturing

The Company manufactures its products within five manufacturing operations
in North America. The Company has implemented modern manufacturing
methodologies based upon continuous improvement, including Just In Time
(JIT) materials handling, Demand Flow Technology (DFT), Statistical Process
Control and Value Managed Relationships with suppliers and customers. The
Company has achieved the ISO-9000 international certification standard.

Generally, each of the Companys manufacturing units use similar processes
consisting of product development, purchasing, high level assembly and test.
For satcom equipment, the process is primarily one of integration, and contract
manufacturers are used whenever possible. Satcom equipment utilizes both
vacuum electron devices (VEDs) and solid-state technology, and the satcom
division procures certain of its components from the Companys other
manufacturing units. For VEDs, the process starts with procurement of raw
material and sub-assemblies from qualified suppliers, who often deliver on a
JIT basis. Raw materials are then formed, primarily by machining, cleaning and
plating certain parts. These steps utilize statistical process control
techniques to assure quality and high production yields. Subassembly is then
performed to produce a vacuum envelope, the essential part of a vacuum electron
device. This subassembly process is performed utilizing DFT, which helps to
minimize inventory. Vacuum assemblies are processed by pumping the atmosphere
from the assemblies while heating them in a furnace and simultaneously
stimulating 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, cupernickel, OFHC copper, and some cathodes, are obtained
from sole, or a limited group of, suppliers.

Competition

The industries and markets in which the Company operates are highly
competitive. The Company encounters competition in most of its business areas
from numerous other companies, including L3 Electron Devices, E2V Technologies,
Xicom Technologies and Thales Electron Devices, 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 competitive prices, 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 market
position and financial condition. Solid-state devices generally serve
end-users low-power requirements, while only microwave vacuum electron devices
currently serve higher-power and higher-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.
The extreme operating parameters of these applications necessitate heat
dissipation capabilities that are best satisfied by the Companys vacuum
electron device products. The Companys management believes that each
technology currently serves its own niche without significant overlap.

Backlog

As of October 3, 2003, the Company had an order backlog of $172.1 million,
representing approximately eight months of sales, compared to an order backlog
of $145.1 million, or approximately seven months of sales, as of September 27,
2002. 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 as 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 relate 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

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and copyrights related to its technology and products. The Company also
has acquired certain intellectual property rights and incurred certain
obligations through license and research and development agreements with third
parties. These agreements may include royalty-bearing licenses, technology
cross licenses and manufacturing supply agreements. Management does not
believe that any single patent or license is material to the success of the
Company as a whole. As a result of contracts with the U.S. Government that
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 that 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, the Company cannot provide assurance that the steps
taken by it will prevent misappropriation or loss of its technology.

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.
The Company and Varian are parties to a Cross-License Agreement that allocates
the rights to the Key Component Technology between the Company and Varian, on a
royalty free basis.

Research and Development

Company-sponsored research and development (R&D) expense was
approximately $6.9 million, $5.9 million, and $5.8 million during fiscal year
2003, fiscal year 2002, and fiscal year 2001, respectively. Research and
development expenses increased during fiscal year 2003 related to new product
development for the communications, radar and medical markets.
Customer-sponsored R&D was approximately $3.7 million, $5.2 million, and $5.0
million during fiscal year 2003, fiscal year 2002 and fiscal year 2001,
respectively. For customer-sponsored R&D, the costs were charged to cost of
sales to match revenue earned.

Employees

As of October 3, 2003, the Company had approximately 1,490 employees, as
compared to 1,480 employees as of September 27, 2002. The Companys workforce
has stabilized at this level after being reduced from approximately 1,720 at
the end of fiscal year 2001. 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 dependent on the continued service of, and on its ability to
attract and retain, qualified technical, marketing, sales and managerial
personnel. There exists competition for such personnel, 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.

U.S. Government Contracts and Regulations

Management expects that in the foreseeable future a significant portion of
the Companys sales will continue 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 primarily under
fixed-price contracts and, to a lesser degree, cost-plus contracts.
Fixed-price contracts accounted for 96.9% of the Companys U.S. Government
sales in fiscal year 2003 and cost-plus contracts accounted for 3.1% of the
Companys U.S. Government sales in fiscal year 2003, as compared to fiscal year
2002, in which approximately 95.2% of U.S. Government sales were from
fixed-price contracts and approximately 4.8% of U.S. Government sales were from
cost-plus contracts and fiscal year 2001, in which approximately 96.2% of U.S.
Government sales was from fixed-price contracts and approximately 3.8% of U.S.
Government sales was from cost-plus contracts.

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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 upon 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 its
contracts, 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, as a result, could potentially have a material adverse effect
on the Companys 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 variety of federal, state and local
environmental laws and regulations and utilizes in its operations a number of
chemicals or similar substances that are classified as hazardous. Management
believes that the Companys current operations are in substantial compliance
with current environmental laws and regulations. However, changes in law or
limitations 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. In addition, it is possible
that the Company may experience releases of certain chemicals or other events
that could cause the incurrence of material cleanup costs or other damages.
The Company is involved from time to time in legal proceedings involving
compliance with

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environmental requirements applicable to its ongoing operations, and may
be involved in legal proceedings involving regulatory compliance, exposure to
chemicals or the remediation of environmental contamination.

Varian has agreed to indemnify the Company for environmental claims
arising from the operations of Varians Electron Devices Business (including
pre-existing contamination) prior to August 11, 1995, subject to certain
exceptions and limitations. Environmental investigation and remedial work is
being undertaken by Varian at three of the Companys manufacturing facilities,
Palo Alto, California, Beverly, Massachusetts and Georgetown, Ontario, Canada.
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 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 subleases a portion of the larger Varian Palo Alto campus, for
which Varian has entered into a Consent Order with the California Environmental
Protection Agency for remediation of soil and groundwater contamination. The
Palo Alto site abuts a federal Superfund site and a state Superfund site. In
addition, Varian has been sued or threatened with suit with respect to some of
the Companys facilities. To date, Varian has, generally at its expense,
conducted required investigation and remediation work at the Companys
facilities and responded to environmental claims arising from Varians prior
operations of the Electron Devices Business.

The Companys San Carlos, California facility also has soil and
groundwater contamination that may require remediation. On February 7, 2003,
Holding entered into an agreement for the sale of the San Carlos real property.
In addition to customary closing and due diligence conditions, the sale of the
property is contingent upon completion of environmental remediation and
demolition of existing structures, to be agreed upon by the parties. The
purchaser has not completed or approved its due diligence investigations of the
property, and there is no assurance that it will do so or that the other
conditions to closing will be satisfied.

With certain limited exceptions, the Company is not indemnified by Varian
for environmental claims arising from the Companys operations after August 11,
1995. The Company cannot provide assurance that it will not incur material
costs or liabilities in connection with proceedings or claims related to
environmental conditions arising from its operations after 1995.




Item 2:Properties

The Company owns, leases or subleases manufacturing, assembly, warehouse,
service and office properties having an aggregate floor space of approximately
1,075,000 square feet, of which approximately 29,000 square feet are leased or
subleased to third parties. The table that follows provides summary
information regarding principal properties owned or leased by the Company:

Property
    
    Owned
    
    Leased/Subleased(square footage)San Carlos, California
    
    
    322,000
    (a)Beverly, Massachusetts
    
    
    169,385
    (b)Georgetown, Ontario, Canada
    
    
    126,000
    
    
    
    21,975Palo Alto, California
    
    
    
    
    
    
    419,000
    (c)Various locations
    
    
    
    
    
    
    16,355
    (d)


(a)
    
    The San Carlos, California square footage includes approximately
20,736 square feet leased to one tenant who provides services to the
Company and others.(b)
    
    The Beverly, Massachusetts square footage also includes
approximately 2,950 square feet leased to two tenants.(c)
    
    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 5,470 square
feet subleased to two tenants.


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|(d) |  | Includes both leased facilities occupied entirely by the Companys
field sales and service organizations and three foreign shared use
facilities that the Company is sharing for varying periods of time
under rental agreements with Varian.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The lenders under CPIs secured credit facility, have a security interest
in all of the Companys interest in the real property that it owns and leases,
excluding its San Carlos, California real property.

On December 22, 2000, a sale-leaseback transaction related to CPIs
facilities in San Carlos was accomplished between CPI and Holding. Holding
paid CPI aggregate consideration of $23.0 million for the San Carlos real
property, consisting of $17.25 million in cash and an unsecured promissory note
in the principal amount of $5.75 million maturing in December 2009, with
interest-only payments on a quarterly basis at the rate of 15.5% per annum,
with up to 35.25% of each interest payment payable in kind, at Holdings
option, by issuance of additional notes. CPI and Holding entered into a lease
of the San Carlos real property for a term of twenty (20) years on a net basis
with a fixed annual rent (payable in equal monthly installments) of $2.45
million. Holding financed the cash portion of the San Carlos purchase price
and its fees and expenses with respect to the transaction by borrowing $18.0
million from Wells Fargo Bank. During fiscal year 2002, the loan was extended
until June 1, 2003 and a principal payment of $0.2 million was made. During
fiscal year 2003, the loan was extended until January 31, 2004 and another
principal payment of $0.3 million was made. The loan bears interest at LIBOR
plus 4.25%and is secured on a non-recourse basis (subject to normal and
customary exceptions) by the San Carlos real property. Holding has entered
into an agreement for the sale of the San Carlos property to an unrelated
party. As discussed above in Item 1 BusinessEnvironmental Matters, the
proposed sale is subject to various conditions.

The Companys headquarters and one principal complex, including one of the
Companys manufacturing facilities, located at the Palo Alto, California site
are leased by way of assignment, or subleased, from Varian or one of its
affiliates or former affiliates. Therefore, the Companys occupancy rights are
dependent on the tenant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 agreement between CPI and Varian dated August 11, 1995, Varian
has agreed to indemnify the Company against liabilities arising from litigation
and governmental claims pertaining to the operation of the Electron Devices
Business of Varian prior to August 11, 1995. Accordingly, management believes
that litigation and governmental claims pending against Varian and relating to
the operation of the Electron Devices Business prior to August 1995, will not
have a material adverse effect on the Companys financial condition or results
of operations. See Business  Environmental Matters.




Item 4:Submission of Matters to a Vote of Security Holders

There were no matters submitted to a vote of security holders during the
fourth quarter of fiscal year 2003.




PART II




Item 5:Market for the Registrants Common Equity and Related Shareholder Matters

CPI is a wholly owned subsidiary of Holding. There is no established
public trading market for the common stock of CPI or Holding. As of December 8,
2003, there were approximately forty-five holders of record of common stock of
Holding and one holder of the common stock of CPI. No cash dividends have been
declared on the common stock of CPI or Holding during the two most recent
fiscal years. Restrictive covenants under the Companys credit facility
generally restrict the declaration or payment of dividends on common stock of
CPI or Holding. The Indenture and the Senior Notes also restrict the
declaration and payment of dividends unless, among other things, certain
financial covenants are satisfied.

See Item 11 Executive CompensationHoldings 2000 Stock Option Plan for
a discussion of Securities Authorized for Issuance Under Equity Compensation
Plans.

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Item 6:Selected Financial Data

The following selected financial data has been derived from the
consolidated financial statements. The information set forth below is not
necessarily indicative of results of future operations, and should be read in
conjunction with Managements Discussion and Analysis of Financial Condition
and Results of Operations and the consolidated financial statements and
related notes thereto included elsewhere in this Annual Report on Form 10-K.

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COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION AND SUBSIDIARIES
FIVE-YEAR SELECTED FINANCIAL DATA

Fiscal Year(Dollars in Thousands)
    
    2003
    
    2002
    
    2001
    
    2000
    
    1999Statement of Operations Data:Sales
    
    $
    265,434
    
    
    
    251,245
    
    
    
    272,521
    
    
    
    243,054
    
    
    
    255,680Gross profit
    
    
    81,477
    
    
    
    59,056
    
    
    
    49,189
    
    
    
    54,306
    
    
    
    56,042(Gain) loss on sale of SSPD (a)
    
    
    (136
    )
    
    
    3,004
    
    
    
    
    
    
    
    
    
    
    
    Operating income
    
    
    41,164
    
    
    
    14,329
    
    
    
    4,837
    
    
    
    8,303
    
    
    
    8,752Interest expense
    
    
    14,540
    
    
    
    16,508
    
    
    
    20,734
    
    
    
    18,663
    
    
    
    17,805Income tax expense
    
    
    10,076
    
    
    
    4,554
    
    
    
    2,950
    
    
    
    1,232
    
    
    
    605Net income (loss) before preferred dividends
    
    $
    16,548
    
    
    
    (6,733
    )
    
    
    (18,847
    )
    
    
    (11,592
    )
    
    
    (9,658
    )EBITDA (b)
    
    $
    47,457
    
    
    
    28,666
    
    
    
    18,183
    
    
    
    23,619
    
    
    
    22,527Certain Non-Cash Charges:Depreciation and amortization
    
    $
    6,293
    
    
    
    11,304
    
    
    
    13,346
    
    
    
    15,316
    
    
    
    13,635Amortization of deferred debt issuance costs
    
    
    1,383
    
    
    
    1,629
    
    
    
    1,987
    
    
    
    1,288
    
    
    
    1,209Capital expenditures
    
    
    3,067
    
    
    
    3,378
    
    
    
    5,788
    
    
    
    5,325
    
    
    
    8,588Balance Sheet Data:Working capital
    
    $
    17,241
    
    
    
    1,101
    
    
    
    22,048
    
    
    
    19,881
    
    
    
    26,907Total assets
    
    
    181,968
    
    
    
    156,189
    
    
    
    204,067
    
    
    
    226,985
    
    
    
    233,584Long-term debt and redeemable preferred stock
    
    
    128,907
    
    
    
    128,693
    
    
    
    148,569
    
    
    
    139,160
    
    
    
    142,039Total stockholders deficit
    
    
    (65,445
    )
    
    
    (73,104
    )
    
    
    (57,608
    )
    
    
    (31,188
    )
    
    
    (12,962
    )


The Company has paid no cash dividend on its common stock in any of the
years presented above.



| | (a) |  | On September 26, 2002, the Company sold its Solid state Products
Division (SSPD). The net pretax loss of $3.0 million included
approximately $2.5 million for the write-off of goodwill.
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (b) |  | EBITDA represents earnings before provision for income taxes,
interest expense, depreciation and amortization and certain
non-recurring charges. A reconciliation of EBITDA to income (loss)
before taxes is as follows:
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Fiscal Year(Dollars in Thousands)
    
    2003
    
    2002
    
    2001
    
    2000
    
    1999EBITDA
    
    $
    47,457
    
    
    
    28,666
    
    
    
    18,183
    
    
    
    23,619
    
    
    
    22,527Less: Depreciation and amortization
    
    
    6,293
    
    
    
    11,304
    
    
    
    13,346
    
    
    
    15,316
    
    
    
    13,635Other
    
    
    
    
    
    
    3,033
    
    
    
    
    
    
    
    
    
    
    
    140Interest Expense
    
    
    14,540
    
    
    
    16,508
    
    
    
    20,734
    
    
    
    18,663
    
    
    
    17,805Income (loss) before taxes
    
    $
    26,624
    
    
    
    (2,179
    )
    
    
    (15,897
    )
    
    
    (10,360
    )
    
    
    (9,053
    )




| |  |  | In fiscal year 2002, EBITDA also excludes the non-cash write-off of
goodwill associated with the sale of SSPD of $2.5 million and the
non-cash impairment loss of $0.5 million related to plant and equipment
used in the satcom equipment segment.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | EBITDA is presented because the Company believes that EBITDA is used by some
investors as a financial indicator of a companys ability to service
indebtedness. While management considers EBITDA to be an important measure
of comparative operating performance, it should be considered in addition
to, but not as a substitute for or superior to, operating income, net
earnings (loss), cash flow and other measures of financial performance
prepared in accordance with accounting principles generally accepted in the
United States. EBITDA does not reflect cash available to fund cash
requirements, and the items excluded from EBITDA, such as depreciation and
amortization, are significant components in assessing the Companys
financial performance. Other significant uses of cash flows are required
before cash will be available to the Company including debt service, taxes
and cash expenditures for various long-term assets. The Companys
calculation of EBITDA may be different from the calculation used by other
companies and, therefore, comparability may be limited.

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COMMUNICATIONS & POWER INDUSTRIES, INC. AND SUBSIDIARIES
FIVE-YEAR SELECTED FINANCIAL DATA

Fiscal Year(Dollars in Thousands)
    
    2003
    
    2002
    
    2001
    
    2000
    
    1999Statement of Operations Data:Sales
    
    $
    265,434
    
    
    
    251,245
    
    
    
    272,521
    
    
    
    243,054
    
    
    
    255,680Gross profit
    
    
    81,477
    
    
    
    59,056
    
    
    
    49,189
    
    
    
    54,306
    
    
    
    56,042(Gain) loss on sale of SSPD (a)
    
    
    (136
    )
    
    
    3,004
    
    
    
    
    
    
    
    
    
    
    
    Operating income
    
    
    39,691
    
    
    
    12,961
    
    
    
    3,813
    
    
    
    8,303
    
    
    
    8,752Interest expense
    
    
    12,511
    
    
    
    14,463
    
    
    
    18,646
    
    
    
    18,663
    
    
    
    17,805Income tax expense
    
    
    10,325
    
    
    
    4,559
    
    
    
    2,950
    
    
    
    1,232
    
    
    
    605Net income (loss) before preferred dividends
    
    $
    16,855
    
    
    
    (6,061
    )
    
    
    (17,783
    )
    
    
    (11,592
    )
    
    
    (9,658
    )EBITDA (b)
    
    $
    45,443
    
    
    
    26,639
    
    
    
    16,661
    
    
    
    23,619
    
    
    
    22,527Certain Non-Cash Charges:Depreciation and amortization
    
    $
    5,752
    
    
    
    10,645
    
    
    
    12,848
    
    
    
    15,316
    
    
    
    13,635Amortization of deferred debt issuance costs
    
    
    1,294
    
    
    
    1,557
    
    
    
    1,655
    
    
    
    1,288
    
    
    
    1,209Capital expenditures
    
    
    3,067
    
    
    
    3,378
    
    
    
    5,788
    
    
    
    5,325
    
    
    
    8,588Balance Sheet Data:Working capital
    
    $
    33,149
    
    
    
    17,837
    
    
    
    39,265
    
    
    
    19,881
    
    
    
    26,907Total assets
    
    
    174,881
    
    
    
    148,501
    
    
    
    195,649
    
    
    
    226,985
    
    
    
    233,584Long-term debt and redeemable preferred stock
    
    
    135,794
    
    
    
    136,004
    
    
    
    156,304
    
    
    
    139,160
    
    
    
    142,039Total stockholders deficit
    
    
    (34,211
    )
    
    
    (45,918
    )
    
    
    (34,450
    )
    
    
    (12,018
    )
    
    
    3,660


The Company has paid no cash dividend on its common stock in any of the
years presented above.



| | (a) |  | On September 26, 2002, the Company sold its Solid state Products
Division (SSPD). The net pretax loss of $3.0 million included
approximately $2.5 million for the write-off of goodwill.
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (b) |  | EBITDA represents earnings before provision for income taxes,
interest expense, depreciation and amortization and certain
non-recurring charges. A reconciliation of EBITDA to income (loss)
before taxes is as follows:
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Fiscal Year(Dollars in Thousands)
    
    2003
    
    2002
    
    2001
    
    2000
    
    1999EBITDA
    
    $
    45,443
    
    
    
    26,639
    
    
    
    16,661
    
    
    
    23,619
    
    
    
    22,527Less: Depreciation and amortization
    
    
    5,752
    
    
    
    10,645
    
    
    
    12,848
    
    
    
    15,316
    
    
    
    13,635Other
    
    
    
    
    
    
    3,033
    
    
    
    
    
    
    
    
    
    
    
    140Interest Expense
    
    
    12,511
    
    
    
    14,463
    
    
    
    18,646
    
    
    
    18,663
    
    
    
    17,805Income (loss) before taxes
    
    $
    27,180
    
    
    
    (1,502
    )
    
    
    (14,833
    )
    
    
    (10,360
    )
    
    
    (9,053
    )




| |  |  | In fiscal year 2002, EBITDA also excludes the non-cash write-off of
goodwill associated with the sale of SSPD of $2.5 million and the
non-cash impairment loss of $0.5 million related to plant and equipment
used in the satcom equipment segment.
| |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | EBITDA is presented because the Company believes that EBITDA is used by
some investors as a financial indicator of a companys ability to
service indebtedness. While management considers EBITDA to be an
important measure of comparative operating performance, it should be
considered in addition to, but not as a substitute for or superior to,
operating income, net earnings (loss), cash flow and other measures of
financial performance prepared in accordance with accounting principles
generally accepted in the United States. EBITDA does not reflect cash
available to fund cash requirement, and the items excluded from EBITDA,
such as depreciation and amortization, are significant components in
assessing the Companys financial performance. Other significant uses
of cash flows are required before cash will be available to the Company
including debt service, taxes and cash expenditures for various
long-term assets. The Companys calculation of EBITDA may be different
from the calculation used by other companies and, therefore,
comparability may be limited.
| |  |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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Item 7:Managements Discussion and Analysis of Financial Condition and Results of operations

The following discussion reflects the consolidated results of Holding,
which are materially consistent with those of CPI except as identified below,
and should be read in conjunction with the consolidated financial statements
and notes thereto:

Overview

The Company serves the radar, electronic countermeasures, medical,
communications, industrial and scientific markets. In addition, the Company
divides the communications market into applications for ground-based satellite
uplinks for military and commercial uses and broadcast sectors. The Company
defines and discusses its orders and sales trends by these end markets in order
to more clearly relate its business to outside investors. Internally, however,
the Company is organized into five operating units that are differentiated
based on products. Four of these operating units comprise the Companys vacuum
electron device (VED) segment. The Company also has a satcom equipment
segment. Segment data is included in Note 13 of the Notes to Consolidated
Financial Statements.

Orders for fiscal year 2003 were $291.4 million, an increase of $43.2
million from fiscal year 2002. The increase from fiscal year 2002 levels
reflects higher demand for products in the radar, electronic countermeasures,
medical and communications markets. Radar orders were $124.1 million, an
increase of $23.1 million, or 22.9%, from $101.0 million in fiscal year 2002.
Orders in the electronic countermeasures market have increased $9.7 million, or
63.8%, to $24.9 million from $15.2 million in fiscal year 2002. The increase
in radar and electronic countermeasure orders reflect continued growth in the
U.S. defense budget stemming principally from the Department of Defenses
recent expanded emphasis on addressing terrorism and homeland security. This
funding has resulted in an increase in new radar system development and
deployment, including increases in the rate at which naval surface combat ships
are being built. In addition, protection of military assets has become a very
high priority resulting in the continuing funding of new, upgrade and
replenishment programs in the electronic countermeasure area. The Company has
enjoyed growth in both the radar and electronic countermeasures market due to
its strong participation in these various initiatives and platforms. Medical
orders increased by $6.0 million, or 18.0%, to $39.3 million from $33.3 million
in fiscal year 2002. The increase was due to higher orders for VEDs used in
cancer therapy systems and magnetic resonance imaging, and x-ray generator and
power supply products used in x-ray imaging. Communication orders increased by
$10.8 million, or 14.9%, to $83.1 million from fiscal year 2002, due
principally to several large orders from direct-to-home service suppliers.
These orders shipped by the end of fiscal year 2003. The Company anticipates a
slight rebound in the traditional communications market and expects order
levels of approximately $80 million for fiscal year 2004. These order increases
were offset in part by declines in the industrial and scientific markets of
$2.3 million and $4.1 million, respectively, from fiscal year 2002. The slight
decline in the industrial market is attributable to the weakness in the
semiconductor market. Order levels for the industrial market for fiscal year
2004 are expected to continue at the $13 million level. Orders for products
sold to the scientific market, the Companys smallest market, decreased from
$9.8 million in fiscal year 2002 to $5.6 million in fiscal year 2003. Orders in
this market are historically one-time type projects and thus difficult to
predict. Also, 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 year 2003 were $265.4 million compared to sales of $251.2
million in fiscal year 2002, an increase of $14.2 million, or 5.7%. This
increase was primarily related to higher sales in the radar and medical
markets. Sales in the radar market increased $9.4 million to $102.6 million in
fiscal year 2003 due to higher spending by the Department of Defense. Sales of
products in the medical market of $38.2 million have increased $8.9 million, or
30.4%, from fiscal year 2002 due to sales of VEDs in cancer treatment
applications and the Companys x-ray generator products. The increase in the
radar and medical markets were offset in part by a $4.2 million decrease in
sales in the industrial market attributable primarily to a weak semiconductor
market. With respect to the remaining markets, sales for fiscal year 2003
remained stable as compared to fiscal year 2002 levels.

In fiscal 2004, orders are expected to decrease by approximately five to
ten percent from the record high fiscal year 2003 levels. The Company expects
that orders in the commercial communications market will decrease slightly from
the 2003 levels as the orders from direct-to-home service suppliers are not
expected to recur at the same levels. Radar and medical orders are expected to
remain strong during fiscal year 2004. Orders

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in the electronic countermeasure market are likely to decline from their
2003 levels, as logistic agencies are catching up on needed repairs and spares.
Orders in the industrial and scientific markets are expected to be relatively
stable as compared to fiscal year 2003.

On September 26, 2002, the Company sold the assets used in its Solid State
Products Division (SSPD) to KMIC Technology Inc., a company owned by the
former management of SSPD. The Company received approximately $0.9 million in
cash and a $0.3 million unsecured promissory note. The note bears interest at
12% per annum and is payable as follows: one-third of the principal plus unpaid
interest is due October 1, 2003 with the remaining balance payable in eight
equal, quarterly installments of principal and interest beginning January 1,
2004 and ending October 1, 2005. During fiscal year 2002, the sale resulted in
a charge to operations of approximately $3.0 million, which represents the net
assets sold including approximately $2.5 million in goodwill and costs and
expenses of the transaction, net of $0.9 million of cash received from the sale
of the operations net assets. Due to the uncertainty of ultimate collection,
the proceeds from the promissory note will be recognized when the cash payments
are received. During fiscal year 2003, a principal payment of $0.1 million was
received from KMIC Technology Inc. In connection with the SSPD transaction, the
Company agreed, subject to certain limitations and exceptions, not to engage in
the manufacture of intermediate power amplifiers for satcom amplifiers
(IPAs) for a 3-year period. In addition, the Company agreed to purchase
from KMIC Technology Inc. $0.7 million of its IPAs per year for such 3-year
period at market value.

Critical Accounting Policies

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

Revenue Recognition

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

Allowance for Doubtful Accounts

The Company monitors the creditworthiness of its customers based on a
variety of factors including the length of time the receivables are past due,
the financial health of the customer, economic conditions and historical
experience. If collectibility is considered uncertain, then the Company will
record a reserve to reduce the receivable to the amount considered collectable.
If circumstances change, then further adjustments could be required.

Warranty Reserves

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

Inventory Valuation

Inventories are stated at the lower of average cost or market (net realizable
value). The carrying value of inventory is reduced for estimated obsolescence
or unmarketability based upon assumptions about future demand, market
conditions, product lifecycles and product pricing. If the Companys
assumptions were to be substantially different than estimated, further
adjustments could be required. While these estimates require management to make
assumptions and judgments, management believes its understanding of the markets
and

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customers the Company serves, as well as the mature nature of many of the
products the Company manufactures, provides it with the ability to make
reliable estimates. Management also evaluates the carrying value of inventory
for lower of cost or market on an individual product or contract basis.
Analyses are performed based on the estimated costs at completion, and if
necessary, a provision is recorded to properly reflect the inventory value of
the products or contracts at the lower of cost or net realizable value (selling
price less estimated cost of disposal. If estimated contract costs based on
these analyses for fixed-price contracts, which represent virtually all of our
contracts, were to be substantially higher than originally estimated,
provisions could also be required, and in such a case, the Company would record
a reserve that would be charged to costs of goods sold.

Impairment of Long-Lived Assets

The Company reviews long-lived assets excluding intangible assets which
are covered by Statement of Financial Accounting Standards (SFAS) No. 142,
Goodwill and Other Intangible 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. Adverse changes in the customers and markets served by the Company could
result in future impairments of long-lived assets.

Goodwill and Intangible Asset Impairment

Goodwill represents the excess of the purchase price over the fair value
of the net assets acquired. The Company performed a goodwill impairment test in
the first quarter of fiscal year 2003, upon adoption of SFAS No. 142. The
Company also performed another goodwill impairment test during the fourth
quarter of the 2003 fiscal year. No impairment was noted based on either test.
Goodwill and certain other corporate assets and liabilities are assigned to the
reporting units which are consistent with the Companys operating divisions.
The fair value of the reporting units are then compared to the carrying value
to determine if there is any potential impairment. The process of evaluating
potential impairment is subjective and requires judgments regarding revenue
forecasts, discount rates, and weighted average cost of capital among other
things. Adverse changes in the industries served by the Company, customer
demand or other market conditions could result in future impairments of
goodwill.

Results of Operations

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

Fiscal Year2003
    
    2002
    
    2001Sales
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of sales
    
    
    69.3
    
    
    
    76.5
    
    
    
    82.0Gross profit
    
    
    30.7
    
    
    
    23.5
    
    
    
    18.0Research and development
    
    
    2.6
    
    
    
    2.3
    
    
    
    2.1Selling and marketing
    
    
    5.9
    
    
    
    6.4
    
    
    
    6.4General and administrative (a)
    
    
    6.8
    
    
    
    7.9
    
    
    
    7.7(Gain) loss on sale of SSPD
    
    
    (0.1
    )
    
    
    1.2
    
    
    
    Operating income
    
    
    15.5
    
    
    
    5.7
    
    
    
    1.8Interest expense
    
    
    5.5
    
    
    
    6.6
    
    
    
    7.6Income (loss) before taxes
    
    
    10.0
    
    
    
    (0.9
    )
    
    
    (5.8
    )Income tax expense
    
    
    3.8
    
    
    
    1.8
    
    
    
    1.1Net income (loss)
    
    
    6.2
    %
    
    
    (2.7
    )%
    
    
    (6.9
    )%Other Data:Preferred Dividends
    
    
    3.7
    %
    
    
    3.4
    %
    
    
    2.7
    %


(a) General and administrative expense includes foreign currency gain
(loss).

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Fiscal Year 2003 Compared to Fiscal Year 2002

Sales. Sales for fiscal year 2003 of $265.4 million were $14.2 million
higher than the prior year level of $251.2 million due primarily to increased
demand for radar and medical products. Radar sales increased $9.4 million from
fiscal year 2002 due to growth in the U.S. defense budget related to the
Department of Defenses recent expanded emphasis on addressing terrorism and
homeland security. This funding has resulted in an increase in new radar system
development and deployment, including increases in the rate at which naval
surface combat ships are being built. Sales of products in the medical market
of $38.2 million have increased by $8.9 million, or 30.4%, from fiscal year
2002 due to sales of VEDs in cancer treatment applications and the Companys
x-ray generator products. Electronic countermeasure and scientific sales were
$22.5 million and $8.3 million, respectively, represents increases of $0.8
million and $1.6 million, respectively, from fiscal year 2002. These increases
were offset in part by decreased sales in the communications and industrial
markets. Communications sales were $82.5 million, a decrease of $2.3 million,
or 2.7%, from fiscal year 2002 sales of $84.8 million. The decrease is
primarily a result of the Companys exit from the solid state business at the
end of fiscal year 2002. The solid state business contributed approximately
$3.5 million in sales in fiscal year 2002. Sales in the industrial market
decreased $4.2 million from fiscal year 2002 due primarily to a weak
semiconductor market.

Gross Margin. Gross margin as a percentage of sales increased to 30.7% in
fiscal year 2003 from 23.5% of sales in fiscal year 2002. The increase in gross
profit as a percentage of sales resulted primarily from gains in production
efficiencies from the increase in sales volume, resolution of technical
problems, favorable product mix, improved pricing for certain products and
completion of contracts with lower pricing in prior periods. In addition,
gross profit for fiscal year 2003 does not include lower margin products from
SSPD , which was sold in September of 2002. In addition, margin fluctuations
are expected from period to period due to the variation in the mix of products
sold during any period.

Research and Development Expenses. Research and development expenses in
fiscal year 2003 increased by $1.0 million to $6.9 million, or 2.6% of sales,
compared to fiscal year 2002s level of $5.9 million, or 2.3% of sales. The
increase can be attributed to new product development including outdoor
amplifiers for the satcom communications market, new low cost x-ray generators
for the medical market and air-cooled transmitter products for the synthetic
aperture radar market.

Selling, Marketing, General and Administrative Expenses. Selling,
marketing, general and administrative expenses in fiscal year 2003 were $33.6
million, or 12.7% of sales, compared to $35.9 million, or 14.3% of sales, in
fiscal year 2002. The total amount of selling and marketing costs decreased
slightly as compared to fiscal year 2002. General and administrative costs
decreased by $1.8 million to $17.9 million from fiscal year 2002. The decrease
relates to the elimination of goodwill amortization expense in fiscal year 2003
upon adoption of SFAS No. 142, a reduction in capital lease amortization
related to the Companys enterprise resource planning system which was fully
amortized in fiscal year 2002, and elimination of operating expenses from the
SSPD Division that was sold in September 2002. The decreases in general and
administrative expenses were offset in part by stock compensation expense of
$0.8 million recorded by the Company related to 100,000 shares of common stock
purchased by certain executive officers for $0.1 million in cash in March 2003
at a price subsequently determined to be less than fair value as determined by
an independent appraisal. In addition, $0.2 million of stock compensation
expense was recognized related to stock option grants in fiscal year 2003.

Gain on Sale of SSPD. The $0.1 million gain on sale of SSPD represents a
principal payment on the unsecured promissory note due from KMIC Technology
Inc. for the purchase of SSPD as described above in Overview.

Interest Expense. Interest expense in fiscal year 2003 was $14.5 million,
a decrease of $2.0 million from fiscal year 2002. The decrease can be
attributed primarily to the prepayment of the $20.0 million term loan in June
2002. The interest on the term loan accrued at a rate equal to the prime rate
plus 5.50% which resulted in approximately $1.7 million of interest expense in
fiscal year 2002.

Net Income. Net income before taxes and preferred dividends was $26.6
million for fiscal year 2003 compared to a net loss before taxes and preferred
dividends of $2.2 million for fiscal year 2002. Net income after taxes but
before preferred dividends was $16.5 million, an improvement of $23.3 million
compared to losses of $6.7 million for fiscal year 2002. The tax expense for
fiscal year 2003 represents an effective tax rate of approximately 38%. The
Companys net loss for fiscal year 2002 reflected income tax expense in spite
of a

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consolidated pretax loss, as a result of the recognition of a 100%
valuation allowance for net operating losses previously recognized.

Differences Between Holding and CPI. CPIs operating results differ
slightly from Holdings operating results due to a sale-leaseback transaction
between CPI and Holding that took place in December 2000. (See further
discussion under Financial Condition of Holding). In fiscal year 2003, CPIs
net income before taxes was $27.2 million, which was approximately $0.6 million
higher than Holdings net income before taxes. As a result of this
transaction, operating costs for CPI were approximately $1.5 million higher
than those of Holding due to rental payments paid by CPI to Holding for use of
the San Carlos facility, offset by amortization of the deferred gain on the
sale-leaseback and additional depreciation by Holding on the San Carlos
facility. Interest expense, net, for CPI was approximately $2.0 million lower
than that of Holding. The decrease primarily relates to the fact that Holdings
interest expense includes interest paid on the mortgage financing of the San
Carlos facility. In addition, interest income from Holding of $0.9 million
related to an intercompany receivable is included in CPIs results, but is
eliminated upon consolidation for Holding. All other operations data for CPI
is consistent with Holdings operations data for fiscal year 2003.

Fiscal Year 2002 Compared to Fiscal Year 2001

Sales. Sales for fiscal year 2002 of $251.2 million were $21.3 million
lower than the prior year level of $272.5 million due primarily to the
continued weakness in the commercial communications market. Communications
sales were $84.8 million, a decrease of $25.0 million, or 22.8%, from fiscal
year 2001 sales of $109.8 million. Industrial and electronic countermeasure
sales were $15.5 million and $21.7 million, respectively, which represents a
decrease of $4.5 million and $0.2 million, respectively, from fiscal year 2001.
Radar, medical and scientific sales, on the other hand, increased by $5.3
million, $1.9 million and $1.2 million, respectively from fiscal year 2001.
Sales in the radar and scientific markets of $93.2 million and $6.7 million,
respectively benefited from increased military and research spending. Sales of
products in the medical market of $29.3 million have increased due to sales of
VEDs in cancer treatment applications and the Companys new line of generators
used in x-ray applications.

Gross Margin. Gross margin as a percentage of sales increased 5.5% to
23.5% in fiscal year 2002 from 18.0% of sales in fiscal year 2001. Gross
margins were negatively affected in fiscal year 2001 by higher start-up and
warranty costs on several new satcom products and increased provisions for
potentially excess and obsolete inventories. In addition, margin fluctuations
are expected from period to period due to the variation in the mix of products
sold during any period.

Research and Development Expenses. Research and development expenses in
fiscal year 2002 increased by $0.1 million to $5.9 million, or 2.3% of sales,
compared to fiscal year 2001s level of $5.8 million, or 2.1% of sales. The
slight increase can be attributed to increased research and development
activities at the Companys satcom equipment segment offset by increased
customer funded development at the Companys division in Beverly,
Massachusetts.

Selling, Marketing, General and Administrative Expenses. Selling,
marketing, general and administrative expenses in fiscal year 2002 were $35.9
million or 14.3% of sales compared to $38.6 million, or 14.2% of sales in
fiscal year 2001. Selling and marketing costs decreased approximately $1.4
million in fiscal year 2002 due primarily to reductions in commissions as a
result of weaker sales, lower headcount in Europe and various cost reduction
programs. General and administrative costs decreased by $1.1 million to $19.8
million from fiscal year 2001. The decrease primarily relates to reduced
general and administrative costs associated with the relocation of the satcom
division to Canada as well as a reduction in overall spending due to cost
reduction programs in place. These decreases were offset in part by higher
management performance incentives. In addition, fiscal year 2001 general and
administrative costs included a gain of $0.9 million on the sale of rental
property in Beverly, Massachusetts.

Loss on Sale of SSPD. On September 26, 2002, the Company sold SSPD to
KMIC Technology Inc., a company owned by the former management of SSPD. The
Company received approximately $0.9 million in cash and a $0.3 million
unsecured promissory note. The sale resulted in a fourth quarter charge to
operations of approximately $3.0 million which represents the book value of the
net assets sold including approximately $2.5 million in goodwill and costs and
expenses of the transaction, net of $0.9 million of cash received from the sale
of the operations net assets. Due to the uncertainty of ultimate collection,
the proceeds from the promissory note will be recognized when the cash payments
are received.

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Interest Expense. Interest expense in fiscal year 2002 was $16.5 million,
a decrease of $4.2 million from fiscal 2001. The decrease is due primarily to a
reduction in outstanding debt as well as lower interest rates.

Net Loss. Net loss before taxes and preferred dividends was $2.2 million
for fiscal year 2002 compared to a net loss before taxes and preferred
dividends of $15.9 million for fiscal year 2001. Net loss after taxes but
before preferred dividends was $6.7 million, an improvement of $12.1 million
compared to losses of $18.8 million for fiscal year 2001. In spite of a
consolidated pretax loss, a provision for income tax expense was booked in
fiscal year 2002 based on the establishment of a 100% valuation allowance. The
fiscal year 2001 provision for income tax expense was primarily due to the
release of amounts previously accrued for potential examinations by tax
authorities and deferred income tax expense resulting from the recognition of a
100% valuation allowance for net operating losses previously recognized,
carryforwards in the United States, and foreign taxes.

Differences Between Holding and CPI. CPIs operating results differ
slightly from Holdings operating results due to a sale-leaseback transaction
between CPI and Holding that took place in December 2000. (See further
discussion under Financial Condition of Holding). In fiscal year 2002, CPIs
net loss before taxes was $1.5 million, which was approximately $0.7 million
lower than Holdings net loss before taxes. As a result of this transaction,
operating costs for CPI were approximately $1.4 million higher than those of
Holding due to rental payments paid by CPI to Holding for use of the San Carlos
facility, offset by amortization of the deferred gain on the sale-leaseback and
additional depreciation by Holding on the San Carlos facility. Interest
expense, net, for CPI was approximately $2.0 million lower than that of
Holding. The decrease primarily relates to the fact that Holdings interest
expense includes interest paid on the mortgage financing of the San Carlos
facility. In addition, interest income from Holding of $0.9 million related to
an intercompany receivable is included in CPIs results, but is eliminated upon
consolidation for Holding. All other operations data for CPI is consistent
with Holdings operations data for fiscal year 2002.

Financial Condition of Holding

As of October 3, 2003, cash and cash equivalents were $33.8 million, as
compared to $2.7 million at September 27, 2002. The majority of the $31.0
million increase relates to cash generated from operating activities, offset in
part by cash used in investing and financing activities in fiscal year 2003 of
$2.9 million and $1.3 million, respectively. Cash provided by operating
activities of $35.3 million was generated primarily from $16.5 million in net
income, non-cash depreciation and amortization of $7.7 million and increases in
current liabilities of $9.2 million. Cash provided by operating activities in
fiscal year 2002 was $44.0 million despite a net loss of $6.7 million due to
significant reductions in accounts receivable and inventories from the prior
year.

Net cash used in investing activities was $2.9 million in fiscal year
2003, $2.5 million in fiscal year 2002, and $3.8 million in fiscal year 2001.
Investing activities were comprised principally of investment in property,
plant and equipment totaling $3.1 million in fiscal year 2003, $3.4 million in
fiscal year 2002, and $5.8 million in fiscal year 2001. The use of cash for
investment in property, plant and equipment in fiscal year 2003 and 2002 was
partially offset by cash proceeds from the fiscal year 2002 sale of SSPD of
$0.1 million and $0.9 million, respectively. The use of cash for investment in
property, plant and equipment in fiscal year 2001 was partially offset by cash
proceeds for the sale of property, plant and equipment of $1.9 million. The
Companys continuing operations typically do not have large capital
requirements. 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
year 2004 to be moderately higher than fiscal year 2003 levels; however, the
Company will continue to manage capital expenditures consistent with business
conditions.

Financing activities during fiscal year 2003 were related primarily to
payment of debt issuance costs and principal on Holdings mortgage financing,
offset by proceeds from the sale by Holding of common stock to members of
management.

In a further effort to provide capital and liquidity in the long term and
in an effort to decrease production costs and more efficiently use the
Companys facilities, the Company relocated its satcom divisions production
operation from Palo Alto, California to its facility in Ontario, Canada during
fiscal year 2001 and 2002. Also, during fiscal year 2001, the Company
relocated its administrative offices into a single building in Palo Alto.

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As of October 3, 2003, the Company had $30.0 million available under its
revolving line of credit that expires May 31, 2005. The following table
provides a summary of the effect on liquidity and cash flows from the Companys
contractual obligations as of October 3, 2003:

Due in Fiscal Years2004
    
    2005
    
    2006
    
    2007
    
    2008
    
    Thereafter
    
    Total(in thousands)(a
    )Debt obligations
    
    $
    17,500
    
    
    
    100,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    117,500Noncancellable operating leases
    
    
    1,127
    
    
    
    888
    
    
    
    268
    
    
    
    80
    
    
    
    71
    
    
    
    2,436
    
    
    
    4,870Senior Redeemable Preferred Stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    28,907
    
    
    
    
    
    
    
    
    
    
    
    28,907Total cash obligations
    
    $
    18,627
    
    
    
    100,888
    
    
    
    268
    
    
    
    28,987
    
    
    
    71
    
    
    
    2,436
    
    
    
    151,277Standby letters of credit
    
    $
    3,317
    
    
    
    2,018
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,335


(a) See December 4, 2003 notice to registered holders of Notes below.

The Companys debt obligations include mortgage financing of Holding in
the amount of $17.5 million incurred by Holding in connection with the purchase
by Holding of the San Carlos real property. This mortgage financing was
refinanced in June 2003. Under the terms of the refinancing, the loan was
extended until January 31, 2004. During fiscal years 2002 and 2003, the Company
repaid $0.5 million in principal amount of loan in two installments, one on
June 1, 2002 and one on December 1, 2002. Restrictions in the Indenture and the
Senior Notes and in the Companys credit facility prohibit CPI from
distributing cash to Holding to satisfy this obligation. Management expects to
either refinance this obligation or to enter into a sale or other transaction
with respect to this property. Holding has entered into an agreement to sell
the San Carlos property. As discussed above in Item 1
BusinessEnvironmental
Matters, the proposed sale is subject to various conditions.

On December 4, 2003, the trustee under the Indenture on behalf of, CPI,
issued a notice to all of the registered holders of the Senior Notes, notifying
them that CPI has elected to redeem $26,000,000 in principal amount of the
Senior Notes on January 5, 2003. The redemption will occur at a price equal to
101.5% of the principal amount of such notes plus accrued and unpaid interest
to January 5, 2003. See Item 1 BusinessRecent
EventsRedemption of Senior
Subordinated Notes of CPI.

Upon the occurrence of a change in control, the Company shall make an
offer to each holder of the Senior Preferred Stock at a purchase price in cash
equal to 101.0% of the aggregate liquidation preference thereof plus
accumulated and unpaid dividends thereon to the date of repurchase.

Generally, there can be no assurance that the combination of cash
generated by operations, borrowing availability from the Companys credit
facility and additional collateral-based financing will be sufficient to meet
the Companys cash requirements. If the Company is unable to satisfy such cash
requirements from these sources, the Company will adopt one or more
alternatives, such as reducing or delaying capital expenditures, reducing
discretionary costs, and negotiating an increase to the Companys borrowing
capacity under its line of credit.

Financial Condition of CPI

As of October 3, 2003, cash and cash equivalents were $33.8 million, as
compared to $2.7 million at September 27, 2002. The majority of the $31.0
million increase relates to cash generated from operating activities, offset in
part by cash used in investing and financing activities in fiscal year 2003 of
$2.9 million and $1.1 million, respectively. Cash provided by operating
activities of $35.1 million was generated primarily from $16.9 million in net
income, non-cash depreciation and amortization of $7.0 million and increases in
current liabilities of $9.8 million. Cash provided by operating activities in
fiscal year 2002 was $43.8 million despite a net loss of $6.1 million due to
significant reductions in accounts receivable and inventories from the prior
year.

Net cash used in investing activities was $2.9 and $2.5 million in fiscal
years 2003 and 2002, respectively. Net cash provided by investing activities
was $13.4 million in fiscal year 2001. Net cash used in investing activities
were comprised principally of investment in property, plant and equipment
totaling $3.1 million in fiscal year 2003, $3.4 million in fiscal year 2002,
and $5.8 million in fiscal year 2001. The use of cash for investment in
property, plant and equipment in fiscal year 2003 and 2002 was partially offset
by cash proceeds

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from the fiscal year 2002 sale of SSPD of $0.1 million and
$0.9 million, respectively. In fiscal year 2001, the
use of cash for investment in property, plant and equipment was offset by
cash proceeds from the sale by CPI of the San Carlos, California facility to
Holding of $17.3 million and the sale of rental property at the Companys
Beverly, Massachusetts facility of $1.9 million. The Companys continuing
operations typically do not have large capital requirements. 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 year 2004 to be
moderately higher than fiscal year 2003 levels; however, the Company will
continue to manage capital expenditures consistent with business conditions.

In a further effort to provide capital and liquidity in the long term and
in an effort to decrease production costs and more efficiently use the
Companys facilities, the Company relocated its Satcom Divisions production
operation from Palo Alto, California to its facility in Ontario, Canada during
fiscal year 2001 and 2002. Also, during fiscal year 2001, the Company
relocated its administrative offices into a single building in Palo Alto.

As of October 3, 2003, the Company had $30.0 million available under its
revolving line of credit that expires May 31, 2005. The following table
provides a summary of the effect on liquidity and cash flows from the Companys
contractual obligations as of October 3, 2003:

Due in Fiscal Years2004
    
    2005
    
    2006
    
    2007
    
    2008
    
    Thereafter
    
    Total(in thousands)(a
    )Debt obligations
    
    $
    
    
    
    
    100,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    100,000Noncancellable operating leases
    
    
    3,577
    
    
    
    3,338
    
    
    
    2,718
    
    
    
    2,530
    
    
    
    2,463
    
    
    
    32,507
    
    
    
    47,133Senior Redeemable Preferred Stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    28,907
    
    
    
    
    
    
    
    
    
    
    
    28,907Total cash obligations
    
    $
    3,577
    
    
    
    103,338
    
    
    
    2,718
    
    
    
    31,437
    
    
    
    2,463
    
    
    
    32,507
    
    
    
    176,040Standby letters of credit
    
    $
    3,317
    
    
    
    2,018
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,335


(a) See December 4, 2003 notice to registered holders of Notes below.

On December 4, 2003, the trustee under the Indenture on behalf of CPI,
issued a notice to all of the registered holders of the Senior Notes, notifying
them that CPI has elected to redeem $26,000,000 in principal amount of the
Senior Notes on January 5, 2003. The redemption will occur at a price equal to
101.5% of the principal amount of such notes plus accrued and unpaid interest
to January 5, 2003. See Item 1 BusinessRecent
EventsRedemption of Senior
Subordinated Notes of CPI.

Upon the occurrence of a change in control, the Company shall make an
offer to each holder of the Senior Preferred Stock at a purchase price in cash
equal to 101.0% of the aggregate liquidation preference therof plus accumulated
and unpaid dividends thereon to the date of repurchase.

Generally, there can be no assurance that the combination of cash
generated by operations, borrowing availability from the Companys Credit
Facility and additional collateral-based financing will be sufficient to meet
the Companys cash requirements. If the Company is unable to satisfy such cash
requirements from these sources, the Company will adopt one or more
alternatives, such as reducing or delaying capital expenditures, reducing
discretionary costs, and negotiating an increase to the Companys borrowing
capacity under its line of credit.

Recent Accounting Pronouncements

The Financial Accounting Standards Board (FASB) issued SFAS No. 143,
Accounting for Asset Retirement Obligations, in August 2001, and SFAS No.
144, Accounting for the Impairment or Disposal of Long-lived Assets, in
October 2001. SFAS No. 143 is effective for fiscal years beginning after June
15, 2002 and requires that the fair value of an asset retirement obligation be
recorded as a liability in the period in which it incurs the obligation. SFAS
No. 144 is effective for fiscal years beginning after December 15, 2001. It
provides a single accounting model for long-lived assets to be disposed of and
replaces SFAS No. 121 Accounting for the Impairment of Long-Lived Assets and
Long-Lived Assets to Be Disposed Of. The Company adopted these Statements on
September 28, 2002. The adoption did not have a material impact on the
Companys consolidated financial position or results of operations.

19



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In April 2002, the FASB issued SFAS No. 145, Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections. This Statement rescinds SFAS Statement
No. 4, Reporting Gains and Losses from Extinguishment of Debt, and an
amendment of that Statement, SFAS Statement No. 64, Extinguishments of Debt
Made to Satisfy Sinking-Fund Requirements. SFAS No. 145 Statement amends SFAS
Statement No. 13, Accounting for Leases, to eliminate an inconsistency
between the required accounting for sale-leaseback transactions and the
required accounting for certain lease modifications that have economic effects
that are similar to sale-leaseback transactions. This Statement also amends
other existing authoritative pronouncements to make various technical
corrections, clarify meanings, or describe their applicability under changed
conditions. The provisions of SFAS No. 145 are effective in fiscal years
beginning after May 15, 2002, with early adoption permitted, and, in general,
are to be applied prospectively. The Company adopted this Statement on
September 28, 2002. The adoption did not have a material impact on the
Companys consolidated financial position or results of operations.

In June 2002, the Financial Accounting Standard Board (FASB) issued SFAS
No. 146, Accounting for Costs Associated with Exit and Disposal Activities.
SFAS 146 requires that a liability for a cost associated with an exit or
disposal activity be recognized and measured initially at fair value only when
the liability is incurred. The provisions of SFAS No. 146 are effective
prospectively for exit or disposal activities initiated after December 31,
2002. Adoption of this statement did not have a material effect on the
Companys consolidated financial position or results of operations.

In November 2002, the FASB issued Interpretation No. 45 (FIN 45),
Guarantors Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others. FIN 45 requires a guarantor to
include disclosure of certain obligations, and if applicable, at the inception
of the guarantee, recognize a liability for the fair value of other certain
obligations undertaken in issuing a guarantee. The recognition requirement is
effective for guarantees issued or modified after December 31, 2002. The
adoption of FIN 45 did not have a material impact on the Companys consolidated
financial position or results of operations.

In December 2002, the FASB issued SFAS 148, Accounting for Stock-Based
Compensation  Transition and Disclosure  an Amendment of SFAS 123. SFAS 148
provides additional transition guidance for those entities that elect to
voluntarily adopt the accounting provisions of SFAS 123, Accounting for
Stock-Based Compensation. In addition, this Statement amends the disclosure
requirements of SFAS No. 123 to require prominent disclosures in both annual
and interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results.
The Company adopted the provisions under this Statement in the second quarter
of fiscal year 2003. Adoption of SFAS 148 did not have a material impact on the
Companys consolidated financial position or results of operations.

In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities, in an effort to expand upon and strengthen
existing accounting guidance as to when a company should consolidate the
financial results of another entity. This interpretation requires variable
interest entities as defined to be consolidated by a company if that company
is subject to a majority of expected losses of the entity or is entitled to
receive a majority of expected residual returns of the entity, or both. A
company that is required to consolidate a variable interest entity is referred
to as the entitys primary beneficiary. The interpretation also requires
certain disclosures about variable interest entities that a company is not
required to consolidate, but in which it has a significant variable interest.
The consolidation and disclosure requirements apply immediately to variable
interest entities created after January 31, 2003. The Company is not the
primary beneficiary of any variable interest entity created after January 31,
2003, nor does the Company have a significant variable interest in a variable
interest entity created after January 31, 2003.

For variable interest entities that existed prior to February 1, 2003, the
consolidation requirements were initially effective for reporting periods
beginning after June 15, 2003. On October 9, 2003, the FASB Staff Issued
Position No. FIN46-6 which delayed the effective date of consolidation
provisions of this interpretation for variable interest entities created before
February 1, 2003 if the reporting entity had not yet issued financial
statements reporting the variable interest entities in accordance with the
consolidation provision of Interpretation 46. The new effective date is for
reporting periods ending after December 15, 2003. The Company will apply the
provisions of this interpretation to variable interest entities created before
February 1, 2003 as of January 3, 2004. The Company has evaluated the impact
of the provisions of Interpretation 46 and it believes it will not have a
material impact on the Companys consolidated financial statements.

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In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133
on Derivative Instruments and Hedging Activities. SFAS 149 amends and
clarifies financial accounting and reporting for derivative instruments and for
hedging activities under SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities. This Statement will be applied prospectively for
contracts entered into or modified after June 30, 2003 and hedging
relationships designated after June 30, 2003. Adoption of SFAS No. 149 in the
Companys fourth quarter did not have a material impact on the Companys
consolidated financial position or results of operations.

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity.
SFAS No. 150 requires that certain financial instruments with characteristics
of both liabilities and equity, be classified as liabilities in statements of
financial position. The financial instruments affected include mandatorily
redeemable stock, certain financial instruments that require or may require the
issuer to buy back some of its shares in exchange for cash or other assets and
certain obligations that can be settled with shares of stock. SFAS No. 150 is
effective for all financial instruments entered into or modified after May 31,
2003 and must be applied to existing financial instruments at the beginning of
the first fiscal period beginning after December 15, 2003 for non-public
entities. The Company is currently analyzing this Statement and has not yet
determined its impact on the Companys consolidated financial position or
results of operations.

Risk Factors

Investors should carefully consider the following risks and the other
information in this report and the Companys other filings with the SEC before
deciding to invest in the Company or to maintain or increase any investment.
The risks and uncertainties described below are not the only ones facing the
Company. Additional risks and uncertainties may also adversely impact and
impair the Companys business. If any of the following risks actually occur,
the Companys business, results of operations, or financial condition would
likely suffer. In such case, the trading price of the Companys securities
could decline and investors might lose all or part of their investment.



| |  | The Company had historical losses. In fiscal year 2003, the Company
had its first profitable year since fiscal year 1998. The Company has
an accumulated deficit, as of October 3, 2003, of $84.5 million. The
Companys ability to generate revenues and profits is subject to the
risks and uncertainties encountered by companies in very competitive
markets.
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The Companys leverage is substantial, which could adversely affect
its financial health and ability to obtain financing in the future and
to react to changes in its business.The Company has a significant
amount of debt, which could have important consequences, including,
but not limited to the following: it could make it more difficult for
the Company to satisfy its obligations under its credit facilities and
to its noteholders; it could require the Company to dedicate a
substantial portion of its cash flow from operations to payments on
debt, which will reduce the funds available for working capital,
capital expenditures, and other general corporate expenses; it could
have the effect of limiting the Companys flexibility in planning for,
or reacting to, changes in its business and the markets in which it
competes; it could place the Company at a disadvantage compared to its
competitors that have proportionately less debt; and it could limit
the Companys ability to borrow additional funds in the future, if
needed, due to applicable financial and restrictive covenants in the
debt.
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The Companys ability to generate the significant amount of cash
needed to service its debt and grow its business depends on many
factors beyond the Companys control. The Companys ability to make
payments on its debt and to fund its planned capital expenditures will
depend on its ability to generate cash and to secure financing in the
future. This, to a certain extent, is subject to general economic,
financial, competitive, legislative, regulatory and other factors
beyond the Companys control. If the business does not generate
sufficient cash flow from operations, and sufficient future borrowings
are not available to the Company under its credit facilities or from
other sources of financing, the Company may not be able to repay its
debt, grow its business or fund its other liquidity needs.
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The markets in which the Company operates are competitive. The
Company encounters competition in certain business areas from other
companies, some of which have resources substantially greater than
those of the Company. The Companys ability to compete in such
markets depends to a large extent on its ability
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| |  | to provide high quality products with shorter lead times at competitive
prices, and its readiness in facilities, equipment and personnel.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------



| |  | Certain markets in which the Company operates are subject to
technological change. The Company must 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. The Companys success will
depend on its ability to anticipate or adapt to new technology on a
timely basis, and if it fails to adapt successfully to technological
changes or fails to obtain access to important technologies, the
business may suffer.
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Changes to governmental environmental regulation and legislation could
adversely affect the Companys business. The Company is subject to a
variety of federal, state and local environmental laws and regulations
and utilizes in its operations a number of chemicals or similar
substances that are classified as hazardous. Management believes that
the Companys current operations are in substantial compliance with
current environmental laws and regulations. However, changes in law
or limitations 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. In addition, it is possible that the Company may experience
releases of certain chemicals or other events that could cause the
incurrence of material cleanup costs or other damages.
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | A portion of the Companys sales are, and are expected to continue to
be, from contracts through the United States Government, which are
subject to Government regulation, changes in Governmental
appropriations, national defense policies and availability of
government funds. United States 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, and additional monies are normally
committed to the contract by the procuring agency only as
appropriations are made by Congress for future fiscal years.
Government contracts are, by their terms, subject to termination by
the United States Government at its convenience or upon default by the
contractor. Changes in governmental regulations, national defense
policies or congressional appropriation could negatively impact the
Companys revenues.
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The Company depends on a limited group of suppliers for certain
materials necessary for the manufacture of its products. If the
Company is unable to procure the necessary materials from its
suppliers, its ability to manufacture products could be severely
impaired, and the Companys growth, financial condition and results of
operations could suffer. In addition, the prices of these raw
materials are subject to fluctuation and could also negatively impact
the Companys financial condition.
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The Company depends on its ability to attract and retain qualified
personnel.Because of the specialized and technical nature of the
Companys business, the Company is dependent on the continued service
of, and on its ability to attract and retain, qualified technical,
marketing, sales and managerial personnel. There exists competition
for such personnel, 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.
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The Companys principal common stockholders can exercise significant
control over the Company and could limit the ability of the Companys
other stockholders to influence the outcome of transactions requiring
shareholder vote. As of December 8, 2003, approximately 76% of the
Companys outstanding common stock is owned by the Companys executive
officers, directors and principal stockholders. These stockholders
will have the ability to exercise influence over all matters requiring
approval by the Companys stockholders, including the election of
directors and approval of significant corporate transactions.
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




Item 7A:Quantitative and Qualitative Disclosures About Market Risk

The Company is exposed to interest rate risk on a portion of its
outstanding debt, as well as foreign currency exchange rate risk inherent in
its sales commitments and non-U.S. dollar denominated expenses, and non-U.S.
dollar denominated assets and liabilities. The Company regularly assesses the
potential impact of these

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risks and does not anticipate any material losses in these areas. The
Company does not use derivative financial instruments for speculative or
trading purposes.

The Companys Senior Subordinated Notes mature in August 2005, and bear a
fixed interest rate of 12% per annum. As discussed above in Item 1
Business-Recent Events, in December 2003, the Company notified the holders of
the Notes of its election to redeem $26.0 million of the Notes. The Companys
remaining outstanding debt, with a carrying value of approximately $17.5
million at October 3, 2003, is subject to changes in the prime rate or LIBOR
rates.

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 Canadian dollar, the British pound, the Euro,
the Australian dollar and the Swiss franc. The Company limits its foreign
currency exposure primarily through natural hedging (offsetting foreign
currency payables with foreign currency receivables), but may enter into
forward contracts if necessary. These efforts reduce, but do not eliminate, the
impact of foreign currency rate movements. The Company estimates that a one
cent strengthening in the Canadian dollar against the U.S. dollar will increase
the Companys costs of goods sold and operating expenses by $0.4 million on an
annual basis, and a one cent weakening will cause a decrease of an equivalent
amount.

The Company performed a sensitivity analysis in which it assessed the
potential loss in future income from the impact of a 10% 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%
adverse movement in the Base Rate or Effective Rate on the Companys variable
rate debt would result in a decrease in future income of less than $0.1
million. In terms of foreign currency exchange rate risk, a 10% adverse
movement in the levels of foreign currency exchange rates against the U.S.
dollar with all other variables held constant would have virtually no effect on
future income as foreign payable and receivable balances have similar values,
minimizing the foreign exchange exposure. Actual results, however, could
differ materially.




Item 8:Financial Statements and Supplementary Data

Information called for by this item is set forth in the consolidated
financial statements of Holding and CPI contained in this report. Specific
financial statements and schedules can be found at the pages listed in the
Index to Financial Statements on page F-1.

COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION
    
    PageIndependent Auditors Report
    
    
    F-2Consolidated Balance Sheets as of October 3, 2003 and September 27, 2002
    
    
    F-3Consolidated Statements of Operations for the 53-week period ended October 3, 2003, and
the 52-week periods ended September 27, 2002 and September 28, 2001
    
    
    F-4Consolidated Statements of Stockholders Deficit for the 53-week period ended October 3,
2003 and the 52-week periods ended September 27, 2002 and September 28, 2001
    
    
    F-5Consolidated Statements of Cash Flows for the 53-week period ended October 3, 2003, and
the 52-week periods ended September 27, 2002 and September 28, 2001
    
    
    F-6Notes to the Consolidated Financial Statements
    
    
    F-8Financial Statement Schedule
    
    
    F-65


COMMUNICATIONS & POWER INDUSTRIES, INC.
    
    PageIndependent Auditors Report
    
    
    F-33Consolidated Balance Sheets as of October 3, 2003 and September 27, 2002
    
    
    F-34Consolidated Statements of Operations for the 53-week period ended October 3, 2003, and
the 52-week periods ended September 27, 2002 and September 28, 2001
    
    
    F-35Consolidated Statements of Stockholders Deficit for the 53-week period ended October 3,
2003 and the 52-week periods ended September 27, 2002 and September 28, 2001
    
    
    F-36Consolidated Statements of Cash Flows for the 53-week period ended October 3, 2003, and
the 52-week periods ended September 27, 2002 and September 28, 2001
    
    
    F-37Notes to the Consolidated Financial Statements
    
    
    F-39Financial Statement Schedule
    
    
    F-66


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Item 9:Changes In and Disagreements with Accountants on Accounting and Financial Disclosure

Not applicable.




Item 9a:Controls and Procedures

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

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

There have been no changes in the Companys internal control over
financial reporting that occurred during the Companys most recent fiscal year
that have materially affected, or are reasonably likely to materially affect,
the Companys internal control over financial reporting.




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.

Name
    
    Age
    
    PositionWilliam P. Rutledge
    
    
    61
    
    
    Chairman of the Board and DirectorO. Joe Caldarelli
    
    
    53
    
    
    Chief Executive Officer and DirectorRobert A. Fickett
    
    
    43
    
    
    President, Chief Operating Officer and DirectorJoel A. Littman
    
    
    51
    
    
    Chief Financial Officer, Treasurer and SecretaryJohn R. Beighley
    
    
    51
    
    
    Vice President and Assistant SecretaryJohn G. Danhakl
    
    
    47
    
    
    DirectorJohn M. Baumer
    
    
    36
    
    
    DirectorJ. Kristofer Galashan
    
    
    25
    
    
    Director


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.

Name
    
    Age
    
    PositionWilliam P. Rutledge
    
    
    61
    
    
    Chairman of the Board and DirectorO. Joe Caldarelli
    
    
    53
    
    
    Chief Executive Officer, and DirectorRobert A. Fickett
    
    
    43
    
    
    President, Chief Operating Officer, and DirectorJoel A. Littman
    
    
    51
    
    
    Chief Financial Officer, Treasurer and SecretaryJohn R. Beighley
    
    
    51
    
    
    Vice President and Assistant SecretaryDon C. Coleman
    
    
    49
    
    
    Vice PresidentMike Cheng
    
    
    48
    
    
    Vice PresidentJohn G. Danhakl
    
    
    47
    
    
    DirectorJohn M. Baumer
    
    
    36
    
    
    DirectorJ. Kristofer Galashan
    
    
    25
    
    
    Director


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William P. Rutledgebecame Chairman of the Board of Holding and CPI in
June 1999. He was also interim Chief Executive Officer during the period June
1999 to November 1999. Prior to this appointment, Mr. Rutledge served as
President and Chief Executive Officer of Allegheny Teledyne Incorporated
(Teledyne, Inc) from August 1996 to March 1997. Mr. Rutledge held several
other positions at Teledyne, Inc. beginning with Group Executive in 1986, Vice
President in 1987, Senior Vice President 1988, Executive Vice President in
1989, and President in 1990. In 1991 he was elected as Chief Executive Officer
and appointed as Chairman in 1993. Prior to joining Teledyne, Inc. Mr.
Rutledge held several management positions at FMC from 1971 to 1986. Mr.
Rutledge received a BS in Metallurgical Engineering from Lafayette College and
an MS in Financial Management from George Washington University.

O. Joe Caldarellibecame Chief Executive Officer and a director of Holding
and CPI in March 2002. Prior to this, Mr. Caldarelli was a Co-Chief Operating
Officer since October 2000 and Vice President of CPI since August 1995. Mr.
Caldarelli is also the Division President of the Communications and Medical
Products (CMP) and Satcom Divisions. Mr. Caldarelli was Vice President and
General Manager for CMP under the Electron Device Business of Varian, 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.

Robert A. Fickettbecame President, Chief Operating Officer and a director
of Holding and CPI in March 2002. Prior to this, Mr. Fickett was a Co-Chief
Operating Officer since October 2000 and Vice President of CPI since April
1998. Mr. Fickett has also been the Division President of the Microwave Power
Products (MPP) Division since April 1998. From January 1996 to April 1998,
Mr. Fickett was Vice President of Operations for MPP. From 1993 until January
1996, he was President and Chief Executive Officer of Altair Technologies,
Inc., a contract manufacturer. From 1982 until 1993, Mr. Fickett held a number
of positions with Varian, 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.

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

John R. Beighleybecame 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 a MBA
from Santa Clara University.

Don C. Colemanbecame a Vice President of CPI and Division President of
the Beverly Microwave Division (BMD) in February 1999. Mr. Coleman was Vice
President of Manufacturing for BMD from February of 1996 until accepting his
current position. From 1990 until 1996, Mr. Coleman held the position of
Engineering Manager for Receiver Protector Products at BMD. Mr. Coleman held a
variety of manufacturing and development engineering positions at Varian from
the time he joined Varian in 1976 until 1990. Prior to being employed by
Varian, Mr. Coleman attended the University of Massachusetts where he received
a B.S. degree in Engineering.

Mike Chengbecame a Vice President of CPI in August 2000 and currently
heads the Companys Eimac Division. From April 1999 to August 2000, Mr. Cheng
was Vice President of Operations for MPP. From 1994 until April 1999, he was
Vice President of Marketing for MPP. From 1980 until 1994, Mr. Cheng held a
number of manufacturing and engineering positions with Varian, including
Production Manager of MPPs Klystron Engineering Group, which he was promoted
to in 1989. Prior to joining Varian, Mr. Cheng was an engineer in

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the Nuclear Energy Division of General Electric Corporation. Mr. Cheng
received a B.S. degree in Chemical Engineering from the University of
California, Berkeley and an MBA from Golden Gate University.

John G. Danhaklbecame a director of the Company in August 1995. He has
been a partner of Leonard Green & Partners, L.P. (LGP), a merchant-banking
firm that manages Green Equity Investors II, L.P. (GEI II), since 1995. Prior
to becoming a partner at LGP, Mr. Danhakl was a Managing Director at Donaldson,
Lufkin & Jenrette Securities Corporation (DLJ) since 1990. Prior to joining
DLJ, Mr. Danhakl was a Vice President at Drexel Burnham Lambert from 1985 to
1990. Mr. Danhakl currently serves on the Boards of Directors of the Arden
Group, Inc., Big 5 Sporting Goods, Diamond Triumph, Auto Glass, Inc., Leslies
Poolmart, Inc., VCA Antech, Inc., Petco Animal Supplies, Inc., MEMC Electronic
Materials, Inc., and Phoenix Scientific, Inc. Mr. Danhakl is a 1980 graduate of
the University of California at Berkeley. He received his MBA in 1985 from the
Harvard Business School.

John M. Baumerbecame a director of the Company in October 2001. He has
been a partner of LGP since 2001. Mr. Baumer had previously been a Vice
President at LGP since 1999. Prior to joining LGP, he had been a Vice President
at DLJ, and had been with DLJ since 1995. Prior to joining DLJ, Mr. Baumer
worked at Fidelity Investments and Arthur Andersen. Mr. Baumer currently serves
on the Boards of Directors of Intercontinental Art, Inc., VCA Antech, Inc.,
Petco Animal Supplies, Inc., Leslies Poolmart, Inc., and Phoenix Scientific,
Inc. Mr. Baumer is a 1990 graduate of the University of Notre Dame. He also
received his MBA in 1995 from the Wharton School at the University of
Pennsylvania.

J. Kristofer Galashanbecame a director of the Company in March 2003. He
joined LGP as an associate in August 2002. Prior to joining LGP, Mr. Galashan
was in the Investment Banking Division of Credit Suisse First Boston (formerly
DLJ) in their Los Angeles office. Mr. Galashan earned a Bachelor of Arts degree
in Honors Business Administration from the Richard Ivey School of Business at
the University of Western Ontario.

Audit Committee and Audit Committee Financial Expert

Neither CPI nor Holding has an audit committee. No member of the Board of
Directors of CPI or Holding has the qualifications required to be considered an
audit committee financial expert for purposes of the SEC rules and regulations.
Currently, the Company is not required to have an audit committee or an audit
committee financial expert.

Code of Ethics

The Company has adopted a code of ethics that applies to its principal
executive officer, principal financial officer and to its controller. The code
of ethics is filed as an exhibit to this annual report on Form 10-K.

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Item 11:Executive Compensation

The following table shows certain information concerning compensation paid
or accrued by the Company to the Chief Executive Officer and the next four most
highly compensated executive officers of Holding and CPI (collectively, the
Named Executive Officers) for each of the last three fiscal years.

Summary Compensation Table

Annual Compensation (e)
    
    Long Term Compensation (e)SecuritiesUnderlyingOther Annual
    
    Options
    
    All otherName and
    
    Fiscal
    
    
    
    
    
    Bonus
    
    Compensation
    
    # of shares
    
    CompensationPrincipal Position
    
    Year
    
    Salary
    
    (a)
    
    (b)
    
    (c)
    
    (d)2003
    
    
    $
    324,000
    
    
    $
    792,000
    
    
    $
    19,500
    
    
    
    50,000
    
    
    $
    24,843O. Joe Caldarelli
    
    
    2002
    
    
    
    252,933
    
    
    
    665,972
    
    
    
    19,762
    
    
    
    
    
    
    
    153,425Chief Executive Officer
    
    
    2001
    
    
    
    184,033
    
    
    
    
    
    
    
    6,864
    
    
    
    
    
    
    
    14,147Robert A. Fickett
    
    
    2003
    
    
    $
    255,008
    
    
    $
    421,875
    
    
    $
    18,958
    
    
    
    30,000
    
    
    $
    20,697Chief Operating Officer and President
    
    
    2002
    
    
    
    237,500
    
    
    
    600,000
    
    
    
    29,421
    
    
    
    
    
    
    
    17,9012001
    
    
    
    211,462
    
    
    
    
    
    
    
    24,090
    
    
    
    
    
    
    
    14,982Don C. Coleman
    
    
    2003
    
    
    $
    160,519
    
    
    $
    178,875
    
    
    $
    22,025
    
    
    
    10,000
    
    
    $
    10,923Vice President
    
    
    2002
    
    
    
    142,077
    
    
    
    137,523
    
    
    
    30,703
    
    
    
    
    
    
    
    9,6522001
    
    
    
    139,462
    
    
    
    52,208
    
    
    
    17,230
    
    
    
    
    
    
    
    9,011Joel A. Littman
    
    
    2003
    
    
    $
    161,538
    
    
    $
    217,200
    
    
    $
    18,958
    
    
    
    15,000
    
    
    $
    11,031Chief Financial Officer, Treasurer
    
    
    2002
    
    
    
    143,780
    
    
    
    156,000
    
    
    
    19,966
    
    
    
    
    
    
    
    10,059and Secretary
    
    
    2001
    
    
    
    133,462
    
    
    
    24,507
    
    
    
    6,832
    
    
    
    6,000
    
    
    
    8,649Mike Cheng
    
    
    2003
    
    
    $
    156,354
    
    
    $
    174,375
    
    
    $
    30,125
    
    
    
    10,000
    
    
    $
    10,387Vice President
    
    
    2002
    
    
    
    135,536
    
    
    
    102,239
    
    
    
    17,543
    
    
    
    
    
    
    
    9,1462001
    
    
    
    131,746
    
    
    
    30,968
    
    
    
    2,862
    
    
    
    
    
    
    
    6,504




|(a) |  | Consists of awards under CPIs Management Incentive Plan for fiscal year
2003, 2002 and 2001. Fiscal year 2003s awards will be paid in fiscal
year 2004.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------



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



|(c) |  | Consists of stock options granted under the 2000 Stock Option Plan. Each
option granted vests at the rate of 25% per year over a
four-year period, beginning on the date of grant.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(d) |  | Consists of (1) Company contributions to CPIs 401(k) plan and
Non-Qualified Deferred Compensation Plan for Named Executive Officers
except Mr. Caldarelli, (2) Company contributions to the Pension Plan for
Mr. Caldarelli, and (3) Company paid premiums for group life insurance
for each of the named executive officers.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(e) |  | The table does not include compensation expense attributable to the
100,000 shares of Holdings common stock purchased by certain executive
officers during fiscal year 2003 at a price which was subsequently
determined to be at below fair value.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Stock Option Grants in Fiscal Year 2003

% of TotalOptionsSecurities
    
    Granted to
    
    
    
    
    
    Market
    
    
    
    
    
    Potential Realizable Value atUnderlying
    
    Employees
    
    Exercise
    
    Price on
    
    
    
    
    
    Assumed Annual Rates of StockOptions
    
    in Fiscal
    
    Price per
    
    Date of
    
    Expiration
    
    Price Appreciation for Ten-YearName
    
    # of shares
    
    Year
    
    Share
    
    Grant
    
    Date
    
    Option Term (c)(a)
    
    
    
    
    
    (b)
    
    
    
    
    
    0%
    
    5%
    
    10%O. Joe Caldarelli
    
    
    50,000
    
    
    
    26.2
    %
    
    $
    1.10
    
    
    $
    9.00
    
    
    
    3/10/13
    
    
    $
    395,000
    
    
    $
    429,589
    
    
    $
    482,656Robert A. Fickett
    
    
    30,000
    
    
    
    15.7
    %
    
    $
    1.10
    
    
    $
    9.00
    
    
    
    3/10/13
    
    
    $
    237,000
    
    
    $
    257,754
    
    
    $
    289,594Don C. Coleman
    
    
    10,000
    
    
    
    5.2
    %
    
    $
    1.10
    
    
    $
    9.00
    
    
    
    3/10/13
    
    
    $
    79,000
    
    
    $
    85,918
    
    
    $
    96,531Joel A. Littman
    
    
    15,000
    
    
    
    7.9
    %
    
    $
    1.10
    
    
    $
    9.00
    
    
    
    3/10/13
    
    
    $
    118,500
    
    
    $
    128,877
    
    
    $
    144,797Mike Cheng
    
    
    10,000
    
    
    
    5.2
    %
    
    $
    1.10
    
    
    $
    9.00
    
    
    
    3/10/13
    
    
    $
    79,000
    
    
    $
    85,918
    
    
    $
    96,531




|(a) |  | Based on a total of 191,000 options granted to employees in fiscal year
2003.
|--- |  | -----------------------------------------------------------------------------



|(b) |  | During the closing of the quarter ended October 3, 2003 and in connection
with the Merger Agreement described above in Item 1 Business-Recent
Events, the Company obtained an updated independent appraisal to
determine the fair value of common stock purchased by certain executives
and stock options granted to certain employees during the quarter ended
April 4, 2003.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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|(c) |  | These columns show gains that could accrue for the respective options,
assuming that the market price of the Companys common stock appreciates
from the date of grant over a period of 10 years at an annualized rate of
0%, 5% and 10%, respectively. If the stock price does not increase above
the exercise price at the time of exercise, realized value to the named
executives from these options will be zero.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Aggregate Option Exercises in Last Fiscal Year and Fiscal Year-end Option Values

The following table provides summary information concerning the shares of
common stock acquired in 2003, the value realized upon exercise of stock
options in 2003, and the year end number and value of unexercised options with
respect to each of the officers listed in the summary compensation table as of
October 3, 2003. The value was calculated by determining the difference between
the fair value of underlying securities and the exercise price. The fair value
of the Companys common stock at October 3, 2003 was assumed to be $15.49 per
share based upon an independent appraisal.

Number of Securities
    
    Value of Unexercised In-the-Underlying Unexercised
    
    Money Options at Fiscal Year-Options at Fiscal Year-End
    
    EndSharesAcquired
    
    ValueName
    
    On Exercise
    
    Realized
    
    Exercisable
    
    Unexercisable
    
    Exercisable
    
    UnexercisableO. Joe Caldarelli
    
    
    
    
    
    
    
    
    
    
    6,000
    
    
    
    52,000
    
    
    $
    86,340
    
    
    $
    748,280Robert A. Fickett
    
    
    
    
    
    
    
    
    
    
    13,625
    
    
    
    33,125
    
    
    
    196,064
    
    
    
    476,669Don C. Coleman
    
    
    
    
    
    
    
    
    
    
    3,750
    
    
    
    11,250
    
    
    
    53,963
    
    
    
    161,888Joel A. Littman
    
    
    
    
    
    
    
    
    
    
    4,500
    
    
    
    18,500
    
    
    
    64,755
    
    
    
    266,215Mike Cheng
    
    
    
    
    
    
    
    
    
    
    4,125
    
    
    
    11,250
    
    
    
    59,359
    
    
    
    161,888


Pension Plan for Chief Executive Officer

During fiscal year 2003, the Company established a defined benefit pension
plan for its Chief Executive Officer, O. Joe Caldarelli. The amount of annual
pension payable to Mr. Caldarelli at age 65 is equal to: (1) 2% of the average
of Mr. Caldarellis highest average indexed earnings for each year of
pensionable service before December 31, 1990 plus (2) the aggregate of 2% of
Mr. Caldarellis Indexed Earnings for each year of pensionable service on or
after January 1, 1991. Notwithstanding the above formula, the amounts payable
to Mr. Caldarelli under the plan cannot exceed the maximum pension limits under
the Canadian Income Tax Act, which currently generally limit annual payments to
approximately $1,700 (Canadian) for each year of service.

Based on the limits imposed under the Canadian Income Tax Act, the Company
estimates that the annual benefits Mr. Caldarelli would receive pursuant to the
pension plan upon retirement at age 65 (assuming continued service until then)
would be approximately $62,000 (Canadian).

Holdings 2000 Stock Option Plan

In March 2000, Holding established the Communications & Power Industries
2000 Stock Option Plan (the Plan) to provide an incentive for key employees
(including the Named Executive Officers), consultants, advisors, and
non-affiliate directors of Holding and its subsidiaries and reserved 250,000
shares of Holdings common stock for issuance under the Plan. Options granted
under the Plan are granted at fair value, expire ten years from the date of
grant and generally vest in four equal annual installments, commencing one year
from the date of grant. The stock options granted pursuant to the Plan are not
considered incentive stock options within the meaning of Section 422 of the
Internal Revenue Code, as amended and are subject to all of the terms and
restrictions contained in the Stock Option Agreements and Stockholders
Agreements. On March 3, 2003, a majority of the holders of Holdings common
stock approved an amendment to the Plan to increase the total number of shares
of common stock that Holding is authorized to issue pursuant to the Plan from
250,000 to 350,000. As of the fiscal year ended October 3, 2003, options
granted under the Plan totaled 304,050 shares of common stock, of which 82,600
were exercisable.

The following table contains information as of October 3, 2003 for
compensation plans previously approved by security holders. There are no
compensation plans for which approval has not been obtained by security
holders.

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Equity Compensation Plan Information

Number of
    
    Weighted-
    
    Number of SecuritiesSecurities to be Issued
    
    average
    
    Remaining Available forupon
    
    Exercise Price
    
    Future Issuance UnderExercise of
    
    of Outstanding
    
    Equity CompensationPlan Category
    
    Outstanding Options
    
    Options
    
    PlansEquity compensation plans
approved by security holders
    
    
    304,050
    
    
    $
    2.18
    
    
    
    45,950


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 value of such Holding
common stock on the date the participant executes an agreement to purchase the
shares. Holding has reserved a total of 1,250,000 shares of common stock for
issuance under the Holding Equity Plan, of which 1,146,750 were issued to the
Companys former 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 year 1995. In March 2003, the Company sold an additional 100,000 shares
of the common stock of Holding for $0.1 million of cash to certain executive
officers of the Company, for a purchase price of $1.10 per share, pursuant to
the Holding Equity Plan. The Company recorded compensation expense of $0.8
million in fiscal year 2003 related to this sale as the shares were
subsequently determined to have been sold at less than fair value as determined
by an independent appraisal.

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 (collectively, the Management Notes). The aggregate principal amount
of such Management Notes was $0.9 million as of October 3, 2003. Of this
amount, $0.7 million 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 $0.2 million 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 and the Varian guaranty. The Board of Directors of Holding has
extended the due dates of all past and future scheduled interest and principal
payments on these Management Notes until the Management Notes are due in 2004
or upon request of the Board of Directors, whichever comes first.

Employment Agreements

Mr. Caldarelli, Mr. Fickett, Mr. Cheng, Mr. Coleman, and Mr. Littman are
parties to employment agreements with CPI, providing for annual base salaries
of $300,000, $250,000 (subject to annual review and adjustment), approximately
$155,000, approximately $159,000, and $144,000 (subject to annual review and
adjustment), respectively.

Under these agreements, each of these executives is eligible for
participation in the Management Incentive Plan. The Board of Directors of CPI
will review the Management Incentive Plan at the beginning of each fiscal year
and will establish the details for participation for such fiscal year. Mr.
Caldarellis target bonus under the Management Incentive Plan is set at 1 times
salary, but is subject to change. The targets for Mr. Fickett , Mr. Cheng, Mr.
Coleman and Mr. Littman are set annually by the Board of Directors.

Upon termination of his employment by the CPI, Mr. Caldarelli will be
entitled to receive severance payments, medical benefits and all other benefits
provided to him by CPI (except for long-term disability) for at least 18 months
and no more than 30 months. Mr. Fickett and Mr. Littman will each be entitled
to receive severance payments, medical benefits and all other benefits provided
to them by CPI for 18 months upon termination of their employment by CPI. Each
of Mr. Caldarelli, Mr. Fickett and Mr. Littman will be entitled to

29



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receive his bonus under the Management Incentive Plan for the entire year
in which his employment is terminated.

Upon termination of their employment by CPI without cause, Mr. Cheng and
Mr. Coleman will each be entitled to receive severance payments, medical
benefits and all other benefits provided to them by CPI for at least 6 months
and no longer than 12 months. If their employment is terminated at any time
within 2 years after the date of a change of control event, Mr. Cheng and Mr.
Coleman will each be entitled to receive severance payments, medical benefits
and all other benefits provided to them by CPI for 12 months. During the
severance period, each of Mr. Cheng and Mr. Coleman will be entitled to receive
100% of the bonus under the Management Incentive Plan that otherwise would have
been earned by such executive.

Compensation Committee Interlocks and Insider Participation

Neither Holding nor CPI has a Compensation Committee. All decisions on
the compensation of executive officers and directors of Holding, CPI or any of
their respective subsidiaries are made by the full board of directors.

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. Caldarelli and Mr. Fickett. None of the directors
or officers has any relationships that would require disclosure by the Company
pursuant to Item 404 of Regulation S-K (Certain Relationships and Related
Transactions), except as described below.

LGP is investment adviser to, and an affiliate of the general partner of,
GEI II, which holds approximately 71.7% of the outstanding shares of Holding.
Holding, in turn, owns all of the outstanding shares of common stock of CPI.
Messrs. Danhakl and Baumer, 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 by GEI II of its interest in
Holding in 1995, Holding and CPI entered into a Management Services Agreement
with LGP pursuant to which LGP receives 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. In addition, pursuant to the Management Services Agreement, it is
contemplated that in connection with and upon consummation of the Merger, LGP
will receive a transaction fee of $1,250,000. See Certain Relationships and
Related Transactions  Management Agreements.

Compensation of Directors

Individuals who are officers of Holding and CPI, as well as Messrs.
Danhakl, Baumer and Galashan, do not receive any compensation from the Company
for their service on the Boards of Directors of Holding and CPI. Mr. Rutledge
was paid annual compensation of $25,000 in fiscal year 2003.

30



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##### Table of Contents






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

All of CPIs common stock is owned by Holding. The following table sets
forth, as of December 8, 2003 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.

Amount and Nature of
    
    Percent ofName and Address of Beneficial Owner (a)
    
    Beneficial Ownership
    
    Shares Outstanding (b)Green Equity Investors II, L.P. (c) (d)
    
    
    3,590,750
    
    
    
    71.70
    %11111 Santa Monica Boulevard, Suite 2000Los Angeles, California 90025John G. Danhakl (c) (d)
    
    
    3,590,750
    
    
    
    71.70
    %11111 Santa Monica Boulevard, Suite 2000Los Angeles, California 90025John M. Baumer (c) (d)
    
    
    3,590,750
    
    
    
    71.70
    %11111 Santa Monica Boulevard, Suite 2000Los Angeles, California 90025J. Kristofer Galashan
    
    
    0
    
    
    
    0.00
    %Al D. Wilunowski (c) (e)
    
    
    535,000
    
    
    
    10.70
    %811 Hansen WayPalo Alto, California 94303William P. Rutledge
    
    
    0
    
    
    
    0
    %O. Joe Caldarelli (c)
    
    
    110,000
    
    
    
    2.20
    %Robert A. Fickett (c)
    
    
    38,000
    
    
    
    .76
    %Don C. Coleman (c)
    
    
    21,250
    
    
    
    .42
    %Joel A. Littman (c)
    
    
    23,750
    
    
    
    .47
    %Mike Cheng (c)
    
    
    14,500
    
    
    
    .29
    %Directors and Executive Officers as a
group (10 persons) (b)
    
    
    3,809,500
    
    
    
    76.07
    %




|(a) |  | Addresses are given only for persons listed as beneficial owners of 5% or
more of common stock of Holding.
|--- |  | ----------------------------------------------------------------------------------------------------------



|(b) |  | Applicable percentage of ownership is based on 5,008,172 shares of common
stock of Holding outstanding as of December 8, 2003. Shares of common
stock of Holding that a person or entity has the right to acquire within
60 days of December 8, 2003 are deemed outstanding for purposes of
computing the percentage ownership of the person or entity holding such
rights, but are not deemed outstanding for purposes of computing the
percentage ownership of any other person, except with respect to the
percentage ownership of all directors and executive officers as a group.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(c) |  | In connection with the Merger Agreement described above in
Business-Recent Events-Merger Agreement, Acquiror entered into a Voting
and Indemnification Agreement (the Voting Agreement) on November 17,
2003 with Holding , GEI II, and certain other stockholders of Holding,
which stockholders have agreed to vote shares of common stock totaling
4,354,500, or approximately 87% of the outstanding shares of common stock
of Holding. Pursuant to the Voting Agreement, each of the stockholders
has agreed, among other things, to vote (a) in favor of the approval and
adoption of all of the transactions contemplated by the Merger Agreement,
(b) against any action, proposal, agreement or transaction that would
result in a breach of any covenant, obligation, agreement, representation
or warranty of Holding under the Merger Agreement or of such person under
the Voting Agreement and (c) against any action, agreement, transaction or
proposal that could reasonably be expected to result in any of the
conditions to the closing of the Merger or Holdings obligations under the
Merger Agreement not being fulfilled, or that is intended, or could
reasonably be expected to delay or adversely affect the Merger Agreement,
the closing of the Merger or the Voting Agreement. Each of the
stockholders party to the Voting Agreement has also agreed that if such
stockholder fails to comply with the voting provisions described above,
then such failure will result in the appointment of certain officers of
Acquiror as such stockholders proxy to vote with respect to such
stockholders shares of common stock. The provisions of the Voting
Agreement described above will terminate upon the earliest of (1) the
mutual agreement of CPI Acquisition Corp. and the security holders party
to the Voting Agreement that hold a majority of the securities subject to
the Voting Agreement, (2) the closing of the Merger and (3) the
termination of the Merger Agreement in accordance with its terms.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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|(d) |  | GEI II is a Delaware limited partnership managed by LGP, which is an
affiliate of the general partner of GEI II. Messrs. Baumer and Danhakl,
through equity ownership interest and/or officer position, 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.
Baumer, and Danhakl, may be deemed to have shared voting power and
investment power with respect to the shares of Holding common stock held
by GEI II. However, such individuals disclaim beneficial ownership of the
securities held by GEI II, except to the extent of their respective
pecuniary interests therein. All of the shares of Holding common stock
shown in the table as being beneficially owned by Messrs. Baumer, and
Danhakl are owned by GEI II.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(e) |  | Includes 25,000 shares originally acquired by Mr. Wilunowski and
subsequently transferred to his child.
|--- |  | -------------------------------------------------------------------------------------------------------

Securities Authorized for Issuance Under Equity Compensation Plans

See Item 11 Executive Compensation-Holdings 2000 Stock Option Plan for
a discussion of the features of the Holding 2000 Stock Option Plan described in
the above table.




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, as of December 8, 2003, holds approximately 71.7% of the
outstanding shares of Holding. Holding, in turn, owns all of the outstanding
shares of common stock of CPI. Messrs. Danhakl and Baumer, who are directors
of Holding and CPI, are also stockholders of the general partner of LGP. In
connection with the acquisition by GEI II of its interest in Holding in 1995,
Holding and CPI entered into a Management Services Agreement with LGP pursuant
to which LGP receives 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 addition, LGP may provide financial advisory and
investment banking services to the Company in connection with major financial
transactions that may be undertaken from time to time. In consideration for
these services, the Company will pay LGP reasonable and customary fees for
services of like kind. The amount of such fees shall be (a) approved in
accordance with the procedures set forth in the applicable Holding or CPI
charter documents or financing agreements, or, (b) if no such procedures are
set forth therein, either (i) approved by a majority of the Board of Directors
of Holding or CPI, as applicable, or (ii) fair to Holding or CPI, as
applicable, from a financial point of view in the opinion of an independent
nationally recognized investment banking firm. In fiscal year 2003, LGP earned
$362,000 pursuant to the terms of the Management Services Agreement. In
addition, pursuant to the Management Services Agreement, it is contemplated
that in connection with and upon consummation of the Merger, LGP will receive a
transaction fee of $1,250,000.

In November 2003, Green Equity Investors III, L.P., an affiliate of GEI
II, purchased all of the outstanding shares of 14% Junior Cumulative Preferred
Stock of CPI and approximately 60% of the shares of 14% Senior Exchangeable
Redeemable Cumulative Preferred Stock of CPI from an independent third party.




PART IV




Item 15:Exhibits, Financial Statement Schedules, and Reports on Form 8-K



|(a) |  | Financial Statement Schedule of Holding and CPI
|--- |  | -----------------------------------------------



| |  | Schedule II  Valuation and Qualifying Accounts
| |  | -----------------------------------------------



|(b) |  | Reports on Form 8-K
|--- |  | -------------------



| |  | None
| |  | ----



|(c) |  | Schedule of Exhibits
|--- |  | --------------------

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ExhibitNo.
    
    Description2.1(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,
1995.2.4
    
    Agreement and Plan of Merger dated as of November 17, 2003, by and among
CPI Acquisition Corp., CPI Merger Sub Corp., Holding and GEI II.3.1(1)
    
    Restated Certificate of Incorporation of CPI filed with the Delaware
Secretary of State on August 11, 1995.3.2 (7)
    
    Amended and Restated Bylaws of CPI dated March 19, 2002.3.3 (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.10.1(6)
    
    Loan and Security Agreement by and among CPI as borrower, the other
obligors named therein, the lenders that are signatories hereto as the
senders, and Foothill Capital Corporation as the arranger and
administrative agent, dated as of December 15, 2000.10.1.1(9)
    
    Amendment Number One to Loan and Security Agreement by and among CPI
as borrower, the other obligors named as signatories therein, the lenders
that are signatories as lenders, and Foothill Capital Corporation as the
arranger and administrative agent.10.1.2
    
    Letter Agreement dated as of December 1, 2003 amending Loan and Security
Agreement by and among CPI as borrower, the other obligors named as
signatories therein, the lenders that are signatories as lenders, and
Foothill Capital Corporation as the arranger and administrative agent,
dated as of December 1, 2003.10.2(6)
    
    Intellectual Property Security Agreement between CPI and Foothill
Capital Corporation as Agent for the Lenders dated December 15, 2000.10.3(6)
    
    Stock Pledge and Security Agreement by CPI to and in favor of
Foothill Capital Corporation, as agent for itself and the other lenders
dated December 15, 2000.10.4(6)
    
    Stock Pledge and Security Agreement by Holding and various CPI
subsidiaries to and in favor of Foothill Capital Corporation, as agent for
itself and the other lenders, dated December 15, 2000.10.5(6)
    
    Environmental Indemnity Agreement for the benefit of Foothill Capital
Corporation, as agent for itself and the other lenders and the lenders,
dated December 15, 2000.10.6(6)
    
    Deed of Trust with Absolute Assignment of Leases and Rents, Security
Agreement and Fixture Filing by and among CPI, First American Title
Company and Foothill Capital Corporation, as agent for itself and the
other lenders, dated December 15, 2000.10.7(6)
    
    Guaranty and Security Agreement in favor of Foothill Capital
Corporation as Agent for itself and the lenders and the other lenders
pursuant to that certain Loan and Security Agreement by and among CPI, the
other obligors, Foothill and the other lenders named herein, dated
December 15, 2000.10.8(6)
    
    Continuing Guaranty in favor of Foothill Capital Corporation, as
agent for itself and the lenders and the other lenders pursuant to that
certain Loan and Security Agreement by and among CPI, the other obligors
named therein, Foothill and the other lenders named herein, dated December
15, 2000.


33



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##### Table of Contents



ExhibitNo.
    
    Description10.9(6)
    
    Intercreditor Agreement among the CPI Parties and Foothill Capital
Corporation, as agent for itself and other lenders, dated December 15,
2000.10.10(6)
    
    Fourth Amendment of Lease by and between The Board of Trustees of the
Leland Stanford Junior
University and CPI, dated December 15, 2000.10.11(6)
    
    Loan Agreement between Holding and Wells Fargo Bank, National
Association, executed as of December 15, 2000.10.11.1(8)
    
    Modification Agreement of Secured Loan between Holding and Wells
Fargo Bank, National Association, dated June 1, 2002.10.12(6)
    
    Promissory Note Secured by Deed of Trust by Holding in favor of
Wells Fargo Bank, National Association, dated December 15, 2000.10.12.1(8)
    
    Amended and Restated Promissory Note Secured by Deed of Trust by
Holding in favor of Wells
Fargo Bank, National Association, dated June 1, 2002.10.13(6)
    
    Deed of Trust with Absolute Assignment of Leases and Rents, Security
Agreement and Fixture Filing by and among Holding, American Securities
Company and Wells Fargo Bank, National Association, dated December 15,
2000.10.13.1(8)
    
    Memorandum of Modification Agreement Amending Deed of Trust by
Holding in favor of Wells Fargo Bank, National Association, dated June 1,
2002.10.13.2(11)
    
    Second Modification Agreement, dated May 30, 2003, by and between
Holding and Wells Fargo Bank, National Association.10.14(6)
    
    Subordination Agreement by CPI and Holding in favor of Wells Fargo
Bank, National Association, dated December 15, 2000.10.14.1(8)
    
    Junior Lienors Consent and Subordination Agreement by CPI in favor
of Wells Fargo Bank,
National Association, dated June 1, 2002.10.15(6)
    
    Hazardous Materials Indemnity Agreement by Holding in favor of Wells
Fargo Bank, National Association, dated December 15, 2000.10.16(6)
    
    Unsecured Promissory Note by Holding in favor of CPI, dated December 15, 2000.10.17(6)
    
    Lease dated as of December 1, 2000 by and between Holding, as lessor, and CPI, as lessee.10.18(1)
    
    Cross License Agreement between CPI and Varian dated as of August 10, 1995.10.19(1)
    
    Trademark License Agreement between CPI and Varian dated as of August 10, 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, 1995.10.26(1)
    
    Holding Common Stock Registration Rights Agreement by and among
Holding, GEI II and the Initial Senior Preferred Stock Purchaser dated as
of August 11, 1995 relating to the Holding Common Stock sold with the
Series A Senior Preferred Stock.10.27(1)
    
    Stockholders Agreement by and among Holding, GEI II and the Initial
Senior Preferred Stock Purchaser dated as of August 11, 1995 relating to
the Holding Common Stock sold with the Series A Senior Preferred Stock.10.28(1)
    
    Stock Subscription Agreement among Holding, CPII Acquisition Corp.
and GEI II dated as of August 11, 1995.10.29(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).10.32(5)
    
    Communications & Power Industries 2000 Stock Option Plan.10.32.1(10)
    
    First Amendment to Communications and Power Industries 2000 Stock
Option Plan.10.33(5)
    
    Form of Stock Option Agreement.10.34(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.10.35(1)
    
    Sublease (Unit 8, Palo Alto) dated as of August 10, 1995 between Varian Realty Inc. and CPI.


34



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##### Table of Contents



ExhibitNo.
    
    Description10.36(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.10.37(12)
    
    Employment Agreement for O. Joe Caldarelli dated March 19, 2002.10.38(12)
    
    Employment Agreement for Robert A. Fickett dated September 30, 2002.10.39(12)
    
    Employment Agreement for Joel A. Littman dated September 30, 2002.10.40
    
    Employment Agreement for Mike Cheng dated November 2, 2002.10.41
    
    Employment Agreement for Don C. Coleman dated November 2, 2002.10.42
    
    Code of Ethics10.43
    
    Pension Plan for Executive Employees of CPI Canada, Inc. (as applicable
to O.Joe Caldarelli effective January 1, 200221(1)
    
    Subsidiaries of CPI and Holding.31
    
    Rule 13a-14 (a) /15d-14 (a) Certifications.32
    
    Section 1350 Certifications




---

|(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, for the year
ended October 1, 1999.                                                        
|    
|(5)  |  | Incorporated by reference to CPIs Annual Report on Form 10-K, for the year
ended September 29, 2000.                                                     
|    
|(6)  |  | Incorporated by reference to CPIs Quarterly Report on Form 10-Q, for the
quarter ended December 28, 2000.                                                
|    
|(7)  |  | Incorporated by reference to CPIs Quarterly Report on Form 10-Q, for the
quarter ended March 29, 2002.                                                   
|    
|(8)  |  | Incorporated by reference to CPIs Quarterly Report on Form 10-Q, for the
quarter ended June 28, 2002.                                                    
|    
|(9)  |  | Incorporated by reference to CPIs Quarterly Report on Form 10-Q, for the
quarter ended January 3, 2003.                                                  
|    
|(10) |  | Incorporated by reference to CPIs Quarterly Report on Form 10-Q, for the
quarter ended April 4, 2003.                                                    
|    
|(11) |  | Incorporated by reference to CPIs Quarterly Report on Form 10-Q, for the
quarter ended July 4, 2003.                                                     
|    
|(12) |  | Incorporated by reference to CPIs Annual Report on Form 10-K, for the
year ended September 27, 2002.                                                     

35



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##### Table of Contents






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
CORPORATIONBy:
    
    /s/ O. Joe CaldarelliO. Joe CaldarelliChief Executive Officer


Date: December 30, 2003

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

Signature
    
    Title
    
    Date/s/ JOHN G. DANHAKL
John G. Danhakl
    
    Director
    
    December 30, 2003/s/ JOHN M. BAUMER
John M. Baumer
    
    Director
    
    December 30, 2003/s/ J. KRISTOFER GALASHAN
J. Kristofer Galashan
    
    Director
    
    December 30, 2003/s/ ROBERT A. FICKETT
Robert A. Fickett
    
    Director
    
    December 30, 2003/s/ WILLIAM P. RUTLEDGE
William P. Rutledge
    
    Chairman of the Board and
Director
    
    December 30, 2003/s/ O. JOE CALDARELLI
O. Joe Caldarelli
    
    Director, Chief Executive Officer
(Principal Executive Officer)
    
    December 30, 2003/s/ JOEL A. LITTMAN
Joel A. Littman
    
    Chief Financial Officer, Treasurer
and Secretary (Principal Financial
and Accounting Officer)
    
    December 30, 2003


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.

36



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##### Table of Contents



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 , INCBy:
    
    /s/ O. Joe CaldarelliO. Joe CaldarelliChief Executive Officer


Date: December 30, 2003

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

Signature
    
    Title
    
    Date/s/ JOHN G. DANHAKL
John G. Danhakl
    
    Director
    
    December 30, 2003/s/ JOHN M. BAUMER
John M. Baumer
    
    Director
    
    December 30, 2003/s/ J. KRISTOFER GALASHAN
J. Kristofer Galashan
    
    Director
    
    December 30, 2003/s/ ROBERT A. FICKETT
Robert A. Fickett
    
    Director
    
    December 30, 2003/s/ WILLIAM P. RUTLEDGE
William P. Rutledge
    
    Chairman of the Board and
Director
    
    December 30, 2003/s/ O. JOE CALDARELLI
O. Joe Caldarelli
    
    Director, Chief Executive Officer
(Principal Executive Officer)
    
    December 30, 2003/s/ JOEL A. LITTMAN
Joel A. Littman
    
    Chief Financial Officer, Treasurer
and Secretary (Principal Financial
and Accounting Officer)
    
    December 30, 2003


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



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##### Table of Contents



COMMUNICATIONS & POWER INDUSTRIES
HOLDING CORPORATION
AND SUBSIDIARIES

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




INDEX TO FINANCIAL STATEMENTS

COMMUNICATIONS & POWER INDUSTRIES HOLDING CORPORATION

PageIndependent Auditors Report
    
    
    F-2Consolidated Balance Sheets as of October 3, 2003 and September 27, 2002
    
    
    F-3Consolidated Statements of Operations for the 53-week period ended October 3,
2003 and the 52-week periods ended September 27, 2002 and September 28, 2001
    
    
    F-4Consolidated Statements of Stockholders Deficit for the 53-week period ended October 3, 2003 and the
52-week periods ended September 27, 2002 and September 28, 2001
    
    
    F-5Consolidated Statements of Cash Flows for the 53-week period ended October 3,
2003 and the 52-week periods ended September 27, 2002 and September 28, 2001
    
    
    F-6Notes to the Consolidated Financial Statements
    
    
    F-8COMMUNICATIONS & POWER INDUSTRIES, INC.Independent Auditors Report
    
    
    F-33Consolidated Balance Sheets as of October 3, 2003 and September 27, 2002
    
    
    F-34Consolidated Statements of Operations for the 53-week period ended October 3, 2003 and the 52-week periods ended September 27, 2002 and September 28, 2001
    
    
    F-35Consolidated Statements of Stockholders Deficit for the 53-week period ended October 3, 2003 and the
52-week periods ended September 27, 2002 and September 28, 2001
    
    
    F-36Consolidated Statements of Cash Flows for the 53-week period ended October 3,
2003 and the 52-week periods ended September 27, 2002 and September 28, 2001
    
    
    F-37Notes to the Consolidated Financial Statements
    
    
    F-39FINANCIAL STATEMENT SCHEDULESCommunications & Power Industries Holding Corporation
    
    
    F-65Communications & Power Industries, Inc.
    
    
    F-66


F-1



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##### Table of Contents






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
3, 2003 and September 27, 2002, and the related consolidated statements of
operations, stockholders deficit, and cash flows for the 53-week period ended
October 3, 2003 and the 52-week periods ended September 27, 2002 and September
28, 2001. In connection with our audits of the consolidated financial
statements, we also have audited the related financial statement schedule.
These consolidated financial statements and financial statement schedule are
the responsibility of 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 auditing standards generally
accepted in the United States of America. 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 3, 2003 and
September 27, 2002, and the results of their operations and their cash flows
for the 53-week period ended October 3, 2003 and the 52-week periods ended
September 27, 2002 and September 28, 2001, in conformity with accounting
principles generally accepted in the United States of America. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.

As discussed in Note 4 to the consolidated financial statements, effective
September 28, 2002, Holding adopted Statement of Financial Accounting Standards
No. 142, Goodwill and Other Intangible Assets.



| | /s/KPMG LLP
| | -----------

Mountain View, California
December 10, 2003

F-2



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##### Table of Contents



COMMUNICATIONS & POWER INDUSTRIES
HOLDING CORPORATION
AND SUBSIDIARIES




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

Fiscal Year-EndASSETS
    
    2003
    
    2002Current AssetsCash and cash equivalents
    
    $
    33,751
    
    
    
    2,724Accounts receivable, net
    
    
    33,128
    
    
    
    30,165Inventories
    
    
    37,358
    
    
    
    40,726Prepaid expenses
    
    
    2,210
    
    
    
    2,637Total current assets
    
    
    106,447
    
    
    
    76,252Property, plant, and equipment, net
    
    
    52,947
    
    
    
    55,846Goodwill
    
    
    19,149
    
    
    
    19,149Intangibles assets, net
    
    
    1,140
    
    
    
    1,613Debt issue costs, net
    
    
    2,285
    
    
    
    3,329Total assets
    
    $
    181,968
    
    
    
    156,189LIABILITIES, SENIOR REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS DEFICITCurrent LiabilitiesCurrent portion of capital leases
    
    $
    
    
    
    
    45Mortgage financing
    
    
    17,500
    
    
    
    17,750Accounts payable
    
    
    15,624
    
    
    
    14,111Accrued expenses
    
    
    21,445
    
    
    
    18,331Product warranty
    
    
    5,401
    
    
    
    4,823Income taxes payable
    
    
    3,584
    
    
    
    2,959Accrued dividends payable
    
    
    15,449
    
    
    
    9,538Advance payments from customers
    
    
    10,203
    
    
    
    7,594Total current liabilities
    
    
    89,206
    
    
    
    75,151Senior subordinated notes
    
    
    100,000
    
    
    
    100,000Total liabilities
    
    
    189,206
    
    
    
    175,151Senior Redeemable Preferred Stock of CPI($.01 par value,
325,000 shares authorized; 297,346 shares issued and outstanding
as of 2003 and 2002; liquidation preference $100 per share)
    
    
    28,907
    
    
    
    28,693Junior Preferred Stock of CPI($.01 par value, 525,000 shares
authorized: 299,541 and 261,032 shares issued and outstanding as of 2003
and 2002, respectively; liquidation preference $100 per share)
    
    
    29,300
    
    
    
    25,449Commitments and contingenciesStockholders DeficitCommon stock ($.01 par value, 6,500,000 shares authorized; 5,008,172 and
4,908,172 shares issued and outstanding as of 2003 and 2002, respectively.)
    
    
    50
    
    
    
    49Additional paid-in capital
    
    
    21,519
    
    
    
    19,111Deferred compensation
    
    
    (1,289
    )
    
    
    Accumulated deficit
    
    
    (84,469
    )
    
    
    (91,041
    )Stockholder loans
    
    
    (1,256
    )
    
    
    (1,223
    )Net stockholders deficit
    
    
    (65,445
    )
    
    
    (73,104
    )Total liabilities, preferred stock and stockholders deficit
    
    $
    181,968
    
    
    
    156,189


See accompanying notes to the consolidated financial statements.

F-3



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##### Table of Contents



COMMUNICATIONS & POWER INDUSTRIES
HOLDING CORPORATION
AND SUBSIDIARIES




CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)

Fiscal Years2003
    
    2002
    
    2001Sales
    
    $
    265,434
    
    
    
    251,245
    
    
    
    272,521Cost of sales
    
    
    183,957
    
    
    
    192,189
    
    
    
    223,332Gross profit
    
    
    81,477
    
    
    
    59,056
    
    
    
    49,189Operating costs and expenses:Research and development
    
    
    6,860
    
    
    
    5,873
    
    
    
    5,767Selling and marketing
    
    
    15,650
    
    
    
    16,073
    
    
    
    17,544General and administrative
    
    
    17,939
    
    
    
    19,777
    
    
    
    21,041(Gain) loss on sale of Solid State
Products Division (SSPD)
    
    
    (136
    )
    
    
    3,004
    
    
    
    Total operating costs and expenses
    
    
    40,313
    
    
    
    44,727
    
    
    
    44,352Operating income
    
    
    41,164
    
    
    
    14,329
    
    
    
    4,837Interest expense
    
    
    14,540
    
    
    
    16,508
    
    
    
    20,734Income (loss) before taxes
    
    
    26,624
    
    
    
    (2,179
    )
    
    
    (15,897
    )Income tax expense
    
    
    10,076
    
    
    
    4,554
    
    
    
    2,950Net income (loss)
    
    
    16,548
    
    
    
    (6,733
    )
    
    
    (18,847
    )Preferred dividends:Senior redeemable preferred stock
    
    
    5,911
    
    
    
    5,151
    
    
    
    4,387Junior preferred stock
    
    
    3,851
    
    
    
    3,356
    
    
    
    2,924Net income (loss) attributable to common stock
    
    $
    6,786
    
    
    
    (15,240
    )
    
    
    (26,158
    )See accompanying notes to the consolidated financial statements.


F-4



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##### Table of Contents



COMMUNICATIONS & POWER INDUSTRIES
HOLDING CORPORATION
AND SUBSIDIARIES




CONSOLIDATED STATEMENTS OF STOCKHOLDERS DEFICIT
(in thousands)

Deferred
    
    
    
    
    
    
    
    
    
    TotalCommon
    
    Paid-in
    
    Stock-based
    
    Accumulated
    
    Stockholder
    

StockholdersStock
    
    Capital
    
    Compensation
    
    Deficit
    
    Loans
    
    DeficitBalances, September 29, 2000
    
    $
    49
    
    
    
    19,111
    
    
    
    
    
    
    
    (49,215
    )
    
    
    (1,133
    )
    
    
    (31,188
    )Amortization of discount and issue costs
on senior redeemable preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (214
    )
    
    
    
    
    
    
    (214
    )Dividends on senior redeemable
preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,387
    )
    
    
    
    
    
    
    (4,387
    )Payment of dividends on junior
preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,924
    )
    
    
    
    
    
    
    (2,924
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (18,847
    )
    
    
    
    
    
    
    (18,847
    )Interest accrued on stockholder loans
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (48
    )
    
    
    (48
    )Balances, September 28, 2001
    
    $
    49
    
    
    
    19,111
    
    
    
    
    
    
    
    (75,587
    )
    
    
    (1,181
    )
    
    
    (57,608
    )Amortization of discount and issue costs
on senior redeemable preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (214
    )
    
    
    
    
    
    
    (214
    )Dividends on senior redeemable
preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,151
    )
    
    
    
    
    
    
    (5,151
    )Payment of dividends on junior
preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,356
    )
    
    
    
    
    
    
    (3,356
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,733
    )
    
    
    
    
    
    
    (6,733
    )Interest accrued on stockholder loans
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (42
    )
    
    
    (42
    )Balances, September 27, 2002
    
    $
    49
    
    
    
    19,111
    
    
    
    
    
    
    
    (91,041
    )
    
    
    (1,223
    )
    
    
    (73,104
    )Amortization of discount and issue costs
on senior redeemable preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (214
    )
    
    
    
    
    
    
    (214
    )Dividends on senior redeemable
preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,911
    )
    
    
    
    
    
    
    (5,911
    )Payment of dividends on junior
preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,851
    )
    
    
    
    
    
    
    (3,851
    )Issuance of stock options at less
than fair value
    
    
    
    
    
    
    1,509
    
    
    
    (1,289
    )
    
    
    
    
    
    
    
    
    
    
    220Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16,548
    
    
    
    
    
    
    
    16,548Interest accrued on stockholder loans
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (33
    )
    
    
    (33
    )Issuance of common stock at less
than fair value
    
    
    1
    
    
    
    899
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    900Balances, October 3, 2003
    
    $
    50
    
    
    
    21,519
    
    
    
    (1,289
    )
    
    
    (84,469
    )
    
    
    (1,256
    )
    
    
    (65,445
    )


See accompanying notes to the consolidated financial statements.

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##### Table of Contents



COMMUNICATIONS & POWER INDUSTRIES
HOLDING CORPORATION
AND SUBSIDIARIES




CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

Fiscal Years2003
    
    2002
    
    2001OPERATING ACTIVITIESNet cash provided by operating activities
    
    $
    35,261
    
    
    
    44,020
    
    
    
    6,513INVESTING ACTIVITIESProceeds from sale of SSPD division
    
    
    136
    
    
    
    926
    
    
    
    Proceeds from sale of property, plant, and equipment
    
    
    
    
    
    
    
    
    
    
    1,944Purchase of property, plant, and equipment
    
    
    (3,067
    )
    
    
    (3,378
    )
    
    
    (5,788
    )Net cash used in investing activities
    
    
    (2,931
    )
    
    
    (2,452
    )
    
    
    (3,844
    )FINANCING ACTIVITIESRepayments on capital leases
    
    
    (45
    )
    
    
    (964
    )
    
    
    (960
    )Payment of debt issue costs
    
    
    (339
    )
    
    
    (101
    )
    
    
    (2,217
    )Repayment of terminated revolving credit facility
    
    
    
    
    
    
    
    
    
    
    (40,000
    )Net (repayments) proceeds from revolving credit
facility
    
    
    
    
    
    
    (21,293
    )
    
    
    21,530Repayments on terminated senior term loans
    
    
    
    
    
    
    
    
    
    
    (16,049
    )Net (repayments) proceeds from senior term loan
    
    
    
    
    
    
    (20,000
    )
    
    
    20,000Net (repayments) proceeds from mortgage financing
    
    
    (250
    )
    
    
    (250
    )
    
    
    18,000Net (repayments) proceeds from bank overdraft
    
    
    (779
    )
    
    
    861
    
    
    
    (4,836
    )Proceeds from issuance of common stock
    
    
    110
    
    
    
    
    
    
    
    Net cash (used in) provided by financing activities
    
    
    (1,303
    )
    
    
    (41,747
    )
    
    
    (4,532
    )NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS
    
    
    31,027
    
    
    
    (179
    )
    
    
    (1,863
    )Cash and cash equivalents at beginning of period
    
    
    2,724
    
    
    
    2,903
    
    
    
    4,766Cash and cash equivalents at end of period
    
    $
    33,751
    
    
    
    2,724
    
    
    
    2,903See accompanying notes to the
consolidated financial statements.


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##### Table of Contents



COMMUNICATIONS & POWER INDUSTRIES
HOLDING CORPORATION
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
(in thousands)

Fiscal Years2003
    
    2002
    
    2001DETAIL OF NET CASH PROVIDED
BY OPERATING ACTIVITIESNet income (loss)
    
    $
    16,548
    
    
    
    (6,733
    )
    
    
    (18,847
    )Adjustments to reconcile net income (loss) to
net cash provided by operating activities:Depreciation
    
    
    5,820
    
    
    
    9,240
    
    
    
    10,708Amortization of deferred debt issue costs
    
    
    1,383
    
    
    
    1,629
    
    
    
    1,987Amortization of goodwill and intangibles
    
    
    473
    
    
    
    2,064
    
    
    
    2,638Allowance for doubtful accounts
    
    
    133
    
    
    
    331
    
    
    
    355Net (gain) loss on the sale of SSPD
    
    
    (136
    )
    
    
    3,004
    
    
    
    Compensation expense from stock issued
at less than fair value
    
    
    790
    
    
    
    
    
    
    
    Compensation expense from stock options
issued at less than fair value
    
    
    220
    
    
    
    
    
    
    
    Deferred income taxes
    
    
    
    
    
    
    3,500
    
    
    
    11,360Loss on liquidation of capital lease
    
    
    
    
    
    
    73
    
    
    
    Interest accrued on stockholder loans
    
    
    (33
    )
    
    
    (42
    )
    
    
    (48
    )Asset impairment loss
    
    
    
    
    
    
    508
    
    
    
    Net losses (gains) on the disposition of assets
    
    
    92
    
    
    
    187
    
    
    
    (792
    )Changes in operating assets and liabilities:Accounts receivable
    
    
    (3,096
    )
    
    
    15,705
    
    
    
    (4,659
    )Inventories
    
    
    3,422
    
    
    
    16,175
    
    
    
    6,271Prepaid expenses
    
    
    427
    
    
    
    (437
    )
    
    
    (638
    )Accounts payable
    
    
    2,292
    
    
    
    (1,672
    )
    
    
    1,007Accrued expenses
    
    
    3,114
    
    
    
    817
    
    
    
    1,052Product warranty
    
    
    578
    
    
    
    618
    
    
    
    1,247Income tax payable, net
    
    
    625
    
    
    
    652
    
    
    
    (9,111
    )Advance payments from customers
    
    
    2,609
    
    
    
    (1,599
    )
    
    
    3,983Net cash provided by operating activities
    
    $
    35,261
    
    
    
    44,020
    
    
    
    6,513See accompanying notes to the consolidated financial statements.


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##### Table of Contents



COMMUNICATIONS & POWER INDUSTRIES
HOLDING CORPORATION
and subsidiaries




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Nature of Operations

Communications & Power Industries Holding Corporation (Holding), through its
wholly owned subsidiary, Communications & Power Industries, Inc. (CPI, and
collectively with Holding, 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 five manufacturing operations 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 the Electron
Devices Business of Varian Associates, Inc., now known as Varian Medical
Systems, Inc. (Varian) 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 the Company. 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. Financing for the acquisition was obtained through the
issuance of 12% Senior Subordinated Notes due 2005 of CPI (Notes) in the
aggregate principal amount of $100.0 million, the issuance 14% Senior
Redeemable Exchangeable Cumulative Preferred Stock due 2007 of CPI (the Senior
Preferred Stock) and the issuance of 14% Junior Cumulative Preferred Stock of
CPI (the Junior Preferred Stock), 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 reported are the 52- week or 53-week periods ending
on the Friday nearest to September 30. Fiscal year 2003 was comprised of the
53-week period ending on October 3, 2003. Fiscal years 2002 and 2001 were
comprised of the 52-week periods ending on September 27, 2002 and September 28,
2001, respectively. All references to years in these notes to consolidated
financial statements represent fiscal years unless otherwise noted.

Use of Estimates

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

Generally, the Company requires no collateral from its customers, and the
Company estimates an allowance for doubtful accounts based on the
creditworthiness of its customers and general economic conditions.
Consequently, an adverse change in those factors could affect the Companys
estimate

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##### Table of Contents



COMMUNICATIONS & POWER INDUSTRIES
HOLDING CORPORATION
and subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

of its bad debts. Historical credit losses have been within managements
expectations, and most transactions with third world economies are backed by
letters of credit.

The Company is self insured for certain losses relating to workers
compensation. The self insurance accrual is based on claims filed and an
estimate for significant claims incurred but not reported.

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. On October 3, 2003, cash and cash equivalents included $0.2
million of restricted cash related to a sublease of the Companys San Carlos
facility. There was no restricted cash at the end of fiscal year 2002 or 2001.

Revenue Recognition

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

The estimated sales values of performance under certain contracts to commercial
customers and U.S. Government fixed-price and fixed-price incentive
contracts 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 that 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 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; and machinery and equipment, 3 to 7 years.

Gains and losses resulting from the disposition of assets (property, plant and
equipment) are reported on a net basis under the caption General and
administrative in the accompanying Consolidated Statements of Operations. Net
(losses) gains on the disposition of assets were ($0.1) million, ($0.2)
million, and $0.8 million for fiscal years 2003, 2002, and 2001, respectively.

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##### Table of Contents



COMMUNICATIONS & POWER INDUSTRIES
HOLDING CORPORATION
and subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Accounting for Long-Lived Assets

The Company adopted Statement of Financial Accounting Standards (SFAS) No.
142, Goodwill and Other Intangible Assets, at the beginning of fiscal year
2003. SFAS No. 142 requires that goodwill be tested annually for impairment and
whenever events or changes in circumstances indicate that an impairment loss
may have occurred, rather than being amortized as previous accounting standards
required. Furthermore, SFAS No. 142 requires purchased intangible assets other
than goodwill to be amortized over their useful lives unless these lives are
determined to be indefinite.

Prior to fiscal year 2003, the Company amortized goodwill on a straight-line
basis over 15 to 25 years and evaluated goodwill for impairment in accordance
with SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of.

The Company adopted SFAS No. 144, Accounting for Impairment or Disposal of
Long-Lived Assets, at the beginning of fiscal year 2003. SFAS No. 144 requires
that the Company assess the impairment of long-lived assets whenever events or
changes in circumstances indicate that their carrying value may not be
recoverable from the estimated future cash flows expected to result from their
use and eventual disposition. Long-lived assets subject to this evaluation
include property, plant and equipment and amortizable intangible assets.

Product Warranty

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

Deferred Debt Issue Costs

Costs incurred related to the issuance of CPIs long-term debt, mortgage
financing 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 periods used for the deferred
costs associated with the mortgage financing, CPIs revolving credit facility
(the Credit Facility), and the Notes are 1 year, 4 years and 10 years,
respectively.

Senior Redeemable Preferred Stock

The Senior Preferred Stock was issued in units with an aggregate of 262,500
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 Preferred Stock, have been reflected as a reduction of the Senior
Preferred Stock issued and are being amortized via a charge to accumulated
deficit over the period until mandatory redemption, 12 years, using the
straight-line method.

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##### Table of Contents



COMMUNICATIONS & POWER INDUSTRIES
HOLDING CORPORATION
and subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Income Taxes

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

Business Risks and Credit Concentrations

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

Foreign Currency Translation

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

Fair Value of Financial Instruments

Financial instruments consist of cash and cash equivalents, accounts
receivable, accounts payable, Credit Facility, mortgage financing and long-term
debt. The carrying value of the Companys cash and cash equivalents, accounts
receivable, accounts payable, Credit Facility and mortgage financing
approximate their fair values due to the relatively short period to maturity of
the instruments. The fair value of the Notes based on quoted market prices or
pricing models using current market rates, is a premium of 1.5% as of October
3, 2003 and a discount of 16% as of September 27, 2002.

Stock-Based Compensation

As allowed by SFAS No. 123, Accounting for Stock-Based Compensation, as
amended by SFAS No. 148, Accounting for Stock-Based Compensation  Transition
and Disclosure, the Company applies the intrinsic value-based method of
accounting prescribed by Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations. Under
this method, compensation expense is recorded only if the current market price
of the underlying stock exceeded the exercise price at the measurement date.
During fiscal year 2003, the Company issued stock options to employees which
were subsequently determined to have been issued below the fair value of the
stock on the date of grant. The compensation cost associated with the 2003
stock options

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##### Table of Contents



COMMUNICATIONS & POWER INDUSTRIES
HOLDING CORPORATION
and subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

is amortized as a charge against income under the caption General and
administrative in the Consolidated Statement of Operations on a straight-line
basis over four years vesting period of the options. If compensation cost for
the Companys stock-based compensation plan had been determined consistent with
SFAS No. 123, the Companys net income (loss) would have changed to the pro
forma amounts indicated below:

Fiscal Year(Dollars in thousands)
    
    2003
    
    2002
    
    2001Net income (loss) as reported
    
    $
    16,548
    
    
    
    (6,733
    )
    
    
    (18,847
    )Add: Stock-based compensation included
in net income (loss) determined under
the
the intrinsic value method, net of tax
    
    
    220
    
    
    
    
    
    
    
    Deduct: Stock-based compensation
determined under fair value based
method, net of tax
    
    
    (533
    )
    
    
    (40
    )
    
    
    (104
    )Pro forma net income (loss)
    
    $
    16,235
    
    
    
    (6,773
    )
    
    
    (18,951
    )


The per share weighted-average fair value of stock options granted during
fiscal years 2003, 2002 and 2001 was $8.07, $.62, and $.74, respectively, on
the date of grant using the Black-Scholes option-pricing model with the
following weighted-average assumptions: risk-free interest rate of 3.38%,
3.38%, and 4.09%, in fiscal years 2003, 2002 and 2001, respectively; expected
life of 5 years; no expected stock price volatility as the shares are not
publicly traded; and an expected dividend yield of 0.0% in all years presented.
Stock-based compensation determined under the fair value based method has been
calculated using accelerated vesting as prescribed by Financial Accounting
Standards Board (FASB) Interpretation No. 28.

Comprehensive Income

The Company has no components of other comprehensive income (loss) and,
accordingly, comprehensive income (loss) is the same as reported net income
(loss) for all periods presented.

Recent Accounting Pronouncements

The Financial Accounting Standards Board (FASB) issued SFAS No. 143,
Accounting for Asset Retirement Obligations, in August 2001, and SFAS No.
144, Accounting for the Impairment or Disposal of Long-lived Assets, in
October 2001. SFAS No. 143 is effective for fiscal years beginning after June
15, 2002 and requires that the fair value of an asset retirement obligation be
recorded as a liability in the period in which it incurs the obligation. SFAS
No. 144 is effective for fiscal years beginning after December 15, 2001. It
provides a single accounting model for long-lived assets to be disposed of and
replaces SFAS No. 121 Accounting for the Impairment of Long-Lived Assets and
Long-Lived Assets to Be Disposed Of. The Company adopted these Statements on
September 28, 2002. The adoption did not have a material impact on the
Companys consolidated financial position or results of operations.

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##### Table of Contents



COMMUNICATIONS & POWER INDUSTRIES
HOLDING CORPORATION
and subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.
This Statement rescinds SFAS Statement No. 4, Reporting Gains and Losses from
Extinguishment of Debt, and an amendment of that Statement, SFAS Statement No.
64, Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements. SFAS
No. 145 Statement amends SFAS Statement No. 13, Accounting for Leases, to
eliminate an inconsistency between the required accounting for sale-leaseback
transactions and the required accounting for certain lease modifications that
have economic effects that are similar to sale-leaseback transactions. This
Statement also amends other existing authoritative pronouncements to make
various technical corrections, clarify meanings, or describe their
applicability under changed conditions. The provisions of SFAS No. 145 are
effective in fiscal years beginning after May 15, 2002, with early adoption
permitted, and, in general, are to be applied prospectively. The Company
adopted this Statement on September 28, 2002. The adoption did not have a
material impact on the Companys consolidated financial position or results of
operations.

In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit and Disposal Activities. SFAS 146 requires that a liability for a
cost associated with an exit or disposal activity be recognized and measured
initially at fair value only when the liability is incurred. The provisions of
SFAS No. 146 are effective prospectively for exit or disposal activities
initiated after December 31, 2002. Adoption of this statement did not have a
material effect on the Companys consolidated financial position or results of
operations.

In November 2002, the FASB issued Interpretation No. 45 (FIN 45),
Guarantors Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others. FIN 45 requires a guarantor to
include disclosure of certain obligations, and if applicable, at the inception
of the guarantee, recognize a liability for the fair value of other certain
obligations undertaken in issuing a guarantee. The recognition requirement is
effective for guarantees issued or modified after December 31, 2002. The
adoption of FIN 45 did not have a material impact on the Companys consolidated
financial position or results of operations.

In December 2002, the FASB issued SFAS 148, Accounting for Stock-Based
Compensation  Transition and Disclosure  an Amendment of SFAS 123. SFAS 148
provides additional transition guidance for those entities that elect to
voluntarily adopt the accounting provisions of SFAS 123, Accounting for
Stock-Based Compensation. In addition, this Statement amends the disclosure
requirements of SFAS No. 123 to require prominent disclosures in both annual
and interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results.
The Company adopted the provisions under this Statement in the second quarter
of fiscal year 2003. Adoption of SFAS 148 did not have a material impact on the
Companys consolidated financial position or results of operations.

In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities, which addresses consolidation by business
enterprises of variable interest entities which have one or both of the
following characteristics: (1) The equity investment at risk is not sufficient
to permit the entity to finance its activities without support from other
parties and (2) the equity investors lack one or more of the defined essential
characteristics of a controlling financial interest. This Interpretation
requires existing unconsolidated variable interest entities to be consolidated
by their primary beneficiaries if the entities do not effectively disperse
risks among the participating
parties. This Interpretation applies immediately to variable interest entities
created after January 31,

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##### Table of Contents



COMMUNICATIONS & POWER INDUSTRIES
HOLDING CORPORATION
and subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2003 and to variable interest entities in which an
enterprise obtains an interest after that date. On October 9, 2003, FASB Staff
Position FIN 46-6 Effective Date of FASB Interpretation No. 46, Consolidation
of Variable Interest Entities was issued. This delayed the effective date of
this Interpretation for variable interest entities created before February 1,
2003 for the Company until January 3, 2004. The Company has evaluated the
impact of the provisions of Interpretation 46 and it believes it will not have
a material impact on the Companys consolidated financial statements.

In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. SFAS 149 amends and clarifies
financial accounting and reporting for derivative instruments and for hedging
activities under SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities. This Statement will be applied prospectively for contracts
entered into or modified after June 30, 2003 and hedging relationships
designated after June 30, 2003. Adoption of SFAS No. 149 in the Companys
fourth quarter did not have a material impact on the Companys consolidated
financial position or results of operations.

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. SFAS No. 150
requires that certain financial instruments with characteristics of both
liabilities and equity be classified as liabilities in statements of financial
position. The financial instruments affected include mandatorily redeemable
stock, certain financial instruments that require or may require the issuer to
buy back some of its shares in exchange for cash or other assets and certain
obligations that can be settled with shares of stock. SFAS No. 150 is
effective for all financial instruments entered into or modified after May 31,
2003 and must be applied to existing financial instruments at the beginning of
the first fiscal period beginning after December 15, 2003 for non-public
entities. The Company is currently analyzing this Statement and has not yet
determined its impact on the Companys consolidated financial position or
results of operations.

Reclassifications

Certain amounts in prior years consolidated financial statements have been
reclassified to conform to the fiscal 2003 presentation. Net operating results
have not been affected by these reclassifications.

3. Balance Sheet Components

Accounts Receivable

Accounts receivable are stated net of allowances for doubtful accounts of $0.6
million at the end of each of fiscal year 2003 and 2002.

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COMMUNICATIONS & POWER INDUSTRIES
HOLDING CORPORATION
and subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Inventories

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

Fiscal Year(Dollars in thousands)
    
    2003
    
    2002Raw materials and parts
    
    $
    26,330
    
    
    
    30,638Work in process
    
    
    8,786
    
    
    
    7,306Finished goods
    
    
    2,242
    
    
    
    2,782Total net inventories
    
    $
    37,358
    
    
    
    40,726


Property, Plant, and Equipment

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

Fiscal Year(Dollars in thousands)
    
    2003
    
    2002Land and land leaseholds
    
    $
    36,243
    
    
    
    36,243Buildings
    
    
    21,261
    
    
    
    21,141Machinery and equipment
    
    
    54,332
    
    
    
    54,874Leased equipment
    
    
    3,450
    
    
    
    3,727Construction in progress
    
    
    1,074
    
    
    
    986116,360
    
    
    
    116,971Less accumulated depreciation
and amortization
    
    
    (63,413
    )
    
    
    (61,125
    )Net property, plant and equipment
    
    $
    52,947
    
    
    
    55,846


Accrued Expenses

Accrued expenses are comprised of the following:

Fiscal Year(Dollars in thousands)
    
    2003
    
    2002Payroll and employee benefits
    
    $
    12,843
    
    
    
    11,253Accrued interest
    
    
    2,108
    
    
    
    2,152Non-income taxes
    
    
    1,068
    
    
    
    1,064Other
    
    
    5,426
    
    
    
    3,862Total accrued expenses
    
    $
    21,445
    
    
    
    18,331


Product Warranty

The Companys products are generally warranted for a variety of periods,
typically one to three years or a predetermined product usage life. The
Company assesses the adequacy of its preexisting warranty liabilities and
adjusts the balance based on actual experience and changes in future
expectations. The

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COMMUNICATIONS & POWER INDUSTRIES
HOLDING CORPORATION
and subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

following table reconciles the changes in the Companys accrued warranty:

Fiscal Year(Dollars in thousands)
    
    2003
    
    2002Beginning accrued warranty
    
    $
    4,823
    
    
    
    4,225Cost of warranty claims
    
    
    (4,883
    )
    
    
    (6,162
    )Accruals for product warranty
    
    
    5,461
    
    
    
    6,760Ending accrued warranty
    
    $
    5,401
    
    
    
    4,823


4. Goodwill and Other Intangible Assets

In June 2001, the FASB issued SFAS No. 141, Business Combinations, and SFAS
No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires that the
purchase method of accounting be used for all business combinations initiated
after June 30, 2001. SFAS No. 142 requires that goodwill and intangible assets
with indefinite useful lives no longer be amortized, but instead be reviewed
for impairment annually, or more frequently if certain indicators arise. SFAS
No. 142 also requires that intangible assets with definite useful lives be
amortized over their respective estimated lives and be reviewed for impairment.
The Company adopted the provisions of SFAS No. 141 and SFAS No. 142 and ceased
amortization of its goodwill, beginning in fiscal year 2003.

Upon adoption of SFAS No. 142, the Company performed a transitional goodwill
impairment evaluation to assess whether goodwill was impaired as of the date of
adoption. Based on the results of the first step of the transitional goodwill
impairment test, it was determined that no potential impairment exists. In
addition, as required by SFAS No. 142, an annual test was performed during the
fourth quarter of fiscal year 2003 and no potential impairment was noted. Also
upon adoption of SFAS No. 142, as required by SFAS No. 141, the Company
reassessed the useful lives and residual values of all intangible assets
acquired in purchase business combinations, and no significant changes were
deemed necessary.

Goodwill

As of October 3, 2003 and September 27, 2002, the Company had $19.1 million of
goodwill, $13.4 million of which has been allocated to the vacuum electron
devices (VED) segment and $5.7 million of which has been allocated to the
satcom equipment segment. During fiscal year ended October 3, 2003, there were
no goodwill impairment losses and there were no changes in the carrying amount
of goodwill.

The following table presents the impact of adopting SFAS No. 142 on net income
(loss) if such standard had been in effect for the 52-week periods ended
September 27, 2002 and September 28, 2001:

F-16Table of Contents

COMMUNICATIONS & POWER INDUSTRIES
HOLDING CORPORATION
and subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Fiscal Year(Dollars in thousands)
    
    2003
    
    2002
    
    2001Net income (loss) as reported
    
    $
    16,548
    
    
    
    (6,733
    )
    
    
    (18,847
    )Adjustments:Goodwill amortization, net of tax
    
    
    
    
    
    
    946
    
    
    
    946Adjusted net income (loss)
    
    $
    16,548
    
    
    
    (5,787
    )
    
    
    (17,901
    )


Intangible Assets

As of October 3, 2003 and September 27, 2002, the Company had $1.9 million of
intangible assets at cost, with accumulated amortization of $0.8 million and
$0.3 million, respectively. Amortization of intangible assets for fiscal years
2003, 2002 and 2001 was approximately $0.5 million, $0.4 million and $1.3
million, respectively. Amortization expense for these intangible assets is
projected to be approximately $0.4 million per year through fiscal year 2006.

5. Sale of Solid State Products Division

On September 26, 2002, the Company sold its Solid State Products Division
(SSPD) to KMIC Technology Inc., a company owned by the former management of
SSPD. The Company received approximately $0.9 million in cash and a $0.3
million unsecured promissory note. The note bears interest at 12% per annum and
is payable as follows: one-third of the principal plus unpaid interest was due
October 1, 2003 with the remaining balance payable in eight quarterly
installments of principal and interest beginning January 1, 2004 and ending
October 1, 2005. During fiscal year 2002, the sale resulted in a charge to
operations of approximately $3.0 million, which represents the net assets sold,
including approximately $2.5 million in goodwill and costs and expenses of the
transaction, net of $0.9 million of cash received from the sale of the
operations net assets. Due to the uncertainty of ultimate collection, the
proceeds from the promissory note are recognized when the cash payments are
received. During fiscal year 2003, cash payments of $0.1 million were
recognized. In connection with the SSPD transaction, the Company agreed,
subject to certain limitations and exceptions, not to engage in the manufacture
of intermediate power amplifiers for satcom amplifiers (IPAs) for a 3-year
period. In addition, the Company agreed to purchase from KMIC Technology Inc.
$0.7 million of its IPAs per year for such 3-year period at market value.

6. Credit Facility

In December 2002, CPI amended the Credit Facility to increase the maximum
amount of its revolving credit line by $20.0 million (the amount of the term
loan formerly outstanding under the same credit facility) from $41.0 million to
$61.0 million and to extend the expiration date from December 22, 2004 to May
31, 2005. The Credit Facility continues to be secured by substantially all of
the assets of CPI and guaranteed by Holding and most of CPIs subsidiaries.
Availability under the Credit Facility continues to be based upon eligible
receivables, machinery and equipment and certain real estate. As of October 3,
2003, CPI had $30.0 million available under the Credit Facility.

The Credit Facility provides for borrowings that will bear interest at a rate
equal to LIBOR plus 3.25% per annum or prime rate plus 1.75% per annum.
Additionally, the terms of the Credit Facility require the Company to maintain
certain financial covenants and limit the payment of cash dividends

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COMMUNICATIONS & POWER INDUSTRIES
HOLDING CORPORATION
and subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

on the
Senior Preferred Stock and Junior Preferred Stock. In addition to customary
fronting and other fees under the Credit Facility, CPI pays a fee equal to
1.25% per annum on outstanding but undrawn amounts of letters of credit,
customary collateral management fees and a commitment fee of 0.375% per annum
on unused facilities.

7. Senior Subordinated Notes of CPI

The $100 million principal amount of Senior Notes matures in 2005 and bears
interest at 12% per annum, payable semiannually. The payment of principal,
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
Notes (the Indenture), to the prior payment in full of all senior
indebtedness (as defined), including indebtedness under the Credit Facility,
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 all of CPIs subsidiaries.

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 as follows:

Year
    
    Percentage2003
    

101.5%2004 and thereafter
    

100.0%


Upon the occurrence of a change of control, CPI will be required to make an
offer to each holder of Notes to repurchase all or a portion of such holders
Notes at a price equal to 101% of the principal amount thereof, plus accrued
and unpaid interest to the date of redemption. The Credit Facility currently
allows CPI to redeem limited amounts of the Notes each fiscal year without
prior permission from the lenders under the Credit Facility. Subsequent to
October 3, 2003, CPI and Holding entered into an amendment to the Credit
Facility that, among other things, permits CPI to redeem up to an aggregate
maximum amount of $30.0 million of the Notes in any fiscal year. See Note 21,
Subsequent Events. In addition, the Indenture contains 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.

8. Senior Preferred Stock of CPI

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

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COMMUNICATIONS & POWER INDUSTRIES
HOLDING CORPORATION
and subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

During fiscal years 2003, 2002, and 2001 cash dividends of $5.9 million, $5.1
million, and $4.4 million, respectively were accrued and not paid on Senior
Preferred Stock.

The Senior Preferred Stock is 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
Credit Facility 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 Restated Certificate of Incorporation of CPI, which governs the rights,
preferences, privileges and restrictions of 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 (the Exchange Notes) due 2007, so long as such
exchange is permitted by the Credit Facility 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 Credit Facility and the Indenture. Except for terms relating to these
subordination provisions, payment of interest on a quarterly basis, 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 terms of the Senior Notes.

9. Junior Preferred Stock of CPI

CPI is authorized to issue up to 525,000 shares of Junior Preferred Stock
including shares of Junior Preferred Stock that 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 formation of CPI in 1995 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

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COMMUNICATIONS & POWER INDUSTRIES
HOLDING CORPORATION
and subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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.

At a value of $100 per share, CPI paid preferred dividends on its Junior
Preferred Stock through the issuance of 38,509, 33,557, and 29,243 shares of
Holding Stock for fiscal years 2003, 2002, and 2001, respectively.

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 that does not expressly
provide that it ranks senior to or on parity with the Junior Preferred Stock
and CPIs common stock.

10. Supplemental Cash Flow Information

Cash paid for interest was $13.3 million, $15.5 million, and $19.2 million, in
fiscal years 2003, 2002, and 2001, respectively. Cash paid for taxes was $8.6
million, $1.2 million, and $0.6 million, in fiscal years 2003, 2002, and 2001,
respectively.

Non-cash financing activities included the following: Dividends on Senior
Preferred Stock included $5.9 million, $5.1 million and $4.4 million of accrued
but unpaid preferred dividends in fiscal years 2003, 2002 and 2001,
respectively. Dividends on Junior Preferred Stock were paid through the
issuance of 38,509, 33,557, and 29,243, shares of Junior Preferred Stock during
fiscal years 2003, 2002, and 2001, respectively. Amortization of discount and
issue costs on the Senior Preferred Stock was $0.2 million for each of fiscal
years 2003, 2002, and 2001. Equipment of $0.1 million was acquired under
capital leases during fiscal year 2001 and fully depreciated in fiscal year
2003. No equipment was acquired under capital leases in fiscal years 2003 or
2002.

11. Leases

At October 3, 2003, the Company was committed to minimum rentals under
non-cancelable operating lease agreements primarily for land and facility
space. A summary of future minimum lease payments (dollars in thousands)
follows:

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COMMUNICATIONS & POWER INDUSTRIES
HOLDING CORPORATION
and subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Operating
    
    SubleaseFiscal Year
    
    Leases
    
    Income2004
    
    $
    1,127
    
    
    
    1372005
    
    
    888
    
    
    
    102006
    
    
    268
    
    
    
    2007
    
    
    80
    
    
    
    2008
    
    
    71
    
    
    
    Thereafter
    
    
    2,436
    
    
    
    Total future minimum lease payments
    
    $
    4,870
    
    
    
    147


Real estate taxes, insurance, and maintenance are also obligations of the
Company. Rental expense under non-cancelable operating leases amounted to $1.3
million, $1.3 million, and $1.2 million, for fiscal years 2003, 2002, and 2001,
respectively.

12. Contingencies

The amount of outstanding letters of credit provided for under the Credit
Facility was $5.3 million as of October 3, 2003.These outstanding obligations
are comprised of the following: $2.6 million related to ten performance bond
guarantees, $2.0 million related to the Companys workers compensation
insurance, and $0.7 million to various other beneficiaries related primarily to
insurance and service contracts.

The Company and Varian are currently defendants in a lawsuit relating to
operations prior to the acquisition by the Company of its business from Varian.
The Companys acquisition agreement with Varian 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.

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, as of October 3,
2003, all such matters involve amounts that would not have a material adverse
effect on the Companys consolidated financial position if unfavorably
resolved.

13. Segments and Related Information

The Company has two reportable segments: VEDs and satcom equipment. Reportable
segments are differentiated based on product. The VED segment is made up of
four operating units, which have been aggregated. Each operating unit has a
President that reports either to the Chief Operating Officer, who in turns
reports to the Chief Executive Officer (CEO), or directly to the CEO.

The CEO evaluates performance and allocates resources to each of these
operating units based on the Companys principal performance measure, earnings
before interest, income taxes, depreciation and amortization and certain other
non-cash charges (EBITDA). These four operating units have similar economic
characteristics as measured by EBITDA. The Companys analysis of the
similarity

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COMMUNICATIONS & POWER INDUSTRIES
HOLDING CORPORATION
and subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

of economic characteristics was based on both a historical and anticipated
future analysis of performance. In addition, the aggregated units are similar
in (i) the nature of their products, (ii) their manufacturing processes, (iii)
their customers and, (iv) their distribution and sales methods.

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

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

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

Summarized financial information concerning the Companys reportable segments
is shown in the following table. Included in the Other column is financial
information for SSPD, which was sold in September 2002 and did not meet the
quantitative thresholds to be reported separately, and certain unallocated
corporate-level operating expenses.

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COMMUNICATIONS & POWER INDUSTRIES
HOLDING CORPORATION
and subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands)
    
    
    
    
    
    SatcomVEDs
    
    Equipment
    
    Other
    
    TotalFiscal Year 2003:Revenues from external
customers
    
    $
    219,870
    
    
    
    45,564
    
    
    
    
    
    
    
    265,434Intersegment product transfers
    
    
    15,662
    
    
    
    
    
    
    
    
    
    
    
    15,662EBITDA
    
    
    50,850
    
    
    
    4,183
    
    
    
    (7,576
    )
    
    
    47,457Total assets
    
    
    94,671
    
    
    
    13,045
    
    
    
    74,252
    
    
    
    181,968Capital expenditures
    
    
    2,612
    
    
    
    352
    
    
    
    103
    
    
    
    3,067Fiscal Year 2002:Revenues from external
customers
    
    $
    202,978
    
    
    
    45,432
    
    
    
    2,835
    
    
    
    251,245Intersegment product transfers
    
    
    12,527
    
    
    
    
    
    
    
    952
    
    
    
    13,479EBITDA
    
    
    37,300
    
    
    
    672
    
    
    
    (9,306
    )
    
    
    28,666Total assets
    
    
    91,608
    
    
    
    14,207
    
    
    
    50,374
    
    
    
    156,189Capital expenditures
    
    
    3,086
    
    
    
    87
    
    
    
    205
    
    
    
    3,378Fiscal Year 2001:Revenues from external
customers
    
    $
    203,656
    
    
    
    64,819
    
    
    
    4,046
    
    
    
    272,521Intersegment product transfers
    
    
    20,081
    
    
    
    
    
    
    
    1,432
    
    
    
    21,513EBITDA
    
    
    29,183
    
    
    
    (4,046
    )
    
    
    (6,954
    )
    
    
    18,183Total assets
    
    
    109,684
    
    
    
    33,015
    
    
    
    61,368
    
    
    
    204,067Capital expenditures
    
    
    3,522
    
    
    
    1,487
    
    
    
    779
    
    
    
    5,788


A reconciliation of EBITDA from reportable segments to Income (loss) before
Taxes is as follows:

(Dollars in thousands)
    
    Fiscal Year2003
    
    2002
    
    2001Segment EBITDA
    
    $
    47,457
    
    
    
    28,666
    
    
    
    18,183Less:Depreciation and amortization
    
    
    6,293
    
    
    
    11,304
    
    
    
    13,346Other
    
    
    
    
    
    
    3,033
    
    
    
    Interest expense
    
    
    14,540
    
    
    
    16,508
    
    
    
    20,734Income (loss) before taxes
    
    $
    26,624
    
    
    
    (2,179
    )
    
    
    (15,897
    )In fiscal year 2002, Other represents non-cash charges of $2.5 million
resulting from the write-off of goodwill in conjunction with the sale of SSPD
and $0.5 million related to impairment of equipment used in the satcom
equipment segment.


CPIs operations outside of North America consist of sales offices in certain
foreign countries. Long-lived assets outside of North America are less than
10% of total consolidated assets. Information about CPIs sales to
geographical regions is presented in the table below. Sales to unaffiliated
customers are based on the location of the customer. There are no individual
foreign countries in which sales are considered material.

Sales by geographic area are as follows:

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COMMUNICATIONS & POWER INDUSTRIES
HOLDING CORPORATION
and subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands)
    
    Fiscal Year2003
    
    2002
    
    2001United States
    
    $
    175,880
    
    
    
    175,060
    
    
    
    182,637All foreign countries
    
    
    89,554
    
    
    
    76,185
    
    
    
    89,884Total sales
    
    $
    265,434
    
    
    
    251,245
    
    
    
    272,521


CPI had one customer, the US Government, that accounted for 10% or more of
consolidated sales in fiscal years 2003, 2002 and 2001. Sales to this customer
were $51.3 million, $43.9 million, and $42.8 million in the Companys
consolidated sales for fiscal years 2003, 2002, and 2001, respectively.
Accounts receivable from this customer represented 21% and 18% of consolidated
accounts receivable at fiscal year end 2003 and 2002, respectively. A
substantial majority of these sales were VED segment products, but this
customer also purchased satcom equipment products as well.

14. 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:

(Dollars in thousands)
    
    CPI
    
    Customer
    
    TotalSponsored
    
    Sponsored
    
    IncurredFiscal year 2003
    
    $
    6,860
    
    
    
    3,725
    
    
    
    10,585Fiscal year 2002
    
    $
    5,873
    
    
    
    5,174
    
    
    
    11,047Fiscal year 2001
    
    $
    5,767
    
    
    
    5,012
    
    
    
    10,779


15. Provision for Income Taxes

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

(Dollars in thousands)
    
    Fiscal Year2003
    
    2002
    
    2001Domestic
    
    $
    17,610
    
    
    
    (2,138
    )
    
    
    (10,431
    )Non-U.S
    
    
    9,014
    
    
    
    (41
    )
    
    
    (5,466
    )Total
    
    $
    26,624
    
    
    
    (2,179
    )
    
    
    (15,897
    )


Income tax expense (benefit) is comprised of the following:

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##### Table of Contents



COMMUNICATIONS & POWER INDUSTRIES
HOLDING CORPORATION
and subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands)
    
    Fiscal Year2003
    
    2002
    
    2001CurrentU.S. federal
    
    $
    6,541
    
    
    
    1,600
    
    
    
    (8,730
    )State
    
    
    1,891
    
    
    
    221
    
    
    
    10Non-U.S
    
    
    1,644
    
    
    
    (767
    )
    
    
    310Total Current
    
    
    10,076
    
    
    
    1,054
    
    
    
    (8,410
    )DeferredU.S. federal
    
    
    
    
    
    
    2,389
    
    
    
    9,350State
    
    
    
    
    
    
    1,085
    
    
    
    2,994Non-U.S
    
    
    
    
    
    
    26
    
    
    
    (984
    )Total Deferred
    
    
    
    
    
    
    3,500
    
    
    
    11,360Income tax expense
    
    $
    10,076
    
    
    
    4,554
    
    
    
    2,950


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

(Dollars in thousands)
    
    Fiscal Year-End2003
    
    2002Deferred tax assets:Inventory and other reserves
    
    $
    8,473
    
    
    
    8,116Accrued vacation
    
    
    1,670
    
    
    
    1,474Deferred compensation and other accruals
    
    
    1,184
    
    
    
    474Foreign jurisdictions, net
    
    
    489
    
    
    
    1,154State taxes
    
    
    650
    
    
    
    Net operating loss and credit carryforwards
    
    
    1,362
    
    
    
    2,089Gross deferred tax assets
    
    
    13,828
    
    
    
    13,307Valuation allowance
    
    
    (10,277
    )
    
    
    (11,799
    )Total deferred tax assets
    
    
    3,551
    
    
    
    1,508Deferred tax liabilities:Accelerated depreciation
    
    
    (3,537
    )
    
    
    (1,507
    )Foreign jurisdictions, net
    
    
    (14
    )
    
    
    (1
    )Total deferred tax liabilities
    
    
    (3,551
    )
    
    
    (1,508
    )Net deferred tax asset
    
    $
    
    
    
    
    


The provision for income tax expense for fiscal year 2003 and 2002 consists of
federal and state current tax expenses. The foreign income tax expense results
from current tax payable in the foreign jurisdictions.

As of fiscal year 2003 and 2002, management has established a full valuation
allowance for all of deferred tax assets for which realization is uncertain.
This allowance has been established based on the uncertainty of utilizing net
operating losses and various tax credits. In assessing the realizability of
deferred tax assets, management considers whether it is more likely than not
that some portion or all of the deferred tax assets will not be realized. The
ultimate realization of deferred tax assets is dependent upon the generation of
future taxable income during the periods in which those temporary differences
become deductible. Management considers the scheduled reversal of deferred tax

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COMMUNICATIONS & POWER INDUSTRIES
HOLDING CORPORATION
and subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

liabilities, projected future taxable income, and tax planning strategies in
making this assessment. Based on the level of historical taxable income and
projections for future taxable income over the periods in which the deferred
tax assets are deductible, management believes it is more likely than not the
Company will realize the benefits of these deductible differences, net of the
existing valuation allowances at October 3, 2003. The net change in the total
valuation allowance for the 53-week period ended October 3, 2003 and the
52-week period ended September 27, 2002 was a decrease of $1.5 million and a
decrease of $0.6 million, respectively.

As of October 3, 2003, the Company has fully utilized the net operating loss
carryforward for federal income tax and has approximately $12.3 million in
state net operating loss carryforward available to reduce future income subject
to income taxes. State net operating loss carryforwards expire beginning in
2008.

As of October 3, 2003, the Company has foreign tax credit carryforwards for
federal income tax and a Manufacturers Investment Credit for California income
tax purposes of approximately $0.6 million available to reduce future federal
and California income taxes, respectively. Foreign tax credit carryforwards
expire beginning in 2008. The California credit carryforward will expire
beginning in 2005.

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

Fiscal Year2003
    
    2002
    
    2001Statutory federal income tax rate
    
    
    35.0
    %
    
    
    (35.0
    )%
    
    
    (35.0
    )%Foreign tax rate differential
    
    
    (0.2
    )
    
    
    (33.2
    )
    
    
    2.0State taxes
    
    
    4.6
    
    
    
    38.9
    
    
    
    18.9Non-deductible expenses
    
    
    1.4
    
    
    
    8.3
    
    
    
    24.4Change in valuation allowance
    
    
    (3.0
    )
    
    
    230.0
    
    
    
    7.7Other
    
    
    
    
    
    
    
    
    
    
    0.6Effective tax rate
    
    
    37.8
    %
    
    
    209.0
    %
    
    
    18.6
    %


16. Stock-Based Benefit Plans

2000 Stock Option Plan

In March 2000, Holding established the Communications & Power Industries 2000
Stock Option Plan (the Plan) to provide an incentive for key employees,
consultants, advisors and non-affiliate directors of Holding and its
subsidiaries, and reserved 250,000 shares of Holdings common stock for
issuance under the Plan. Options granted under the Plan are granted at fair
market value, expire ten years from the date of grant and generally vest in
four equal annual installments, commencing one year from the date of grant.
The stock options granted pursuant to the Plan are not considered incentive
stock options within the meaning of Section 422 of the Internal Revenue Code,
as amended, and are subject to all of the terms and restrictions contained in
the Stock Option Agreements and Stockholders Agreements. Upon a merger or a
sale, the Stock Option Committee of

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COMMUNICATIONS & POWER INDUSTRIES
HOLDING CORPORATION
and subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

the Board of Directors (Committee), may, in its discretion, do one or more of
the following: (1) shorten the period which options are exercisable, (2)
accelerate the vesting schedule of the options, (3) arrange to have surviving
or successor entity assume the options or grant replacement options with
appropriate adjustments in the exercise prices and adjustments in the number
and kind of securities, and (4) cancel these options upon payment to the option
holder in cash. All determinations to the preceding shall be made by the
Committee and shall be final, binding and conclusive on all parties.

On March 3, 2003, a majority of the holders of Holdings common stock adopted
an amendment to the Plan to increase the total number of shares of common stock
that Holding is authorized to issue pursuant to the Plan from 250,000 to
350,000. A summary of the status of the Plan is as follows:

Options OutstandingNumber of
    
    Weighted-Options Available
    
    Shares Under
    
    Average Exercisefor Grant
    
    Option
    
    PriceAuthorized
    
    
    250,000
    
    
    
    
    
    
    
    Granted
    
    
    (235,050
    )
    
    
    235,050
    
    
    $
    4.00Balance at September 28, 2001
    
    
    14,950
    
    
    
    235,050
    
    
    $
    4.00Granted
    
    
    (2,000
    )
    
    
    2,000
    
    
    $
    4.00Canceled
    
    
    21,750
    
    
    
    (21,750
    )
    
    $
    4.00Balance at September 27, 2002
    
    
    34,700
    
    
    
    215,300
    
    
    $
    4.00Additional shares authorized
    
    
    100,000
    
    
    
    
    
    
    
    Granted
    
    
    (191,000
    )
    
    
    191,000
    
    
    $
    1.10Canceled
    
    
    102,250
    
    
    
    (102,250
    )
    
    $
    4.00Balance at October 3, 2003
    
    
    45,950
    
    
    
    304,050
    
    
    $
    2.18


The following table summarizes information about options outstanding under the
Plan at October 3, 2003:

Options Outstanding
    
    Options ExercisableOutstanding OptionsWeighted Average
    
    Weighted-
    
    
    
    Weighted-Range of
    
    
    
    
    
    Remaining
    
    average
    
    Number of
    
    averageExercise
    
    Number
    
    Contractual Life
    
    Exercise
    
    Shares
    
    ExercisePrices
    
    of Shares
    
    (In Years)
    
    Price
    
    Exercisable
    
    Price$4.00
    
    
    113,050
    
    
    
    6.78
    
    
    $
    4.00
    
    
    
    82,600
    
    
    $
    4.00$1.10
    
    
    191,000
    
    
    
    9.42
    
    
    $
    1.10
    
    
    
    
    
    
    $
    1.10


The Company uses the intrinsic-value based method to account for its employees
stock-based compensation plan. For options granted in fiscal year 2002 and
2001, no compensation cost has been recognized in the accompanying consolidated
financial statements for options granted under this plan as the exercise price
of each option equaled the fair value of the underlying common stock as of the
grant date. With respect to options granted in fiscal year 2003, the Company
has recorded deferred stock-based compensation of approximately $1.5 million
for the difference at the grant date between

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COMMUNICATIONS & POWER INDUSTRIES
HOLDING CORPORATION
and subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

the exercise price and the fair value as determined by an independent
appraisal. The total deferred stock-based compensation recorded will be
amortized on a straight-line basis over the four-year vesting period.

Holding Equity Plan

In August 1995, Holding established the Holding 1995 Management Equity Plan
(the Holding Equity Plan), under which certain of Holdings and CPIs present
and former executive officers are participants. Under the Holding Equity Plan,
participants 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 1,250,000
shares of Holding Common Stock for issuance under the Holding Equity Plan, of
which 1,146,750 were issued to the Companys former Chief Executive Officer,
certain officers and key employees in fiscal year 1995. In March 2003, the
Company sold an additional 100,000 shares to certain executive officers of
Holding and CPI for $1.10 per share in cash. The Company recorded compensation
expense of $0.8 million related to this sale as the shares were subsequently
determined to have been sold at less than the fair value as determined by an
independent appraisal.

17. Retirement and Profit Sharing Plans

CPI provides a qualified 401(k) investment plan covering substantially all of
its domestic employees and a pension contribution plan covering substantially
all of its Canadian employees. The plans provide for CPI to contribute an
amount based on a percentage of each participants base pay. CPI also has a
Non-Qualified Deferred Compensation Plan (the Non-Qualified Plan) that allows
eligible executives and directors to defer a portion of their compensation.
Participant contributions and Company matching contributions are 100% vested.
The deferred compensation liability amounted to approximately $0.1 and $0.1
million as of October 3, 2003 and September 27, 2002, respectively. Total CPI
contributions to these plans were $2.7 million for each of fiscal years 2003,
2002, and 2001.

CPIs bonus program provides incentive bonuses to management if certain
performance goals are achieved. Such performance goals are measured based upon
earnings before interest, taxes, depreciation and amortization, cash flow and
asset utilization.

Defined Benefit Plan

In fiscal year 2003, the Company established a defined benefit pension plan for
its Chief Executive Officer. The plans benefits are based on compensation
earnings but are limited by Canadas Income Tax Act. All costs of the plan will
be borne by the Company. The plans assets consist primarily of mutual funds
and cash.

The following table shows the net periodic pension cost and other data of this
plan for fiscal year 2003:

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COMMUNICATIONS & POWER INDUSTRIES
HOLDING CORPORATION
and subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands)Components of net periodic pension costCurrent year service cost
    
    $
    23Prior year service cost
    
    
    124Interest cost
    
    
    20Actual return on plan assets
    
    
    (13
    )Net periodic pension cost
    
    $
    154Benefit ObligationBeginning balance
    
    $
    Transfer from defined contribution plan
    
    
    102Service cost
    
    
    147Interest cost
    
    
    20Benefits paid
    
    
    Exchange rate adjustment
    
    
    40Ending balance
    
    $
    309Plan Assets at Fair ValueBeginning balance
    
    $
    Transfer from defined contribution plan
    
    
    102Actual return on plan assets
    
    
    13Company contributions
    
    
    147Benefits paid
    
    
    Exchange rate adjustment
    
    
    40Ending balance
    
    $
    302Benefit obligations in excess of plan assets
    
    $
    7


The projected benefit obligations and net periodic pension cost were determined
using the following weighted average assumptions:

Discount rate
    
    
    4.75
    %Expected return on plan assets
    
    
    7.50
    %Expected rate of compensation increases
    
    
    5.50
    %


18. Related Party Transactions

Sale-leaseback transaction between CPI and Holding

On December 22, 2000, a sale-leaseback transaction related to CPIs facilities
in San Carlos, California was accomplished between CPI and Holding. Holding
paid CPI aggregate consideration of $23.0 million for the San Carlos real
property, consisting of $17.25 million in cash and an unsecured promissory note
in the principal amount of $5.75 million. The promissory note matures in
December 2009, and provides for interest-only payments on a quarterly basis at
the rate of 15.5% per annum, with up to 35.25% of each interest payment payable
in kind, at Holdings option, by its issuance of additional notes. CPI and
Holding entered into a lease of the San Carlos real property for a term of
twenty (20) years on a net basis with a fixed annual rent (payable in equal
monthly

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COMMUNICATIONS & POWER INDUSTRIES
HOLDING CORPORATION
and subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

installments) of $2.45 million. Holding financed the cash portion of the San
Carlos purchase price and its fees and expenses with respect to the transaction
by borrowing $18.0 million from Wells Fargo Bank, which loan matured June 1,
2002. During fiscal year 2002 , the loan was extended until June 1, 2003 and a
principal payment of $0.2 million was made. During fiscal year 2003, the loan
was extended until January 31, 2004 and another principal payment of $0.3
million was made. The loan bears interest at LIBOR plus 4.25% and is secured on
a non-recourse basis (subject to normal and customary exceptions) by the San
Carlos real property. CPI realized a gain on the sale of the property of
approximately $8.5 million that is being recognized over the twenty year lease
term. Intercompany accounts and transactions associated with this
sale-leaseback transaction have been eliminated in consolidation.

Outside Advisors

Holding and CPI have entered into a management services agreement with Leonard
Green & Partners, L.P. (LGP) to pay approximately $0.4 million, plus
out-of-pocket expenses, annually to LGP, which is an affiliate of the general
partner of Green Equity Investors II, L.P., Holdings majority stockholder.
Certain individuals who are stockholders of the general partner of LGP are
members of the Board of Directors of Holding and CPI. The management services
agreement provides for management, consulting and financial planning services,
including assistance in strategic planning, providing market and financial
analyses, negotiating and structuring financing and exploring expansion
opportunities. In addition, LGP may provide financial advisory and investment
banking services to the Company in connection with major financial transactions
for an additional fee.

Stockholder Loans

In connection with Holdings 1995 Management Equity Plan, certain executive
officers of CPI and Holding elected to pay a portion of the purchase price for
their Management Shares by delivery of a secured promissory note (collectively,
the Management Notes) to Holding.

The aggregate principal amount of such Management Notes was $0.9 million as of
October 3, 2003. Of this amount, $0.7 million 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 $0.2 million 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 and the Varian guaranty. The Board of
Directors of Holding has extended the due dates of all past and future
scheduled interest and principal payments on these Management Notes until the
Management Notes are due in 2004 or upon request of the Board of Directors,
whichever comes first.

19. Guarantees

Holding has guaranteed CPIs obligations under the Credit Facility, the Senior
Notes and the Indenture. Other than the transactions associated with the San
Carlos real property purchase and

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COMMUNICATIONS & POWER INDUSTRIES
HOLDING CORPORATION
and subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

related financing and leaseback arrangements, the consolidated balance sheets
of Holding as of October 3, 2003 and September 27, 2002 are substantially
identical to those of CPI.

In connection with the sale of SSPD in September 2002 to KMIC Technology Inc.
the Company was required to provide a $100,000 letter of credit as a partial
guarantee for the new companys leased facilities. The letter of credit
guarantee expires in November 2003.

20. Quarterly Financial Data (Unaudited)

(Dollars in thousands)Oct. 3,
    
    July 4,
    
    Apr. 4,
    
    Jan. 3,
    
    Sept. 27,
    
    June 28,
    
    Mar. 29,
    
    Dec. 28,Quarter Ended
    
    2003
    
    2003
    
    2003
    
    2003
    
    2002
    
    2002
    
    2002
    
    2001Sales
    
    $
    65,190
    
    
    
    70,721
    
    
    
    67,897
    
    
    
    61,626
    
    
    
    59,613
    
    
    
    64,792
    
    
    
    60,612
    
    
    
    66,228Gross profit
    
    $
    20,655
    
    
    
    23,448
    
    
    
    20,684
    
    
    
    16,690
    
    
    
    15,287
    
    
    
    16,664
    
    
    
    12,946
    
    
    
    14,159Net income (loss)
    
    $
    2,536
    
    
    
    8,257
    
    
    
    3,219
    
    
    
    2,536
    
    
    
    (2,927
    )
    
    
    (1,039
    )
    
    
    (1,733
    )
    
    
    (1,034
    )


During the closing of the quarter ended October 3, 2003 and in connection with
the Merger Agreement described in Note 21, the Company obtained an updated
independent appraisal to determine the fair value of common stock purchased by
certain executives and stock options granted to certain employees during the
quarter ended April 4, 2003. The Company recognized additional employee
compensation expense for 100,000 shares of Holding common stock, based on the
difference between the issue price of common stock and the revised fair value
of common stock. The Company also recognized additional employee compensation
expense over the four-year vesting period for 191,000 shares of stock options
granted, based on the difference between the exercise price and the revised
fair value of the Companys common stock. As a result, compensation expense
increased from previously reported amounts by $0.8 million and $0.1 million for
the quarters ended April 4, 2003 and July 4, 2003, respectively. As of April 4,
2003, the reported balance sheet amounts for additional paid-in capital and
deferred stock-based compensation were increased by $2.3 million and $1.5
million, respectively. As of July 4, 2003, the reported balance sheet amounts
for additional paid-in capital and deferred stock-based compensation were
increased by $2.3 million and $1.4 million, respectively.

21. Subsequent Events

Proposed Merger

On November 17, 2003, the Company entered into an Agreement and Plan of Merger
(the Merger Agreement), under which a corporation (Acquiror) owned by The
Cypress Group L.L.C., a New York-based private equity firm, agreed to acquire
the Company in a cash-for-stock transaction with a total value of approximately
$300 million.

Pursuant to the Merger Agreement, a wholly owned subsidiary of Acquiror will
merge with and into the Company (the Merger), with the Company as the
surviving corporation. Consummation of the Merger is subject to customary
conditions, including a condition that Acquiror obtain the requisite debt
financing. Subject to the satisfaction of the applicable conditions, it is
currently anticipated that the Merger will close in the second quarter of
fiscal year 2004.

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COMMUNICATIONS & POWER INDUSTRIES
HOLDING CORPORATION
and subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Pursuant to the Management Services
Agreement described in Note 18, it is
contemplated that in connection with and upon consummation of the Merger, LGP
will receive a transaction fee of $1,250,000.

Redemption of 12% Senior Subordinated Notes of CPI

On December 4, 2003, CPI instructed the trustee under the Indenture to send a
notice to all of the registered holders of the Senior Notes, notifying them
that CPI has elected to redeem $26,000,000 in principal amount of the Notes on
January 5, 2004, pursuant to and in accordance with the terms of the Indenture.
The redemption will occur at a price equal to 101.5% of the principal amount
of such notes plus accrued and unpaid interest to January 5, 2004. In
connection with the redemption, CPI and Holding entered into an amendment to
the Credit Facility that, among other things, permits CPI to redeem up to an
aggregate maximum amount of $30.0 million of the Senior Notes in any fiscal
year.

Related Party Transactions

In November 2003, Green Equity
Investors III, L.P., an affiliate of GEI II,
purchased all of the outstanding shares of 14% Junior Cumulative Preferred
Stock of CPI and approximately 60% of the shares of 14% Senior Exchangeable
Redeemable Cumulative Preferred Stock of CPI from an independent third party.

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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 3, 2003
and September 27, 2002, and the related consolidated statements of operations,
stockholders deficit, and cash flows for the 53-week period ended October 3,
2003 and the 52-week periods ended September 27, 2002 and September 28, 2001.
In connection with our audits of the consolidated financial statements, we also
have audited the related financial statement schedule. These consolidated
financial statements and financial statement schedule are the responsibility of
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 auditing standards generally
accepted in the United States of America. 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 3, 2003 and September 27,
2002, and the results of their operations and their cash flows for the 53-week
period ended October 3, 2003 and the 52-week periods ended September 27, 2002
and September 28, 2001, in conformity with accounting principles generally
accepted in the United States of America. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.

As discussed in Note 4 to the consolidated financial statements, effective
September 28, 2002, CPI adopted Statement of Financial Accounting Standards No.
142, Goodwill and Other Intangible Assets.

/s/KPMG LLP

Mountain View, California
December 10, 2003

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




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

Fiscal Year-End2003
    
    2002ASSETSCurrent AssetsCash and cash equivalents
    
    $
    33,751
    
    
    
    2,724Accounts receivable, net
    
    
    33,128
    
    
    
    30,165Inventories
    
    
    37,358
    
    
    
    40,726Prepaid expenses
    
    
    2,210
    
    
    
    2,637Total current assets
    
    
    106,447
    
    
    
    76,252Property, plant, and equipment, net
    
    
    40,132
    
    
    
    42,478Goodwill
    
    
    19,149
    
    
    
    19,149Intangibles assets, net
    
    
    1,140
    
    
    
    1,613Debt issue costs, net
    
    
    2,263
    
    
    
    3,259Note receivable from parent
    
    
    5,750
    
    
    
    5,750Total assets
    
    $
    174,881
    
    
    
    148,501LIABILITIES, SENIOR REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS DEFICITCurrent LiabilitiesCurrent portion of capital leases
    
    $
    
    
    
    
    45Accounts payable
    
    
    15,624
    
    
    
    14,111Accrued expenses
    
    
    22,783
    
    
    
    19,340Product warranty
    
    
    5,401
    
    
    
    4,823Income taxes payable
    
    
    3,838
    
    
    
    2,964Accrued dividends payable
    
    
    15,449
    
    
    
    9,538Advance payments from customers
    
    
    10,203
    
    
    
    7,594Total current liabilities
    
    
    73,298
    
    
    
    58,415Senior subordinated notes
    
    
    100,000
    
    
    
    100,000Deferred income on sale-leaseback
    
    
    6,887
    
    
    
    7,311Total liabilities
    
    
    180,185
    
    
    
    165,726Senior Redeemable Preferred Stock($ .01 par value, 325,000 shares
authorized; 297,346 shares issued and outstanding as of
2003 and 2002, respectively; liquidation preference $100 per share)
    
    
    28,907
    
    
    
    28,693Commitments and contingenciesStockholders DeficitJunior Preferred Stock ($ .01 par value, 525,000 shares authorized;
299,541 and 261,032 shares issued and outstanding as of 2003
and 2002, respectively; liquidation preference $100 per share)
    
    
    2
    
    
    
    2Common stock ($ .01 par value, 400,000 shares authorized; 1 share
issued and outstanding as of 2003 and 2002)
    
    
    
    
    
    
    Additional paid-in capital
    
    
    50,758
    
    
    
    44,608Deferred stock-based compensation
    
    
    (1,289
    )
    
    
    Accumulated deficit
    
    
    (82,426
    )
    
    
    (89,305
    )Stockholder loans
    
    
    (1,256
    )
    
    
    (1,223
    )Net stockholders deficit
    
    
    (34,211
    )
    
    
    (45,918
    )Total liabilities, senior redeemable preferred stock
and stockholders deficit
    
    $
    174,881
    
    
    
    148,501


See accompanying notes to the consolidated financial statements.

F-34



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##### Table of Contents



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




CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)

Fiscal Year2003
    
    2002
    
    2001Sales
    
    $
    265,434
    
    
    
    251,245
    
    
    
    272,521Cost of sales
    
    
    183,957
    
    
    
    192,189
    
    
    
    223,332Gross profit
    
    
    81,477
    
    
    
    59,056
    
    
    
    49,189Operating costs and expenses:Research and development
    
    
    6,860
    
    
    
    5,873
    
    
    
    5,767Selling and marketing
    
    
    15,650
    
    
    
    16,073
    
    
    
    17,544General and administrative
    
    
    19,412
    
    
    
    21,145
    
    
    
    22,065(Gain) losson sale of Solid State Products
Division (SSPD)
    
    
    (136
    )
    
    
    3,004
    
    
    
    Total operating costs and expenses
    
    
    41,786
    
    
    
    46,095
    
    
    
    45,376Operating income
    
    
    39,691
    
    
    
    12,961
    
    
    
    3,813Interest expense
    
    
    12,511
    
    
    
    14,463
    
    
    
    18,646Income (loss) before taxes
    
    
    27,180
    
    
    
    (1,502
    )
    
    
    (14,833
    )Income tax expense
    
    
    10,325
    
    
    
    4,559
    
    
    
    2,950Net income (loss)
    
    
    16,855
    
    
    
    (6,061
    )
    
    
    (17,783
    )Preferred dividends:Senior Redeemable Preferred Stock
    
    
    5,911
    
    
    
    5,151
    
    
    
    4,387Junior Preferred Stock
    
    
    3,851
    
    
    
    3,356
    
    
    
    2,924Net income (loss) attributable to common stock
    
    $
    7,093
    
    
    
    (14,568
    )
    
    
    (25,094
    )


See accompanying notes to the consolidated financial statements.

F-35



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##### Table of Contents



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




CONSOLIDATED STATEMENTS OF STOCKHOLDERS DEFICIT
(in thousands)

Junior
    
    
    
    
    
    Additional
    
    Deferred
    
    
    
    
    
    
    
    
    
    TotalPreferred
    
    Common
    
    Paid-in
    
    Stock-based
    
    Accumulated
    
    Stockholder
    
    Stockholders'Stock
    
    Stock
    
    Capital
    
    Compensation
    
    Deficit
    
    Loans
    
    DeficitBalances, September 29, 2000
    
    $
    2
    
    
    
    
    
    
    
    38,328
    
    
    
    
    
    
    
    (49,215
    )
    
    
    (1,133
    )
    
    
    (12,018
    )Amortization of discount and issue costs
on senior redeemable preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (214
    )
    
    
    
    
    
    
    (214
    )Dividends on senior redeemable
preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,387
    )
    
    
    
    
    
    
    (4,387
    )Payment of dividends on junior
preferred stock
    
    
    
    
    
    
    
    
    
    
    2,924
    
    
    
    
    
    
    
    (2,924
    )
    
    
    
    
    
    
    Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (17,783
    )
    
    
    
    
    
    
    (17,783
    )Interest accrued on stockholder loan
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (48
    )
    
    
    (48
    )Balances, September 28, 2001
    
    $
    2
    
    
    
    
    
    
    
    41,252
    
    
    
    
    
    
    
    (74,523
    )
    
    
    (1,181
    )
    
    
    (34,450
    )Amortization of discount and issue costs
on senior redeemable preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (214
    )
    
    
    
    
    
    
    (214
    )Dividends on senior redeemable
preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,151
    )
    
    
    
    
    
    
    (5,151
    )Payment of dividends on junior
preferred stock
    
    
    
    
    
    
    
    
    
    
    3,356
    
    
    
    
    
    
    
    (3,356
    )
    
    
    
    
    
    
    Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,061
    )
    
    
    
    
    
    
    (6,061
    )Interest accrued on stockholder loan
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (42
    )
    
    
    (42
    )Balances, September 27, 2002
    
    $
    2
    
    
    
    
    
    
    
    44,608
    
    
    
    
    
    
    
    (89,305
    )
    
    
    (1,223
    )
    
    
    (45,918
    )Amortization of discount and issue costs
on senior redeemable preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (214
    )
    
    
    
    
    
    
    (214
    )Dividends on senior redeemable
preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,911
    )
    
    
    
    
    
    
    (5,911
    )Payment of dividends on junior
preferred stock
    
    
    
    
    
    
    
    
    
    
    3,851
    
    
    
    
    
    
    
    (3,851
    )
    
    
    
    
    
    
    Issuance of Holding stock options at less
than fair value
    
    
    
    
    
    
    
    
    
    
    1,509
    
    
    
    (1,289
    )
    
    
    
    
    
    
    
    
    
    
    220Issuance of Holding stock at less than
fair value
    
    
    
    
    
    
    
    
    
    
    790
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    790Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16,855
    
    
    
    
    
    
    
    16,855Interest accrued on stockholder loan
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (33
    )
    
    
    (33
    )Balances, October 3, 2003
    
    $
    2
    
    
    
    
    
    
    
    50,758
    
    
    
    (1,289
    )
    
    
    (82,426
    )
    
    
    (1,256
    )
    
    
    (34,211
    )


See accompanying notes to the consolidated financial statements.

F-36



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##### Table of Contents



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




CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

Fiscal Years2003
    
    2002
    
    2001OPERATING ACTIVITIESNet cash provided by operating activities
    
    $
    35,080
    
    
    
    43,770
    
    
    
    6,789INVESTING ACTIVITIESProceeds from sale of property to parent
    
    
    
    
    
    
    
    
    
    
    17,250Proceeds from sale of SSPD division
    
    
    136
    
    
    
    926
    
    
    
    Proceeds from sale of property, plant and equipment
    
    
    
    
    
    
    
    
    
    
    1,944Purchase of property, plant, and equipment
    
    
    (3,067
    )
    
    
    (3,378
    )
    
    
    (5,788
    )Net cash (used in) provided by investing activities
    
    
    (2,931
    )
    
    
    (2,452
    )
    
    
    13,406FINANCING ACTIVITIESRepayments on capital leases
    
    
    (45
    )
    
    
    (964
    )
    
    
    (960
    )Payment of debt issue costs
    
    
    (298
    )
    
    
    (101
    )
    
    
    (1,743
    )Repayment of terminated revolving credit facility
    
    
    
    
    
    
    
    
    
    
    (40,000
    )Net repayments of revolving credit facility
    
    
    
    
    
    
    (21,293
    )
    
    
    21,530Repayments on terminated senior term loans
    
    
    
    
    
    
    
    
    
    
    (16,049
    )Net (repayments) proceeds from bank overdraft
    
    
    (779
    )
    
    
    861
    
    
    
    (4,836
    )Net (repayments) proceeds from senior term loans
    
    
    
    
    
    
    (20,000
    )
    
    
    20,000Net cash used in financing activities
    
    
    (1,122
    )
    
    
    (41,497
    )
    
    
    (22,058
    )NET INCREASE (DECREASE) INCASH AND CASH EQUIVALENTS
    
    
    31,027
    
    
    
    (179
    )
    
    
    (1,863
    )Cash and cash equivalents at beginning of period
    
    
    2,724
    
    
    
    2,903
    
    
    
    4,766Cash and cash equivalents at end of period
    
    $
    33,751
    
    
    
    2,724
    
    
    
    2,903


See accompanying notes to the consolidated financial statements.

F-37



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##### Table of Contents



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

CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
(in thousands)

Fiscal Years2003
    
    2002
    
    2001DETAIL OF NET CASH PROVIDEDBY OPERATING ACTIVITIESNet income (loss)
    
    $
    16,855
    
    
    
    (6,061
    )
    
    
    (17,783
    )Adjustments to reconcile net income (loss) to
net cash provided by operating activities:Depreciation
    
    
    5,279
    
    
    
    8,581
    
    
    
    10,210Amortization of deferred debt issue costs
    
    
    1,294
    
    
    
    1,557
    
    
    
    1,655Amortization of goodwill and intangibles
    
    
    473
    
    
    
    2,064
    
    
    
    2,638Allowance for doubtful accounts
    
    
    133
    
    
    
    331
    
    
    
    355(Gain) loss on the sale of SSPD
    
    
    (136
    )
    
    
    3,004
    
    
    
    Gain on sale of property to Holding
    
    
    (424
    )
    
    
    (424
    )
    
    
    (317
    )Compensation expense from Holding stock
issued at less than fair value
    
    
    790
    
    
    
    
    
    
    
    Compensation expense from Holding stock options
issued at less than fair value
    
    
    220
    
    
    
    
    
    
    
    Deferred income taxes
    
    
    
    
    
    
    3,500
    
    
    
    11,360Loss on liquidation of capital lease
    
    
    
    
    
    
    73
    
    
    
    Interest accrued on stockholder loan
    
    
    (33
    )
    
    
    (42
    )
    
    
    (48
    )Asset impairment loss
    
    
    
    
    
    
    508
    
    
    
    Net losses (gains) on the disposition of assets
    
    
    80
    
    
    
    188
    
    
    
    (792
    )Changes in operating assets and liabilities:Accounts receivable
    
    
    (3,096
    )
    
    
    15,705
    
    
    
    (4,659
    )Inventories
    
    
    3,422
    
    
    
    16,175
    
    
    
    6,271Prepaid expenses
    
    
    427
    
    
    
    (436
    )
    
    
    (638
    )Accounts payable
    
    
    2,292
    
    
    
    (2,118
    )
    
    
    1,453Accrued expenses
    
    
    3,443
    
    
    
    1,489
    
    
    
    965Product warranty
    
    
    578
    
    
    
    618
    
    
    
    1,247Income tax payable, net
    
    
    874
    
    
    
    657
    
    
    
    (9,111
    )Advance payments from customers
    
    
    2,609
    
    
    
    (1,599
    )
    
    
    3,983Net cash provided by operating activities
    
    $
    35,080
    
    
    
    43,770
    
    
    
    6,789


See accompanying notes to the consolidated financial statements.

F-38



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##### Table of Contents



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 or 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 five manufacturing operations 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 the Electron
Devices business of Varian Associates, Inc.(now known as Varian Medical
Systems, Inc.) (Varian) 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 the
Company. 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. Financing for the acquisition was obtained through the
issuance of 12% Senior Subordinated Notes due 2005 of CPI (the Notes) in the
aggregate principal amount of $100.0 million, the issuance of 14% Senior
Redeemable Exchangeable Cumulative Preferred Stock due 2007 of CPI (the Senior
Preferred Stock), and the issuance of 14% Junior Cumulative Preferred Stock of
CPI, (the Junior Preferred Stock), 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 reported are the 52-week or 53-week periods ending
on the Friday nearest to September 30. Fiscal year 2003 was comprised of the
53-week period ending on October 3, 2003. Fiscal years 2002 and 2001 were
comprised of the 52-week periods ending on September 27, 2002 and September 28,
2001, respectively. All references to years in these notes to consolidated
financial statements represent fiscal years unless otherwise noted.

Use of Estimates

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

Generally, CPI requires no collateral from its customers, and CPI estimates an
allowance for doubtful accounts based on the creditworthiness of its customers
and general economic conditions. Consequently, an adverse change in those
factors could affect CPIs estimate of its bad debts.

F-39



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##### Table of Contents



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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued

Historical credit losses have been within managements expectations, and most
transactions with third world economies are backed by letters of credit.

The Company is self insured for certain losses relating to workers
compensation. The self insurance accrual is based on claims filed and an
estimate for significant claims incurred but not reported.

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. On October 3, 2003, cash and cash equivalents included $0.2
million of restricted cash related to a sublease of the Companys San Carlos
facility. There was no restricted cash at the end of fiscal year 2002 or 2001.

Revenue Recognition

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

The estimated sales values of performance under certain contracts to commercial
customers and U.S. Government fixed-price and fixed-price incentive contracts
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 that 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 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; and machinery and equipment, 3 to 7 years.

Gains and losses resulting from the disposition of assets (property, plant and
equipment) are reported on a net basis under the caption General and
administrative in the accompanying Consolidated Statements of Operations. Net
(losses) gains on the disposition of assets were ($0.1) million, ($0.2)
million, and $0.8 million for fiscal years 2003, 2002 and 2001, respectively.

F-40



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##### Table of Contents



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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued

Accounting for Long-Lived Assets

The Company adopted Statement of Financial Accounting Standards (SFAS) No.
142, Goodwill and Other Intangible Assets, at the beginning of fiscal year
2003. SFAS No. 142 requires that goodwill be tested annually for impairment
and whenever events or changes in circumstances indicate that an impairment
loss may have occurred, rather than being amortized as previous accounting
standards required. Furthermore, SFAS No. 142 requires purchased intangible
assets other than goodwill to be amortized over their useful lives unless these
lives are determined to be indefinite.

Prior to fiscal year 2003, the Company amortized goodwill on a straight-line
basis over 15 to 25 years and evaluated goodwill for impairment in accordance
with SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of.

The Company adopted SFAS No. 144, Accounting for Impairment or Disposal of
Long-Lived Assets, at the beginning of fiscal year 2003. SFAS No. 144 requires
that the Company assess the impairment of long-lived assets whenever events or
changes in circumstances indicate that their carrying value may not be
recoverable from the estimated future cash flows expected to result from their
use and eventual disposition. Long-lived assets subject to this evaluation
include property, plant and equipment and amortizable intangible assets.

Product Warranty

CPIs products are generally warranted for a variety of periods, typically one
to three years or a predetermined product usage life. A provision for
estimated future costs of repair, replacement or customer accommodations is
reflected in the accompanying consolidated financial statements.

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 periods used for the deferred costs associated with the
mortgage financing, , CPIs revolving credit facility (the Credit Facility),
and the Senior Notes are 1 year, 4 years and 10 years, respectively.

Senior Preferred Stock

The Senior Preferred Stock was issued in units with an aggregate of 262,500
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 Preferred Stock, have been reflected as a reduction of the Senior
Preferred Stock issued and are being amortized via a charge to accumulated
deficit over the period until mandatory redemption, 12 years, using the
straight-line method.

Income Taxes

The Company records income taxes using the asset and liability method.
Deferred tax assets and liabilities are recognized for the estimated future tax
consequences attributable to differences between


F-41Table of Contents

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued

the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax
rates in effect for the year in which those temporary differences are expected
to be recorded or settled. The effect on deferred tax assets and liabilities
of a change in tax rates is recognized in income in the period that includes
the enactment date.

Business Risks and Credit Concentrations

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

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 (loss). Foreign currency gains and losses are reported under the caption
General and administrative in the Consolidated Statement of Operations.

Fair Value of Financial Instruments

Financial instruments consist of cash and cash equivalents, accounts
receivable, accounts payable, Credit Facility, mortgage financing and long-term
debt. The carrying value of CPIs cash and cash equivalents, accounts
receivable, accounts payable, Credit Facility and mortgage financing
approximate their fair values due to the relatively short period to maturity of
the instruments. The fair value of the Senior Notes based on quoted market
prices or pricing models using current market rates, is a premium of 1.5% as of
October 3, 2003 and a discount of 16% as of September 27, 2002.

Stock-Based Compensation

As allowed by SFAS No. 123, Accounting for Stock-Based Compensation, as
amended by SFAS No. 148, Accounting for Stock-Based Compensation  Transition
and Disclosure, the Company applies the intrinsic value-based method of
accounting prescribed by Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations. Under
this method, compensation expense is recorded only if the current market price
of the underlying stock exceeded the exercise price at the measurement date.
During fiscal year 2003, the Company issued stock options to employees which
were subsequently determined to have been issued below the fair value of the
stock on the date of grant. The compensation costs associated with the 2003
stock options is amortized as a charge against income under the caption
General and administrative on the Consolidated Statement of Operations on a
straight-line basis over four years vesting period of
the options. If compensation cost for the Companys stock-based compensation
plan had been determined consistent with SFAS No. 123, the Companys net income
(loss) would have changed to the pro forma amounts indicated below:

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##### Table of Contents



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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued

Fiscal Year(Dollars in thousands)
    
    2003
    
    2002
    
    2001Net income (loss) as reported
    
    $
    16,855
    
    
    
    (6,061
    )
    
    
    (17,783
    )Add: Stock-based compensation included
in net income (loss) determined under the
the intrinsic value method, net of tax
    
    
    220
    
    
    
    
    
    
    
    Deduct: Stock-based compensation
determined under fair value based
method, net of tax
    
    
    (533
    )
    
    
    (40
    )
    
    
    (104
    )Pro forma net income (loss)
    
    $
    16,542
    
    
    
    (6,101
    )
    
    
    (17,887
    )


The per share weighted-average fair value of stock options granted during
fiscal years 2003, 2002 and 2001 was $8.07, $.62, and $.74, respectively, on
the date of grant using the Black-Scholes option-pricing model with the
following weighted-average assumptions: risk-free interest rate of 3.38%,
3.38%, and 4.09%, in fiscal years 2003, 2002 and 2001, respectively; expected
life of 5 years; no expected stock price volatility as the shares are not
publicly traded; and an expected dividend yield of 0.0% in all years presented.
Stock-based compensation determined under the fair value based method has been
calculated using accelerated vesting as prescribed by Financial Accounting
Standards Board (FASB) Interpretation No. 28.

Comprehensive Income

The Company has no components of other comprehensive income (loss) and,
accordingly, comprehensive income (loss) is the same as reported net income
(loss) for all periods presented.

Recent Accounting Pronouncements

The Financial Accounting Standards Board (FASB) issued SFAS No. 143,
Accounting for Asset Retirement Obligations, in August 2001, and SFAS No.
144, Accounting for the Impairment or Disposal of Long-lived Assets, in
October 2001. SFAS No. 143 is effective for fiscal years beginning after June
15, 2002 and requires that the fair value of an asset retirement obligation be
recorded as a liability in the period in which it incurs the obligation. SFAS
No. 144 is effective for fiscal years beginning after December 15, 2001. It
provides a single accounting model for long-lived assets to be disposed of and
replaces SFAS No. 121 Accounting for the Impairment of Long-Lived Assets and
Long-Lived Assets to Be Disposed Of. The Company adopted these Statements on
September 28, 2002. The adoption did not have a material impact on the
Companys consolidated financial position or results of operations.

In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.
This Statement rescinds SFAS Statement No. 4, Reporting Gains and Losses from
Extinguishment of Debt, and an amendment of
that Statement, SFAS Statement No. 64, Extinguishments of Debt Made to Satisfy
Sinking-Fund Requirements. SFAS No. 145 Statement amends SFAS Statement No.
13, Accounting for Leases, to eliminate an inconsistency between the required
accounting for sale-leaseback transactions and the required accounting for
certain lease modifications that have economic effects that are similar to
sale-leaseback transactions. This Statement also amends other existing
authoritative pronouncements to


F-43Table of Contents

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued

make various technical corrections, clarify
meanings, or describe their applicability under changed conditions. The
provisions of SFAS No. 145 are effective in fiscal years beginning after May
15, 2002, with early adoption permitted, and, in general, are to be applied
prospectively. The Company adopted this Statement on September 28, 2002. The
adoption did not have a material impact on the Companys consolidated financial
position or results of operations.

In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit and Disposal Activities. SFAS 146 requires that a liability for a
cost associated with an exit or disposal activity be recognized and measured
initially at fair value only when the liability is incurred. The provisions of
SFAS No. 146 are effective prospectively for exit or disposal activities
initiated after December 31, 2002. Adoption of this statement did not have a
material effect on the Companys consolidated financial position or results of
operations.

In November 2002, the FASB issued Interpretation No. 45 (FIN 45),
Guarantors Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others. FIN 45 requires a guarantor to
include disclosure of certain obligations, and if applicable, at the inception
of the guarantee, recognize a liability for the fair value of other certain
obligations undertaken in issuing a guarantee. The recognition requirement is
effective for guarantees issued or modified after December 31, 2002. The
adoption of FIN 45 did not have a material impact on the Companys consolidated
financial position or results of operations.

In December 2002, the FASB issued SFAS 148, Accounting for Stock-Based
Compensation  Transition and Disclosure  an Amendment of SFAS 123. SFAS 148
provides additional transition guidance for those entities that elect to
voluntarily adopt the accounting provisions of SFAS 123, Accounting for
Stock-Based Compensation. In addition, this Statement amends the disclosure
requirements of SFAS No. 123 to require prominent disclosures in both annual
and interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results.
The Company adopted the provisions under this Statement in the second quarter
of fiscal year 2003. Adoption of SFAS 148 did not have a material impact on the
Companys consolidated financial position or results of operations.

In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities, which addresses consolidation by business
enterprises of variable interest entities which have one or both of the
following characteristics: (1) The equity investment at risk is not sufficient
to permit the entity to finance its activities without support from other
parties and (2) the equity investors lack one or more of the defined essential
characteristics of a controlling financial interest. This Interpretation
requires existing unconsolidated variable interest entities to be consolidated
by their primary beneficiaries if the entities do not effectively disperse
risks among the participating parties. This Interpretation applies immediately
to variable interest entities created after January 31, 2003 and to variable
interest entities in which an enterprise obtains an interest after that date.
On October 9, 2003, FASB Staff Position FIN 46-6 Effective Date of FASB
Interpretation No. 46, Consolidation of Variable Interest Entities was issued.
This delayed the effective date of this
Interpretation for variable interest entities created before February 1, 2003
for the Company until January 3, 2004. The Company has evaluated the impact of
the provisions of Interpretation 46 and it believes it will not have a material
impact on the Companys financial statements.

In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. SFAS 149 amends and clarifies
financial accounting and


F-44Table of Contents

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued

reporting for derivative instruments and for hedging
activities under SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities. This Statement will be applied prospectively for contracts
entered into or modified after June 30, 2003 and hedging relationships
designated after June 30, 2003. Adoption of SFAS No. 149 in the Companys
fourth quarter did not have a material impact on the Companys consolidated
financial position or results of operations.

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. SFAS No. 150
requires that certain financial instruments with characteristics of both
liabilities and equity be classified as liabilities in statements of financial
position. The financial instruments affected include mandatorily redeemable
stock, certain financial instruments that require or may require the issuer to
buy back some of its shares in exchange for cash or other assets and certain
obligations that can be settled with shares of stock. SFAS No. 150 is
effective for all financial instruments entered into or modified after May 31,
2003 and must be applied to existing financial instruments at the beginning of
the first fiscal period beginning after December 15, 2003 for non-public
entities. The Company is currently analyzing this Statement and has not yet
determined its impact on the Companys consolidated financial position or
results of operations.

Reclassifications

Certain amounts in prior years consolidated financial statements have been
reclassified to conform to the fiscal 2003 presentation. Net operating results
have not been affected by these reclassifications.



|3. |  | Balance Sheet Components
|-- |  | ------------------------

Accounts Receivable

Accounts receivable are stated net of allowances for doubtful accounts of $0.6
million at the end of each of fiscal year 2003 and 2002.

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##### Table of Contents



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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued

Inventories

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

Fiscal Year-End(Dollars in thousands)
    
    2003
    
    2002Raw materials and parts
    
    $
    26,330
    
    
    
    30,638Work in process
    
    
    8,786
    
    
    
    7,306Finished goods
    
    
    2,242
    
    
    
    2,782Total net inventories
    
    $
    37,358
    
    
    
    40,726


Property, Plant, and Equipment

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

Fiscal Year-End(Dollars in thousands)
    
    2003
    
    2002Land and land leaseholds
    
    $
    26,720
    
    
    
    26,720Buildings
    
    
    13,661
    
    
    
    13,521Machinery and equipment
    
    
    54,332
    
    
    
    54,874Leased equipment
    
    
    3,450
    
    
    
    3,727Construction in progress
    
    
    1,074
    
    
    
    98699,237
    
    
    
    99,828Less accumulated depreciation
And amortization
    
    
    (59,105
    )
    
    
    (57,350
    )Net property, plant and equipment
    
    $
    40,132
    
    
    
    42,478


Accrued Expenses

Accrued expenses are comprised of the following:

Fiscal Year-End(Dollars in thousands)
    
    2003
    
    2002Payroll and employee benefits
    
    $
    12,843
    
    
    
    11,253Accrued interest
    
    
    2,100
    
    
    
    2,069Non-income taxes
    
    
    1,068
    
    
    
    1,064Other
    
    
    6,772
    
    
    
    4,954Total accrued expenses
    
    $
    22,783
    
    
    
    19,340


Product Warranty

The Companys products are generally warranted for a variety of periods,
typically one to three years or a predetermined product usage life. The
Company assesses the adequacy of its preexisting warranty
liabilities and adjusts the balance based on actual experience and changes in
future expectations. The

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued

following table reconciles the changes in the
Companys accrued warranty:

Fiscal Year(Dollars in thousands)
    
    2003
    
    2002Beginning accrued warranty
    
    $
    4,823
    
    
    
    4,225Cost of warranty claims
    
    
    (4,883
    )
    
    
    (6,162
    )Accruals for product warranty
    
    
    5,461
    
    
    
    6,760Ending accrued warranty
    
    $
    5,401
    
    
    
    4,823




|4. |  | Goodwill and Other Intangible Assets
|-- |  | ------------------------------------

In June 2001, the FASB issued SFAS No. 141, Business Combinations, and SFAS
No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires that the
purchase method of accounting be used for all business combinations initiated
after June 30, 2001. SFAS No. 142 requires that goodwill and intangible assets
with indefinite useful lives no longer be amortized, but instead be reviewed
for impairment annually, or more frequently if certain indicators arise. SFAS
No. 142 also requires that intangible assets with definite useful lives be
amortized over their respective estimated lives and be reviewed for impairment.
The Company adopted the provisions of SFAS No. 141 and SFAS No. 142 and ceased
amortization of its goodwill, beginning in fiscal year 2003.

Upon adoption of SFAS No. 142, the Company performed a transitional goodwill
impairment evaluation to assess whether goodwill was impaired as of the date of
adoption. Based on the results of the first step of the transitional goodwill
impairment test, it was determined that no potential impairment exists. In
addition, as required by SFAS No. 142, an annual test was performed during the
fourth quarter of fiscal year 2003, and no potential impairment was noted. Also
upon adoption of SFAS No. 142, as required by SFAS No. 141, the Company
reassessed the useful lives and residual values of all intangible assets
acquired in purchase business combinations, and no significant changes were
deemed necessary.

Goodwill

As of October 3, 2003 and September 27, 2002, the Company had $19.1 million of
goodwill, $13.4 million of which has been allocated to the vacuum electron
devices (VED) segment and $5.7 million of which has been allocated to the
satcom equipment segment. During the fiscal year ended October 3, 2003, there
were no goodwill impairment losses and no changes in the carrying amount of
goodwill.

The following table presents the impact of adopting SFAS No. 142 on net income
(loss) if such standard had been in effect for the 52-week periods ended
September 27, 2002 and September 28, 2001.

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##### Table of Contents



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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued

Fiscal Year(Dollars in thousands)
    
    2003
    
    2002
    
    2001Net income (loss) as reported
    
    $
    16,855
    
    
    
    (6,061
    )
    
    
    (17,783
    )Adjustments:Goodwill amortization, net of tax
    
    
    
    
    
    
    946
    
    
    
    946Adjusted net income (loss)
    
    $
    16,855
    
    
    
    (5,115
    )
    
    
    (16,837
    )


Intangible Assets

As of October 3, 2003 and September 27, 2002, the Company had $1.9 million of
intangible assets at cost, with accumulated amortization of $0.8 million and
$0.3 million, respectively. Amortization of intangible assets for fiscal years
2003, 2002 and 2001 was approximately $0.5 million, $0.4 million and $1.3
million, respectively. Amortization expense for these intangible assets is
projected to be approximately $0.4 million per year through fiscal year 2006.

5. Sale of Solid State Products Division

On September 26, 2002, the Company sold its Solid State Products Division
(SSPD) to KMIC Technology Inc., a company owned by the former management of
SSPD. The Company received approximately $0.9 million in cash and a $0.3
million unsecured promissory note. The note bears interest at 12% per annum and
is payable as follows: one-third of the principal plus unpaid interest was due
October 1, 2003 with the remaining balance payable in eight quarterly
installments of principal and interest beginning January 1, 2004 and ending
October 1, 2005. During fiscal year 2002, the sale resulted in a charge to
operations of approximately $3.0 million, which represents the net assets sold
including approximately $2.5 million in goodwill and costs and expenses of the
transaction, net of $0.9 million of cash received from the sale of the
operations net assets. Due to the uncertainty of ultimate collection, the
proceeds from the promissory note are recognized when the cash payments are
received. During fiscal year 2003, cash payments of $0.1 million were
recognized. In connection with the SSPD transaction, the Company agreed,
subject to certain limitations and exceptions, not to engage in the manufacture
of intermediate power amplifiers for satcom amplifiers (IPAs) for a 3-year
period. In addition, the Company agreed to purchase from KMIC Technology Inc.
$0.7 million of its IPAs per year for such 3-year period.

6. Credit Facility

In December 2002, the Company amended the Credit Facility to increase the
maximum amount of its revolving credit line by $20.0 million (the amount of the
term loan formerly outstanding under the same credit facility), from $41.0
million to $61.0 million and to extend the expiration date from December 22,
2004 to May 31, 2005. The Credit Facility continues to be secured by
substantially all of the assets of CPI and guaranteed by Holding and most of
CPIs subsidiaries. Availability under
the Credit Facility continues to be based upon eligible receivables, machinery
and equipment and certain real estate. As of October 3, 2003, CPI had $30.0
million available under the Credit Facility.

The Credit Facility provides for borrowings that will bear interest at a rate
equal to LIBOR plus 3.25% per annum or prime rate plus 1.75% per annum.
Additionally, the terms of the Credit Facility require the Company to maintain
certain financial covenants and limit the payment of cash dividends

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##### Table of Contents



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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued

on the
Senior Preferred Stock and Junior Preferred Stock. In addition to customary
fronting and other fees under the Credit Facility, CPI pays a fee equal to
1.25% per annum on outstanding but undrawn amounts of letters of credit,
customary collateral management fees and a commitment fee of 0.375% per annum
on unused facilities.

7. Senior Subordinated Notes

The $100 million principal amount of the Notes matures in 2005 and bears
interest at 12% per annum, payable semiannually. The payment of principal,
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
Notes (the Indenture), to the prior payment in full of all senior
indebtedness (as defined), including indebtedness under the Credit Facility,
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 all of CPIs subsidiaries.

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 as follows

Year
    
    Percentage2003
    
    101.5%2004 and thereafter
    
    100.0%


Upon the occurrence of a change of control, CPI will be required to make an
offer to each holder of Notes to repurchase all or a portion of such holders
Notes at a price equal to 101% of the principal amount thereof, plus accrued
and unpaid interest to the date of redemption. The Credit Facility currently
allows CPI to redeem limited amounts of Notes each fiscal year without prior
permission from the lenders under the Credit Facility. Subsequent to October
3, 2003, CPI and Holding entered into an amendment to the Credit Facility that,
among other things, permits CPI to redeem up to an aggregate maximum amount of
$30.0 million of the Notes in any fiscal year. See Note 21, Subsequent Events.
In addition, the Indenture contains 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.

8. Senior Redeemable Preferred Stock

CPI is authorized to issue up to 325,000 shares of Senior Preferred Stock,
including shares of Senior Preferred Stock that 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. Beginning August 1, 2000, dividends may be paid only in
cash.

During fiscal years 2003, 2002 and 2001, cash dividends of $5.9 million, $5.1
million and $4.4 million, respectively were accrued and not paid on Senior
Preferred Stock.

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##### Table of Contents



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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued

The Senior Preferred Stock is 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
Credit Facility 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 Restated Certificate of Incorporation of CPI, which governs the rights,
preferences, privileges and restrictions of 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 (the Exchange Notes) due 2007, so long as such
exchange is permitted by the Credit Facility 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 Credit Facility and the Indenture. Except for terms relating to these
subordination provisions, payment of interest on a quarterly basis, 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.

9. Junior Preferred Stock

CPI is authorized to issue up to 525,000 shares of Junior Preferred Stock,
including shares of Junior Preferred Stock that 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 formation of CPI in 1995 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

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued

and
non-assessable shares of Junior Preferred Stock having an aggregate liquidation
preference equal to the amount of such dividends.

At a value of $100 per share, CPI paid preferred dividends on its Junior
Preferred Stock through the issuance of 38,509, 33,557 and 29,243 shares of
Holding Stock for fiscal years 2003, 2002 and 2001, respectively.

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 that does not expressly
provide that it ranks senior to or on parity with the Junior Preferred Stock
and the Companys common stock.

10. Supplemental Cash Flow Information

Cash paid for interest was $12.3 million, $14.5 million and $18.2 million in
fiscal years 2003, 2002 and 2001, respectively.Cash paid for taxes was $8.6
million, $1.2 million and $0.6 million, in fiscal years 2003, 2002 and 2001,
respectively.

Non-cash financing activities included the following: Dividends on Senior
Preferred Stock included $5.9 million, $5.1 million and $4.4 million of accrued
but unpaid preferred dividends in fiscal years 2003, 2002 and 2001,
respectively. Dividends on Junior Preferred Stock were paid through the
issuance of 38,509, 33,557 and 29,243 shares of Junior Preferred Stock during
fiscal years 2003, 2002, and 2001, respectively. Amortization of discount and
issue costs on the Senior Preferred Stock was $0.2 million for each of fiscal
years 2003, 2002, and 2001. Equipment of $0.1 million was acquired under
capital leases during fiscal year 2001 and fully depreciated in fiscal year
2003. No equipment was acquired under capital leases for fiscal years 2003 or
2002.

11. Leases

At October 3, 2003, CPI was committed to minimum rentals under non-cancelable
operating lease agreements primarily for land and facility space. Also, as
noted in Note 18 Related Party Transactions, on December 22, 2000, CPI and
Holding entered into an operating lease of the San Carlos real property for a
term of twenty (20) years on a net basis with a fixed annual rent (payable in
equal monthly installments) of $2.45 million.

A summary of future minimum lease payments (in thousands) follows:

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued

Operating
    
    SubleaseFiscal Year
    
    Leases
    
    Income2004
    
    $
    3,577
    
    
    
    1372005
    
    
    3,338
    
    
    
    102006
    
    
    2,718
    
    
    
    2007
    
    
    2,530
    
    
    
    2008
    
    
    2,463
    
    
    
    Thereafter
    
    
    32,507
    
    
    
    Total future minimum lease payments
    
    $
    47,133
    
    
    
    147


Real estate taxes, insurance, and maintenance are also obligations of CPI.
Rental expense under non-cancelable operating leases amounted to $3.7 million,
$3.7 million, and $3.0 million for fiscal years 2003, 2002, and 2001,
respectively.

12. Contingencies

The amount of outstanding letters of credit provided for under the Credit
Facility was $5.3 million as of October 3, 2003. These outstanding obligations
are comprised of the following: $2.6 million related to ten performance bond
guarantees, $2.0 million related to the Companys workers compensation
insurance, and $0.7 million to various other beneficiaries related primarily to
insurance and service contracts.

The Company and Varian are currently defendants in a lawsuit relating to
operations prior to the acquisition by the Company of its business from Varian.
The Companys acquisition agreement with Varian provides for Varians retention
of liability arising out of the above referenced litigation. Accordingly, in
the opinion of management, the outcome of that litigation will not have a
material adverse effect on the financial condition, results of operations or
cash flows of CPI.

From time to time, CPI may be subject to other claims that arise in the
ordinary course of business. In the opinion of management, as of October 3,
2003, all such matters involve amounts that would not have a material adverse
effect on the Companys consolidated financial position if unfavorably
resolved.

13. Segments and Related Information

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

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

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued

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

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

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

Summarized financial information concerning the Companys reportable segments
is shown in the following table. Included in the Other column is financial
information for SSPD, which was sold on September 26, 2002 and did not meet the
quantitative thresholds to be reported separately, and certain unallocated
corporate-level operating expenses.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued

Satcom(Dollars in thousands)
    
    VEDs
    
    Equipment
    
    Other
    
    TotalFiscal Year 2003:Revenues from external customers
    
    $
    219,870
    
    
    
    45,564
    
    
    
    
    
    
    
    265,434Intersegment product transfers
    
    
    15,662
    
    
    
    
    
    
    
    
    
    
    
    15,662EBITDA
    
    
    50,850
    
    
    
    4,183
    
    
    
    (9,590
    )
    
    
    45,443Total Assets
    
    
    94,671
    
    
    
    13,045
    
    
    
    67,165
    
    
    
    174,881Capital Expenditures
    
    
    2,612
    
    
    
    352
    
    
    
    103
    
    
    
    3,067Fiscal Year 2002:Revenues from external customers
    
    $
    202,978
    
    
    
    45,432
    
    
    
    2,835
    
    
    
    251,245Intersegment product transfers
    
    
    12,527
    
    
    
    
    
    
    
    952
    
    
    
    13,479EBITDA
    
    
    37,300
    
    
    
    672
    
    
    
    (11,333
    )
    
    
    26,639Total Assets
    
    
    91,608
    
    
    
    14,207
    
    
    
    42,686
    
    
    
    148,501Capital Expenditures
    
    
    3,086
    
    
    
    87
    
    
    
    205
    
    
    
    3,378Fiscal Year 2001:Revenues from external customers
    
    $
    203,656
    
    
    
    64,819
    
    
    
    4,046
    
    
    
    272,521Intersegment product transfers
    
    
    20,081
    
    
    
    
    
    
    
    1,432
    
    
    
    21,513EBITDA
    
    
    29,183
    
    
    
    (4,046
    )
    
    
    (8,476
    )
    
    
    16,661Total Assets
    
    
    109,684
    
    
    
    33,015
    
    
    
    52,950
    
    
    
    195,649Capital Expenditures
    
    
    3,522
    
    
    
    1,487
    
    
    
    779
    
    
    
    5,788


A reconciliation of EBITDA from reportable segments to Income (Loss) before
Taxes is as follows:

(Dollars in thousands)
    
    Fiscal Year2003
    
    2002
    
    2001Segment EBITDA
    
    $
    45,443
    
    
    
    26,639
    
    
    
    16,661Less:Depreciation and amortization
    
    
    5,752
    
    
    
    10,645
    
    
    
    12,848Other
    
    
    
    
    
    
    3,033
    
    
    
    Interest expense
    
    
    12,511
    
    
    
    14,463
    
    
    
    18,646Income (loss) before taxes
    
    $
    27,180
    
    
    
    (1,502
    )
    
    
    (14,833
    )In fiscal year 2002, Other represents non-cash charges of $2.5 million
resulting from the write-off of goodwill in conjunction with the sale of SSPD
and $0.5 million related to impairment of equipment used in the satcom
equipment segment.


CPIs operations outside of North America consist of sales offices in certain
foreign countries. Long-lived assets outside of North America are less than
10% of total consolidated assets. Information about CPIs sales to
geographical regions is presented in the table below. Sales to unaffiliated
customers are based on the location of the customer. There are no individual
foreign countries in which sales are considered material.

Sales by geographic area are as follows:

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued

(Dollars in thousands)
    
    Fiscal Year2003
    
    2002
    
    2001United States
    
    $
    175,880
    
    
    
    175,060
    
    
    
    182,637All foreign countries
    
    
    89,554
    
    
    
    76,185
    
    
    
    89,884Total sales
    
    $
    265,434
    
    
    
    251,245
    
    
    
    272,521


CPI has one customer, the US Government, that accounted for 10% or more of
consolidated sales in fiscal years 2003, 2002 and 2001. Sales to this customer
were $51.3 million, $43.9 million and $42.8 million in the Companys
consolidated sales for fiscal years 2003, 2002, and 2001, respectively.
Accounts receivable from this customer represented 21% and 18% of consolidated
accounts receivable at fiscal year end 2003 and 2002, respectively. A
substantial majority of these sales were VED segment products, but this
customer also purchased satcom equipment products as well.

14. Research and Development

CPI-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 CPI on research and development are summarized as
follows:

CPI
    
    Customer
    
    Total(Dollars in thousands)
    
    Sponsored
    
    Sponsored
    
    IncurredFiscal year 2003
    
    $
    6,860
    
    
    
    3,725
    
    
    
    10,585Fiscal year 2002
    
    $
    5,873
    
    
    
    5,174
    
    
    
    11,047Fiscal year 2001
    
    $
    5,767
    
    
    
    5,012
    
    
    
    10,779


15. Provision for Income Taxes

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

(Dollars in thousands)
    
    Fiscal Year2003
    
    2002
    
    2001Domestic
    
    $
    18,166
    
    
    
    (1,461
    )
    
    
    (9,367
    )Non-U.S
    
    
    9,014
    
    
    
    (41
    )
    
    
    (5,466
    )Total
    
    $
    27,180
    
    
    
    (1,502
    )
    
    
    (14,833
    )


Income tax expense (benefit) is comprised of the following:

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued

(Dollars in thousands)
    
    Fiscal Year2003
    
    2002
    
    2001CurrentU.S. federal
    
    $
    6,740
    
    
    
    1,601
    
    
    
    (8,730
    )State
    
    
    1,941
    
    
    
    225
    
    
    
    10Non-U.S
    
    
    1,644
    
    
    
    (767
    )
    
    
    310Total Current
    
    
    10,325
    
    
    
    1,059
    
    
    
    (8,410
    )DeferredU.S. federal
    
    
    
    
    
    
    2,389
    
    
    
    9,350State
    
    
    
    
    
    
    1,085
    
    
    
    2,994Non-U.S
    
    
    
    
    
    
    26
    
    
    
    (984
    )Total Deferred
    
    
    
    
    
    
    3,500
    
    
    
    11,360Income tax expense
    
    $
    10,325
    
    
    
    4,559
    
    
    
    2,950


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

(Dollars in thousands)
    
    Fiscal Year-End2003
    
    2002Deferred tax assets:Inventory and other reserves
    
    $
    8,473
    
    
    
    8,116Accrued vacation
    
    
    1,670
    
    
    
    1,474Deferred compensation and other accruals
    
    
    1,184
    
    
    
    474Foreign jurisdictions, net
    
    
    489
    
    
    
    1,154State taxes
    
    
    668
    
    
    
    Net operating loss and credit carryforwards
    
    
    1,336
    
    
    
    2,059Gross deferred tax assets
    
    
    13,820
    
    
    
    13,277Valuation allowance
    
    
    (10,274
    )
    
    
    (11,769
    )Total deferred tax assets
    
    
    3,546
    
    
    
    1,508Deferred tax liabilities:Accelerated depreciation
    
    
    (3,532
    )
    
    
    (1,507
    )Foreign jurisdictions, net
    
    
    (14
    )
    
    
    (1
    )Total deferred tax liabilities
    
    
    (3,546
    )
    
    
    (1,508
    )Net deferred tax asset
    
    $
    
    
    
    
    


The provision for income tax expense for fiscal year 2003 and 2002 consists of
federal and state current tax expenses. The foreign income tax expense results
from current tax payable in the foreign jurisdictions.

As of fiscal year 2003 and 2002, management has established a full valuation
allowance for all of deferred tax assets for which realization is uncertain.
This allowance has been established based on the uncertainty of utilizing net
operating losses and various tax credits. In assessing the realizability of
deferred tax assets, management considers whether it is more likely than not
that some portion or all of the deferred tax assets will not be realized. The
ultimate realization of deferred tax assets is dependent upon the generation of
future taxable income during the periods in which those temporary differences
become deductible. Management considers the scheduled reversal of deferred tax

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued

liabilities, projected future taxable income, and tax planning strategies in
making this assessment. Based on the level of historical taxable income and
projections for future taxable income over the periods in which the deferred
tax assets are deductible, management believes it is more likely than not that
the Company will realize the benefits of these deductible differences, net of
the existing valuation allowances at October 3, 2003. The net change in the
total valuation allowance for the 53 week-period ended October 3, 2003 and the
52-week period ended September 27, 2002 was a decrease of $1.5 million and a
decrease of $0.2 million, respectively.

As of October 3, 2003, the Company has fully utilized the net operating loss
carryforward for federal income tax and has approximately $12.0 million in
state net operating loss carryforwards available to reduce future income
subject to income taxes. State net operating loss carryforwards expire
beginning in 2008.

As of October 3, 2003, the Company has foreign tax credit carryforwards for
federal income tax purposes of $0.2 million and a manufacturers investment
credit for California income tax purposes of approximately $0.6 million
available to reduce future federal and California income taxes, respectively.
Foreign tax credit carryforwards expire beginning in 2008. The California
credit will expire beginning in 2005.

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

Fiscal Year2003
    
    2002
    
    2001Statutory federal income tax
benefit rate
    
    
    35.0
    %
    
    
    (35.0
    )%
    
    
    (35.0
    )%Foreign tax rate differential
    
    
    (0.2
    )
    
    
    (48.2
    )
    
    
    2.2State taxes
    
    
    4.6
    
    
    
    56.6
    
    
    
    20.2Non-deductible expenses
    
    
    1.4
    
    
    
    12.0
    
    
    
    26.1Change in valuation allowance
    
    
    (2.8
    )
    
    
    318.1
    
    
    
    5.7Other
    
    
    
    
    
    
    
    
    
    
    0.7Effective tax rate
    
    
    38.0
    %
    
    
    303.5
    %
    
    
    19.9
    %


16. Stock-Based Benefit Plans

2000 Stock Option Plan

In March 2000, Holding established the Communications & Power Industries 2000
Stock Option Plan (the Plan) to provide an incentive for key employees,
consultants, advisors and non-affiliate directors of Holding and its
subsidiaries, and reserved 250,000 shares of Holdings common stock for
issuance under the Plan. Options granted under the Plan are granted at fair
value, expire ten years from the date of grant and generally vest in four equal
annual installments, commencing one year from the date of grant. The stock
options granted pursuant to the Plan are not considered incentive stock
options within the meaning of Section 422 of the Internal Revenue Code, as
amended, and are subject to all of the terms and restrictions contained in the
Stock Option Agreements and Stockholders Agreements. Upon a merger or a sale,
the Stock Option Committee of the Board of Directors

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued

(Committee), may, in its
discretion, do one or more of the following: (1) shorten the period which
options are exercisable, (2) accelerate the vesting schedule of the options,
(3) arrange to have surviving or successor entity assume the options or grant
replacement options with appropriate adjustments in the exercise prices and
adjustments in the number and kind of securities, and (4) cancel these options
upon payment to the option holder in cash. All determinations to the preceding
shall be made by the Committee and shall be final, binding and conclusive on
all parties.

On March 3, 2003, a majority of the holders of Holdings common stock adopted
an amendment to the Plan to increase the total number of shares of common stock
that Holding is authorized to issue pursuant to the Plan from 250,000 to
350,000. A summary of the status of the Plan is as follows:

Options OutstandingOptions Available
    
    Number of Shares
    
    Weighted-averagefor Grant
    
    Under Option
    
    Exercise PriceAuthorized
    
    
    250,000
    
    
    
    
    
    
    
    Granted
    
    
    (235,050
    )
    
    
    235,050
    
    
    $
    4.00Balance at September 28, 2001
    
    14,950
    
    
    
    235,050
    
    
    $
    4.00Granted
    
    
    (2,000
    )
    
    
    2,000
    
    
    $
    4.00Canceled
    
    
    21,750
    
    
    
    (21,750
    )
    
    $
    4.00Balance at September 27, 2002
    
    34,700
    
    
    
    215,300
    
    
    $
    4.00Additional shares authorized
    
    
    100,000
    
    
    
    
    
    
    
    Granted
    
    
    (191,000
    )
    
    
    191,000
    
    
    $
    1.10Canceled
    
    
    102,250
    
    
    
    (102,250
    )
    
    $
    4.00Balance at October 3, 2003
    
    
    45,950
    
    
    
    304,050
    
    
    $
    2.18


The following table summarizes information about options outstanding under the
Plan at October 3, 2003:

Options Outstanding
    
    Options ExercisableOutstanding OptionsWeighted AverageRemainingRange of Exercise
    
    
    
    
    
    Contractual Life
    
    Weighted-average
    
    Number of Shares
    
    Weighted-averagePrices
    
    Number of Shares
    
    (In Years)
    
    Exercise Price
    
    Exercisable
    
    Exercise Price$4.00
    
    
    113,050
    
    
    
    6.78
    
    
    $
    4.00
    
    
    
    82,600
    
    
    $
    4.00$1.10
    
    
    191,000
    
    
    
    9.42
    
    
    $
    1.10
    
    
    
    
    
    
    $
    1.10


The Company uses the intrinsic-value based method to account for its employees
stock-based compensation plan. For options granted in fiscal year 2002 and
2001, no compensation cost has been

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued

recognized in the accompanying consolidated
financial statements for options granted under this plan as the exercise price
of each option equaled the fair value of the underlying common stock as of the
grant date. With respect to options granted in fiscal year 2003, the Company
has recorded deferred stock-based compensation of approximately $1.5 million
for the difference at the grant date between the exercise price and the fair
value as determined by an independent appraisal. The total deferred stock-based
compensation recorded will be amortized on a straight-line basis over the
four-year vesting period.

Holding Equity Plan

In August 1995, Holding established the Holding 1995 Management Equity Plan
(the Holding Equity Plan), under which certain of Holdings and CPIs present
and former executive officers are participants. Under the Holding Equity Plan,
participants may purchase shares of Holding common stock (Management Shares)
at a price determined by Holdings Board of Directors to be the fair value of
such Holding common stock on the date the participant executes an agreement to
purchase the shares. Holding has reserved a total of 1,250,000 shares of
Holding Common Stock for issuance under the Holding Equity Plan, of which
1,146,750 were issued to the Companys former Chief Executive Officer, certain
officers and key employees in fiscal year 1995. In March 2003, the Company
sold an additional 100,000 shares to certain executive officers of Holding and
CPI for $1.10 per share in cash. The Company recorded compensation expense of
$0.8 million related to this sale as the shares were subsequently determined to
have been sold at less than the fair value as determined by an independent
appraisal.

17. Retirement and Profit Sharing Plans

CPI provides a qualified 401(k) investment plan covering substantially all of
its domestic employees and a pension contribution plan covering substantially
all of its Canadian employees. The plans provide for CPI to contribute an
amount based on a percentage of each participants base pay. CPI also has a
Non-Qualified Deferred Compensation Plan (the Non-Qualified Plan) that allows
eligible executives and directors to defer a portion of their compensation.
Participant contributions and CPI matching contributions to the Non-Qualified
Plan are 100% vested. The deferred compensation liability amounted to
approximately $0.1 million and $0.1 million as of October 3, 2003 and September
27, 2002, respectively. Total CPI contributions to these plans were $2.7
million for each of fiscal years 2003, 2002, and 2001.

CPIs bonus program provides incentive bonuses to management if certain
performance goals are achieved. Such performance goals are measured based upon
earnings before interest, taxes, depreciation and amortization, cash flow and
asset utilization.

Defined Benefit Plan

In fiscal year 2003, the Company established a defined benefit pension plan for
its Chief Executive Officer. The plans benefits are based on compensation
earnings but are limited by Canadas Income Tax Act. All costs of the plan will
be borne by the Company. The plans assets consist primarily of mutual funds
and cash.

The following table shows the net periodic pension cost and other data of this
plan for fiscal year 2003:

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(Dollars in thousands)Components of net periodic pension costCurrent year service cost
    
    $
    23Prior year service cost
    
    
    124Interest cost
    
    
    20Actual return on plan assets
    
    
    (13
    )Net periodic pension cost
    
    $
    154Benefit ObligationBeginning balance
    
    $
    Transfer from defined contribution plan
    
    
    102Service cost
    
    
    147Interest cost
    
    
    20Benefits paid
    
    
    Exchange rate adjustment
    
    
    40Ending balance
    
    $
    309Plan Assets at Fair ValueBeginning balance
    
    $
    Transfer from defined contribution plan
    
    
    102Actual return on plan assets
    
    
    13Company contributions
    
    
    147Benefits paid
    
    
    Exchange rate adjustment
    
    
    40Ending balance
    
    $
    302Benefit obligations in excess of plan assets
    
    $
    7


The projected benefit obligations and net periodic pension cost were determined
using the following weighted-average assumptions:

Discount rate
    
    
    4.75
    %Expected return on plan assets
    
    
    7.50
    %Expected rate of compensation increases
    
    
    5.50
    %


18. Related Party Transactions

Sale-leaseback transaction with Holding

On December 22, 2000, a sale-leaseback transaction related to CPIs facilities
in San Carlos, California was accomplished between CPI and Holding. Holding
paid CPI aggregate consideration of $23.0 million for the San Carlos real
property, consisting of $17.25 million in cash and an unsecured promissory note
in the principal amount of $5.75 million. The promissory note matures in
December 2009, and provides for interest-only payments on a quarterly basis at
the rate of 15.5% per annum, with up to 35.25% of each interest payment payable
in kind, at Holdings option, by its issuance of additional notes. CPI and
Holding entered into a lease of the San Carlos real property for a term of
twenty (20) years on a net basis with a fixed annual rent (payable in equal
monthly installments) of

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued

$2.45 million. Holding financed the cash portion of
the San Carlos purchase price and its fees and expenses with respect to the
transaction by borrowing $18.0 million from Wells Fargo Bank, which loan
matured June 1, 2002. During fiscal year 2002, the loan was extended until June
1, 2003 and a principal payment of $0.2 million was made. During fiscal year
2003, the loan was extended until January 31, 2004 and another principal
payment of $0.3 million was made. The loan bears interest at LIBOR plus 4.25%
and is secured on a non-recourse basis (subject to normal and customary
exceptions) by the San Carlos real property. CPI realized a gain on the sale
of the property of approximately $8.5 million that is being recognized over the
twenty year lease term. Intercompany accounts and transactions associated with
this sale-leaseback transaction have been eliminated in consolidation.

Holding Summary

CPIs related party transactions with Holding consist of the following (in
thousands);

Fiscal Year-End(Dollars in thousands)
    
    2003
    
    2002Note receivable from Holding
    
    $
    5,750
    
    
    
    5,750Net accounts payable to Holding
    
    $
    923
    
    
    
    670Deferred income on sale-leasebackCurrent portion
    
    $
    424
    
    
    
    424Deferred portion
    
    $
    6,887
    
    
    
    7,311Shareholder loan
    
    $
    1,256
    
    
    
    1,223


Fiscal Year(Dollars in thousands)
    
    2003
    
    2002Rent expense
    
    $
    2,450
    
    
    
    2,450Interest income on note receivable
    
    $
    891
    
    
    
    891Interest income on shareholder loan
    
    $
    33
    
    
    
    42Realized gain on sale of property
    
    $
    424
    
    
    
    424


Outside Advisors

Holding and CPI have entered into a management services agreement with Leonard
Green & Partners, L.P. (LGP) to pay approximately $0.4 million, plus
out-of-pocket expenses, annually to LGP, which is an affiliate of the general
partner of Green Equity Investors II, L.P., Holdings majority stockholder.
Certain individuals who are stockholders of the general partner of LGP are
members of the Board of Directors of Holding and CPI. The management services
agreement provides for management, consulting and financial planning services,
including assistance in strategic planning, providing market and financial
analyses, negotiating and structuring financing and exploring expansion
opportunities. In addition, LGP may provide financial advisory and investment
banking services to the Company in connection with major financial transactions
for an additional fee.

Stockholder Loans

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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 (collectively,
the Management Notes) to Holding.

The aggregate principal amount of such Management Notes was $0.9 million as of
October 3, 2003. Of this amount, $0.7 million 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 $0.2 million 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 and the Varian guaranty. The Board of
Directors of Holding has extended the due dates of all past and future
scheduled interest and principal payments on these Management Notes until the
Management Notes are due in 2004 or upon request of the Board of Directors,
whichever comes first.

19. Holding Data

Holding has guaranteed CPIs obligations under the Credit Facility, the Senior
Notes and the Indenture. Other than the following, the consolidated balance
sheets of Holding as of October 3, 2003 and September 27, 2002 are
substantially identical to that of CPI and its subsidiaries: (i) the
presentation of CPIs preferred stock as minority interest and the components
of stockholders equity of Holding, and (ii) the transactions associated with
the San Carlos real property purchase and related financing and leaseback
arrangements, as noted in Note 18 Related Party Transactions.

The consolidated balance sheets of Holding are summarized as follows (in
thousands, except per share amounts):

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##### Table of Contents



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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued

Fiscal YearAssets
    
    2003
    
    2002Current assets
    
    $
    106,447
    
    
    
    76,252Long-term assets
    
    
    75,521
    
    
    
    79,937Total assets
    
    $
    181,968
    
    
    
    156,189Liabilities and Stockholders EquityCurrent liabilities
    
    $
    89,206
    
    
    
    75,151Long-term debt and deferred taxes
    
    
    100,000
    
    
    
    100,000Total liabilities
    
    
    189,206
    
    
    
    175,151Senior Redeemable Preferred Stock of subsidiary
    
    
    28,907
    
    
    
    28,693Junior Preferred Stock of subsidiary
    
    
    29,300
    
    
    
    25,449Stockholders Equity:Common stock ($.01 par value, 6,500,000 shares authorized;
5,008,172 and 4,908,172 shares issued and outstanding as of
2003 and 2002, respectively)
    
    
    50
    
    
    
    49Additional paid-in capital
    
    
    21,519
    
    
    
    19,111Deferred stock-based compensation
    
    
    (1,289
    )
    
    
    Accumulated deficit
    
    
    (84,469
    )
    
    
    (91,041
    )Less stockholder loans
    
    
    (1,256
    )
    
    
    (1,223
    )Total liabilities and stockholders equity
    
    $
    181,968
    
    
    
    156,189


Separate financial statements of CPIs direct and indirect subsidiaries, all of
which are also guarantors under the Senior Notes and the Indenture and certain
of which are guarantors under the Credit Facility, are not included because (i)
these subsidiaries are jointly and severally liable for the obligations under
the Senior Notes, the Indenture and, as applicable, the Credit Facility and
(ii) the separate financial statements and other disclosures concerning these
subsidiaries are not deemed by CPI to be material to investors.

20. Quarterly Financial Data (Unaudited)

(Dollars in thousands)Oct. 3,
    
    July 4,
    
    Apr. 4,
    
    Jan. 3,
    
    Sept. 27,
    
    June 28,
    
    Mar. 29,
    
    Dec. 28,Quarter Ended
    
    2003
    
    2003
    
    2003
    
    2003
    
    2002
    
    2002
    
    2002
    
    2001Sales
    
    $
    65,190
    
    
    
    70,721
    
    
    
    67,897
    
    
    
    61,626
    
    
    
    59,613
    
    
    
    64,792
    
    
    
    60,612
    
    
    
    66,228Gross profit
    
    $
    20,655
    
    
    
    23,448
    
    
    
    20,684
    
    
    
    16,690
    
    
    
    15,287
    
    
    
    16,664
    
    
    
    12,946
    
    
    
    14,159Net income (loss)
    
    $
    2,380
    
    
    
    8,528
    
    
    
    3,286
    
    
    
    2,661
    
    
    
    (2,567
    )
    
    
    (1,052
    )
    
    
    (1,760
    )
    
    
    (682
    )


During the closing of the quarter ended October 3, 2003 and in connection with
the Merger Agreement described in Note 21, the Company obtained an updated
independent appraisal to determine the fair value of common stock purchased by
certain executives and stock options granted to certain employees during the
quarter ended April 4, 2003. The Company recognized additional employee
compensation expense for 100,000 shares of Holding common stock, based on the
difference between the issue price of common stock and the revised fair value
of the Companys

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##### Table of Contents



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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued

common stock. The Company also recognized additional employee
compensation expense over the four-year vesting period for 191,000 shares of
stock options granted based on the difference between the exercise price and
the revised fair value of common stock. As a result, compensation expense
increased from previously reported amounts by $0.8 million and $0.1 million for
the quarters ended
April 4, 2003 and July 4, 2003, respectively. As of April 4, 2003, the reported
balance sheet amounts for additional paid-in capital and deferred stock-based
compensation were increased by $2.3 million and $1.5 million, respectively.
As of July 4, 2003, the reported balance sheet amounts for additional paid-in
capital and deferred stock-based compensation were increased by $2.3 million
and $1.4 million, respectively.

21. Subsequent Events

Proposed Merger

On November 17, 2003, the Company entered into an Agreement and Plan of Merger
(the Merger Agreement), under which a corporation (Acquiror) owned by The
Cypress Group L.L.C., a New York-based private equity firm, agreed to acquire
the Company in a cash-for-stock transaction with a total value of approximately
$300 million.

Pursuant to the Merger Agreement, a wholly owned subsidiary of Acquiror will
merge with and into the Company (the Merger) with the Company as the
surviving corporation. Consummation of the Merger is subject to customary
conditions, including a condition that Acquiror obtain the requisite debt
financing. Subject to the satisfaction of the applicable conditions, it is
currently anticipated that the Merger will close in the second quarter of
fiscal year 2004.

Pursuant to the Management Services Agreement described in Note 18, it is
contemplated that in connection with and upon consummation of the Merger, LGP
will receive a transaction fee of $1,250,000.

Redemption of 12% Senior Notes of CPI

On December 4, 2003, CPI instructed the trustee under the Indenture to send a
notice to all of the registered holders of the Senior Notes, notifying them
that CPI has elected to redeem $26,000,000 in principal amount of the Notes on
January 5, 2004, pursuant to and in accordance with the terms of the Indenture.
The redemption will occur at a price equal to 101.5% of the principal amount
of such notes plus accrued and unpaid interest to January 5, 2004. In
connection with the redemption, CPI and Holding entered into an amendment to
the Credit Facility that, among other things, permits CPI to redeem up to an
aggregate maximum amount of $30,000,000 of the Notes in any fiscal year.

Related Party Transaction

In November 2003, Green Equity Investors III, L.P., an affiliate of GEI II,
purchased all of the outstanding shares of 14% Junior Cumulative Preferred
Stock of CPI and approximately 60% of the shares of 14% Senior Exchangeable
Redeemable Cumulative Preferred Stock of CPI from an independent third party.

F-64



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SCHEDULE II

COMMUNICATIONS & POWER INDUSTRIES
HOLDING CORPORATION
AND SUBSIDIARIES

VALUATION AND QUALIFYING ACCOUNTS
(in thousands)

Balance at
    
    Charged to
    
    
    
    
    
    Balance atBeginning of
    
    Costs and
    
    Deduction
    
    End ofDescription
    
    Period
    
    Expenses
    
    Amount
    
    PeriodAllowance for doubtful accounts receivableFiscal year ended 2001
    
    $
    797
    
    
    
    355
    
    
    
    717
    
    
    
    435Fiscal year ended 2002
    
    $
    435
    
    
    
    331
    
    
    
    189
    
    
    
    577Fiscal year ended 2003
    
    $
    577
    
    
    
    133
    
    
    
    135
    
    
    
    575


F-65



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SCHEDULE II

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

VALUATION AND QUALIFYING ACCOUNTS
(in thousands)

Balance at
    
    Charged to
    
    
    
    
    
    Balance atBeginning of
    
    Costs and
    
    Deduction
    
    End ofDescription
    
    Period
    
    Expenses
    
    Amount
    
    PeriodAllowance for doubtful accounts receivableFiscal year ended 2001
    
    $
    797
    
    
    
    355
    
    
    
    717
    
    
    
    435Fiscal year ended 2002
    
    $
    435
    
    
    
    331
    
    
    
    189
    
    
    
    577Fiscal year ended 2003
    
    $
    577
    
    
    
    133
    
    
    
    135
    
    
    
    575


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Exhibit Index

ExhibitNo.
    
    Description2.1(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,
1995.2.4
    
    Agreement and Plan of Merger dated as of November 17, 2003, by and among
CPI Acquisition Corp., CPI Merger Sub Corp., Holding and GEI II.3.1(1)
    
    Restated Certificate of Incorporation of CPI filed with the Delaware
Secretary of State on August 11, 1995.3.2(7)
    
    Amended and Restated Bylaws of CPI dated March 19, 2002.3.3(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.10.1(6)
    
    Loan and Security Agreement by and among CPI as borrower, the other
obligors named therein, the lenders that are signatories hereto as the
senders, and Foothill Capital Corporation as the arranger and
administrative agent, dated as of December 15, 2000.10.1.1(9)
    
    Amendment Number One to Loan and Security Agreement by and among CPI
as borrower, the other obligors named as signatories therein, the lenders
that are signatories as lenders, and Foothill Capital Corporation as the
arranger and administrative agent.10.1.2
    
    Letter Agreement dated as of December 1, 2003 amending Loan and Security
Agreement by and among CPI as borrower, the other obligors named as
signatories therein, the lenders that are signatories as lenders, and
Foothill Capital Corporation as the arranger and administrative agent,
dated as of December 1, 2003.10.2(6)
    
    Intellectual Property Security Agreement between CPI and Foothill
Capital Corporation as Agent for the Lenders dated December 15, 2000.10.3(6)
    
    Stock Pledge and Security Agreement by CPI to and in favor of
Foothill Capital Corporation, as agent for itself and the other lenders
dated December 15, 2000.10.4(6)
    
    Stock Pledge and Security Agreement by Holding and various CPI
subsidiaries to and in favor of Foothill Capital Corporation, as agent for
itself and the other lenders, dated December 15, 2000.10.5(6)
    
    Environmental Indemnity Agreement for the benefit of Foothill Capital
Corporation, as agent for itself and the other lenders and the lenders,
dated December 15, 2000.10.6(6)
    
    Deed of Trust with Absolute Assignment of Leases and Rents, Security
Agreement and Fixture Filing by and among CPI, First American Title
Company and Foothill Capital Corporation, as agent for itself and the
other lenders, dated December 15, 2000.10.7(6)
    
    Guaranty and Security Agreement in favor of Foothill Capital
Corporation as Agent for itself and the lenders and the other lenders
pursuant to that certain Loan and Security Agreement by and among CPI, the
other obligors, Foothill and the other lenders named herein, dated
December 15, 2000.10.8(6)
    
    Continuing Guaranty in favor of Foothill Capital Corporation, as
agent for itself and the lenders and the other lenders pursuant to that
certain Loan and Security Agreement by and among CPI, the other obligors
named therein, Foothill and the other lenders named herein, dated December
15, 2000.






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##### Table of Contents



ExhibitNo.
    
    Description10.9(6)
    
    Intercreditor Agreement among the CPI Parties and Foothill Capital
Corporation, as agent for itself and other lenders, dated December 15,
2000.10.10(6)
    
    Fourth Amendment of Lease by and between The Board of Trustees of the
Leland Stanford Junior
University and CPI, dated December 15, 2000.10.11(6)
    
    Loan Agreement between Holding and Wells Fargo Bank, National
Association, executed as of December 15, 2000.10.11.1(8)
    
    Modification Agreement of Secured Loan between Holding and Wells
Fargo Bank, National Association, dated June 1, 2002.10.12(6)
    
    Promissory Note Secured by Deed of Trust by Holding in favor of
Wells Fargo Bank, National Association, dated December 15, 2000.10.12.1(8)
    
    Amended and Restated Promissory Note Secured by Deed of Trust by
Holding in favor of Wells
Fargo Bank, National Association, dated June 1, 2002.10.13(6)
    
    Deed of Trust with Absolute Assignment of Leases and Rents, Security
Agreement and Fixture Filing by and among Holding, American Securities
Company and Wells Fargo Bank, National Association, dated December 15,
2000.10.13.1(8)
    
    Memorandum of Modification Agreement Amending Deed of Trust by
Holding in favor of Wells Fargo Bank, National Association, dated June 1,
2002.10.13.2(11)
    
    Second Modification Agreement, dated May 30, 2003, by and between
Holding and Wells Fargo Bank, National Association.10.14(6)
    
    Subordination Agreement by CPI and Holding in favor of Wells Fargo
Bank, National Association, dated December 15, 2000.10.14.1(8)
    
    Junior Lienors Consent and Subordination Agreement by CPI in favor
of Wells Fargo Bank,
National Association, dated June 1, 2002.10.15(6)
    
    Hazardous Materials Indemnity Agreement by Holding in favor of Wells
Fargo Bank, National Association, dated December 15, 2000.10.16(6)
    
    Unsecured Promissory Note by Holding in favor of CPI, dated December
15, 2000.10.17(6)
    
    Lease dated as of December 1, 2000 by and between Holding, as lessor,
and CPI, as lessee.10.18(1)
    
    Cross License Agreement between CPI and Varian dated as of August 10,
1995.10.19(1)
    
    Trademark License Agreement between CPI and Varian dated as of August
10, 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, 1995.10.26(1)
    
    Holding Common Stock Registration Rights Agreement by and among
Holding, GEI II and the Initial Senior Preferred Stock Purchaser dated as
of August 11, 1995 relating to the Holding Common Stock sold with the
Series A Senior Preferred Stock.10.27(1)
    
    Stockholders Agreement by and among Holding, GEI II and the Initial
Senior Preferred Stock Purchaser dated as of August 11, 1995 relating to
the Holding Common Stock sold with the Series A Senior Preferred Stock.10.28(1)
    
    Stock Subscription Agreement among Holding, CPII Acquisition Corp.
and GEI II dated as of August 11, 1995.10.29(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)10.32(5)
    
    Communications & Power Industries 2000 Stock Option Plan.10.32.1(10)
    
    First Amendment to Communications and Power Industries 2000 Stock
Option Plan.10.33(5)
    
    Form of Stock Option Agreement.10.34(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.10.35(1)
    
    Sublease (Unit 8, Palo Alto) dated as of August 10, 1995 between
Varian Realty Inc. and CPI.






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##### Table of Contents



ExhibitNo.
    
    Description10.36(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.10.37(12)
    
    Employment Agreement for O. Joe Caldarelli dated March 19, 2002.10.38(12)
    
    Employment Agreement for Robert A. Fickett dated September 30, 2002.10.39(12)
    
    Employment Agreement for Joel A. Littman dated September 30, 2002.10.40
    
    Employment Agreement for Mike Cheng dated November 2, 2002.10.41
    
    Employment Agreement for Don C. Coleman dated November 2, 2002.10.42
    
    Code of Ethics10.43
    
    Pension Plan for Executive Employees of CPI Canada, Inc. (as applicable
to O.Joe Caldarelli effective January 1, 200221(1)
    
    Subsidiaries of CPI and Holding.31
    
    Rule 13a-14 (a) /15d-14 (a) Certifications.32
    
    Section 1350 Certifications




---

|(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, for the year
ended October 1, 1999.                                                        
|    
|(5)  |  | Incorporated by reference to CPIs Annual Report on Form 10-K, for the year
ended September 29, 2000.                                                     
|    
|(6)  |  | Incorporated by reference to CPIs Quarterly Report on Form 10-Q, for the
quarter ended December 28, 2000.                                                
|    
|(7)  |  | Incorporated by reference to CPIs Quarterly Report on Form 10-Q, for the
quarter ended March 29, 2002.                                                   
|    
|(8)  |  | Incorporated by reference to CPIs Quarterly Report on Form 10-Q, for the
quarter ended June 28, 2002.                                                    
|    
|(9)  |  | Incorporated by reference to CPIs Quarterly Report on Form 10-Q, for the
quarter ended January 3, 2003.                                                  
|    
|(10) |  | Incorporated by reference to CPIs Quarterly Report on Form 10-Q, for the
quarter ended April 4, 2003.                                                    
|    
|(11) |  | Incorporated by reference to CPIs Quarterly Report on Form 10-Q, for the
quarter ended July 4, 2003.                                                     
|    
|(12) |  | Incorporated by reference to CPIs Annual Report on Form 10-K, for the
year ended September 27, 2002.