**UNITED STATESSECURITIES AND EXCHANGECOMMISSION**Washington,DC 20549

**FORM 10-Q**

**(MarkOne)**

**x****                             ****QUARTERLY REPORT PURSUANT TOSECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

**For the quarterly period endedMarch 30, 2007**

**or**

**o****                                ****TRANSITION REPORT PURSUANT TOSECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934**

For the transition period from               to

Commission file number:  **000-51928**

**CPI INTERNATIONAL, INC.**

(Exact Nameof Registrant as Specified in Its Charter)

**Delaware**

(State orOther Jurisdiction of Incorporation or Organization)

**75-3142681**

(I.R.S.Employer Identification No.)

**811 HansenWay**Palo Alto, California 94303-1110(650) 846-2900

(Address ofPrincipal Executive Offices and Telephone Number,Including Area Code)

Indicateby check mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 duringthe preceding 12 months (or for such shorter period that the registrant wasrequired to file such reports) and (2) has been subject to such filingrequirements for the past 90 days. Yes   x      No   o

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” inRule 12b-2 of the Exchange Act. (Check one):Large accelerated filer   o      Acceleratedfiler   o      Non-accelerated filer   x

Indicateby check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act).Yes   o      No   x

**APPLICABLEONLY TO CORPORATE ISSUERS:**

Indicate the number of sharesoutstanding for each of the registrant’s classes of Common Stock, as of thelatest practicable date: 16,314,032 shares of Common Stock, $.01 par value, atApril 30, 2007.

 

----

**CPIINTERNATIONAL, INC.** and subsidiaries

**INDEX**
| **Part I: Financial  Information** |                                                                                        |   |
|------------------------------------|---------------------------------------------------------------------------------------------|--------|
| Item  1.                           | Financial  Statements                                                                       |   |   |
|                               | Unaudited Condensed Consolidated Balance Sheets                                             |   | 4 |
|                               | Unaudited Condensed Consolidated Statements of  Operations and Comprehensive Income         |   | 5 |
|                               | Unaudited Condensed Consolidated Statements of Cash  Flows                                  |   | 6 |
|                               | Notes to Unaudited Condensed Consolidated Financial  Statements                             |   | 7 |
| Item 2.                            | Management’s Discussion and Analysis of Financial  Condition and Results of Operations |   | 30 |
| Item 3.                            | Quantitative and Qualitative Disclosures About Market  Risk                                 |   | 46 |
| Item 4.                            | Controls and Procedures                                                                     |   | 47 |
| **Part  II: Other Information**    |                                                                                        |   |
| Item  1.                           | Legal  Proceedings                                                                          |   | 48 |
| Item 1A.                           | Risk Factors                                                                                |   | 48 |
| Item 2.                            | Unregistered Sales of Equity Securities and Use of  Proceeds                                |   | 48 |
| Item 3.                            | Defaults Upon Senior Securities                                                             |   | 48 |
| Item 4.                            | Submission of Matters to a Vote of Security Holders                                         |   | 48 |
| Item  5.                           | Other  Information                                                                          |   | 48 |
| Item 6.                            | Exhibits                                                                                    |   | 49 |

** **

2

----

**CPI INTERNATIONAL, INC.**

**andsubsidiaries**

***Cautionary StatementsRegarding Forward-Looking Statements***

This document containsforward-looking statements within the meaning of Section 27A of the SecuritiesAct of 1933, as amended, and Section 21E of the Securities Exchange Act of1934, as amended, that relate to future events or our future financialperformance. In some cases, readers can identify forward-looking statements byterminology such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “believe,”“estimate,” “predict,” “potential” or “continue,” the negative of such terms orother comparable terminology. These statements are only predictions. Actualevents or results may differ materially.

Although we believe thatthe expectations reflected in the forward-looking statements are reasonable, wecannot guarantee future results, levels of activity, performance orachievements. Moreover, neither we nor any other person assumes responsibilityfor the accuracy and completeness of the forward-looking statements.Forward-looking statements are subject to known and unknown risks anduncertainties, which could cause actual results to differ materially from theresults projected, expected or implied by the forward-looking statements. Theserisk factors include, without limitation, competition in our end markets; oursignificant amount of debt; changes or reductions in the U.S. defense budget;U.S. government contracts laws and regulations; changes in technology; theimpact of unexpected costs; inability to obtain raw materials and components;and currency fluctuations. All written and oral forward-looking statements madein connection with this report that are attributable to us or persons acting onour behalf are expressly qualified in their entirety by the foregoing riskfactors and other cautionary statements included herein and in our otherfilings with the Securities and Exchange Commission (“SEC”). We are under noduty to update any of the forward-looking statements after the date of thisreport to conform such statements to actual results or to changes in ourexpectations.

The information in thisreport is not a complete description of our business or the risks anduncertainties associated with an investment in our securities. You shouldcarefully consider the various risks and uncertainties that impact our businessand the other information in this report and in our other filings with the SECbefore you decide to invest in our securities or to maintain or increase yourinvestment.

3

----

**PART I: FINANCIAL INFORMATION**

**Item 1. Financial Statements**

**CONDENSED CONSOLIDATEDBALANCE SHEETS**(in thousands, except share and per share data — unaudited)
| ** **                                                                                                                                                                         | ** ** | **March 30,  2007** | ** ** | **September 29,  2006** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|------------------------------|------------|
| **Assets**                                                                                                                                                                         |       |                     |       |                         |       |
| Current Assets:                                                                                                                                                                    |       |                     |       |                         |       |
| Cash and cash  equivalents                                                                                                                                                         |       | $                        | 27,605     |                         | $          | 30,153 |   |
| Restricted cash                                                                                                                                                                    |       | 1,937                    |       | 1,746                        |       |
| Accounts  receivable, net                                                                                                                                                          |       | 47,293                   |       | 43,628                       |       |
| Inventories                                                                                                                                                                        |       | 56,910                   |       | 54,031                       |       |
| Deferred tax  assets                                                                                                                                                               |       | 11,560                   |       | 11,520                       |       |
| Prepaid and  other current assets                                                                                                                                                  |       | 3,658                    |       | 3,080                        |       |
| Total current  assets                                                                                                                                                              |       | 148,963                  |       | 144,158                      |       |
| Property, plant, and equipment,  net                                                                                                                                               |       | 65,978                   |       | 63,851                       |       |
| Deferred debt issue  costs, net                                                                                                                                                    |       | 8,917                    |       | 9,644                        |       |
| Intangible assets, net                                                                                                                                                             |       | 74,268                   |       | 75,489                       |       |
| Goodwill                                                                                                                                                                           |       | 147,271                  |       | 147,489                      |       |
| Other long-term assets                                                                                                                                                             |       | 558                      |       | 1,128                        |       |
| Total assets                                                                                                                                                                       |       | $                        | 445,955    |                         | $          | 441,759 |   |
|                                                                                                                                                                               |       |                     |       |                         |       |
| **Liabilities and stockholders’  equity**                                                                                                                                     |       |                     |       |                         |       |
| Current Liabilities:                                                                                                                                                               |       |                     |       |                         |       |
| Current portion  of long-term debt                                                                                                                                                 |       | $                        | —     |                         | $          | 1,714 |   |
| Accounts payable                                                                                                                                                                   |       | 20,629                   |       | 19,101                       |       |
| Accrued expenses                                                                                                                                                                   |       | 23,312                   |       | 23,269                       |       |
| Product warranty                                                                                                                                                                   |       | 5,525                    |       | 5,958                        |       |
| Income taxes  payable                                                                                                                                                              |       | 6,050                    |       | 10,693                       |       |
| Advance payments  from customers                                                                                                                                                   |       | 6,017                    |       | 6,310                        |       |
| Total current  liabilities                                                                                                                                                         |       | 61,533                   |       | 67,045                       |       |
| Deferred income taxes                                                                                                                                                              |       | 29,613                   |       | 29,933                       |       |
| Long-term debt, less  current portion                                                                                                                                              |       | 241,808                  |       | 245,067                      |       |
| Other long-term  liabilities                                                                                                                                                       |       | 60                       |       | 41                           |       |
| Total  liabilities                                                                                                                                                                 |       | 333,014                  |       | 342,086                      |       |
| Commitments and  contingencies                                                                                                                                                     |       |                     |       |                         |       |
| Stockholders’ equity                                                                                                                                                          |       |                     |       |                         |       |
| Common stock  ($0.01 par value, 90,000,000 shares authorized; 4,275,566 shares issued and  outstanding) authorized; 16,291,889 and 16,049,577 shares issued  and outstanding) |       | 163                      |       | 160                          |       |
| Additional  paid-in capital                                                                                                                                                        |       | 67,371                   |       | 65,295                       |       |
| Accumulated  other comprehensive income                                                                                                                                            |       | 273                      |       | 679                          |       |
| Retained  earnings                                                                                                                                                                 |       | 45,134                   |       | 33,539                       |       |
| Total  stockholders’ equity                                                                                                                                                   |       | 112,941                  |       | 99,673                       |       |
| Total liabilities and  stockholders’ equity                                                                                                                                   |       | $                        | 445,955    |                         | $          | 441,759 |   |

**See accompanying notes to the condensed consolidatedfinancial statements.**

4

----

**CONDENSED CONSOLIDATEDSTATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME** (in thousands, except share andper share data — unaudited)
| ** **                                             | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|--------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                             | ** ** | **March 30,  2007**         | ** ** | **March 31,  2006**       | ** ** | **March 30,  2007** | ** ** | **March 31,  2006** | ** ** |
| Sales                                                  |       | $                                | 88,444     |                           | $          | 86,929 |   | $ | 172,167 |   | $ | 169,308 |   |
| Cost of sales                                          |       | 60,739                           |       | 61,185                         |       | 117,881 |   | 118,356 |   |
| Gross profit                                           |       | 27,705                           |       | 25,744                         |       | 54,286 |   | 50,952 |   |
| Operating costs  and expenses:                         |       |                             |       |                           |       |   |   |   |   |
| Research and development                               |       | 2,352                            |       | 1,941                          |       | 4,243 |   | 3,851 |   |
| Selling and marketing                                  |       | 4,799                            |       | 4,680                          |       | 9,628 |   | 9,704 |   |
| General and administrative                             |       | 5,846                            |       | 4,676                          |       | 10,250 |   | 11,978 |   |
| Amortization of acquisition-related intangible  assets |       | 546                              |       | 546                            |       | 1,094 |   | 1,094 |   |
| Net loss on disposition of fixed assets                |       | 40                               |       | 143                            |       | 58 |   | 208 |   |
| Total operating  costs and expenses                    |       | 13,583                           |       | 11,986                         |       | 25,273 |   | 26,835 |   |
| Operating income                                       |       | 14,122                           |       | 13,758                         |       | 29,013 |   | 24,117 |   |
| Interest  expense, net                                 |       | 5,275                            |       | 6,400                          |       | 10,614 |   | 12,464 |   |
| Income before  income taxes                            |       | 8,847                            |       | 7,358                          |       | 18,399 |   | 11,653 |   |
| Income tax  expense                                    |       | 3,087                            |       | 3,013                          |       | 6,804 |   | 5,093 |   |
| Net income                                             |       | $                                | 5,760      |                           | $          | 4,345 |   | $ | 11,595 |   | $ | 6,560 |   |
|                                                   |       |                             |       |                           |       |   |   |   |   |
| Other  comprehensive income, net of tax                |       |                             |       |                           |       |   |   |   |   |
| Net unrealized loss on cash flow hedges                |       | (17                              | )          | (306                           | )          | (406 | ) | (489 | ) |
| Comprehensive  income                                  |       | $                                | 5,743      |                           | $          | 4,039 |   | $ | 11,189 |   | $ | 6,071 |   |
|                                                   |       |                             |       |                           |       |   |   |   |   |
| Earnings per  share - Basic                            |       | $                                | 0.35       |                           | $          | 0.33 |   | $ | 0.72 |   | $ | 0.50 |   |
| Earnings per  share - Diluted                          |       | $                                | 0.32       |                           | $          | 0.29 |   | $ | 0.66 |   | $ | 0.44 |   |
|                                                   |       |                             |       |                           |       |   |   |   |   |
| Shares used to  compute earnings per share - Basic     |       | 16,253,522                       |       | 13,078,954                     |       | 16,161,149 |   | 13,078,954 |   |
| Shares used to compute  earnings per share - Diluted   |       | 17,730,318                       |       | 14,784,947                     |       | 17,646,457 |   | 14,776,514 |   |

**See accompanying notes to the condensed consolidatedfinancial statements.**

5

----

**CONDENSED CONSOLIDATEDSTATEMENTS OF CASH FLOWS** (in thousands — unaudited)
| ** **                                                       | ** ** | **Six Months Ended** | ** ** |
|------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                       | ** ** | **March 30,  2007**       | ** ** | **March 31,  2006** | ** ** |
| **Cash  flows from operating activities**                        | ** ** | ** **                     | ** ** | ** ** | ** ** |
| Net cash provided by (used in) operating activities              |       | $                              | 6,299      |   | $ | (4,515 | ) |
|                                                             |       |                           |       |   |   |
| **Cash  flows from investing activities**                        |       |                           |       |   |   |
| Expenses relating to sale of San Carlos property                 |       | —                         |       | (4 | ) |
| Capital expenditures                                             |       | (5,347                         | )          | (5,817 | ) |
| Capitalized expenses relating to potential business  acquisition |       | (119                           | )          | — |   |
| Net cash used in investing activities                            |       | (5,466                         | )          | (5,821 | ) |
|                                                             |       |                           |       |   |   |
| **Cash  flows from financing activities**                        |       |                           |       |   |   |
| Proceeds from issuance of debt                                   |       | —                         |       | 10,000 |   |
| Repayments of debt                                               |       | (5,000                         | )          | — |   |
| Proceeds from issuance of common stock to employees              |       | 398                            |       | — |   |
| Proceeds from exercise of stock options                          |       | 542                            |       | — |   |
| Payment of IPO financing costs                                   |       | —                         |       | (1,374 | ) |
| Stockholder distribution payments                                |       | —                         |       | (17,000 | ) |
| Excess tax benefit on stock option exercises                     |       | 679                            |       | — |   |
| Net cash used in financing activities                            |       | (3,381                         | )          | (8,374 | ) |
|                                                             |       |                           |       |   |   |
| **Net  decrease in cash and cash equivalents**                   |       | (2,548                         | )          | (18,710 | ) |
| Cash and cash equivalents at beginning of period                 |       | 30,153                         |       | 26,511 |   |
| Cash and cash equivalents at end of period                       |       | $                              | 27,605     |   | $ | 7,801 |   |
|                                                             |       |                           |       |   |   |
| **Supplemental  cash flow disclosures**                          |       |                           |       |   |   |
| Cash paid for interest                                           |       | $                              | 10,707     |   | $ | 12,378 |   |
| Cash paid for  taxes, net of refunds                             |       | $                              | 10,495     |   | $ | 4,607 |   |

**See accompanying notes to the condensed consolidatedfinancial statements.**

6

----

**NOTESTO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(All tabular dollar amounts in thousandsexcept share and per share amounts)**

# **1.****                                     ****Organization and Basis ofPresentation**

Unless the contextotherwise requires, “CPI International” means CPI International, Inc., and “CPI”means Communications & Power Industries, Inc. CPI is a direct subsidiary ofCPI International. CPI International is a holding company with no operations ofits own. The term the “Company” refers to CPI International and its subsidiarieson a consolidated basis.

The accompanyingcondensed consolidated financial statements represent the consolidated resultsand financial position of CPI International, which is controlled by affiliatesof The Cypress Group (“Cypress”). CPI International, through its wholly ownedsubsidiary, CPI, develops, manufactures, and distributes microwave and powergrid Vacuum Electron Devices (“VEDs”), microwave amplifiers, modulators andvarious other power supply equipment and devices. The Company has two reportablesegments, VED and satcom equipment.

The condensedconsolidated financial statements include those of the Company and itssubsidiaries. Significant intercompany balances, transactions, andstockholdings have been eliminated in consolidation.

TheCompany’s fiscal year is the 52- or 53-week period that ends on the Fridaynearest September 30. Fiscal year 2007 comprises the 52-week period endingSeptember 28, 2007 and fiscal year 2006 comprised the 52-week period endedSeptember 29, 2006. All period references are to the Company’s fiscal periodsunless otherwise indicated. These condensed consolidated financialstatements should be read in conjunction with the audited consolidatedfinancial statements and accompanying notes included in the Company’s AnnualReport on Form 10-K for the year ended September 29, 2006.

On May 3, 2006, theCompany completed the initial public offering of its common stock (see Note 4for further disclosure).

# **2.****                                     ****Supplemental Balance SheetInformation**

**AccountsReceivable:**Accounts receivable are stated net of allowances for doubtful accounts of $0.1million and $0.5 million at March 30, 2007 and September 29, 2006,respectively.

**Inventories:** The following table provides details ofinventories, net of reserves:

|                        | ** ** | **March 30,  2007** | ** ** | **September 29,  2006** | ** ** |
|------------------------|------------|--------------------------|------------|------------------------------|------------|
| Raw material and parts |       | $                        | 37,058     |                         | $          | 35,160 |   |
| Work in process        |       | 12,375                   |       | 10,481                       |       |
| Finished goods         |       | 7,477                    |       | 8,390                        |       |
|                   |       | $                        | 56,910     |                         | $          | 54,031 |   |

 

7

----

**Reservefor excess, slow moving and obsolete inventory:** The following table summarizes the activity relatedto reserves for excess, slow moving and obsolete inventory:

|                                                | ** ** | **Six Months Ended** | ** ** |
|------------------------------------------------|------------|--------------------------------|------------|
| ** **                                     | ** ** | **March 30, 2007**   | ** ** | **March 31, 2006** | ** ** |
| Balance at beginning of  period                |       | $                              | 8,822      |   | $ | 8,655 |   |
| Inventory provision,  charged to cost of sales |       | 540                            |       | 473 |   |
| Inventory write-offs                           |       | (218                           | )          | (151 | ) |
| Balance at end of period                       |       | $                              | 9,144      |   | $ | 8,977 |   |

**Reservefor loss contracts and cost in excess of market inventory:** The following table summarizes theactivity related to reserves for loss contracts and cost in excess of marketinventory:

|                                                                                                | ** ** | **Six Months Ended** | ** ** |
|------------------------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                                     | ** ** | **March 30, 2007**   | ** ** | **March 31, 2006** | ** ** |
| Balance at beginning of  period                                                                |       | $                              | 1,702      |   | $ | 1,430 |   |
| Provision for loss  contracts and cost in excess of market inventory, charged to cost of sales |       | 49                             |       | 652 |   |
| Credit to cost of sales  upon revenue recognition                                              |       | (453                           | )          | (629 | ) |
| Balance at end of period                                                                       |       | $                              | 1,298      |   | $ | 1,453 |   |

**ProductWarranty:** Thefollowing table summarizes the activity related to product warranty:

|                                                          | ** ** | **Six Months Ended** | ** ** |
|----------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                               | ** ** | **March 30, 2007**   | ** ** | **March 31, 2006** | ** ** |
| Beginning accrued  warranty                              |       | $                              | 5,958      |   | $ | 6,359 |   |
| Accruals for product  warranty, charged to cost of sales |       | 2,374                          |       | 2,738 |   |
| Cost of warranty claims                                  |       | (2,807                         | )          | (2,679 | ) |
| Ending accrued warranty                                  |       | $                              | 5,525      |   | $ | 6,418 |   |

** **

8

----

**IntangibleAssets:** Thefollowing tables present the details of the Company’s total acquisition-relatedintangible assets:
| ** **                                        | ** ** | **March 30, 2007** | ** ** | **September 29, 2006** | ** ** |
|---------------------------------------------------|------------|------------------------------|------------|----------------------------------|------------|
| ** **                                        | ** ** | **Cost**                     | ** ** | **Accumulated  Amortization**    | ** ** | **Net** | ** ** | **Cost** | ** ** | **Accumulated  Amortization** | ** ** | **Net** | ** ** |
| VED Core Technology                               |       | $                            | 30,700     |                             | $          | (1,965 | ) | $ | 28,735 |   | $ | 30,700 |   | $ | (1,659 | ) | $ | 29,041 |   |
| VED Application  Technology                       |       | 19,800                       |       | (2,526                           | )          | 17,274 |   | 19,800 |   | (2,130 | ) | 17,670 |   |
| X-ray Generator and  Satcom ApplicationTechnology |       | 8,000                        |       | (1,708                           | )          | 6,292 |   | 8,000 |   | (1,441 | ) | 6,559 |   |
| Customer backlog                                  |       | 17,450                       |       | (17,450                          | )          | — |   | 17,450 |   | (17,450 | ) | — |   |
| Land lease                                        |       | 11,810                       |       | (833                             | )          | 10,977 |   | 11,810 |   | (706 | ) | 11,104 |   |
| Tradename                                         |       | 5,800                        |       | —                           |       | 5,800 |   | 5,800 |   | — |   | 5,800 |   |
| Customer list and  programs                       |       | 5,700                        |       | (565                             | )          | 5,135 |   | 5,700 |   | (451 | ) | 5,249 |   |
| Noncompete agreement                              |       | 110                          |       | (55                              | )          | 55 |   | 110 |   | (44 | ) | 66 |   |
|                                              |       | $                            | 99,370     |                             | $          | (25,102 | ) | $ | 74,268 |   | $ | 99,370 |   | $ | (23,881 | ) | $ | 75,489 |   |

The estimatedfuture amortization expense of purchased intangibles as of March 30, 2007,excluding the Company’s unamortized tradename, is as follows:

| Fiscal Year             | ** ** | **Amount** | ** ** |
|------------------------------|------------|------------|------------|
| 2007 (remaining six  months) |       | $          | 1,223      |   |
| 2008                         |       | 2,446      |       |
| 2009                         |       | 2,446      |       |
| 2010                         |       | 2,424      |       |
| 2011                         |       | 2,424      |       |
| Thereafter                   |       | 57,505     |       |
|                         |       | $          | 68,468     |   |

**Goodwill:** The following table presents goodwill byreportable segment at March 30, 2007 and September 29, 2006:

|                  | ** ** | **March 30,  2007** | ** ** | **September 29,  2006** | ** ** |
|------------------|------------|--------------------------|------------|------------------------------|------------|
| VED              |       | $                        | 133,440    |                         | $          | 133,637 |   |
| Satcom Equipment |       | 13,831                   |       | 13,852                       |       |
|             |       | $                        | 147,271    |                         | $          | 147,489 |   |

The decrease ingoodwill from September 29, 2006 to March 30, 2007 was due to an adjustment fortax benefits realized from the exercise of fully vested stock options that wereacquired in a business combination.

9

----

# **3.****                                     ****Long-Term Debt**

Long-term debt comprisesthe following:

|                                                                               | ** ** | **March 30,  2007** | ** ** | **September 29,  2006** | ** ** |
|-------------------------------------------------------------------------------|------------|--------------------------|------------|------------------------------|------------|
| Term loan, expiring  2010                                                     |       | $                        | 37,500     |                         | $          | 42,500 |   |
| 8% Senior subordinated  notes, due 2012                                       |       | 125,000                  |       | 125,000                      |       |
| Floating rate senior  notes, due 2015, net of issue discount of $692 and $719 |       | 79,308                   |       | 79,281                       |       |
|                                                                          |       | 241,808                  |       | 246,781                      |       |
| Less: Current portion                                                         |       | —                   |       | 1,714                        |       |
| Long-term portion                                                             |       | $                        | 241,808    |                         | $          | 245,067 |   |

**SeniorCredit Facility and Term Loan of CPI:**In fiscal year 2004, CPI entered into a $130.0 millioncredit agreement, which was amended and restated on November 29, 2004, andfurther amended on February 16, 2005, April 13, 2005, and December 15, 2005(the “Senior Credit Facility”). The Senior Credit Facility consists of a $40.0million revolving commitment, with a sub-facility of $15.0 million for lettersof credit and $5.0 million for swingline loans (“Revolver”), which expires onJanuary 23, 2010, and a $90.0 million term loan (“Term Loan”), which expires onJuly 23, 2010. As of March 30, 2007, the Company had no outstanding borrowingsunder the Revolver and $37.5 million outstanding under the Term Loan, aftertaking into account a $5.0 million Term Loan repayment in December2006 using available operating cash. The $5.0 million Term Loan repaymentincluded a $1.7 million ECF (as defined below) payment, and an optionalprepayment of $3.3 million. In December 2005, CPI borrowed $10.0 million on theTerm Loan to pay a dividend to CPI International. CPI International used theproceeds of that dividend to pay a portion of the special cash dividend of$17.0 million to its stockholders. Upon certain specified conditions, includingcompliance on a pro forma basis with the covenants in the Senior CreditFacility, CPI may seekcommitments for a new class of term loans, not to exceed $65.0 million. TheSenior Credit Facility is guaranteed by CPI International and all of CPI’sdomestic subsidiaries and is secured by substantially all of their assets.

Anyborrowings under the Revolver would currently bear interest at a rate equal to,at CPI’s option, LIBOR plus 2.75% per annum, or the Alternate Base Rate (“ABR”)plus 1.75% per annum. Available borrowings under the Revolver are reduced byany amounts secured through letters of credit; at March 30, 2007, the Companyhad letters of credit commitments for $3.8 million. The Term Loan borrowingscurrently bear interest at a rate equal to, at CPI’s option, LIBOR plus 2.25%per annum or the ABR plus 1.25% per annum, payable quarterly. The ABR is thegreater of (a) the Prime Rate and (b) the Federal Funds Rate plus 0.50%. Inaddition to customary fronting and administrative fees under the Senior CreditFacility, CPI pays letter of credit participation fees equal to the applicableRevolver LIBOR margin per annum on the average daily amount of the letter ofcredit exposure, and a commitment fee of 0.50% per annum on the average daily unusedamount of revolving commitment. As of March 30, 2007 (1) the Term Loanborrowing consisted of one tranche of $5.5 million and one tranche of $32.0million with interest payable on April 12, 2007 and April 23, 2007, each at7.6% per annum, and (2) a Revolving commitment of $3.8 million for letter ofcredit exposure, with letter of credit participation fees and fronting feespayable quarterly at a combined interest rate of 3.0% per annum.

10

----

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

CPIis also required to make an annual prepayment within 90 days after the end ofeach fiscal year based on a calculation of Excess Cash Flow, as defined in theSenior Credit Facility (“ECF”), multiplied by a factor of 25%, 50% or 75%depending on the leverage ratio at the end of the fiscal year, less optionalprepayments made during the fiscal year. On December 30, 2004, CPI made an ECFpayment of $3.9 million. The ECF payment was applied pro rata, in accordancewith the provisions of the Senior Credit Facility, against the remainingscheduled installments of Term Loan principal due up to, but not including, theSeptember 30, 2009 scheduled principal installment. The Company made an ECFpayment of $1.7 million for the fiscal year ended September 29, 2006 inDecember 2006 and there is no expected ECF payment due for fiscal year 2007,primarily because of the $3.3 million optional prepayment that was made inDecember 2006.

CPIcan make optional prepayments on the outstanding loans at any time without premiumor penalty, except for customary “breakage” costs with respect to LIBOR loans.In March 2005, CPI made an optional prepayment of $5.7 million; in May 2006,CPI made additional optional prepayments of $47.5 million in the aggregateusing proceeds from the initial public offering of CPI International’s commonstock (the “IPO”); and in December 2006, CPI made an additional prepayment of$3.3 million. The optional prepayments were applied pro rata, in accordancewith the provisions of the Senior Credit Facility, against the remainingscheduled installments of Term Loan principal due up to June 30, 2009, with thebalance applied to scheduled installment amounts on or after September 30,2009, in direct order of maturity.

TheSenior Credit Facility contains a number of covenants that, among other things,restrict, subject to certain exceptions, the ability of CPI International, CPIand CPI’s domestic subsidiaries to: sell assets; engage in mergers andacquisitions; pay dividends and distributions or repurchase their capitalstock; incur additional indebtedness or issue equity interests; makeinvestments and loans; create liens or further negative pledges on assets;engage in certain transactions with affiliates; enter into sale and leasebacktransactions; amend agreements or make prepayments relating to subordinatedindebtedness; and amend or waive provisions of charter documents in a mannermaterially adverse to the lenders. CPI and CPI’s subsidiaries must comply with:a minimum interest coverage ratio; a maximum total leverage ratio; a minimumfixed charge coverage ratio; and a maximum capital expenditures limitation,each calculated on a consolidated basis for CPI and CPI’s subsidiaries. CPIInternational must also comply with a minimum interest coverage ratio, aminimum fixed charge coverage ratio and a maximum leverage ratio, eachcalculated on a consolidated basis for CPI International and its subsidiaries.As of March 30, 2007, CPI and CPI International were in compliance with allSenior Credit Facility financial covenants.

11

----

Subjectin certain cases to applicable notice provisions and grace periods, events ofdefault under the Senior Credit Facility include, among other things: failureto make payments when due; breaches of representations and warranties in thedocuments governing the Senior Credit Facility; non-compliance by CPIInternational, CPI and/or CPI’s subsidiaries with certain covenants; failure byCPI International, CPI and/or CPI’s subsidiaries to pay certain otherindebtedness or to observe any other covenants or agreements that would allowacceleration of such indebtedness, collectively in excess of $5.0 million atany time; events of bankruptcy or insolvency of CPI International, CPI and/orCPI’s subsidiaries; certain uninsured and unstayed judgments of $5.0 million ormore against CPI International; impairment of the security interests in thecollateral or the guarantees under the Senior Credit Facility; and a change incontrol, as defined in the documents governing the Senior Credit Facility.

**8% Senior subordinated notes of CPI:**In connection with a business combination onJanuary 23, 2004, CPI issued $125.0 million in aggregate principal amountof its 8% Senior Subordinated Notes (the “8% Notes”). The 8% Notes have nosinking fund requirements.

The8% Notes bear interest at the rate of 8.0% per year, payable on February 1and August 1 of each year. The 8% Notes will mature on February 1,2012. The 8% Notes are unsecured obligations, jointly and severally guaranteedby CPI International and each of CPI’s domestic subsidiaries. The payment ofall obligations relating to the 8% Notes are subordinated in right of paymentto the prior payment in full in cash or cash equivalents of all senior debt (asdefined in the indenture governing the 8% Notes) of CPI, including debt underthe Senior Credit Facility. Each guarantee of the 8% Notes is and will besubordinated to guarantor senior debt (as defined in the indenture governingthe 8% Notes) on the same basis as the 8% Notes are subordinated to CPI’s seniordebt.

Atany time or from time to time on or after February 1, 2008, CPI, at itsoption, may redeem the 8% Notes, in whole or in part, at the redemption prices(expressed as percentages of principal amount) set forth below, together withaccrued and unpaid interest thereon, if any, to the redemption date, ifredeemed during the 12-month period beginning on February 1 of the yearsindicated below:

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

At any time on or prior to February 1, 2008, the 8% Notes may also beredeemed or purchased (by CPI or any other person) in whole but not in part, atCPI’s option, upon the occurrence of a change of control (as defined in theindenture governing the 8% Notes) at a price equal to 100% of the principalamount of the 8% Notes, plus a “make-whole” premium (as defined in theindenture governing the 8% Notes) to the redemption price on February 1, 2008,and accrued and unpaid interest, if any, to, the date of redemption orpurchase. Upon a change of control, CPI may be required to purchase all or anypart of the 8% Notes for a cash price equal to 101% of the principal amount,plus accrued and unpaid interest thereon, if any, to the date of purchase.

12

----

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

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

**Floating rate senior notes of CPI International:**On February 22,2005, CPI International issued $80.0 million in principal amount of itsFloating Rate Senior Notes (“FR Notes”). The FR Notes were issued at a 1%discount. The proceeds from the issuance of FR Notes were used to make adistribution to stockholders of CPI International of approximately $75.8million and to pay fees and expenses of approximately $3.5 million associatedwith the issuance of FR Notes. The FR Notes have no sinking fund requirements.

TheFR Notes require interest payments at an annual interest rate, reset at thebeginning of each semi-annual period, equal to the then six-month LIBOR plus5.75%, payable semiannually on February 1 and August 1 of each year. Theinterest rate on the semi-annual interest payment due August 1, 2007 isapproximately 11.15% per annum. CPI International may, at its option, elect topay interest through the issuance of additional FR Notes for any interestpayment date on or before February 1, 2010. If CPI International elects topay interest through the issuance of additional FR Notes, the annual interestrate on the FR Notes will increase by an additional 1% step-up, with thestep-up increasing by an additional 1% for each interest payment made throughthe issuance of additional FR Notes (up to a maximum of 4%). The FR Notes willmature on February 1, 2015.

TheFR Notes are general unsecured obligations of CPI International. The FR Notesare not guaranteed by any of CPI International’s subsidiaries but arestructurally subordinated to all existing and future indebtedness and otherliabilities of CPI International’s subsidiaries. The FR Notes are senior inright of payment to CPI International’s existing and future indebtedness thatis expressly subordinated to the FR Notes.

BecauseCPI International is a holding company with no operations of its own, CPIInternational relies on distributions from CPI to satisfy its obligations underthe FR Notes. The Senior Credit Facility and the indenture governing the 8%Notes restrict CPI’s ability to make distributions to CPI International. TheSenior Credit Facility prohibits CPI from making distributions to CPIInternational unless there is no default under the Senior Credit Facility andCPI International and CPI satisfy certain leverage ratios. The indenturegoverning the 8% Notes prohibits CPI from making distributions to CPIInternational unless, among other things, there is no default under theindenture and the amount of the proposed dividend plus all previous RestrictedPayments (as defined in the indenture governing the 8% Notes) does not exceed aspecified amount.

13

----

Atany time or from time to time CPI International, at its option, may redeem theNotes in whole or in part at the redemption prices (expressed as percentages ofprincipal amount) set forth below, together with accrued and unpaid interestthereon, if any, to the redemption date, if redeemed during the 12-month periodbeginning on February 1 of the years indicated below:

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

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

Theindenture governing the FR Notes contains certain covenants that, among otherthings, limit the ability of CPI International and its restricted subsidiaries(as defined in the indenture governing the FR Notes) to incur additionalindebtedness, sell assets, consolidate or merge with or into other companies,pay dividends or repurchase or redeem capital stock or subordinatedindebtedness, make certain investments, issue capital stock of theirsubsidiaries, incur liens and enter into certain types of transactions withtheir affiliates.

Eventsof default under the indenture governing the FR Notes include: failure to makepayments on the FR Notes when due; failure to comply with covenants in theindenture governing the FR Notes; a default under certain other indebtedness ofCPI International or any of its restricted subsidiaries that is caused by afailure to make payments on such indebtedness or that results in theacceleration of the maturity of such indebtedness; the existence of certainfinal judgments or orders against CPI International or any of the restrictedsubsidiaries; and the occurrence of certain insolvency or bankruptcy events.

 **Debt Maturities:**As of March 30, 2007, maturities on long-term debt were as follows:
| **Fiscal Year** | ** ** | **Term Loan** | ** ** | **Floating Rate  Senior Notes** | ** ** | **8% Senior  Subordinated  Notes** | ** ** | **Total** | ** ** |
|----------------------|------------|--------------------|------------|-------------------------------------------|------------|-----------------------------------------|------------|-----------|------------|
| 2007                 |       | $                  | —     |                                      | $          | —                                  |       | $         | —     |   | $ | — |   |
| 2008                 |       | —             |       | —                                    |       | —                                  |       | —    |       |
| 2009                 |       | —             |       | —                                    |       | —                                  |       | —    |       |
| 2010                 |       | 37,500             |       | —                                    |       | —                                  |       | 37,500    |       |
| 2011                 |       | —             |       | —                                    |       | —                                  |       | —    |       |
| Thereafter           |       | —             |       | 80,000                                    |       | 125,000                                 |       | 205,000   |       |
|                 |       | $                  | 37,500     |                                      | $          | 80,000                                  |       | $         | 125,000    |   | $ | 242,500 |   |

#  

14

----

# **4.****                                     ****Stockholders’ Equity**

**Commonand Preferred Stock:**On April 7, 2006, the Company amended and restated its certificate ofincorporation to provide for 90,000,000 authorized shares of common stock, parvalue $0.01 per share, and 10,000,000 authorized shares of preferred stock, parvalue $0.01 per share. The holder of each share of common stock has the rightto one vote. The board of directors has the authority to issue the undesignatedpreferred stock in one or more series and to fix the rights, preferences,privileges and restrictions thereof. As of March 30, 2007 and September 29,2006, there were no shares of preferred stock outstanding.

On April 7, 2006, inconnection with the amendment and restatement of its certificate ofincorporation, the Company also effected a 3.059-to-1 stock split of itsoutstanding shares of common stock as of such date. All share and per shareamounts in the accompanying condensed consolidated financial statements andaccompanying notes have been retroactively restated to reflect this stocksplit.

On May 3, 2006, theCompany completed the IPO of its common stock. The Company sold 2,941,200shares of common stock and the selling stockholders sold 4,117,670 shares, atan initial public offering price to the public of $18.00 per share, resultingin proceeds to the Company of approximately $47.3 million, net of IPOtransaction costs of approximately $5.6 million. The Company used the netproceeds to repay $47.3 million of the Term Loan under the Senior CreditFacility.

# **5.****                                     ****Share-based Compensation Plans**

The Company has fourstock plans: the 2006 Equity and Performance Incentive Plan (the “2006 Plan”),the 2006 Employee Stock Purchase Plan (the “2006 ESPP”), the 2004 StockIncentive Plan (the “2004 Plan”) and the 2000 Stock Option Plan (the “2000 Plan”).

**2006Plan:** The 2006Plan provides for an aggregate of up to 1,400,000 shares of CPI International’scommon stock to be available for awards, plus the number of shares subject toawards granted under the 2004 Plan and the 2000 Plan that are forfeited, expireor are cancelled after the effective date of the 2006 Plan. All of the Company’semployees (including officers), directors, and consultants are eligible forawards under the 2006 Plan. The 2006 Plan is administered by the Compensation Committeeof the Board of Directors (“Compensation Committee”) and awards may consist ofoptions, stock appreciation rights, restricted stock, other stock unit awards,performance awards, dividend equivalents or any combination of the foregoing.The exercise price for stock options generally cannot be less than 100% of thefair market value of the shares on the date of grant.

**2006ESPP:** The 2006ESPP permits eligible employees to purchase common stock at a discounted price.An aggregate of 760,000 shares of common stock is reserved for issuance underthis plan. The stock purchase plan is administered by the CompensationCommittee. Employees participating in the plan may purchase stock for theiraccounts according to a price formula set by the Compensation Committee, asadministrator, before the applicable offering period, which cannot exceed 24months. The price per share will equal a fixed percentage (which may not belower than 85%) of the fair market value of a share of common stock on the lastday of the purchase period in the offering, or the lower of (1) a fixedpercentage (not to be less than 85%) of the fair market value of a share ofcommon stock on the date of commencement of participation in the offering and(2) a fixed percentage (not to be less than 85%) of the fair market value of ashare of common stock on the date of purchase. The initial 2006 ESPP offering 

15

----

period began onJuly 1, 2006; the participants’ purchase price for CPI International, Inc.common stock will be 85% of the closing market price on the last trading day ofeach quarter.

**2004Plan:** No furtheroptions are available for issuance under the 2004 Plan. The Company issued bothtime and performance stock option awards under the 2004 Plan. All stock optiongrants under the 2004 Plan were issued at exercise prices equal to or greaterthan the estimated market price of the Company’s common stock at option grantdate.

**2000Plan:**No furtheroptions are available for issuance under the 2000 Plan. In accordance with theterms of the stock option agreements, the unvested stock options outstandingunder the 2000 Plan became fully vested in February 2004 in connection with abusiness combination. The 2000 Plan option holders were offered the opportunityto either roll over their stock options from the predecessor company intooptions to purchase common stock of CPI International or exercise their stockoptions. Management elected to roll over options to purchase 912,613 shares ofcommon stock at prices ranging from $0.20 to $0.74 per share.

**Stock Options:**A summary of theCompany’s stock option activity as of March 30, 2007, and changes during thesix months then ended is presented below:

|                                                | ** ** | **Number of  Shares** | ** ** | **Weighted-  Average  Exercise Price** | ** ** | **Weighted-  Average  Remaining  Contractual  Term (Years)** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
|------------------------------------------------|------------|----------------------------|------------|---------------------------------------------|------------|-------------------------------------------------------------------|------------|---------------------------------|------------|
| Outstanding at  September 29, 2006             |       | 3,163,057                  |       | $                                           | 4.51       | ** **                                                        | ** ** | ** **                      | ** ** | ** ** |
| Granted                                        |       | 291,000                    |       | 14.28                                       | ** ** | ** **                                                        | ** ** | ** **                      | ** ** |
| Exercised                                      |       | (206,949                   | )          | 2.62                                        | ** ** | ** **                                                        | ** ** | ** **                      | ** ** |
| Forfeited                                      |       | (31,141                    | )          | 10.03                                       |       |                                                              |       |                            |       |
| Outstanding at March  30, 2007                 |       | 3,215,967                  |       | $                                           | 5.47       |                                                              | 7.05       |                            | $          | 44,232 |   |
| Vested and expected to  vest at March 30, 2007 |       | 3,188,743                  |       | $                                           | 5.41       |                                                              | 7.04       |                            | $          | 44,028 |   |
| Exercisable at March 30, 2007                  |       | 2,308,489                  |       | $                                           | 3.00       |                                                              | 6.48       |                            | $          | 37,448 |   |

The grant datefair value of awards granted during the first six months of fiscal year 2007was estimated as of the date of grant using the Black-Scholes options pricingmodel, assuming no expected dividends and the following ranges of assumptions:

| Expected term (in years) |   | 5.99 — 6.25   |
|--------------------------|--------|--------------------|
| Expected volatility      |   | 49.33%             |
| Risk-free rate           |   | 4.56% — 4.73% |
| Grant date fair value    |   | $7.66 — $9.07 |

 

16

----

Since the Company’scommon stock has not been publicly traded for a sufficient time period, theexpected volatility is based on expected volatilities of similar companies thathave a longer history of being publicly traded. The expected life of optionsgranted is based on the simplified method for plain vanilla options inaccordance with Securities and Exchange Commission Staff Accounting BulletinNo. 107. The risk-free rates are based on the U.S. Treasury yield in effect atthe time of the grant.

Cash received from optionexercises under all share-based payment arrangements during the first sixmonths of fiscal year 2007 was $0.5 million. The total intrinsic value ofoptions exercised was $2.7 million during the first six months of fiscal year2007. There were no options granted or exercised during the first six months offiscal year 2006.

As of March 30, 2007,there was approximately $4.2 million of total unrecognized compensation costsrelated to nonvested stock options, which is expected to be recognized over aweighted-average vesting period of 2.4 years.

**RestrictedStock Awards:**Therewere 11,466 and 9,999 shares of restricted stock granted to directorsoutstanding as of March 30, 2007 and September 29, 2006, respectively. Therestricted stock awards vest over periods of one to three years and have a 10year contractual life.

A summary of the statusof the Company’s nonvested restricted stock awards as of March 30, 2007, andchanges during the six months then ended is presented below:

|                                  | ** ** | **Number of  Shares** | ** ** | **Weighted-Average  Grant-Date  Fair Value** | ** ** |
|----------------------------------|------------|----------------------------|------------|---------------------------------------------------|------------|
| Nonvested at September  29, 2006 |       | 9,999                      |       | $                                                 | 18.00      |   |
| Granted                          |       | 7,022                      |       | 17.09                                             |       |
| Vested                           |       | (5,555                     | )          | 18.00                                             |       |
| Forfeited                        |       | —                     |       | —                                            |       |
| Nonvested at March 30, 2007      |       | 11,466                     |       | $                                                 | 17.44      |   |

As of March 30,2007, there was $0.2 million of total unrecognized compensation costs relatedto nonvested restricted stock awards, which is expected to be recognized over aweighted average vesting period of 1.6 years.

**Share-BasedCompensation Cost:** There was no unrecognized compensation costrelating to stock options outstanding at the beginning of fiscal year 2006 andno stock options were granted during the first six months of fiscal year 2006.Therefore, there was no share-based compensation cost in the first six monthsof fiscal year 2006. Totalshare-based compensation cost for the Company’s stock plans in the first sixmonths of fiscal year 2007 comprise the following:

17

----

 

|                                                                               | ** ** | **Six Months Ended  March 30, 2007** | ** ** |
|-------------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|
| Share-based  compensation cost recognized in the income statement by caption: | ** ** | ** **                                               | ** ** |
| Cost of sales                                                                 |       | $                                                        | 102        |   |
| Research and  development                                                     |       | 26                                                       |       |
| Selling and  marketing                                                        |       | 51                                                       |       |
| General and  administrative                                                   |       | 314                                                      |       |
|                                                                          |       | $                                                        | 493        |   |
| Share-based compensation  cost capitalized in inventory                       |       | $                                                        | 107        |   |
| Share-based  compensation cost remaining in inventory at end of period        |       | $                                                        | 36         |   |
| Share-based  compensation expense by type of award:                           | ** ** | ** **                                               | ** ** |
| Stock options                                                                 |       | $                                                        | 435        |   |
| Restricted stock                                                              |       | 58                                                       |       |
|                                                                          |       | $                                                        | 493        |   |

# **6.****                                     ****Derivative Financial Instruments**

The Company uses forwardexchange contracts to hedge the foreign currency exposure associated withforecasted manufacturing costs in Canada. As of March 30, 2007, CPI hadoutstanding forward contract commitments to purchase Canadian dollars for anaggregate U.S. notional amount of $21.5 million; the last forward contractexpires on December 17, 2007. At March 30, 2007 and September 29, 2006, thefair value of foreign currency forward contracts was a net liability of $0.2million and an asset of $0.1 million, respectively, and the unrealized (loss)gain was $(0.1) million and $8 thousand, net of related tax expense,respectively.

The Company’s foreigncurrency forward contracts are designated as a cash flow hedge and areconsidered highly effective, as defined by Statement of Financial AccountingStandards (“SFAS”) No. 133, “Accounting for Derivative Instruments and HedgingActivities.” The unrealized gains and losses from foreign exchange forwardcontracts are included in “Accumulated other comprehensive income” in thecondensed consolidated balance sheets, and the Company anticipates recognizingthe entire unrealized loss in operating earnings within the next twelve months.Changes in the fair value of foreign currency forward contracts due to changesin time value are excluded from the assessment of effectiveness, and are immediatelyrecognized in General and Administrative in the condensed consolidatedstatements of operations. The time value was not material for first six monthsof fiscal years 2007 and 2006. If the transaction being hedged fails to occur,or if a portion of any derivative is ineffective, then the Company promptlyrecognizes the gain or loss on the associated financial instrument in the condensedconsolidated statements of operations. No ineffective amounts were recognizeddue to anticipated transactions failing to occur in the first six months offiscal years 2007 and 2006. Realized gains and losses from foreign currencyforward contracts are recognized in cost of sales and general andadministrative in the condensed consolidated statements of operations. Netincome in the first six months of fiscal year 2007 includes a recognized lossfrom foreign currency forward contracts of $0.1 million. Net income in thefirst six months of fiscal year 2006 includes a recognized gain from foreigncurrency forward contracts of $1.0 million.

18

----

In April 2005, theCompany expanded its use of derivatives to hedge the interest rate exposureassociated with the FR Notes. On April 15, 2005, the Company entered into an$80 million interest rate swap contract (“the Swap”) to receive variable rate6-month LIBOR interest and pay 4.15% fixed rate interest, which when combinedwith the 5.75% margin, results in a fixed rate of 9.9% on the FR Notes throughJanuary 31, 2008. The Swap interest payments are made semi-annually, beginningwith the first payment on February 1, 2006. The Swap matures on January 31,2008. In fiscal year 2005, the Company deposited $1.0 million as collateral forthe Swap; the amount of collateral fluctuates based on the fair value of theSwap. In fiscal year 2006, the Company received a $0.5 million refund of theSwap collateral. The Swap collateral remaining is reported as Prepaid and OtherCurrent Assets in the accompanying condensed consolidated balance sheets as ofMarch 30, 2007, and as Other Long-term Assets as of September 29, 2006. Theunrealized gains and losses from the Swap are included in “Accumulated othercomprehensive income” in the condensed consolidated balance sheets. Theineffective portion of the Swap was not significant, and the interest rate swapgain or loss are included in the assessment of hedge effectiveness. At March30, 2007 and September 29, 2006, the fair value of the Swap was an asset of$0.7 million and $1.1 million, respectively, and the unrealized gain, net ofrelated tax expense, was $0.4 million and $0.7 million, respectively.

# **7.****                                     ****Income Taxes**

The Company’s effectivetax rate was approximately 37% and 44% for the first six months of fiscal year2007 and 2006, respectively. The lower effective income tax rate in the firstsix months of fiscal year 2007 was primarily due to a change in filing positionthat was made in the third quarter of fiscal year 2006 as a result of foreignincome tax planning activities, discrete tax benefits related to prior yearforeign tax filings and lower effective income tax rates in the first sixmonths of fiscal year 2007 in certain foreign jurisdictions primarily due todecreases in the Canadian statutory tax rates. The effective tax rate for thefirst six months of fiscal year 2006 included a $0.3 million chargeattributable to the fourth quarter of fiscal year 2005 consisting of $0.5million to correct the overstatement of tax benefits recorded in the fourthquarter of fiscal year 2005 for stock-based compensation expense that is notdeductible for income tax purposes in a foreign tax jurisdiction, offset byreversal of a $0.2 million tax contingency reserve that was no longer required.Without the correction to the overstatement of tax benefits, the Company’seffective tax rate for the first six months of fiscal year 2006 would have beenapproximately 41%.

# **8.****                                     ****Earnings Per Share**

Basic earnings per shareis computed using the weighted-average number of common shares outstandingduring the period. Diluted earnings per share is computed using theweighted-average number of common and dilutive potential common equivalentshares outstanding during the period. Potential common equivalent shares consistof common stock issuable upon exercise of stock options using the treasurystock method.

19

----

The following table is areconciliation of the shares used to calculate basic and diluted earnings pershare:

|                                                               | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|---------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                    | ** ** | **March 30,  2007**         | ** ** | **March 31,  2006**       | ** ** | **March 30,  2007** | ** ** | **March 31,  2006** | ** ** |
| Weighted average shares  outstanding - Basic                  |       | 16,253,522                       |       | 13,078,954                     |       | 16,161,149 |   | 13,078,954 |   |
| Effect of dilutive  stock options and restricted stock awards |       | 1,476,796                        |       | 1,705,993                      |       | 1,485,308 |   | 1,697,560 |   |
| Weighted average shares outstanding - Diluted                 |       | 17,730,318                       |       | 14,784,947                     |       | 17,646,457 |   | 14,776,514 |   |

 

As further discussed inNote 4, on April 7, 2006, in connection with the amendment and restatement ofits certificate of incorporation, the Company effected a 3.059-to-1 split ofits outstanding shares of common stock as of such date. All share and per shareamounts have been retroactively restated to reflect this stock split.

# **9.****                                     ****Segments, Geographic and CustomerInformation**

The Company’s reportablesegments are VED and satcom equipment. The VED segment develops, manufacturesand distributes high power/high frequency microwave and radio frequency signalcomponents. The satcom equipment segment manufactures and supplies high poweramplifiers and networks for satellite communication uplink and industrialapplications. Segment information reported below is consistent with the mannerin which it is reviewed and evaluated by the Company’s chief operating decisionmaker, its chief executive officer, and is based on the nature of the Company’soperations and products offered to customers.

Summarized financialinformation concerning the Company’s reportable segments is shown in thefollowing tables:
| ** **                      | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|---------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                      | ** ** | **March 30,  2007**         | ** ** | **March 31,  2006**       | ** ** | **March 30,  2007** | ** ** | **March 31,  2006** | ** ** |
| Sales from external  customers  |       |                             |       |                           |       |   |   |   |   |
| VED                             |       | $                                | 72,216     |                           | $          | 69,597 |   | $ | 139,191 |   | $ | 132,793 |   |
| Satcom equipment                |       | 16,228                           |       | 17,332                         |       | 32,976 |   | 36,515 |   |
|                            |       | $                                | 88,444     |                           | $          | 86,929 |   | $ | 172,167 |   | $ | 169,308 |   |
| Intersegment product  transfers |       |                             |       |                           |       |   |   |   |   |
| VED                             |       | $                                | 4,582      |                           | $          | 6,476 |   | $ | 9,705 |   | $ | 12,684 |   |
| Satcom equipment                |       | 9                                |       | 2                              |       | 9 |   | 2 |   |
|                            |       | $                                | 4,591      |                           | $          | 6,478 |   | $ | 9,714 |   | $ | 12,686 |   |
| EBITDA                          |       |                             |       |                           |       |   |   |   |   |
| VED                             |       | $                                | 17,932     |                           | $          | 17,396 |   | $ | 35,516 |   | $ | 33,461 |   |
| Satcom equipment                |       | 1,121                            |       | 1,961                          |       | 2,618 |   | 4,852 |   |
| Other                           |       | (2,743                           | )          | (3,304                         | )          | (4,739 | ) | (9,745 | ) |
|                            |       | $                                | 16,310     |                           | $          | 16,053 |   | $ | 33,395 |   | $ | 28,568 |   |

 

20

----

Amounts not reported as VED or satcom equipment are reported as other.Other consists primarily of corporate operating expenses and certain otherexpenses that are managed by the corporate organization, such as businesscombination-related expenses, share-based compensation expense, and certainnon-recurring or unusual expenses. The first six months of fiscal year 2006included non-recurring expenses for a special bonus of $3.25 million andexpenses of $2.5 million related to the relocation of the Company’s Eimacoperations from its former San Carlos, California facility to its nearby PaloAlto, California and Mountain View, California facilities. The special bonuswas paid to employees and directors (other than directors who are employees oraffiliates of Cypress) to reward them for the increase in Company value.

EBITDArepresents earnings before provision for income taxes, net interest expense anddepreciation and amortization. For the reasons listed below, the Companybelieves that GAAP-based financial information for leveraged businesses such asthe Company’s business should be supplemented by EBITDA so that investorsbetter understand the Company’s financial performance in connection with theiranalysis of the Company’s business:

·                    EBITDA is a component of the measures used by the Company’sboard of directors and management team to evaluate the Company’s operatingperformance;

·                    the Senior Credit Facility contains covenants that requirethe Company to maintain certain interest expense coverage and leverage ratiosthat contain EBITDA as a component, and the Company’s management team usesEBITDA to monitor compliance with such covenants;

·                    EBITDA is a component of the measures used by the Company’smanagement team to make day-to-day operating decisions;

·                    EBITDA facilitates comparisons between the Company’soperating results and those of competitors with different capital structuresand therefore is a component of the measures used by the Company’s managementto facilitate internal comparisons to competitors’ results and the Company’sindustry in general; and

·                    the payment of management bonuses is contingent upon, amongother things, the satisfaction by the Company of certain targets that containEBITDA as a component.

Other companies may define EBITDA differently and, asa result, the Company’s measure of EBITDA may not be directly comparable toEBITDA of other companies. Although the Company uses EBITDA as a financialmeasure to assess the performance of its business, the use of EBITDA is limitedbecause it does not include certain material costs, such as interest and taxes,necessary to operate the Company’s business. When analyzing the Company’sperformance, EBITDA should be considered in addition to, and not as asubstitute for, net income, cash flows from operating activities or otherstatements of operations or statements of cash flows data prepared inaccordance with GAAP.

21

----

Thefollowing table reconciles net income to EBITDA:
| ** **                     | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|--------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                     | ** ** | **March 30,  2007**         | ** ** | **March 31,  2006**       | ** ** | **March 30,  2007** | ** ** | **March 31,  2006** | ** ** |
| Net income                     |       | $                                | 5,760      |                           | $          | 4,345 |   | $ | 11,595 |   | $ | 6,560 |   |
| Depreciation and  amortization |       | 2,188                            |       | 2,295                          |       | 4,382 |   | 4,451 |   |
| Interest  expense, net         |       | 5,275                            |       | 6,400                          |       | 10,614 |   | 12,464 |   |
| Income tax  expense            |       | 3,087                            |       | 3,013                          |       | 6,804 |   | 5,093 |   |
| EBITDA                         |       | $                                | 16,310     |                           | $          | 16,053 |   | $ | 33,395 |   | $ | 28,568 |   |

Geographic salesby customer location were as follows for external customers:
| ** **            | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-----------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **            | ** ** | **March 30,  2007**         | ** ** | **March 31,  2006**       | ** ** | **March 30,  2007** | ** ** | **March 31,  2006** | ** ** |
| United States         |       | $                                | 52,577     |                           | $          | 57,207 |   | $ | 102,081 |   | $ | 108,207 |   |
| All foreign countries |       | 35,867                           |       | 29,722                         |       | 70,086 |   | 61,101 |   |
| Total sales           |       | $                                | 88,444     |                           | $          | 86,929 |   | $ | 172,167 |   | $ | 169,308 |   |

Net property,plant and equipment by geographic area was as follows:
| ** **    | ** ** | **March 30, 2007** | ** ** | **September 29, 2006**                 | ** ** |
|---------------|------------|------------------------------|------------|--------------------------------------------------|------------|
| ** **    | ** ** | **Cost**                     | ** ** | **Accumulated  Depreciation  and  Amortization** | ** ** | **Net Property,  Plant and  Equipment** | ** ** | **Cost** | ** ** | **Accumulated  Depreciation  and  Amortization** | ** ** | **Net Property,  Plant and  Equipment** | ** ** |
| United States |       | $                            | 66,154     |                                             | $          | (13,995 | ) | $ | 52,159 |   | $ | 64,527 |   | $ | (11,221 | ) | $ | 53,306 |   |
| Canada        |       | 15,534                       |       | (1,763                                           | )          | 13,771 |   | 11,915 |   | (1,440 | ) | 10,475 |   |
| Other         |       | 175                          |       | (127                                             | )          | 48 |   | 177 |   | (107 | ) | 70 |   |
| Total         |       | $                            | 81,863     |                                             | $          | (15,885 | ) | $ | 65,978 |   | $ | 76,619 |   | $ | (12,768 | ) | $ | 63,851 |   |

The United StatesGovernment is the only customer that accounted for 10% or more of the Company’sconsolidated sales in the first six months of fiscal years 2007 and 2006.Direct sales to the United States Government were $29.0 million and $27.8million for first six months of fiscal years 2007 and 2006, respectively.Accounts receivable from this customer represented 14% of consolidated accountsreceivable as of March 30, 2007 and September 29, 2006.

There were no individualforeign countries with sales greater than 10% of total sales for the periodspresented.

# **10.****                              ****Sale of San Carlos Assets**

In February 2003, theCompany entered into an agreement to sell the land and close its facilitieslocated in San Carlos, California to consolidate the Company’s Eimac operationsinto the Company’s existing facility in nearby Palo Alto, California. InSeptember 2006, the sale was completed. The aggregate sales proceeds were $24.8million, of which $11.3 million was received in September 2006 and $13.5million was received as advance payments in fiscal 2004. The Company had totalselling costs of 

22

----

$1.3 millionrelated to the sale of the San Carlos property. The aggregate sales proceeds of$24.8 million less the related selling costs of $1.3 million, offset by theland and building’s net book value of approximately $23.5 million, resulted inno gain or loss on the sale.

# **11.****                              ****Special Cash Dividend**

In December 2005, theBoard of Directors declared and paid a special cash dividend to stockholders of$17.0 million. This dividend was paid using (a) the $10.0 million in netproceeds obtained from the additional borrowing under the Senior CreditFacility in connection with the December 2005 amendment thereto, and (b)available cash.

# **12.****                              ****Recently Released AccountingPronouncements**

In June 2006, theFinancial Accounting Standards Board (“FASB”) issued Interpretation 48, “Accountingfor Income Tax Uncertainties” (“FIN 48”). FIN 48 defines the threshold forrecognizing the benefits of tax return positions in the financial statements as“more-likely-than-not” to be sustained by the taxing authority. The recentlyissued literature also provides guidance on the derecognition, measurement andclassification of income tax uncertainties, along with any related interest andpenalties. FIN 48 also includes guidance concerning accounting for income taxuncertainties in interim periods and increases the level of disclosuresassociated with any recorded income tax uncertainties. FIN 48 is effective forfiscal years beginning after December 15, 2006. Any differences betweenthe amounts recognized in the statements of financial position prior to theadoption of FIN 48 and the amounts reported after adoption will be accountedfor as a cumulative-effect adjustment recorded to the beginning balance ofretained earnings. The Company will be required to adopt FIN 48 in fiscal year2008 and is currently in the process of determining the impact, if any, ofadopting the provisions of FIN 48 on its financial position, results of operationsand liquidity.

In September 2006, theFASB issued SFAS No. 157, “Fair Value Measurements,” which defines fair value,establishes a framework for measuring fair value under other accountingpronouncements that permit or require fair value measurements, changes themethods used to measure fair value and expands disclosures about fair valuemeasurements. In particular, disclosures are required to provide informationon: the extent to which fair value is used to measure assets and liabilities;the inputs used to develop measurements; and the effect of certain of themeasurements on earnings (or changes in net assets). SFAS No. 157 is effectivefor fiscal years beginning after November 15, 2007 and interim periods withinthose fiscal years. Early adoption, as of the beginning of an entity’s fiscalyear, is also permitted, provided interim financial statements have not yetbeen issued. The Company will be required to adopt SFAS No. 157 in fiscal year2008 and is currently evaluating the potential impact, if any, that theadoption of SFAS No. 157 will have on its consolidated financial statements.

In September 2006, theFASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pensionand Other Postretirement Plans—an amendment of FASB Statements No. 87, 88, 106,and 132(R),” which requires an employer to recognize the overfunded orunderfunded status of a defined benefit plan as an asset or liability in itscondensed consolidated balance sheet. Under SFAS No. 158, actuarial gains andlosses and prior service costs or credits that have not yet been recognizedthrough earnings as net periodic benefit cost will be recognized in othercomprehensive income, net of tax, until they are amortized as a component ofnet periodic benefit cost. SFAS No. 158 is effective as of the end of thefiscal year ending after December 15, 2006 and shall not be appliedretrospectively. The Company will be required to adopt SFAS No. 158 in thefourth quarter of fiscal year 2007 and is currently evaluating the impact, ifany, that the adoption of SFAS No. 158 will have on its consolidated financialstatements.

23

----

In September 2006, theSecurities and Exchange Commission issued Staff Accounting Bulletin No. 108, “Consideringthe Effects of Prior Year Misstatements when Quantifying Misstatements inCurrent Year Financial Statements” (“SAB No. 108”). SAB No. 108 providesguidance on how prior year misstatements should be considered when quantifyingmisstatements in the current year financial statements. SAB No. 108 requiresregistrants to quantify misstatements using both a balance sheet and an incomestatement approach and evaluate whether either approach results in quantifyinga misstatement that, when all relevant quantitative and qualitative factors areconsidered, is material. SAB No. 108 does not change the guidance in SAB No.99, “Materiality,” when evaluating the materiality of misstatements. SAB No.108 is effective for fiscal years ending after November 15, 2006. Upon initialapplication, SAB No. 108 permits a one-time cumulative effect adjustment tobeginning retained earnings. The Company will be required to adopt SAB No. 108in the fourth quarter of fiscal year 2007 and believes at this time that theadoption of SAB No. 108 will not have a material impact on its consolidated financialstatements.

In February 2007, theFASB issued SFAS No. 159, The Fair Value Option for Financial Assets andFinancial Liabilities - Including an amendment of FASB Statement No. 115. SFAS159 permits companies to choose to measure many financial instruments andcertain other items at fair value that are not currently required to bemeasured at fair value. The objective of SFAS 159 is to provide opportunitiesto mitigate volatility in reported earnings caused by measuring related assetsand liabilities differently without having to apply hedge accountingprovisions. SFAS 159 also establishes presentation and disclosure requirementsdesigned to facilitate comparisons between companies that choose differentmeasurement attributes for similar types of assets and liabilities. SFAS 159will be effective in the first quarter of fiscal year 2009. The Company iscurrently evaluating the impact that this statement will have on itsconsolidated financial statements.

# **13.****                              ****Supplemental Guarantors CondensedConsolidating Financial Information (Unaudited)**

On January 23, 2004, CPIissued $125.0 million of 8% Notes that are guaranteed by CPI International andall of CPI’s domestic subsidiaries. Separate financial statements of theguarantors are not presented because (i) the guarantors are wholly-owned andhave fully and unconditionally guaranteed the 8% Notes on a joint and severalbasis and (ii) the Company’s management has determined that such separatefinancial statements are not material to investors. Instead, presented beloware the consolidating financial statements of: (a) the parent or CPIInternational, (b) the issuer, CPI, (c) the guarantor subsidiaries (all of thedomestic subsidiaries), (d) the non-guarantor subsidiaries, (e) theconsolidating elimination entries, and (f) the consolidated totals. Theaccompanying consolidating financial information should be read in connectionwith the condensed consolidated financial statements of CPI International.

Investments insubsidiaries are accounted for based on the equity method. The principalelimination entries eliminate investments in subsidiaries, intercompanybalances, intercompany transactions and intercompany sales.

24

----

**CONDENSEDCONSOLIDATING BALANCE SHEET**

**As of March 30, 2007**
| ** **                                       | ** ** | **Parent  (CPI Int’l)** | ** ** | **Issuer  (CPI)** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Consolidating  Eliminations** | ** ** | **Consolidated  Total** | ** ** |
|--------------------------------------------------|------------|-----------------------------------|------------|-------------------|------------|-----------------------------|------------|---------------------------------|------------|---------------------------------|------------|-------------------------|------------|
| **Assets**                                       |       |                              |       |              |       |                        |       |                            |       |                            |       |                    |       |
| Cash and cash  equivalents                       |       | $                                 | 516        |              | $          | 25,113                      |       | $                               | 508        |                            | $          | 1,468                   |       | $ | — |   | $ | 27,605 |   |
| Restricted cash                                  |       | —                            |       | —            |       | 1,160                       |       | 777                             |       | —                          |       | 1,937                   |       |
| Accounts receivable,  net                        |       | —                            |       | 24,103            |       | 8,048                       |       | 15,142                          |       | —                          |       | 47,293                  |       |
| Inventories                                      |       | —                            |       | 38,825            |       | 2,539                       |       | 16,197                          |       | (651                            | )          | 56,910                  |       |
| Deferred tax  assets                             |       | —                            |       | 10,954            |       | 3                           |       | 865                             |       | (262                            | )          | 11,560                  |       |
| Intercompany  receivable                         |       | —                            |       | 27,631            |       | 1,955                       |       | —                          |       | (29,586                         | )          | —                  |       |
| Prepaid and  other current assets                |       | 1,239                             |       | 1,622             |       | 331                         |       | 729                             |       | (263                            | )          | 3,658                   |       |
| Total current assets                             |       | 1,755                             |       | 128,248           |       | 14,544                      |       | 35,178                          |       | (30,762                         | )          | 148,963                 |       |
| Property, plant  and equipment, net              |       | —                            |       | 49,327            |       | 2,845                       |       | 13,806                          |       | —                          |       | 65,978                  |       |
| Deferred debt  issue costs, net                  |       | 3,010                             |       | 5,907             |       | —                      |       | —                          |       | —                          |       | 8,917                   |       |
| Intangible  assets, net                          |       | —                            |       | 59,107            |       | 6,590                       |       | 8,571                           |       | —                          |       | 74,268                  |       |
| Goodwill                                         |       | —                            |       | 93,160            |       | 5,848                       |       | 48,263                          |       | —                          |       | 147,271                 |       |
| Other long-term  assets                          |       | —                            |       | 558               |       | —                      |       | —                          |       | —                          |       | 558                     |       |
| Intercompany  notes receivable                   |       | —                            |       | 1,035             |       | —                      |       | —                          |       | (1,035                          | )          | —                  |       |
| Investment in  subsidiaries                      |       | 219,037                           |       | 61,789            |       | —                      |       | —                          |       | (280,826                        | )          | —                  |       |
| Total assets                                     |       | $                                 | 223,802    |              | $          | 399,131                     |       | $                               | 29,827     |                            | $          | 105,818                 |       | $ | (312,623 | ) | $ | 445,955 |   |
|                                             |       |                              |       |              |       |                        |       |                            |       |                            |       |                    |       |
| **Liabilities  and stockholders’ equity**   |       |                              |       |              |       |                        |       |                            |       |                            |       |                    |       |
| Accounts payable                                 |       | $                                 | 192        |              | $          | 12,535                      |       | $                               | 554        |                            | $          | 7,348                   |       | $ | — |   | $ | 20,629 |   |
| Accrued expenses                                 |       | 1,320                             |       | 16,239            |       | 702                         |       | 5,051                           |       | —                          |       | 23,312                  |       |
| Product warranty                                 |       | —                            |       | 3,159             |       | 225                         |       | 2,141                           |       | —                          |       | 5,525                   |       |
| Deferred income  taxes                           |       | 262                               |       | —            |       | —                      |       | —                          |       | (262                            | )          | —                  |       |
| Income taxes  payable                            |       | —                            |       | —            |       | 379                         |       | 5,934                           |       | (263                            | )          | 6,050                   |       |
| Advance payments  from customers                 |       | —                            |       | 2,865             |       | 1,519                       |       | 1,633                           |       | —                          |       | 6,017                   |       |
| Intercompany  payable                            |       | 28,396                            |       | —            |       | —                      |       | 1,190                           |       | (29,586                         | )          | —                  |       |
| Total current liabilities                        |       | 30,170                            |       | 34,798            |       | 3,379                       |       | 23,297                          |       | (30,111                         | )          | 61,533                  |       |
| Deferred income  taxes                           |       | —                            |       | 23,813            |       | —                      |       | 5,800                           |       | —                          |       | 29,613                  |       |
| Intercompany  notes payable                      |       | —                            |       | —            |       | —                      |       | 1,035                           |       | (1,035                          | )          | —                  |       |
| Long-term debt,  less current portion            |       | 79,308                            |       | 162,500           |       | —                      |       | —                          |       | —                          |       | 241,808                 |       |
| Other long-term  liabilities                     |       | —                            |       | 60                |       | —                      |       | —                          |       | —                          |       | 60                      |       |
| Total liabilities                                |       | 109,478                           |       | 221,171           |       | 3,379                       |       | 30,132                          |       | (31,146                         | )          | 333,014                 |       |
| Common stock                                     |       | 163                               |       | —            |       | —                      |       | —                          |       | —                          |       | 163                     |       |
| Parent  investment                               |       | —                            |       | 120,610           |       | 22,228                      |       | 57,632                          |       | (200,470                        | )          | —                  |       |
| Additional  paid-in capital                      |       | 67,371                            |       | —            |       | —                      |       | —                          |       | —                          |       | 67,371                  |       |
| Accumulated  other comprehensive income          |       | 273                               |       | (154              | )          | —                      |       | (95                             | )          | 249                             |       | 273                     |       |
| Retained  earnings                               |       | 46,517                            |       | 57,504            |       | 4,220                       |       | 18,149                          |       | (81,256                         | )          | 45,134                  |       |
| Net stockholders’ equity                    |       | 114,324                           |       | 177,960           |       | 26,448                      |       | 75,686                          |       | (281,477                        | )          | 112,941                 |       |
| Total  liabilities and stockholders’ equity |       | $                                 | 223,802    |              | $          | 399,131                     |       | $                               | 29,827     |                            | $          | 105,818                 |       | $ | (312,623 | ) | $ | 445,955 |   |

** **

25

----

**CONDENSEDCONSOLIDATING BALANCE SHEET**

**As of September 29, 2006**
| ** **                                       | ** ** | **Parent  (CPI Int’l)** | ** ** | **Issuer  (CPI)** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Consolidating  Eliminations** | ** ** | **Consolidated  Total** | ** ** |
|--------------------------------------------------|------------|-----------------------------------|------------|-------------------|------------|-----------------------------|------------|---------------------------------|------------|---------------------------------|------------|-------------------------|------------|
| **Assets**                                       |       |                              |       |              |       |                        |       |                            |       |                            |       |                    |       |
| Cash and cash  equivalents                       |       | $                                 | 139        |              | $          | 28,299                      |       | $                               | 290        |                            | $          | 1,425                   |       | $ | — |   | $ | 30,153 |   |
| Restricted cash                                  |       | —                            |       | —            |       | 941                         |       | 805                             |       | —                          |       | 1,746                   |       |
| Accounts  receivable, net                        |       | —                            |       | 22,642            |       | 7,132                       |       | 13,854                          |       | —                          |       | 43,628                  |       |
| Inventories                                      |       | —                            |       | 34,659            |       | 2,215                       |       | 18,540                          |       | (1,383                          | )          | 54,031                  |       |
| Deferred tax  assets                             |       | —                            |       | 10,703            |       | 3                           |       | 814                             |       | —                          |       | 11,520                  |       |
| Intercompany  receivable                         |       | —                            |       | 27,988            |       | 2,748                       |       | —                          |       | (30,736                         | )          | —                  |       |
| Prepaid and  other current assets                |       | 887                               |       | 1,238             |       | 165                         |       | 790                             |       | —                          |       | 3,080                   |       |
| Total current assets                             |       | 1,026                             |       | 125,529           |       | 13,494                      |       | 36,228                          |       | (32,119                         | )          | 144,158                 |       |
| Property, plant  and equipment, net              |       | —                            |       | 50,344            |       | 2,982                       |       | 10,525                          |       | —                          |       | 63,851                  |       |
| Deferred debt  issue costs, net                  |       | 3,123                             |       | 6,521             |       | —                      |       | —                          |       | —                          |       | 9,644                   |       |
| Intangible  assets, net                          |       | —                            |       | 59,901            |       | 6,715                       |       | 8,873                           |       | —                          |       | 75,489                  |       |
| Goodwill                                         |       | —                            |       | 93,378            |       | 5,848                       |       | 48,263                          |       | —                          |       | 147,489                 |       |
| Other long-term  assets                          |       | 731                               |       | 397               |       | —                      |       | —                          |       | —                          |       | 1,128                   |       |
| Intercompany  notes receivable                   |       | —                            |       | 1,035             |       | —                      |       | —                          |       | (1,035                          | )          | —                  |       |
| Investment in  subsidiaries                      |       | 204,778                           |       | 55,247            |       | —                      |       | —                          |       | (260,025                        | )          | —                  |       |
| Total assets                                     |       | $                                 | 209,658    |              | $          | 392,352                     |       | $                               | 29,039     |                            | $          | 103,889                 |       | $ | (293,179 | ) | $ | 441,759 |   |
|                                             |       |                              |       |              |       |                        |       |                            |       |                            |       |                    |       |
| **Liabilities  and stockholders’ equity**   |       |                              |       |              |       |                        |       |                            |       |                            |       |                    |       |
| Current portion  of long-term debt               |       | $                                 | —     |              | $          | 1,714                       |       | $                               | —     |                            | $          | —                  |       | $ | — |   | $ | 1,714 |   |
| Accounts payable                                 |       | 199                               |       | 9,667             |       | 490                         |       | 8,745                           |       | —                          |       | 19,101                  |       |
| Accrued expenses                                 |       | 1,298                             |       | 16,130            |       | 921                         |       | 4,920                           |       | —                          |       | 23,269                  |       |
| Product warranty                                 |       | —                            |       | 3,506             |       | 204                         |       | 2,248                           |       | —                          |       | 5,958                   |       |
| Income taxes  payable                            |       | —                            |       | 4,778             |       | 204                         |       | 5,711                           |       | —                          |       | 10,693                  |       |
| Advance payments  from customers                 |       | —                            |       | 3,451             |       | 909                         |       | 1,950                           |       | —                          |       | 6,310                   |       |
| Intercompany  payable                            |       | 27,744                            |       | —            |       | —                      |       | 2,992                           |       | (30,736                         | )          | —                  |       |
| Total current liabilities                        |       | 29,241                            |       | 39,246            |       | 2,728                       |       | 26,566                          |       | (30,736                         | )          | 67,045                  |       |
| Deferred income  taxes                           |       | 447                               |       | 23,578            |       | —                      |       | 5,908                           |       | —                          |       | 29,933                  |       |
| Intercompany  notes payable                      |       | —                            |       | —            |       | —                      |       | 1,035                           |       | (1,035                          | )          | —                  |       |
| Long-term debt,  less current portion            |       | 79,281                            |       | 165,786           |       | —                      |       | —                          |       | —                          |       | 245,067                 |       |
| Other long-term  liabilities                     |       | —                            |       | 41                |       | —                      |       | —                          |       | —                          |       | 41                      |       |
| Total liabilities                                |       | 108,969                           |       | 228,651           |       | 2,728                       |       | 33,509                          |       | (31,771                         | )          | 342,086                 |       |
| Common stock                                     |       | 160                               |       | —            |       | —                      |       | —                          |       | —                          |       | 160                     |       |
| Parent investment                                |       | —                            |       | 120,705           |       | 22,228                      |       | 57,536                          |       | (200,469                        | )          | —                  |       |
| Additional  paid-in capital                      |       | 65,295                            |       | —            |       | —                      |       | —                          |       | —                          |       | 65,295                  |       |
| Accumulated  other comprehensive income          |       | 679                               |       | 8                 |       | —                      |       | (23                             | )          | 15                              |       | 679                     |       |
| Retained  earnings                               |       | 34,555                            |       | 42,988            |       | 4,083                       |       | 12,867                          |       | (60,954                         | )          | 33,539                  |       |
| Net stockholders’ equity                    |       | 100,689                           |       | 163,701           |       | 26,311                      |       | 70,380                          |       | (261,408                        | )          | 99,673                  |       |
| Total  liabilities and stockholders’ equity |       | $                                 | 209,658    |              | $          | 392,352                     |       | $                               | 29,039     |                            | $          | 103,889                 |       | $ | (293,179 | ) | $ | 441,759 |   |

** **

26

----

**CONDENSEDCONSOLIDATING STATEMENT OF OPERATIONS**

**For the Quarter Ended March 30, 2007**
| ** **                                                                    | ** ** | **Parent  (CPI Int’l)** | ** ** | **Issuer  (CPI)** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Consolidating  Eliminations** | ** ** | **Consolidated  Total** | ** ** |
|-------------------------------------------------------------------------------|------------|-----------------------------------|------------|-------------------|------------|-----------------------------|------------|---------------------------------|------------|---------------------------------|------------|-------------------------|------------|
| Sales                                                                         |       | $                                 | —     |              | $          | 56,666                      |       | $                               | 16,351     |                            | $          | 34,143                  |       | $ | (18,716 | ) | $ | 88,444 |   |
| Cost of sales                                                                 |       | —                            |       | 40,211            |       | 13,642                      |       | 26,255                          |       | (19,369                         | )          | 60,739                  |       |
| Gross profit                                                                  |       | —                            |       | 16,455            |       | 2,709                       |       | 7,888                           |       | 653                             |       | 27,705                  |       |
| Operating costs  and expenses:                                                |       |                              |       |              |       |                        |       |                            |       |                            |       |                    |       |
| Research and development                                                      |       | —                            |       | 902               |       | —                      |       | 1,450                           |       | —                          |       | 2,352                   |       |
| Selling and marketing                                                         |       | —                            |       | 2,015             |       | 869                         |       | 1,915                           |       | —                          |       | 4,799                   |       |
| General and administrative                                                    |       | —                            |       | 4,402             |       | 515                         |       | 929                             |       | —                          |       | 5,846                   |       |
| Amortization of acquisition-related intangible  assets                        |       | —                            |       | 334               |       | 62                          |       | 150                             |       | —                          |       | 546                     |       |
| Net loss on disposition of assets                                             |       | —                            |       | 17                |       | —                      |       | 23                              |       | —                          |       | 40                      |       |
| Total operating  costs and expenses                                           |       | —                            |       | 7,670             |       | 1,446                       |       | 4,467                           |       | —                          |       | 13,583                  |       |
| Operating income                                                              |       | —                            |       | 8,785             |       | 1,263                       |       | 3,421                           |       | 653                             |       | 14,122                  |       |
| Interest expense (income), net                                                |       | 2,072                             |       | 3,328             |       | (9                          | )          | (116                            | )          | —                          |       | 5,275                   |       |
| (Loss) income  before income tax expense and equity in income of subsidiaries |       | (2,072                            | )          | 5,457             |       | 1,272                       |       | 3,537                           |       | 653                             |       | 8,847                   |       |
| Income tax (benefit) expense                                                  |       | (787                              | )          | 2,650             |       | 356                         |       | 868                             |       | —                          |       | 3,087                   |       |
| Equity in income of subsidiaries                                              |       | 7,045                             |       | 4,238             |       | —                      |       | —                          |       | (11,283                         | )          | —                  |       |
| Net income                                                                    |       | $                                 | 5,760      |              | $          | 7,045                       |       | $                               | 916        |                            | $          | 2,669                   |       | $ | (10,630 | ) | $ | 5,760 |   |

**CONDENSEDCONSOLIDATING STATEMENT OF OPERATIONS**

**For the Quarter Ended March 31, 2006**
| ** **                                                                    | ** ** | **Parent  (CPI Int’l)** | ** ** | **Issuer  (CPI)** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Consolidating  Eliminations** | ** ** | **Consolidated  Total** | ** ** |
|-------------------------------------------------------------------------------|------------|-----------------------------------|------------|-------------------|------------|-----------------------------|------------|---------------------------------|------------|---------------------------------|------------|-------------------------|------------|
| Sales                                                                         |       | $                                 | —     |              | $          | 56,580                      |       | $                               | 16,101     |                            | $          | 34,148                  |       | $ | (19,900 | ) | $ | 86,929 |   |
| Cost of sales                                                                 |       | —                            |       | 42,238            |       | 13,241                      |       | 25,797                          |       | (20,091                         | )          | 61,185                  |       |
| Gross profit                                                                  |       | —                            |       | 14,342            |       | 2,860                       |       | 8,351                           |       | 191                             |       | 25,744                  |       |
| Operating costs  and expenses:                                                |       |                              |       |              |       |                        |       |                            |       |                            |       |                    |       |
| Research and development                                                      |       | —                            |       | 842               |       | —                      |       | 1,099                           |       | —                          |       | 1,941                   |       |
| Selling and marketing                                                         |       | —                            |       | 1,933             |       | 974                         |       | 1,773                           |       | —                          |       | 4,680                   |       |
| General and administrative                                                    |       | —                            |       | 1,784             |       | 435                         |       | 2,457                           |       | —                          |       | 4,676                   |       |
| Amortization of acquisition-related intangible  assets                        |       | —                            |       | 334               |       | 62                          |       | 150                             |       | —                          |       | 546                     |       |
| Net loss on disposition of assets                                             |       | —                            |       | 143               |       | —                      |       | —                          |       | —                          |       | 143                     |       |
| Total operating  costs and expenses                                           |       | —                            |       | 5,036             |       | 1,471                       |       | 5,479                           |       | —                          |       | 11,986                  |       |
| Operating income                                                              |       | —                            |       | 9,306             |       | 1,389                       |       | 2,872                           |       | 191                             |       | 13,758                  |       |
| Interest expense (income), net                                                |       | 2,052                             |       | 4,339             |       | (4                          | )          | 13                              |       | —                          |       | 6,400                   |       |
| (Loss) income  before income tax expense and equity in income of subsidiaries |       | (2,052                            | )          | 4,967             |       | 1,393                       |       | 2,859                           |       | 191                             |       | 7,358                   |       |
| Income tax (benefit) expense                                                  |       | (821                              | )          | 2,539             |       | 390                         |       | 905                             |       | —                          |       | 3,013                   |       |
| Equity in income of subsidiaries                                              |       | 5,576                             |       | 3,148             |       | —                      |       | —                          |       | (8,724                          | )          | —                  |       |
| Net income                                                                    |       | $                                 | 4,345      |              | $          | 5,576                       |       | $                               | 1,003      |                            | $          | 1,954                   |       | $ | (8,533 | ) | $ | 4,345 |   |

** **

27

----

**CONDENSEDCONSOLIDATING STATEMENT OF OPERATIONS**

**For the Six Months Ended March 30, 2007**
| ** **                                                                    | ** ** | **Parent  (CPI Int’l)** | ** ** | **Issuer  (CPI)** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Consolidating  Eliminations** | ** ** | **Consolidated  Total** | ** ** |
|-------------------------------------------------------------------------------|------------|-----------------------------------|------------|-------------------|------------|-----------------------------|------------|---------------------------------|------------|---------------------------------|------------|-------------------------|------------|
| Sales                                                                         |       | $                                 | —     |              | $          | 108,031                     |       | $                               | 30,931     |                            | $          | 68,686                  |       | $ | (35,481 | ) | $ | 172,167 |   |
| Cost of sales                                                                 |       | —                            |       | 75,706            |       | 25,707                      |       | 52,681                          |       | (36,213                         | )          | 117,881                 |       |
| Gross profit                                                                  |       | —                            |       | 32,325            |       | 5,224                       |       | 16,005                          |       | 732                             |       | 54,286                  |       |
| Operating costs  and expenses:                                                |       |                              |       |              |       |                        |       |                            |       |                            |       |                    |       |
| Research and development                                                      |       | —                            |       | 1,545             |       | —                      |       | 2,698                           |       | —                          |       | 4,243                   |       |
| Selling and marketing                                                         |       | —                            |       | 3,984             |       | 1,698                       |       | 3,946                           |       | —                          |       | 9,628                   |       |
| General and administrative                                                    |       | —                            |       | 8,093             |       | 722                         |       | 1,435                           |       | —                          |       | 10,250                  |       |
| Amortization of acquisition-related intangible  assets                        |       | —                            |       | 668               |       | 125                         |       | 301                             |       | —                          |       | 1,094                   |       |
| Net loss on disposition of assets                                             |       | —                            |       | 17                |       | —                      |       | 41                              |       | —                          |       | 58                      |       |
| Total operating  costs and expenses                                           |       | —                            |       | 14,307            |       | 2,545                       |       | 8,421                           |       | —                          |       | 25,273                  |       |
| Operating income                                                              |       | —                            |       | 18,018            |       | 2,679                       |       | 7,584                           |       | 732                             |       | 29,013                  |       |
| Interest expense (income), net                                                |       | 4,120                             |       | 6,619             |       | (15                         | )          | (110                            | )          | —                          |       | 10,614                  |       |
| (Loss) income  before income tax expense and equity in income of subsidiaries |       | (4,120                            | )          | 11,399            |       | 2,694                       |       | 7,694                           |       | 732                             |       | 18,399                  |       |
| Income tax (benefit) expense                                                  |       | (1,566                            | )          | 5,221             |       | 737                         |       | 2,412                           |       | —                          |       | 6,804                   |       |
| Equity in income of subsidiaries                                              |       | 14,149                            |       | 7,971             |       | —                      |       | —                          |       | (22,120                         | )          | —                  |       |
| Net income                                                                    |       | $                                 | 11,595     |              | $          | 14,149                      |       | $                               | 1,957      |                            | $          | 5,282                   |       | $ | (21,388 | ) | $ | 11,595 |   |

**CONDENSEDCONSOLIDATING STATEMENT OF OPERATIONS**

**For the Six Months Ended March 31, 2006**
| ** **                                                                    | ** ** | **Parent  (CPI Int’l)** | ** ** | **Issuer  (CPI)** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Consolidating  Eliminations** | ** ** | **Consolidated  Total** | ** ** |
|-------------------------------------------------------------------------------|------------|-----------------------------------|------------|-------------------|------------|-----------------------------|------------|---------------------------------|------------|---------------------------------|------------|-------------------------|------------|
| Sales                                                                         |       | $                                 | —     |              | $          | 108,583                     |       | $                               | 29,042     |                            | $          | 68,956                  |       | $ | (37,273 | ) | $ | 169,308 |   |
| Cost of sales                                                                 |       | —                            |       | 80,526            |       | 23,942                      |       | 51,266                          |       | (37,378                         | )          | 118,356                 |       |
| Gross profit                                                                  |       | —                            |       | 28,057            |       | 5,100                       |       | 17,690                          |       | 105                             |       | 50,952                  |       |
| Operating costs and  expenses:                                                |       |                              |       |              |       |                        |       |                            |       |                            |       |                    |       |
| Research and  development                                                     |       | —                            |       | 1,686             |       | —                      |       | 2,165                           |       | —                          |       | 3,851                   |       |
| Selling and  marketing                                                        |       | —                            |       | 4,098             |       | 1,843                       |       | 3,763                           |       | —                          |       | 9,704                   |       |
| General and  administrative                                                   |       | —                            |       | 6,570             |       | 734                         |       | 4,674                           |       | —                          |       | 11,978                  |       |
| Amortization of  acquisition-related intangible assets                        |       | —                            |       | 668               |       | 125                         |       | 301                             |       | —                          |       | 1,094                   |       |
| Net loss on  disposition of assets                                            |       | —                            |       | 172               |       | —                      |       | 36                              |       | —                          |       | 208                     |       |
| Total operating costs  and expenses                                           |       | —                            |       | 13,194            |       | 2,702                       |       | 10,939                          |       | —                          |       | 26,835                  |       |
| Operating income                                                              |       | —                            |       | 14,863            |       | 2,398                       |       | 6,751                           |       | 105                             |       | 24,117                  |       |
| Interest expense  (income), net                                               |       | 4,100                             |       | 8,346             |       | (9                          | )          | 27                              |       | —                          |       | 12,464                  |       |
| (Loss) income before  income tax expense and equity in income of subsidiaries |       | (4,100                            | )          | 6,517             |       | 2,407                       |       | 6,724                           |       | 105                             |       | 11,653                  |       |
| Income tax  (benefit) expense                                                 |       | (1,640                            | )          | 3,779             |       | 696                         |       | 2,258                           |       | —                          |       | 5,093                   |       |
| Equity in income  of subsidiaries                                             |       | 9,020                             |       | 6,282             |       | —                      |       | —                          |       | (15,302                         | )          | —                  |       |
| Net income                                                                    |       | $                                 | 6,560      |              | $          | 9,020                       |       | $                               | 1,711      |                            | $          | 4,466                   |       | $ | (15,197 | ) | $ | 6,560 |   |

** **

28

----

**CONDENSED CONSOLIDATING STATEMENTOF CASH FLOWS**

**For the Six Months Ended March 30, 2007**
| ** **                                                       | ** ** | **Parent  (CPI Int’l)** | ** ** | **Issuer  (CPI)** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Consolidating  Eliminations** | ** ** | **Consolidated  Total** | ** ** |
|------------------------------------------------------------------|------------|-----------------------------------|------------|-------------------|------------|-----------------------------|------------|---------------------------------|------------|---------------------------------|------------|-------------------------|------------|
| **Cash  flows from operating activities**                        |       |                              |       |              |       |                        |       |                            |       |                            |       |                    |       |
| Net cash (used in) provided by operating activities              |       | $                                 | (563       | )                 | $          | 2,888                       |       | $                               | 239        |                            | $          | 3,735                   |       | $ | — |   | $ | 6,299 |   |
| **Cash  flows from investing activities**                        | ** ** | ** **                        |       |              | ** ** | ** **                  |       |                            |       |                            | ** ** | ** **              | ** ** |
| Capital expenditures                                             |       | —                            |       | (1,634            | )          | (21                         | )          | (3,692                          | )          | —                          |       | (5,347                  | )          |
| Capitalized expenses relating to potential business  acquisition |       | —                            |       | (119              | )          | —                      |       | —                          |       | —                          |       | (119                    | )          |
| Net cash used in investing activities                            |       | —                            |       | (1,753            | )          | (21                         | )          | (3,692                          | )          | —                          |       | (5,466                  | )          |
| **Cash  flows from financing activities**                        |       |                              |       |              |       |                        |       |                            |       |                            |       |                    |       |
| Repayments of debt                                               |       | —                            |       | (5,000            | )          | —                      |       | —                          |       | —                          |       | (5,000                  | )          |
| Proceeds from issuance of common stock to employees              |       | 398                               |       | —            |       | —                      |       | —                          |       | —                          |       | 398                     |       |
| Proceeds from exercise of stock options                          |       | 542                               |       | —            |       | —                      |       | —                          |       | —                          |       | 542                     |       |
| Excess tax benefit on stock option exercises                     |       | —                            |       | 679               |       | —                      |       | —                          |       | —                          |       | 679                     |       |
| Net cash provided by (used in) financing activities              |       | 940                               |       | (4,321            | )          | —                      |       | —                          |       | —                          |       | (3,381                  | )          |
| **Net  increase (decrease) in cash and cash equivalents**        |       | 377                               |       | (3,186            | )          | 218                         |       | 43                              |       | —                          |       | (2,548                  | )          |
| Cash and cash equivalents at beginning of period                 |       | 139                               |       | 28,299            |       | 290                         |       | 1,425                           |       | —                          |       | 30,153                  |       |
| Cash and cash  equivalents at end of period                      |       | $                                 | 516        |              | $          | 25,113                      |       | $                               | 508        |                            | $          | 1,468                   |       | $ | — |   | $ | 27,605 |   |

**CONDENSED CONSOLIDATING STATEMENTOF CASH FLOWS**

**For the Six Months Ended March 31, 2006**
| ** **                                                | ** ** | **Parent  (CPI Int’l)** | ** ** | **Issuer  (CPI)** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Consolidating  Eliminations** | ** ** | **Consolidated  Total** | ** ** |
|-----------------------------------------------------------|------------|-----------------------------------|------------|-------------------|------------|-----------------------------|------------|---------------------------------|------------|---------------------------------|------------|-------------------------|------------|
| **Cash  flows from operating activities**                 |       |                              |       |              |       |                        |       |                            |       |                            |       |                    |       |
| Net cash (used in) provided by operating activities       |       | $                                 | (2,116     | )                 | $          | (4,158                      | )          | $                               | 22         |                            | $          | 1,737                   |       | $ | — |   | $ | (4,515 | ) |
| **Cash  flows from investing activities**                 | ** ** | ** **                        |       |              | ** ** | ** **                  |       |                            | ** ** | ** **                      |       |                    |       |
| Expenses relating to sale of San Carlos property          |       | —                            |       | (4                | )          | —                      |       | —                          |       | —                          |       | (4                      | )          |
| Capital expenditures                                      |       | —                            |       | (5,009            | )          | (79                         | )          | (729                            | )          | —                          |       | (5,817                  | )          |
| Net cash used in investing activities                     |       | —                            |       | (5,013            | )          | (79                         | )          | (729                            | )          | —                          |       | (5,821                  | )          |
| **Cash  flows from financing activities**                 |       |                              |       |              |       |                        |       |                            |       |                            |       |                    |       |
| Proceeds from issuance of debt                            |       | —                            |       | 10,000            |       | —                      |       | —                          |       | —                          |       | 10,000                  |       |
| Payment of IPO financiing costs                           |       | (1,374                            | )          | —            |       | —                      |       | —                          |       | —                          |       | (1,374                  | )          |
| Stockholder distribution payments                         |       | (17,000                           | )          | —            |       | —                      |       | —                          |       | —                          |       | (17,000                 | )          |
| Intercompany dividends                                    |       | 20,459                            |       | (20,459           | )          | —                      |       | —                          |       | —                          |       | —                  |       |
| Net cash provided by (used in) financing activities       |       | 2,085                             |       | (10,459           | )          | —                      |       | —                          |       | —                          |       | (8,374                  | )          |
| **Net  (decrease) increase in cash and cash equivalents** |       | (31                               | )          | (19,630           | )          | (57                         | )          | 1,008                           |       | —                          |       | (18,710                 | )          |
| Cash and cash equivalents at beginning of period          |       | 33                                |       | 25,528            |       | 323                         |       | 627                             |       | —                          |       | 26,511                  |       |
| Cash and cash  equivalents at end of period               |       | $                                 | 2          |              | $          | 5,898                       |       | $                               | 266        |                            | $          | 1,635                   |       | $ | — |   | $ | 7,801 |   |

** **

29

----

**Item 2. Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

*Our fiscal years are the 52- or 53-weekperiods that end on the Friday nearest September 30. Fiscal year 2007 comprisesthe 52-week period ending September 28, 2007 and fiscal year 2006 comprised the52-week period ended September 29, 2006. The following discussion should beread in conjunction with the accompanying condensed consolidated financialstatements, and the notes thereto, of CPI International, Inc.*

**Overview**

CPIInternational, Inc., headquartered in Palo Alto, California, is the parentcompany of Communications & Power Industries, Inc., a leading provider ofmicrowave, radio frequency, power and control solutions for critical defense,communications, medical, scientific and other applications. Communications& Power Industries, Inc. develops, manufactures and distributes productsused to generate, amplify and transmit high-power/high-frequency microwave andradio frequency signals and/or provide power and control for variousapplications. End-use applications of these systems include the transmission ofradar signals for navigation and location; transmission of deception signalsfor electronic countermeasures; transmission and amplification of voice, dataand video signals for broadcasting, Internet and other types of communications;providing power and control for medical diagnostic imaging; and generatingmicrowave energy for radiation therapy in the treatment of cancer and forvarious industrial and scientific applications.

Unless the contextotherwise requires, “CPI International” means CPI International, Inc., and “CPI”means Communications & Power Industries, Inc. CPI is a direct subsidiary ofCPI International. CPI International is a holding company with no operations ofits own. The terms “we,” “us,” “our” and the “Company” refer to CPIInternational and its direct and indirect subsidiaries on a consolidated basis.

**EimacRelocation**

We began the relocationof our Eimac operations (“Eimac”) from our former San Carlos, Californiafacility to our nearby Palo Alto, California and Mountain View, Californiafacilities during fiscal year 2005. On June 1, 2006, we made organizationalchanges and consolidated the operating activities of Eimac into our MicrowavePower Products division, which also operates in our Palo Alto facility. Theintegration of Eimac into our Palo Alto operations was completed in January2007.

As part of thisrelocation, Eimac experienced planned manufacturing disruptions stemming fromthe decommissioning of our production equipment in San Carlos and the requiredreconfiguration, installation and testing of that equipment prior to productionreadiness in Palo Alto. During fiscal year 2005, in anticipation of theseplanned disruptions, customers accelerated the placement of orders with Eimac.This order acceleration in fiscal year 2005, and the subsequent acceleration ofproduct shipments, caused a reduction of customers’ demand requirements fromEimac during the first half of fiscal year 2006, particularly in our medical,communications and industrial markets.

****TheEimac relocation negatively impacted Eimac orders and sales for the first sixmonths of fiscal year 2006 as compared to the first six months of fiscal year2007. During the first six months of fiscal year 2006, we incurred move relatedexpenses and Eimac experienced unfavorable overhead absorption andmanufacturing variances due to the reduction in sales volume and relocationdisruptions. By the first quarter of fiscal year 2007, orders and sales ratesfor Eimac had recovered to near their historical levels.****

30

----

**Orders**

We sell our products intosix end markets: radar, electronic warfare, medical, communications, industrialand scientific.

Our customer salescontracts are recorded as orders when we accept written customer purchaseorders or contracts. Customer purchase orders with an undefined deliveryschedule, or blanket purchase orders, are not reported as orders until thedelivery date is determined. Our government sales contracts are not reported asorders until we have been notified that the contract has been funded. Totalorders for a fiscal period represent the total dollar amount of customer ordersrecorded by us during the fiscal period, reduced by the dollar amount of anyorder cancellations or terminations during the fiscal period.

Our orders by market forthe first six months of fiscal years 2007 and 2006 are summarized as follows(dollars in millions):
| ** **          | ** ** | **Six Months Ended** | ** ** | ** **                   | ** ** | ** **                   | ** ** |
|---------------------|------------|--------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **          | ** ** | **March 30, 2007**   | ** ** | **March 31, 2006** | ** ** | **Increase (Decrease)** | ** ** |
| ** **          | ** ** | **Amount**                     | ** ** | **% of Orders**    | ** ** | **Amount**                   | ** ** | **% of Orders** | ** ** | **Amount** | ** ** | **Percent** | ** ** |
| Radar               |       | $                              | 66.7       |                         | 36         | %                            | $          | 64.3 |   | 37 | % | $ | 2.4 |   | 4 | % |
| Electronic  Warfare |       | 9.6                            |       | 5                            |       | 9.7                          |       | 6 |   | (0.1 | ) | (1 | ) |
| Medical             |       | 36.8                           |       | 20                           |       | 33.7                         |       | 20 |   | 3.1 |   | 9 |   |
| Communications      |       | 54.6                           |       | 30                           |       | 52.1                         |       | 30 |   | 2.5 |   | 5 |   |
| Industrial          |       | 10.6                           |       | 6                            |       | 9.7                          |       | 6 |   | 0.9 |   | 9 |   |
| Scientific          |       | 5.9                            |       | 3                            |       | 2.6                          |       | 1 |   | 3.3 |   | 127 |   |
| Total               |       | $                              | 184.2      |                         | 100        | %                            | $          | 172.1 |   | 100 | % | $ | 12.1 |   | 7 | % |

Explanations forthe order increase or decrease by market for the first six months of fiscalyear 2007 compared to the first six months of fiscal year 2006 are as follows:

·                  **Radar and Electronic Warfare:** The majority of our sales in theradar and electronic warfare markets are for products for domestic andinternational defense and government end uses. Orders in these markets arecharacterized by many smaller orders in the $0.5 million to $3.0 million rangeby product or program. On a combined basis, orders for the radar and electronicwarfare markets increasedfrom an aggregate of $74.0 million in the first six months of fiscal year 2006to an aggregate of $76.3 million in the first six months of fiscal year 2007.This approximate 3% overall increase in orders for these markets on a combinedbasis is consistent with our expectations of overall low single digitpercentage average long-term annual growth in these markets taken on a combinedbasis.

·                  **Medical: **The increase in medical orders from thefirst six months of fiscal year 2006 to the first six months of fiscal year2007 resulted from continued increases in orders for our magnetic resonanceimaging (“MRI”) products due to growth in the number of MRI systems on which wehave products, increases in orders for products used in radiation therapy forthe treatment of cancer and increases in orders for our x-ray generators due togrowth in the overall market and our share of this market. These increases werepartially offset by a period-over-period decrease due to a change in thetiming of booking orders for x-ray generators for a large customer. Previously, we booked orders for x-ray generators for 

31

----

this customer on a quarterly basis, but as of September 2006,we began to book orders for this customer on an annual basis. As a result of this timing change, orders for x-ray generators for thiscustomer decreased $1.4 million in the first six months of fiscal year 2007 ascompared to the first six months of fiscal year 2006.  The annual order webooked in September 2006 was the largest order we had ever received fromthis customer for our medical imaging products.

·                  **Communications: **The increase in communications orders wasprimarily attributable to a $2.3 million increase in orders to mostly foreigncustomers for newer types of amplifiers used for news gathering and mobileapplications. In addition, the first six months of fiscal year 2007, incomparison to the first six months of fiscal year 2006, included a $1.4 millionincrease in orders for our traditional amplifiers for U.S. and foreignbroadcast network applications, as well as foreign direct-to-home broadcastapplications. These increases were partially offset by a decrease in orders forour newer types of amplifiers for certain programs for North Americandirect-to-home broadcast and military satellite communications applications,due to the timing of orders for these programs.

·                  **Industrial:**Orders in theindustrial market, one of our smallest markets, are cyclical and generally reflectthe performance of the overall economy. The increase in industrial orders was primarilyattributable to the timing of orders for products used in the dielectricheating, instrumentation and semiconductor markets.

·                  **Scientific:** Orders in the scientific market, oursmallest market, are historically one-time projects and can fluctuatesignificantly from period to period. The increase in scientific orders wasprimarily the result of orders for products for the Spallation Neutron Sourceat Oakridge National Laboratory.

Incoming order levelsfluctuate significantly on a quarterly or annual basis, and a particularquarter’s or year’s order rate may not be indicative of future order levels. Inaddition, our sales are highly dependent upon manufacturing scheduling andperformance and, accordingly, it is not possible to accurately predict whenorders will be recognized as sales.

**Backlog**

As of March 30, 2007, we had an order backlog of$200.7 million compared to an order backlog of $197.7 million as of March 31,2006. Backlog represents the cumulative balance, at a given point in time, ofrecorded customer sales orders that have not yet been shipped or recognized assales. Backlog is increased when an order is received, and backlog is decreasedwhen we recognize sales. We believe backlog and orders information is helpfulto investors because this information may be indicative of future salesresults. Although backlog consists of firm orders for which goods and servicesare yet to be provided, customers can, and sometimes do, terminate or modifythese orders. However, historically the amount of modifications andterminations has not been material compared to total contract volume.

**Resultsof Operations**

We derive our revenueprimarily from the sale of microwave and radio frequency products, includinghigh-power microwave amplifiers, satellite communications amplifiers, medicalx-ray imaging subsystems, and other related products. Our products generallyhave selling prices ranging from $2,000 to $100,000, with certain limitedproducts priced up to $1,000,000.

Cost of goods soldgenerally includes costs for raw materials, manufacturing costs, includingallocation of overhead and other indirect costs, charges for reserves forexcess and obsolete inventory, warranty claims and losses on fixed pricecontracts. Operating expenses generally consist of research and development,selling and marketing and general and administrative expenses.

32

----

*QuarterEnded March 30, 2007 Compared to Quarter Ended March 31, 2006*

The following table setsforth our historical results of operations for each of the periods indicated(dollars in millions):
| ** **                                        | ** ** | **Quarter Ended**       | ** ** |
|---------------------------------------------------|------------|------------------------------|------------|
| ** **                                        | ** ** | **March 30, 2007** | ** ** | **March 31, 2006** | ** ** |
| ** **                                        | ** ** | **Amount**                   | ** ** | **% of Sales** | ** ** | **Amount** | ** ** | **% of Sales** | ** ** |
| Sales                                             |       | $                            | 88.4       |   | 100.0 | % | $ | 86.9 |   | 100.0 | % |
| Cost of sales                                     |       | 60.7                         |       | 68.7 |   | 61.2 |   | 70.4 |   |
| Gross profit                                      |       | 27.7                         |       | 31.3 |   | 25.7 |   | 29.6 |   |
| Research and  development                         |       | 2.4                          |       | 2.7 |   | 1.9 |   | 2.2 |   |
| Selling and  marketing                            |       | 4.8                          |       | 5.4 |   | 4.7 |   | 5.4 |   |
| General and  administrative                       |       | 5.8                          |       | 6.6 |   | 4.7 |   | 5.4 |   |
| Amortization of  acquisition- related intangibles |       | 0.5                          |       | 0.6 |   | 0.5 |   | 0.6 |   |
| Net loss on  disposition of assets                |       | —                       |       | 0.0 |   | 0.1 |   | 0.1 |   |
| Operating income                                  |       | 14.1                         |       | 16.0 |   | 13.8 |   | 15.9 |   |
| Interest  expense, net                            |       | 5.3                          |       | 6.0 |   | 6.4 |   | 7.4 |   |
| Income before taxes                               |       | 8.8                          |       | 10.0 |   | 7.4 |   | 8.5 |   |
| Income tax  expense                               |       | 3.1                          |       | 3.5 |   | 3.0 |   | 3.5 |   |
| Net income                                        |       | $                            | 5.8        |   | 6.6 | % | $ | 4.3 |   | 5.0 | % |
| Other Data:                                       |       |                         |       |   |   |   |   |   |   |
| EBITDA (a)                                        |       | $                            | 16.3       |   | 18.4 | % | $ | 16.1 |   | 18.5 | % |

----

Note: Totals may not equal the sum of the component line items due toindependent rounding. Percentages are calculated based on rounded dollaramounts presented.

(a)               EBITDArepresents earnings before provision for income taxes, net interest expense anddepreciation and amortization. For the reasons listed below, we believe thatGAAP-based financial information for leveraged businesses such as ours shouldbe supplemented by EBITDA so that investors better understand our financialperformance in connection with their analysis of our business:

·                    EBITDA is a component of the measures used by our board ofdirectors and management team to evaluate our operating performance;

·                    our senior credit facilities contain covenants that requireus to maintain certain interest expense coverage and leverage ratios thatcontain EBITDA as a component, and our management team uses EBITDA to monitorcompliance with such covenants;

·                    EBITDA is a component of the measures used by our managementteam to make day-to-day operating decisions;

·                    EBITDA facilitates comparisons between our operating resultsand those of competitors with different capital structures and therefore is acomponent of the measures used by the management to facilitate internalcomparisons to competitors’ results and our industry in general; and

·                    the payment of management bonuses is contingent upon, amongother things, the satisfaction by us of certain targets that contain EBITDA asa component.

Other companies may define EBITDA differently and, as aresult, our measure of EBITDA may not be directly comparable to EBITDA of othercompanies. Although we use EBITDA as a financial measure to assess theperformance of our business, the use of EBITDA is limited because it does notinclude certain material costs, such as interest and taxes, necessary to 

33

----

operate our business. When analyzing our performance, EBITDAshould be considered in addition to, and not as a substitute for, net income,cash flows from operating activities or other statements of operations orstatements of cash flows data prepared in accordance with GAAP.

For a reconciliation of EBITDA to Net Income, see Note9 of the accompanying unaudited condensed consolidated financial statements.

**Sales:** Our sales by market for the secondquarter of fiscal years 2007 and 2006 are summarized as follows (dollars inmillions):
| ** **          | ** ** | **Quarter Ended**       | ** ** | ** **                   | ** ** | ** **                   | ** ** |
|---------------------|------------|------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **          | ** ** | **March 30, 2007** | ** ** | **March 31, 2006** | ** ** | **Increase (Decrease)** | ** ** |
| ** **          | ** ** | **Amount**                   | ** ** | **% of Sales**     | ** ** | **Amount**                   | ** ** | **% of Sales** | ** ** | **Amount** | ** ** | **Percent** | ** ** |
| Radar               |       | $                            | 29.2       |                         | 33         | %                            | $          | 30.3 |   | 35 | % | $ | (1.1 | ) | (4 | )% |
| Electronic  Warfare |       | 7.1                          |       | 8                            |       | 7.3                          |       | 8 |   | (0.2 | ) | (3 | ) |
| Medical             |       | 17.0                         |       | 19                           |       | 14.1                         |       | 16 |   | 2.9 |   | 21 |   |
| Communications      |       | 27.0                         |       | 31                           |       | 28.6                         |       | 33 |   | (1.6 | ) | (6 | ) |
| Industrial          |       | 6.4                          |       | 7                            |       | 5.3                          |       | 6 |   | 1.1 |   | 21 |   |
| Scientific          |       | 1.7                          |       | 2                            |       | 1.3                          |       | 2 |   | 0.4 |   | 31 |   |
| Total               |       | $                            | 88.4       |                         | 100        | %                            | $          | 86.9 |   | 100 | % | $ | 1.5 |   | 2 | % |

Sales for thesecond quarter of fiscal year 2007 of $88.4 million were $1.5 million, or 2%,higher than sales of $86.9 million for the second quarter of fiscal year 2006.Explanations for the sales increase or decrease by market are as follows:

·                  **Radar and ElectronicWarfare: **Themajority of our sales in the radar and electronic warfare markets are forproducts for domestic and international defense and government end uses. On acombined basis, sales for these two markets decreased approximately 3%, dueprimarily to the timing of orders and sales for certain radar programs.Management believes that, on a combined basis, these markets will experiencelow single digit percentage average long-term annual growth.

·                  **Medical:** The 21% increase in sales of our medicalimaging and radiation therapy products was due to increased sales of ourproducts used in x-ray imaging, MRI and in radiation therapy for the treatmentof cancer. In the second quarter of fiscal year 2007, sales of x-ray generatorsto U.S. and foreign customers increased $1.1 million, including an increase of$0.8 million in sales of x-ray generators for linear accelerators for thetreatment of cancer, as compared to the second quarter of fiscal year 2006.Shipments of our medical imaging products used in MRI also increased incomparison to the second quarter of fiscal year 2006 due to an increase insales of replacement products, or spares, resulting from growth in the numberof MRI systems on which we have products. Sales of products used in radiationtherapy for the treatment of cancer increased $0.7 million.

·                  **Communications: **The decrease in sales in the communicationsmarket was primarily the result of the cyclical nature of the direct-to-homebroadcast applications market. Shipments of our traditional satellitecommunications amplifiers for direct-to-home broadcast applications were $3.1million lower in the second quarter of fiscal year 2007 than in the secondquarter of fiscal year 2006. Shipments of traditional amplifiers to an Indiangovernment agency for a one-time application totaling $0.8 million in thesecond quarter of fiscal year 2006 were not expected to, and did not, repeatduring the second 

34

----

quarter of fiscal year 2007. In addition, shipments to a foreigncustomer for a communications system decreased $0.6 million. These decreaseswere partially offset by a $3.2 million increase in shipments of our newersatellite communications products to U.S. and foreign customers, includingincreases in shipments of newer types of amplifiers that are also used in U.S.and foreign direct-to-home broadcast applications, U.S. military satellitecommunications applications and foreign satellite news gathering or mobileapplications.

·                  **Industrial:**The increase in industrial sales wasprimarily due to increased demand for power supplies for the semiconductormarket and vacuum electron devices for the dielectric heating andinstrumentation markets. In addition, the timing of shipments for a foreignmilitary aircraft test system positively impacted sales in the second quarterof fiscal year 2007.

·                  **Scientific: **Sales in the scientific market, oursmallest market, are historically one-time projects and can fluctuatesignificantly from period to period. The primary contributor to the increase inscientific sales was an increase in product sales for various accelerator andfusion applications.

**GrossProfit**. Grossprofit was $27.7 million, or 31.3% of sales, for the second quarter of fiscalyear 2007 as compared to $25.7 million, or 29.6% of sales, in the secondquarter of fiscal year 2006. The second quarter of fiscal year 2006 includednon-recurring expenses of approximately $2.3 million for move-related expenses,including unfavorable overhead absorption and manufacturing variances, forEimac. The second quarter of fiscal year 2007, as compared to the secondquarter of fiscal year 2006, was favorably impacted by higher sales and afavorable mix of products with higher gross margins and was unfavorablyimpacted by approximately $1.1 million due to increases in our Canadiandenominated manufacturing expenses resulting from the expiration of favorableforeign currency hedge contracts in March 2006.

**Research andDevelopment**. Research and developmentexpenses were $2.4 million, or 2.7% of sales, for the second quarter of fiscalyear 2007, a $0.5 million increase from $1.9 million, or 2.2% of sales, for thesecond quarter of fiscal year 2006.  Theincrease in research and development expenses was primarily due to additionalinvestment in the development of new medical diagnostic imaging products andvacuum electron device products for radar, electronic warfare and satellitecommunication markets.

**Sellingand Marketing**.Selling and marketing expenses were $4.8 million, or 5.4% of sales, for thesecond quarter of fiscal year 2007, a $0.1 million increase from the $4.7million, or 5.4% of sales, for the second quarter of fiscal year 2006. Sellingand marketing expenses as a percent of sales for the second quarter of fiscalyear 2007 were similar to the second quarter of fiscal year 2006.

**Generaland Administrative**.General and administrative expenses were $5.8 million, or 6.6% of sales, forthe second quarter of fiscal year 2007, a $1.1 million increase from the $4.7million, or 5.4% of sales, for the second quarter of fiscal year 2006. Theincrease in general and administrative expenses in the second quarter of fiscalyear 2007 was primarily due to incremental expenses associated with meeting thecompliance requirements of Section 404 of the Sarbanes-Oxley Act of 2002 and additionalexpenses as a result of becoming a publicly traded company in April 2006. Inaddition, general and administrative expenses for the second quarter of fiscalyear 2007 includes $0.3 million for expenses associated with the evaluation ofcertain potential acquisition candidates and $0.2 million for stock-basedcompensation expenses. The second quarter of fiscal year 2006 did not includeany acquisition-related expenses or stock-based compensation expense.

35

----

**Amortizationof Acquisition-Related Intangibles**. Amortization of acquisition-related intangiblesconsists of purchase accounting charges for technology and other intangibleassets. Amortizationof acquisition-related intangibles was $0.5 million for both the second quarterof fiscal year 2007 and the second quarter of fiscal year 2006.

**InterestExpense, net (“Interest Expense”)**. Interest Expense of $5.3 million for the secondquarter of fiscal year 2007 was $1.1 million lower than interest expense of$6.4 million for the second quarter of fiscal year 2006. The reduction ininterest expense in the second quarter of fiscal year 2007 compared to thesecond quarter of fiscal year 2006 was primarily due to the lower debt levelsresulting from term loan prepayments of $5.0 million in December 2006, and$47.5 million in May 2006 using the proceeds from the IPO of our common stock.

**Income Tax Expense**. We recorded an income tax provision of $3.1 million and $3.0 million for thesecond quarter of fiscal years 2007 and 2006, respectively. Our effective tax rate wasapproximately 35% for the second quarter of fiscal year 2007 as compared toapproximately 41% for the second quarter of fiscal year 2006. The lowereffective income tax rate in the second quarter of fiscal year 2007 compared tothe second quarter of fiscal year 2006 is primarily due to a change in filingposition that was implemented in the third quarter of fiscal year 2006 as aresult of foreign income tax planning activities, discrete tax benefits relatedto prior year foreign tax filings and lower effective income tax rates in fiscal year 2007 in certain foreign jurisdictions, includingCanada.

**NetIncome**. Netincome was $5.8 million, or 6.6% of sales, for the second quarter of fiscalyear 2007 as compared to $4.3 million, or 5.0% of sales, in the second quarterof fiscal year 2006. The increase in net income in the second quarter of fiscalyear 2007 was due primarily to lower interest expense, the absence ofmove-related expenses and the impact of a lower effective tax rate in thecurrent quarter; offset by increases in our Canadian dollar denominatedexpenses in the current quarter resulting from the expiration of favorableforeign currency hedge contracts in March 2006, and higher acquisition-relatedand public company expenses such as for Sarbanes-Oxley compliance in fiscalyear 2007.

**EBITDA**. EBITDA was $16.3 million, or 18.4% ofsales, for the second quarter of fiscal year 2007 as compared to $16.1 million,or 18.5% of sales, in the second quarter of fiscal year 2006. The increase inthe second quarter of fiscal year 2007 was primarily due to the absence ofmove-related expenses of $2.7 million, including unfavorable overheadabsorption and manufacturing variances for the Eimac relocation, higher salesand a favorable mix of products with higher gross margins in the currentquarter; offset by increases of $1.4 million in our Canadian dollar denominatedexpenses in the second quarter of fiscal year 2007 due to the expiration offavorable foreign currency hedge contracts in March 2006, and higheracquisition-related and public company expenses such as for Sarbanes-Oxleycompliance in fiscal year 2007.

36

----

*SixMonths Ended March 30, 2007 Compared to Six Months Ended March 31, 2006*

The following table setsforth our historical results of operations for each of the periods indicated(dollars in millions):
| ** **                                       | ** ** | **Six Months Ended** | ** ** |
|--------------------------------------------------|------------|--------------------------------|------------|
| ** **                                       | ** ** | **March 30, 2007**   | ** ** | **March 31, 2006** | ** ** |
| ** **                                       | ** ** | **Amount**                     | ** ** | **% of Sales** | ** ** | **Amount** | ** ** | **% of Sales** | ** ** |
| Sales                                            |       | $                              | 172.2      |   | 100.0 | % | $ | 169.3 |   | 100.0 | % |
| Cost of sales (a)                                |       | 117.9                          |       | 68.5 |   | 118.4 |   | 69.9 |   |
| Gross profit                                     |       | 54.3                           |       | 31.5 |   | 51.0 |   | 30.1 |   |
| Research and  development                        |       | 4.2                            |       | 2.4 |   | 3.9 |   | 2.3 |   |
| Selling and marketing (a)                        |       | 9.6                            |       | 5.6 |   | 9.7 |   | 5.7 |   |
| General and  administrative (a)                  |       | 10.3                           |       | 6.0 |   | 12.0 |   | 7.1 |   |
| Amortization of  acquisition-related intangibles |       | 1.1                            |       | 0.6 |   | 1.1 |   | 0.6 |   |
| Net loss on disposition  of assets               |       | 0.1                            |       | 0.1 |   | 0.2 |   | 0.1 |   |
| Operating income                                 |       | 29.0                           |       | 16.8 |   | 24.1 |   | 14.2 |   |
| Interest expense, net                            |       | 10.6                           |       | 6.2 |   | 12.5 |   | 7.4 |   |
| Income before  taxes                             |       | 18.4                           |       | 10.7 |   | 11.7 |   | 6.9 |   |
| Income tax expense                               |       | 6.8                            |       | 3.9 |   | 5.1 |   | 3.0 |   |
| Net income                                       |       | $                              | 11.6       |   | 6.7 | % | $ | 6.6 |   | 3.9 | % |
| Other Data:                                      |       |                           |       |   |   |   |   |   |   |
| EBITDA (b)                                       |       | $                              | 33.4       |   | 19.4 | % | $ | 28.6 |   | 16.9 | % |

----

Note: Totals may not equal the sum of thecomponent line items due to independent rounding. Percentages are calculatedbased on rounded dollar amounts presented.

(a)          Thesix months ended March 31, 2006 includes a special bonus expense (see “SpecialBonus” below) of $3.25 million, allocated as follows: $0.3 million to cost ofsales, $0.2 million to selling and marketing and $2.75 million to general andadministrative.

(b)         EBITDArepresents earnings before provision for income taxes, net interest expense anddepreciation and amortization. For the reasons listed below, we believe thatGAAP-based financial information for leveraged businesses such as ours shouldbe supplemented by EBITDA so that investors better understand our financialperformance in connection with their analysis of our business:

·                    EBITDA is a component of the measures used by our board ofdirectors and management team to evaluate our operating performance;

·                    our senior credit facilities contain covenants that requireus to maintain certain interest expense coverage and leverage ratios thatcontain EBITDA as a component, and our management team uses EBITDA to monitorcompliance with such covenants;

·                    EBITDA is a component of the measures used by our managementteam to make day-to-day operating decisions;

·                    EBITDA facilitates comparisons between our operating resultsand those of competitors with different capital structures and therefore is acomponent of the measures used by the management to facilitate internalcomparisons to competitors’ results and our industry in general; and

·                    the payment of management bonuses is contingent upon, amongother things, the satisfaction by us of certain targets that contain EBITDA asa component.

Other companies may define EBITDA differently and, as aresult, our measure of EBITDA may not be directly comparable to EBITDA of othercompanies. Although we use EBITDA as a financial measure to assess theperformance of our business, 

37

----

the use of EBITDA is limited because it does notinclude certain material costs, such as interest and taxes, necessary tooperate our business. When analyzing our performance, EBITDA should beconsidered in addition to, and not as a substitute for, net income, cash flowsfrom operating activities or other statements of operations or statements ofcash flows data prepared in accordance with GAAP.

For a reconciliation ofEBITDA to Net Income, see Note 9 of the accompanying unaudited condensedconsolidated financial statements.

**Sales:** Our sales by market for the first sixmonths of fiscal years 2007 and 2006 are summarized as follows (dollars inmillions):
| ** **          | ** ** | **Six Months Ended** | ** ** | ** **                   | ** ** | ** **                   | ** ** |
|---------------------|------------|--------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **          | ** ** | **March 30, 2007**   | ** ** | **March 31, 2006** | ** ** | **Increase (Decrease)** | ** ** |
| ** **          | ** ** | **Amount**                     | ** ** | **% of Orders**    | ** ** | **Amount**                   | ** ** | **% of Orders** | ** ** | **Amount** | ** ** | **Percent** | ** ** |
| Radar               |       | $                              | 57.4       |                         | 33         | %                            | $          | 58.0 |   | 34 | % | $ | (0.6 | ) | (1 | )% |
| Electronic  Warfare |       | 12.9                           |       | 7                            |       | 13.0                         |       | 8 |   | (0.1 | ) | (1 | ) |
| Medical             |       | 34.1                           |       | 20                           |       | 27.3                         |       | 16 |   | 6.8 |   | 25 |   |
| Communications      |       | 53.1                           |       | 31                           |       | 58.7                         |       | 35 |   | (5.6 | ) | (10 | ) |
| Industrial          |       | 11.4                           |       | 7                            |       | 9.7                          |       | 6 |   | 1.7 |   | 18 |   |
| Scientific          |       | 3.3                            |       | 2                            |       | 2.6                          |       | 1 |   | 0.7 |   | 27 |   |
| Total               |       | $                              | 172.2      |                         | 100        | %                            | $          | 169.3 |   | 100 | % | $ | 2.9 |   | 2 | % |

Sales for the firstsix months of fiscal year 2007 of $172.2 million were $2.9 million, or 2%,higher than sales of $169.3 million for the first six months of fiscal year2006. Explanations for the sales increase or decrease by market are as follows:

·                  **Radar and ElectronicWarfare: **Themajority of our sales in the radar and electronic warfare markets are forproducts for domestic and international defense and government end uses. On acombined basis, sales for these two markets decreased slightly, totaling anaggregate of $71.0 million in the first six months of fiscal year 2006, ascompared to an aggregate of $70.3 million in the first quarter of fiscal year2007. The slight decline in combined sales was due primarily to the timing oforders and sales for certain radar programs. Management believes that, on acombined basis, these markets will experience low-to-mid single digitpercentage average long-term annual growth.

·                  **Medical:** The 25% increase in sales of our medicalimaging and radiation therapy products was primarily due to increased sales ofour products used in MRI and in x-ray imaging. In the first six months offiscal year 2007, as compared to the first six months of fiscal year 2006,sales of products used in MRI increased $2.3 million due to an increase insales of replacement products, or spares, resulting from to growth in thenumber of MRI systems on which we have products. Sales of x-ray generators toU.S. and foreign customers increased $3.6 million, including a $2.0 millionincrease in sales of x-ray generators for the treatment of cancer.

·                  **Communications: **The decrease in sales in thecommunications market was primarily the result of the cyclical nature of thedirect-to-home broadcast applications market. Shipments of traditionalsatellite communications amplifiers for North American direct-to-home broadcastapplications were $9.2 million lower in the first six months of fiscal year2007 than in the first six months of fiscal year 2006. Shipments of $1.3million in satellite communications amplifiers to an Indian government agencyfor a one-time application in the first six months of fiscal year 2006 did notrecur in the first six months 

38

----

of fiscal year 2007. In addition, shipments for U.S.and foreign military communications programs decreased $1.1 million andshipments to a foreign customer decreased $0.8 million; these decreases weredue to purchases made for these programs in the first six months of fiscal year2006 that have provided these programs with sufficient stores of our productsfor the time being. These decreases were partially offset by a $6.8 millionincrease in shipments of our newer satellite communications products to U.S.and foreign customers for various programs, including foreign satellite newsgathering or mobile applications, direct-to-home broadcast applications andmilitary satellite communications applications. These newer satellitecommunications products for the direct-to-home broadcast and military satellitecommunications applications were for the 30 gigahertz frequency band, orKa-band, which is projected to be one of the major new satellitecommunications growth areas for both commercial and military applications.

·                  **Industrial:**The increase in industrial sales was primarilydue to increased demand for power supplies for the semiconductor market and forvacuum electron devices for the dielectric heating and instrumentation markets.

·                  **Scientific: **Sales in the scientific market, oursmallest market, are historically one-time projects and can fluctuatesignificantly from period to period. The increase in sales in the first sixmonths of fiscal year 2007 in comparison to the first six months of fiscal year2006 was due to increased activity on a variety of scientific programs.

**GrossProfit**. Grossprofit was $54.3 million, or 31.5% of sales, for the first six months of fiscalyear 2007 as compared to $51.0 million, or 30.1% of sales, in the first sixmonths of fiscal year 2006. The first six months of fiscal year 2006 includednon-recurring expenses of approximately $3.8 million for move-related expenses,including unfavorable overhead absorption and manufacturing variances, forEimac. The first six months of fiscal year 2007, as compared to the first sixmonths of fiscal year 2006, were favorably impacted by higher sales and afavorable mix of products with higher gross margins and were unfavorablyimpacted by approximately $2.2 million due to increases in our Canadiandenominated manufacturing expenses resulting from the expiration of favorableforeign currency hedge contracts in March 2006 and the impact of the weakerU.S. dollar in the first six months of fiscal year 2007 compared to the firstsix months of 2006.

**Research andDevelopment**. Research and developmentexpenses were $4.2 million, or 2.4% of sales, for the first six months offiscal year 2007, a $0.3 million increase from $3.9 million, or 2.3% of sales,for the first six months of fiscal year 2006. The increase in research and development expenses was primarily due toadditional investment in the growth of medical diagnostic imaging products andVED products for radar, electronic warfare and satellite communication markets.Total spending on research and development, including company-sponsored amountscharged to research and development, and customer-sponsored amounts charged tocost of sales, increased from $7.0 million, or 4.1% of sales, to $7.5 million,or 4.4% of sales, in the first six months of fiscal years 2006 and 2007,respectively.

**Sellingand Marketing**.Selling and marketing expenses were $9.6 million, or 5.6% of sales, for thefirst six months of fiscal year 2007, a $0.1 million decrease from the $9.7million, or 5.7% of sales, for the first six months of fiscal year 2006.Selling and marketing expenses for the first six months of fiscal year 2006included $0.2 million of the special bonus, discussed below.

**Generaland Administrative**.General and administrative expenses were $10.3 million, or 6.0% of sales, forthe first six months of fiscal year 2007, a $1.7 million decrease from the$12.0 million, or 7.1% of sales, for the first six months of fiscal year 2006.The first six months of fiscal year 2006 

39

----

included $2.75million of the special bonus, discussed below, and relocation expenses of $0.3 million for Eimac. The first six months of fiscal year2007 includes incremental expenses associated with meeting the compliancerequirements of Section 404 of the Sarbanes-Oxley Act of 2002 and additionalexpenses as a result of becoming a publicly traded company in April 2006.  In addition, general and administrativeexpenses for the first six months of fiscal year 2007 includes $0.5 million forexpenses associated with the evaluation of certain potential acquisitioncandidates and $0.3 million for stock-based compensation expenses. The firstsix months of fiscal year 2006 did not include any acquisition-related expensesor stock-based compensation expense.

**SpecialBonus***.* On December 15, 2005, our board ofdirectors approved the payment of $3.25 million in special, one-time bonuses toour employees and directors (other than directors who are employees oraffiliates of The Cypress Group) to reward them for the increase in companyvalue. The special bonus was not paid pursuant to our management incentiveplan, our 2006 Equity and Performance Incentive Plan or any of our other formalcompensation plans. The bonus amount was not determined based on a formula, butwas instead an amount determined by our board of directors to be reasonablecompensation for the increase in company value. The special bonus was chargedto the condensed consolidated statement of operations in the same lines as cashcompensation paid to the same employees and directors, as follows: $2.75million to General and administrative, $0.3 million to Cost of sales, and $0.2million to Selling and marketing.

**Amortizationof Acquisition-Related Intangibles**. Amortization of acquisition-related intangiblesconsists of purchase accounting charges for technology and other intangibleassets. Amortizationof acquisition-related intangibles was $1.1 million for both the first sixmonths of fiscal year 2007 and the first six months of fiscal year 2006.

**InterestExpense, net (“Interest Expense”)**. Interest Expense of $10.6 million for the first sixmonths of fiscal year 2007 was $1.9 million lower than interest expense of$12.5 million for the first six months of fiscal year 2006. The reduction ininterest expense for the first six months of fiscal year 2007 compared to thefirst six months of fiscal year 2006 was primarily due to the lower debt levelsresulting from term loan prepayments of $5.0 million in December 2006, and$47.5 million in May 2006 using proceeds from the IPO of our common stock.

**Income Tax Expense**. The Company recorded an income tax provision of $6.8 million and $5.1million for the first six months of fiscal years 2007 and 2006, respectively.The Company’s effective tax rate was approximately 37% for the first six monthsof fiscal year 2007 as compared to approximately 44% for the first six monthsof fiscal year 2006. The lower effective income tax rate in the first sixmonths of fiscal year 2007 is primarily due to a change in filing position thatwas implemented in the third quarter of fiscal year 2006 as a result of foreignincome tax planning activities, discrete tax benefits related to prior yearforeign tax filings and lower effectiveincome tax rates in the first six months of fiscal year 2007 in certain foreign jurisdictions, includingCanada.

Income tax expense for the first six months offiscal year 2006 included $0.3 million of charges attributable to the fourthquarter of fiscal year 2005, consisting of $0.5 million to correct theoverstatement of tax benefits recorded in the fourth quarter of fiscal year2005 for stock-based compensation expense that is not deductible for income taxpurposes in a foreign tax jurisdiction, offset by reversal of a $0.2 milliontax contingency reserve that was no longer required. Without the correction to the overstatement of tax benefits, the Company’seffective tax rate for the first six months of fiscal year 2006 would have beenapproximately 41%.

40

----

**NetIncome**. Netincome was $11.6 million, or 6.7% of sales, for the first six months of fiscalyear 2007 as compared to $6.6 million, or 3.9% of sales, in the first sixmonths of fiscal year 2006. The increase in the first six months of fiscal year 2007 was primarily due to theabsence in fiscal year 2007 of non-recurring expenses for the special bonus andmove-related expenses, lower interest expense, higher sales and a favorable mixof products with higher gross margins in fiscal year 2007, and the impact of alower effective tax rate; offset by increases in our Canadian denominatedexpenses resulting from the expiration of favorable foreign currency hedgecontracts in March 2006, stock-based compensation expenses in fiscal year 2007,and higher acquisition-related and public company expenses such as forSarbanes-Oxley compliance in fiscal year 2007.

**EBITDA**. EBITDA was $33.4 million, or 19.4% ofsales, for the first six months of fiscal year 2007 as compared to $28.6million, or 16.9% of sales, in the first six months of fiscal year 2006. Theincrease in the first six months of fiscal year 2007 was primarily due to the absence infiscal year 2007 of non-recurring expenses for the special bonus of $3.25million and move-related expenses of $4.5 million, including unfavorableoverhead absorption and manufacturing variances for the Eimac relocation,higher sales and a favorable mix of products with higher gross margins infiscal year 2007; offset by increases in our Canadian denominated expenses of$2.1 million resulting from the expiration of favorable foreign currency hedgecontracts in March 2006, stock-based compensation expenses in fiscal year 2007of $0.5 million, and higher acquisition-related and public company expensessuch as for Sarbanes-Oxley compliance in fiscal year 2007.

**Liquidity and Capital Resources**

***Overview***

Our liquidity is affectedby many factors, some of which are based on normal ongoing operations of ourbusiness and others that are related to uncertainties in the markets in whichwe compete and other global economic factors. We have historically financed,and intend to continue to finance, our capital and working capitalrequirements, including debt service and internal growth, through a combinationof cash flows from our operations and borrowings under our senior credit facilities.Our primary uses of cash are cost of sales, operating expenses, debt serviceand capital expenditures.

As of March 30, 2007, wehad $242.5 million in total principal amount of debt outstanding, compared to$247.5 million as of September 29, 2006. In addition, as of March 30, 2007, wehad borrowing availability of $36.2 million under the revolver under our seniorcredit facilities. As of March 30, 2007, we had cash and equivalents of $27.6million compared to $30.2 million as of September 29, 2006. Cash balances inexcess of operating requirements are invested daily in overnight U.S.Government securities.

We believe that we havethe financial resources to meet our business requirements for the next twelvemonths, including capital expenditures and working capital requirements, and tocomply with the financial covenants in the documents governing our debt.

**Historical Operating, Investing and FinancingActivities**

***OperatingActivities.***

Operating activities provided cash of $6.3million in the first six months of fiscal year 2007, which was attributable tonet income of $11.6 million and depreciation, amortization and other non-cashcharges of $5.4 million, partially offset by $10.7 million for cash used forworking capital. The primary uses of cash for working capital in the first sixmonths of fiscal year 2007 were for reduction in income taxes payable of $4.6million due primarily to income tax payments from the taxable gain on the saleof our San Carlos property in fiscal year 2006, and increases in accountsreceivable of $3.7 million and inventories of $2.9 million due to the timing ofcustomer shipments.

41

----

Operating activities used cash of $4.5million in the first six months of fiscal year 2006, which was attributable to$15.7 million for cash used for working capital, partially offset by cashprovided by net income of $6.6 million and depreciation, amortization and othernon-cash charges of $4.6 million. The primary uses of cash for working capitalin the first six months of fiscal year 2006 were for increases in accountsreceivable of $7.2 million and inventory of $2.5 million due to the timing ofcustomer shipments and decreases in advance payments from customers of $5.2million.

***InvestingActivities.***

Net cash used ininvesting activities was $5.5 million for the first six months of fiscal year2007 and $5.8 million for the first six months of fiscal year 2006; the primaryinvesting activity was for capital expenditures. Capital expenditures in thefirst six months of fiscal year 2007 included $3.5 million for a buildingexpansion project for our Canadian manufacturing facility. Capital expendituresfor the first six months of fiscal year 2006 included $4.0 million to purchase capital equipment, buildingand land lease improvements related to the consolidation of Eimac into our PaloAlto facility, and $0.2 million for the building expansion project for ourCanadian manufacturing facility.

Ourcontinuing operations typically do not have large recurring capital expenditurerequirements. Capital expenditures are generally made to replace existingassets, increase productivity, facilitate cost reductions or meet regulatoryrequirements. In fiscal year 2007, ongoing capital expenditures are expected tobe approximately $4.5 million, excluding expenditures of approximately $4.5million for completion of the Canadian facility expansion, of which $3.5million was incurred in the first six months of fiscal year 2007.

***FinancingActivities.***

Net cash used infinancing activities was $3.4 million for the first six months of fiscal year2007, compared to net cash used in financing activities of $8.4 million for thefirst six months of fiscal year 2006. Financing activities for the first sixmonths of fiscal year 2007 consisted primarily of a $5.0 million term loanrepayment in December 2006 using available operating cash; partially offset byproceeds of $0.5 million from the exercise of stock options and $0.4 millionfrom the purchase of shares under our employee stock purchase plan, and $0.7million of excess tax benefits from stock option exercises. The $5.0 millionterm loan repayment included a $1.7 million required annual ECF prepayment,described below, for fiscal year 2006 and an optional prepayment of $3.3million.

For the firstsix months of fiscal year 2006, CPI used the $10 million proceeds of the additionalterm loan borrowing to pay a dividend to CPI International Inc. to fund aportion of a special cash dividend of $17 million paid by CPI International,Inc. to the holders of its common stock on December 15, 2005. The remainder ofthe dividend was financed from cash on hand.

Our senior creditfacilities require an annual prepayment to be made within 90 days after the endof the fiscal year based on a calculation of excess cash flow, as defined inthe senior credit facilities (“ECF”), multiplied by a factor of 25%, 50% or 75%depending on the leverage ratio at the end of the fiscal year, less anyoptional prepayments made during the fiscal year. There was no ECF payment duefor fiscal year 2005, and therefore, no ECF cash payment was made in the firstsix months of fiscal year 2006.

42

----

**Recently Released Accounting Pronouncements**

In July 2006, theFinancial Accounting Standards Board (“FASB”) issued Interpretation 48, “Accountingfor Income Tax Uncertainties” (“FIN 48”). FIN 48 defines the threshold forrecognizing the benefits of tax return positions in the financial statements as“more-likely-than-not” to be sustained by the taxing authority. The recentlyissued literature also provides guidance on the derecognition, measurement andclassification of income tax uncertainties, along with any related interest andpenalties. FIN 48 also includes guidance concerning accounting for income taxuncertainties in interim periods and increases the level of disclosuresassociated with any recorded income tax uncertainties. FIN 48 is effective forfiscal years beginning after December 15, 2006. Any differences betweenthe amounts recognized in the statements of financial position prior to theadoption of FIN 48 and the amounts reported after adoption will be accountedfor as a cumulative-effect adjustment recorded to the beginning balance ofretained earnings. We will be required to adopt FIN 48 in fiscal year 2008, andwe are currently in the process of determining the impact, if any, of adoptingthe provisions of FIN 48 on our financial position, results of operations andliquidity.

In September 2006, the FASBissued Statement of Financial Accounting Standards (“SFAS”) No. 157, “FairValue Measurements,” which defines fair value, establishes a framework formeasuring fair value under other accounting pronouncements that permit orrequire fair value measurements, changes the methods used to measure fair valueand expands disclosures about fair value measurements. In particular,disclosures are required to provide information on: the extent to which fairvalue is used to measure assets and liabilities; the inputs used to developmeasurements; and the effect of certain of the measurements on earnings (orchanges in net assets). SFAS No. 157 is effective for fiscal years beginningafter November 15, 2007 and interim periods within those fiscal years. Earlyadoption, as of the beginning of an entity’s fiscal year is also permitted,provided interim financial statements have not yet been issued. We will berequired to adopt SFAS No. 157 in fiscal year 2008, and we are currentlyevaluating the potential impact, if any, that the adoption of SFAS No. 157 willhave on our consolidated financial statements.

In September 2006, the FASBissued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension andOther Postretirement Plans—an amendment of FASB Statements No. 87, 88, 106, and132(R),” which requires an employer to recognize the overfunded or underfundedstatus of a defined benefit plan as an asset or liability in its consolidatedbalance sheet. Under SFAS No. 158, actuarial gains and losses and prior servicecosts or credits that have not yet been recognized through earnings as netperiodic benefit cost will be recognized in other comprehensive income, net oftax, until they are amortized as a component of net periodic benefit cost. SFASNo. 158 is effective as of the end of the fiscal year ending after December 15,2006 and shall not be applied retrospectively. We will be required to adoptSFAS No. 158 in the fourth quarter of fiscal year 2007, and we are currentlyevaluating the impact, if any, that the adoption of SFAS No. 158 will have onour consolidated financial statements.

In September 2006, theSecurities and Exchange Commission issued Staff Accounting Bulletin No. 108, “Consideringthe Effects of Prior Year Misstatements when Quantifying Misstatements inCurrent Year Financial Statements” (“SAB No. 108”). SAB No. 108 providesguidance on how prior year misstatements should be considered when quantifyingmisstatements in the current year financial statements. SAB No. 108 requiresregistrants to quantify misstatements using both a balance sheet and an incomestatement approach and evaluate whether either approach results in quantifyinga misstatement that, when all relevant quantitative and qualitative factors areconsidered, is material. SAB No. 108 does not change the guidance in SAB No.99, “Materiality,” when evaluating the materiality of misstatements. SAB No.108 is effective for fiscal years ending after November 15, 2006. Upon initialapplication, SAB No. 108 permits a one-time cumulative effect adjustment tobeginning retained earnings. We will be required to adopt SAB No. 108 in thefourth quarter of fiscal year 2007, and we believe at this time that theadoption of SAB No. 108 will not have a material impact on our consolidatedfinancial statements.

43

----

In February 2007, theFASB issued SFAS No. 159, The Fair Value Option for Financial Assets andFinancial Liabilities - Including an amendment of FASB Statement No. 115 (“SFAS159”). SFAS 159 permits companies to choose to measure many financialinstruments and certain other items at fair value that are not currentlyrequired to be measured at fair value. The objective of SFAS 159 is to provideopportunities to mitigate volatility in reported earnings caused by measuringrelated assets and liabilities differently without having to apply hedgeaccounting provisions. SFAS 159 also establishes presentation and disclosure requirementsdesigned to facilitate comparisons between companies that choose differentmeasurement attributes for similar types of assets and liabilities. SFAS 159will be effective in the first quarter of fiscal year 2009. We are currentlyevaluating the impact that this statement will have on our consolidatedfinancial statements.

**Critical Accounting Policies and Estimates**

Our consolidatedfinancial statements are based on the selection and application of significantaccounting policies. The preparation of these financial statements andapplication of these policies require management to make estimates andassumptions that affect the reported amounts of assets and liabilities and thedisclosure of contingent assets and liabilities at the date of the financialstatements, as well as the reported amounts of revenues and expenses during thereporting period. Actual results could differ from those estimates. However, weare not currently aware of any reasonably likely events or circumstances thatwould result in materially different results from current estimates.

We believe the followingcritical accounting policies are the most significant to the presentation ofour financial statements and require the most subjective and complex judgments.These matters, and the judgments and uncertainties affecting them, are alsoessential to understanding our reported and future operating results.

**Revenuerecognition**

We generally recognizerevenue upon shipment of product, following receipt of written purchase orders,when the price is fixed or determinable, title has transferred andcollectibility is reasonably assured. Approximately 1% of our sales for ourfiscal years 2004 through 2006 are based on the percentage of completion methodof accounting where the sales value is determined on the basis of costsincurred and estimates of costs at completion, which require managementestimates of future costs. Changes in estimated costs at completion over timecould have a material impact on our operating results.

**Inventoryreserves**

We assess the valuationof inventory and periodically write down the value for estimated excess andobsolete inventory based upon actual usage and estimates about future demand.The excess balance determined by this analysis becomes the basis for our excessinventory charge. Management personnel play a key role in our excess inventoryreview process by providing updated sales forecasts, managing product rolloversand working with manufacturing to maximize recovery of excess inventory. If ourestimates regarding demand are inaccurate or changes in technology affectdemand for certain products in an unforeseen manner, we may incur losses orgains in excess of our established markdown reserve that could be material.

Management also reviewsthe carrying value of inventory for lower of cost or market on an individualproduct or contract basis. A loss reserve is charged to cost of sales if theestimated product cost or the contract cost at completion is in excess of netrealizable value (selling price less estimated cost of disposal). If the actualcontract cost at completion is different than originally estimated, then a lossor gain provision adjustment would be recorded that could have a materialimpact on our operating results.

44

----

**Productwarranty**

Our products aregenerally warranted for a variety of periods, typically one to three years or apredetermined product usage life. A provision for estimated future costs ofrepair, replacement or customer accommodations is reflected in the consolidatedfinancial statements included in this report. We assess the adequacy of ourpreexisting warranty liabilities and adjust the balance based on actualexperience and changes in future expectations. The determination of productwarranty reserves requires us to make estimates of product return rates andexpected cost to repair or replace the products under warranty. If actualrepair and replacement costs differ significantly from our estimates, thenadjustments to recognize additional cost of sales may be required.

**Recoverabilityof long-lived assets**

We account for goodwilland other intangible assets in accordance with SFAS No. 142, “Goodwill andOther Intangible Assets.” SFAS No. 142 requires that goodwill and identifiableintangible assets with indefinite useful lives be tested for impairment atleast annually. SFAS No. 142 also requires that intangible assets withestimable useful lives be amortized over their respective estimated usefullives and reviewed for impairment in accordance with SFAS No. 144, “Accountingfor the Impairment or Disposal of Long-Lived Assets.” We amortize identifiableintangible assets on a straight-line basis over their useful lives of up to 50years.

We assess therecoverability of the carrying value of goodwill and other intangible assetswith indefinite useful lives at least annually or whenever events or changes incircumstances indicate that the carrying amount of the asset may not be fullyrecoverable. Recoverability of goodwill is measured at the reporting unit level(our five divisions) based on a two-step approach. First, the carrying amountof the reporting unit is compared to the fair value as estimated by the futurenet discounted cash flows expected to be generated by the reporting unit. Tothe extent that the carrying value of the reporting unit exceeds the fair valueof the reporting unit, a second step is performed, wherein the reporting unit’sassets and liabilities are valued. The implied fair value of goodwill iscalculated as the fair value of the reporting unit in excess of the fair valueof all non-goodwill assets and liabilities allocated to the reporting unit. Tothe extent the reporting unit’s carrying value of goodwill exceeds its impliedfair value, impairment exists and must be recognized. This process requires theuse of discounted cash flow models that utilize estimates of future revenue andexpenses as well as the selection of appropriate discount rates. There isinherent uncertainty in these estimates, and changes in these factors over timecould result in an impairment charge.

At March 30, 2007 andSeptember 29, 2006, the carrying amount of goodwill and other intangibleassets, net was $222 million and $223 million, respectively. As of March 30,2007, no significant changes in the underlying business assumptions orcircumstances that drive the impairment analysis led us to believe thatgoodwill might have been impaired. We will continue to evaluate the need forimpairment if changes in circumstances or available information indicate thatimpairment may have occurred, and at least annually in the fourth quarter.

At March 30, 2007 andSeptember 29, 2006, the carrying amount of property, plant and equipment was$66 million and $64 million, respectively. We assess the recoverability ofproperty, plant and equipment to be held and used by a comparison of thecarrying amount of an asset or group of assets to the future net undiscountedcash flows expected to be generated by the asset or group of assets. If suchassets are considered impaired, then the impairment recognized is measured asthe amount by which the carrying amount of the assets exceeds the fair value ofthe assets. This process requires the use of cash flow models that utilizeestimates of future revenue and expenses. There is inherent uncertainty inthese estimates, and changes in these factors over time could result in animpairment charge.

45

----

A prolonged generaleconomic downturn and, specifically, a prolonged downturn in the defense,communications or medical markets, or technological changes, as well as othermarket factors could intensify competitive pricing pressure, create animbalance of industry supply and demand, or otherwise diminish volumes orprofits. Such events, combined with changes in interest rates, could adverselyaffect our estimates of future net cash flows to be generated by our long-livedassets. Consequently, it is possible that our future operating results could bematerially and adversely affected by additional impairment charges related tothe recoverability of our long-lived assets.

**Accountingfor stock-based compensation**

At the beginning offiscal year 2006, we adopted SFAS No. 123 (revised 2004), “Share-Based Payment”(“SFAS No. 123R”), and Staff Accounting Bulletin No. 107, “Share-Based Payment,”for our existing stock option plans under the prospective method. Under theprospective method, only new awards (or awards modified, repurchased, orcancelled after the effective date) are accounted for under the provisions ofSFAS No. 123R. Previously, we applied the intrinsic-value method of accounting prescribedby Accounting Principles Board Opinion No. 25, “Accounting for StockIssued to Employees,” and related interpretations. Under the intrinsic-valuemethod, compensation expense was recorded only if the market price of the stockexceeded the stock option exercise price at the measurement date. We willcontinue to account for stock option awards outstanding at September 30, 2005using the intrinsic-value method of measuring equity share options unless suchoptions are modified.

The fair value of each optionaward is estimated on the date of grant using the Black-Scholes model. TheBlack-Scholes option valuation model was developed for use in estimating thefair value of traded options that have no vesting restrictions and are fullytransferable and requires the input of subjective assumptions, including theexpected stock price volatility and estimated option life.

In accordance with SFASNo. 123R, prior to becoming a public entity in April 2006, we used the minimumvalue method to determine a calculated value, rather than a fair value, ofshare awards. Under the minimum value method, stock price volatility wasassumed to be zero. The estimated fair value (or calculated value, asapplicable) of our stock-based awards, less expected forfeitures, is amortizedover the awards’ vesting period on a straight-line basis for awards grantedafter the adoption of SFAS No. 123R and on a graded vesting basis forawards granted prior to the adoption of SFAS No. 123R. Since our commonstock has not been publicly traded for a sufficient time period, the expectedvolatility is based on expected volatilities of similar companies that have alonger history of being publicly traded. The expected life of options grantedis based on the simplified method for plain vanilla options in accordance withSecurities and Exchange Commission Staff Accounting Bulletin 107. The risk-freerates are based on the U.S. Treasury yield in effect at the time of the grant.For the six months ended March 30, 2007 and March 31, 2006, we recognized $0.5million and zero in stock-based compensation expense, respectively.

**Item 3. Quantitative andQualitative Disclosures About Market Risk**

We do not use market risksensitive instruments for trading or speculative purposes.

***Interestrate risk:*****Ourexposure to market risk for changes in interest rates relates primarily to ourlong-term debt and our investment in overnight government securities.

We have variable ratedebt that comprises $80.0 million in floating rate senior notes due in 2015 anda $37.5 million term loan under our senior credit facilities, due in 2010. Ourvariable rate debt is subject to changes in the prime rate and the LIBOR rate.We entered into an interest rate swap contract (the “Swap”) with a notionalamount of $80.0 million to effectively convert the floating rate senior notesto a fixed rate of 9.9% through the Swap maturity date in January 2008. We alsohave $125.0 million of fixed rate 8% Notes. At March 30, 2007, the fair valueof the unrealized gain on the Swap was $0.4 million, net of tax.

46

----

***Foreigncurrency exchange risk:*****Although the majority of our revenue and expenseactivities are transacted in U.S. dollars, we do transact business in foreigncountries. Our primary foreign currency cash flows are in Canada and severalEuropean countries. In an effort to reduce our foreign currency exposure toCanadian dollar denominated expenses, we enter into Canadian dollar forwardcontracts to hedge the Canadian dollar denominated costs for our manufacturingoperation in Canada. As of March 30, 2007, we had entered into Canadian dollarforward contracts for approximately $24.6 million (Canadian dollars), or 67% ofestimated Canadian dollar denominated expenses through December 2007, at anaverage rate of approximately $0.87 U.S. dollar to Canadian dollar. We estimatethe impact of a one cent change in the U.S. dollar to Canadian dollar exchangerate (without giving effect to our Canadian dollar forward contracts) to beapproximately $0.5 million annually to operating income or approximately 1.9cents to basic earnings per share and 1.7 cents to diluted earnings per share.

Net income in the firstsix months of fiscal year 2007 includes a recognized loss from foreign currencyforward contracts of $0.1 million. Net income in the first six months of fiscalyear 2006 includes a recognized gain from foreign currency forward contracts of$1.0 million. At March 30, 2007, the fair value of the unrealized loss onCanadian dollar forward contracts was $0.1 million, net of tax.

**Item 4.Controls and Procedures**

Management, including ourprincipal executive officer and principal financial officer, has evaluated, asof the end of the period covered by this report, the effectiveness of thedesign and operation of our disclosure controls and procedures with respect tothe information generated for use in this report. Based upon, and as of thedate of that evaluation, the principal executive officer and principalfinancial officer concluded that the disclosure controls and procedures wereeffective to provide reasonable assurances that information required to bedisclosed in the reports filed or submitted under the Securities Exchange Actof 1934, as amended, is recorded, processed, summarized and reported within thetime periods specified in the Securities and Exchange Commission’s rules andforms.

There have been nochanges in our internal control over financial reporting that occurred duringthe most recent fiscal quarter that have materially affected, or are reasonablylikely to materially affect, our internal control over financial reporting.

47

----

**Part II:OTHER INFORMATION**

**Item 1.Legal Proceedings**

None.

**Item 1A.Risk Factors**

**The Company’sAnnual Report on Form 10-K for the fiscal year ended September 29, 2006includes a detailed discussion of our risk factors.**

**Item 2.Unregistered Sales of Equity Securities and Use of Proceeds**

None.

**Item 3.Defaults Upon Senior Securities**

None.

**Item4.  Submission of Matters to a Vote ofSecurity Holders**

At an Annual Meeting ofStockholders held on February 8, 2007, the following proposals were presentedfor a vote of the stockholders of the Company:

Proposal No. 1: Theelection of two directors to serve for a three-year term ending at the 2010Annual Meeting of Stockholders. 

| Nominee            | ** ** | **For Votes** | ** ** | **Withheld Votes** | ** ** |
|--------------------|------------|--------------------|------------|-------------------------|------------|
| Jeffrey P.  Hughes |       | 14,665,684         |       | 1,041,726               |       |
| Stephen R. Larson  |       | 15,684,466         |       | 22,944                  |       |

The term of officefor the following directors continued after the Annual Meeting: O. JoeCaldarelli, Michael F. Finley, Michael Targoff and William P. Rutledge.

Proposal No. 2: Theratification of the appointment of KPMG LLP as the Company’s independentregistered public accounting firm for fiscal year 2007.

| Votes   | ** ** | **Shares** | ** ** | **% of Shares Voted** | ** ** | **% of Outstanding Shares** | ** ** |
|---------|------------|------------|------------|--------------------------------------|------------|--------------------------------------------|------------|
| For     |       | 15,413,918 |       | 98.13                                | %          | 95.84                                      | %          |
| Against |       | 293,217    |       | 1.87                                 | %          | 1.82                                       | %          |
| Abstain |       | 275        |       | 0                                    | %          | 0                                          | %          |

**Item 5. Other Information**

None.

48

----

**Item 6.Exhibits**
| No.    | ** ** | **Description**                                                                                                                                              |
|--------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 31.1   |       | Certification of Chief Executive Officer pursuant to  Rule 13a-15(e) and Rule 15d-15(e), promulgated under the Securities Exchange  Act of 1934, as amended. |
|   |       |                                                                                                                                                         |
| 31.2   |       | Certification of Chief Financial Officer pursuant to  Rule 13a-15(e) and Rule 15d-15(e), promulgated under the Securities Exchange  Act of 1934, as amended. |
|   |       |                                                                                                                                                         |
| 32.1   |       | Certifications of Chief Executive Officer, pursuant  to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002.       |
|   |       |                                                                                                                                                         |
| 32.2   |       | Certifications of Chief Financial Officer, pursuant  to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002.       |
|   |       |                                                                                                                                                         |

 

49

----

**SIGNATURES**

Pursuant to the requirementsof the Securities Exchange Act of 1934, the registrant has duly caused thisreport to be signed on its behalf by the undersigned, thereunto dulyauthorized.

CPI INTERNATIONAL, INC.
| Dated: May 14, 2007  |   | /s/ O. Joe Caldarelli                                                                                           |
|---------------------------|--------|-----------------------------------------------------------------------------------------------------------------|
|                      |   | O. Joe Caldarelli  Chief Executive Officer                                                                      |
|                      |   |                                                                                                            |
|                      |   |                                                                                                            |
| Dated: May  14, 2007 |   | /s/ Joel A. Littman                                                                                             |
|                      |   | Joel A. Littman  Chief Financial Officer, Treasurer and Secretary  (Principal Financial and Accounting Officer) |

** **

50

----