UNITEDSTATESSECURITIES AND EXCHANGECOMMISSIONWashington, DC20549

FORM 10-Q

(MarkOne)

|        |                                                                                       |
|--------|---------------------------------------------------------------------------------------|
|   | QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934 |

For the quarterly period ended December30, 2005

or

|        |                                                                                         |
|--------|-----------------------------------------------------------------------------------------|
|   | TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACTOF 1934 |

For the transition period from      to

Commission file number:** 333-11386-04    **

CPIINTERNATIONAL, INC.

(Exact Name ofRegistrant as Specified in ItsCharter)

Delaware

(Stateor Other Jurisdiction of Incorporation orOrganization)

75-3142681

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

811 Hansen WayPaloAlto, California 94303-1110(650)846-2900

(Address of PrincipalExecutive Offices and Telephone Number,Including AreaCode)

CPI HOLDCO,INC.

(Former Name, if ChangedSince Last Report)

Indicate by checkmark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period thatthe registrant was required to file such reports) and (2) has beensubject to such filing requirements for the past 90 days.Yes    No   

Indicate by check mark whether theregistrant is an accelerated filer (as defined in Rule 12b-2 of theExchange Act). Yes       No   

Indicate by check mark whether the registrant isa shell company (as defined in Rule 12b-2 of the Exchange Act).Yes       No    

APPLICABLEONLY TO CORPORATE ISSUERS:

Indicate the numberof shares outstanding for each of the Registrant’s classes ofCommon Stock, as of the latest practicable date: 4,275,566 shares ofCommon Stock, $.01 par value, at February  13,2006.

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CPI International,Inc.andSubsidiaries

INDEX

|                                      |  |                                                                                            |        |        |        |        |  |  |  |  |
|--------------------------------------|--|--------------------------------------------------------------------------------------------|--------|--------|--------|--------|--|--|--|--|
| **PartI: FinancialInformation** |  |                                                                                       |   |   |
| Item1.                               |  | FinancialStatements                                                                        |        |   |   |   |
|                                 |  | Condensed ConsolidatedBalance Sheets                                                       |        |   | 4      |   |
|                                 |  | CondensedConsolidated Statements of Operations and ComprehensiveIncome                     |        |   | 5      |   |
|                                 |  | Condensed ConsolidatedStatements of Cash Flows                                             |        |   | 6      |   |
|                                 |  | Notes toCondensed Consolidated FinancialStatements                                         |        |   | 7      |   |
| Item 2.                              |  | Management’s Discussion and Analysis of Financial Conditionand Results of Operations |        |   | 26     |   |
| Item 3.                              |  | Quantitative and Qualitative Disclosures About MarketRisk                                  |        |   | 35     |   |
| Item 4.                              |  | Controls andProcedures                                                                     |        |   | 36     |   |
| **Part II:Other Information**        |  |                                                                                       |   |   |
| Item 1.                              |  | Legal Proceedings                                                                          |        |   | 37     |   |
| Item 1A.                             |  | Risk Factors                                                                               |        |   | 37     |   |
| Item 2.                              |  | Unregistered Sales of Equity Securities and Use ofProceeds                                 |        |   | 37     |   |
| Item 3.                              |  | Defaults UponSenior Securities                                                             |        |   | 37     |   |
| Item 4.                              |  | Submission of Matters to a Vote of SecurityHolders                                         |        |   | 37     |   |
| Item 5.                              |  | OtherInformation                                                                           |        |   | 37     |   |
| Item 6.                              |  | Exhibits                                                                                   |        |   | 37     |   |
|                                      |

2

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CPI International,Inc.and Subsidiaries

Cautionary StatementsRegarding Forward-Looking Statements

This documentcontains forward-looking statements within the meaning of Section 27Aof the Securities Act of 1933, as amended, and Section 21E of theSecurities Exchange Act of 1934, as amended, that relate to futureevents or our future financial performance. In some cases, readers canidentify forward-looking statements by terminology 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.Actual events or results may differ materially.

Althoughwe believe that the expectations reflected in the forward-lookingstatements are reasonable, we cannot guarantee future results, levelsof activity, performance or achievements. Moreover, neither we nor anyother person assumes responsibility for the accuracy and completenessof the forward-looking statements. All written and oral forward-lookingstatements made in connection with this report that are attributable tous or persons acting on our behalf are expressly qualified in theirentirety by the ‘‘risk factors,’’ and othercautionary statements included herein and in the other filings with theSecurities and Exchange Commission(‘‘SEC’’) made by CPI International, Inc.We are under no duty to update any of the forward-looking statementsafter the date of this report to conform such statements to actualresults or to changes in the expectations.

The informationin this report is not a complete description of our business or therisks and uncertainties associated with an investment in oursecurities. You should carefully consider the various risks anduncertainties that impact our business and the other information inthis report and in CPI International, Inc.'s other filings withthe SEC before you decide to invest in our securities or to maintain orincrease your investment.

3

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Part I: FinancialInformation

Item 1. Financial Statements

CPIInternational, Inc.andSubsidiaries

CONDENSED CONSOLIDATED BALANCESHEETS(in thousands, except share and per share data —unaudited)

|                                                                                                   |  |                  |         |                   |  |        |         |        |  |  |
|---------------------------------------------------------------------------------------------------|--|------------------|---------|-------------------|--|--------|---------|--------|--|--|
|                                                                                              |  | December30, 2005 |         | September30, 2005 |
| **Assets**                                                                                        |  |             |    |              |  |   |    |   |
| CurrentAssets:                                                                                    |  |             |    |              |  |   |    |   |
| Cashand cashequivalents                                                                           |  | $                | 16,761  |              |  | $      | 26,511  |   |
| Restrictedcash                                                                                    |  |             | 1,044   |              |  |   | 1,287   |   |
| Accountsreceivable,net                                                                            |  |             | 41,609  |              |  |   | 39,295  |   |
| Inventories                                                                                       |  |             | 50,137  |              |  |   | 50,620  |   |
| Deferredtax assets                                                                                |  |             | 12,990  |              |  |   | 12,346  |   |
| Prepaidsand other currentassets                                                                   |  |             | 3,454   |              |  |   | 3,981   |   |
| Totalcurrentassets                                                                                |  |             | 125,995 |              |  |   | 134,040 |   |
| Property,plant and equipment,net                                                                  |  |             | 84,958  |              |  |   | 83,624  |   |
| Deferred debtissue costs,net                                                                      |  |             | 10,704  |              |  |   | 11,061  |   |
| Intangible assets,net                                                                             |  |             | 77,327  |              |  |   | 77,941  |   |
| Goodwill                                                                                          |  |             | 145,462 |              |  |   | 145,462 |   |
| Otherlong-termassets                                                                              |  |             | 2,978   |              |  |   | 2,416   |   |
| Totalassets                                                                                       |  | $                | 447,424 |              |  | $      | 454,544 |   |
| **Liabilitiesand Stockholders'Equity**                                                            |  |             |    |              |  |   |    |   |
| CurrentLiabilities:                                                                               |  |             |    |              |  |   |    |   |
| Accountspayable                                                                                   |  | $                | 17,032  |              |  | $      | 21,421  |   |
| Accruedexpenses                                                                                   |  |             | 33,287  |              |  |   | 27,247  |   |
| Productwarranty                                                                                   |  |             | 6,190   |              |  |   | 6,359   |   |
| Income taxespayable                                                                               |  |             | 3,744   |              |  |   | 1,546   |   |
| Advance paymentsfromcustomers                                                                     |  |             | 8,357   |              |  |   | 12,067  |   |
| Totalcurrentliabilities                                                                           |  |             | 68,610  |              |  |   | 68,640  |   |
| Deferredincome taxes                                                                              |  |             | 33,420  |              |  |   | 35,556  |   |
| Advancepayments from sale of San Carlosproperty                                                   |  |             | 13,450  |              |  |   | 13,450  |   |
| Long-termdebt                                                                                     |  |             | 294,244 |              |  |   | 284,231 |   |
| Totalliabilities                                                                                  |  |             | 409,724 |              |  |   | 401,877 |   |
| Commitmentsandcontingencies                                                                       |  |             |    |              |  |   |    |   |
| Stockholders'Equity:                                                                              |  |             |    |              |  |   |    |   |
| Commonstock ($0.01 par value, 5,500,000 shares authorized; 4,275,566shares issued andoutstanding) |  |             | 43      |              |  |   | 43      |   |
| Additionalpaid-incapital                                                                          |  |             | 17,684  |              |  |   | 34,683  |   |
| Accumulatedother comprehensiveincome                                                              |  |             | 1,438   |              |  |   | 1,621   |   |
| Retainedearnings                                                                                  |  |             | 18,535  |              |  |   | 16,320  |   |
| Totalstockholders’equity                                                                    |  |             | 37,700  |              |  |   | 52,667  |   |
| Totalliabilities and stockholders'equity                                                          |  | $                | 447,424 |              |  | $      | 454,544 |   |
|                                                                                                   |

Seeaccompanying notes to the condensed consolidated financialstatements.

4

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CPI International, Inc.andSubsidiaries

CONDENSED CONSOLIDATEDSTATEMENTS OFOPERATIONS AND COMPREHENSIVE INCOME (in thousands, except shareand per share data —unaudited)

|                                                           |  |                  |           |                   |  |        |           |        |  |  |
|-----------------------------------------------------------|--|------------------|-----------|-------------------|--|--------|-----------|--------|--|--|
|                                                      |  | QuarterEnded     |
|                                                      |  | December 30,2005 |           | December 31, 2004 |
| Sales                                                     |  | $                | 82,379    |              |  | $      | 73,733    |   |
| Cost of sales                                             |  |             | 57,171    |              |  |   | 50,029    |   |
| Grossprofit                                               |  |             | 25,208    |              |  |   | 23,704    |   |
| Operatingcosts andexpenses:                               |  |             |      |              |  |   |      |   |
| Researchand development                                   |  |             | 1,910     |              |  |   | 1,448     |   |
| Sellingand marketing                                      |  |             | 5,024     |              |  |   | 4,068     |   |
| Generaland administrative                                 |  |             | 7,302     |              |  |   | 3,969     |   |
| Amortization ofacquisition-related intangible assets      |  |             | 548       |              |  |   | 4,906     |   |
| Net loss on dispositionof assets                          |  |             | 65        |              |  |   | 56        |   |
| Totaloperating costs and expenses                         |  |             | 14,849    |              |  |   | 14,447    |   |
| Operatingincome                                           |  |             | 10,359    |              |  |   | 9,257     |   |
| Interestexpense, net                                      |  |             | 6,064     |              |  |   | 4,080     |   |
| Incomebefore income taxes                                 |  |             | 4,295     |              |  |   | 5,177     |   |
| Income tax expense                                        |  |             | 2,080     |              |  |   | 2,079     |   |
| Netincome                                                 |  | $                | 2,215     |              |  | $      | 3,098     |   |
| Othercomprehensive income, net oftax                      |  |             |      |              |  |   |      |   |
| Net unrealized(loss)/gain on cash flowhedges              |  |             | (183      | )            |  |   | 816       |   |
| Comprehensiveincome                                       |  | $                | 2,032     |              |  | $      | 3,914     |   |
| Netincome per share —Basic                          |  | $                | 0.52      |              |  | $      | 0.72      |   |
| Netincome per share —Diluted                        |  | $                | 0.46      |              |  | $      | 0.69      |   |
| Sharesused to compute net income per share —Basic   |  |             | 4,275,566 |              |  |   | 4,275,566 |   |
| Sharesused to compute net income per share —Diluted |  |             | 4,831,141 |              |  |   | 4,489,280 |   |
|                                                           |

Seeaccompanying notes to the condensed consolidated financialstatements.

5

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CPI International, Inc.andSubsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF CASHFLOWS (in thousands —unaudited)

|                                                     |  |                 |         |                  |  |        |         |         |  |  |
|-----------------------------------------------------|--|-----------------|---------|------------------|--|--------|---------|---------|--|--|
|                                                |  | QuarterEnded    |
|                                                |  | December30,2005 |         | December31, 2004 |
| **OperatingActivities**                             |  |            |    |             |  |   |    |    |
| Netcash provided by operatingactivities             |  | $               | 198     |             |  | $      | 10,233  |    |
| **InvestingActivities**                             |  |            |    |             |  |   |    |    |
| Expenses relatingto sale of San Carlosproperty      |  |            | (3      | )           |  |   | (8      | )  |
| Purchase ofEconco's net assets, net of cashacquired |  |            | — |             |  |   | (18,685 | )  |
| Capitalexpenditures                                 |  |            | (2,945  | )           |  |   | (1,194  | )  |
| Netcash used in investingactivities                 |  |            | (2,948  | )           |  |   | (19,887 | )  |
| **FinancingActivities**                             |  |            |    |             |  |   |    |    |
| Proceeds from(repayments on) senior termloan        |  |            | 10,000  |             |  |   | (3,878  | )  |
| Special cashdividend                                |  |            | (17,000 | )           |  |   | — |    |
| Repaymentson capitalleases                          |  |            | — |             |  |   | (20     | )  |
| Net cash used in financingactivities                |  |            | (7,000  | )           |  |   | (3,898  | )  |
| **NetDecrease in Cash and CashEquivalents**         |  |            | (9,750  | )           |  |   | (13,552 | )  |
| Cashand cash equivalents at beginning ofperiod      |  |            | 26,511  |             |  |   | 40,476  |    |
| Cashand cash equivalents at end ofperiod            |  | $               | 16,761  |             |  | $      | 26,924  |    |
| **SupplementalDisclosures of Cash FlowInformation** |  |            |    |             |  |   |    |    |
| Cash paid forinterest                               |  | $               | 1,810   |             |  | $      | 1,410   |    |
| Cash paid fortaxes, net ofrefunds                   |  | $               | 2,554   |             |  | $      | 120     |    |
|                                                     |

Seeaccompanying notes to the condensed consolidated financialstatements.

6

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**CPIInternational, Inc.**andSubsidiaries

NOTES TO CONDENSED CONSOLIDATEDFINANCIALSTATEMENTS(unaudited)

1.Basis of Presentation

Unless the context otherwise requires, (1)‘‘CPI International’’ or the‘‘Successor’’ means CPI International, Inc.(formerly known as CPI Holdco, Inc.), (2)‘‘Predecessor’’ means Communications &Power Industries Holding Corporation, the predecessor to CPIInternational, (3) ‘‘CPI’’ meansCommunications & Power Industries, Inc. and (4)‘‘Merger’’ means the January23,  2004 merger pursuant to which CPI International acquired thePredecessor. CPI is a direct subsidiary of CPI International. CPIInternational is a holding company with no operations of its own. Theterms ‘‘we,’’‘‘us,’’ ‘‘our’’and the ‘‘Company’’ refer to CPIInternational, or the Predecessor, as applicable, and its direct andindirect subsidiaries on a consolidated basis.

The accompanyingcondensed consolidated financial statements represent the consolidatedresults and financial position of CPI International, a Delawarecorporation, controlled by affiliates of The Cypress Group L.L.C.(‘‘Cypress’’). CPI International, throughits wholly owned subsidiary, CPI, develops, manufactures, anddistributes microwave and power grid Vacuum Electron Devices(‘‘VEDs’’), microwave amplifiers,modulators and various other power supply equipment and devices. TheCompany has two reportable segments, VED and satcom equipment.Effective January  17,  2006, the Company changed its namefrom CPI Holdco, Inc. to CPI International, Inc.

Theaccompanying consolidated financial statements have been prepared inaccordance with accounting principles generally accepted in the UnitedStates of America and include the accounts of the Company and itsconsolidated subsidiaries.  In the opinion of management, theaccompanying unaudited consolidated financial statements contain alladjustments necessary to present fairly the consolidated financialposition of the Company and its consolidated results of operations andcash flows.

The Company’s fiscal year is the 52 or 53-weekperiod ending on the Friday nearest September  30. Fiscal year2006 comprises the 52-week period ending September  29,2006, and fiscal year 2005 comprised the 52-week period endedSeptember  30,  2005. All period references are to theCompany’s fiscal periods unless otherwiseindicated. These interim financial statements should be read inconjunction with the consolidated financial statements and accompanyingnotes included in the Company’s Annual Report onForm 10-K for the year ended September 30, 2005. Certainamounts in prior years’ condensed consolidated financialstatements have been reclassified to conform to the fiscal 2006presentation. Net operating results have not been affected by thesereclassifications.

There is currently no public marketfor CPI International's common stock.

|          |                                        |
|----------|----------------------------------------|
| 2.  | Supplemental Balance Sheet Information |

**Accountsreceivable:**    Accounts receivable are stated net of allowancesfor doubtful accounts of $0.7  million for both December30,  2005 and September  30,2005.

**Inventories:**    The following table providesdetails of inventories, net of reserves (inthousands):

|                        |  |                 |        |                   |  |        |        |        |  |  |
|------------------------|--|-----------------|--------|-------------------|--|--------|--------|--------|--|--|
|                   |  | December30,2005 |        | September30, 2005 |
| Raw materials andparts |  | $               | 33,225 |              |  | $      | 29,627 |   |
| Work inprocess         |  |            | 11,237 |              |  |   | 12,540 |   |
| Finishedgoods          |  |            | 5,675  |              |  |   | 8,453  |   |
| Inventories            |  | $               | 50,137 |              |  | $      | 50,620 |   |
|                        |

7

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**CPIInternational, Inc.**andSubsidiaries

NOTES TO CONDENSED CONSOLIDATEDFINANCIALSTATEMENTS , continued(unaudited)

**Reserve for excess, slow moving andobsolete inventory:**    The following table summarizes theactivity related to reserves for excess, slow moving and obsoleteinventory during the first quarter of fiscal years 2006 and 2005 (inthousands):

|                                             |  |                  |         |                  |  |        |       |         |  |  |
|---------------------------------------------|--|------------------|---------|------------------|--|--------|-------|---------|--|--|
|                                        |  | QuarterEnded     |
|                                        |  | December30, 2005 |         | December 31,2004 |
| Beginningbalance                            |  | $                | 8,655   |             |  | $      | 8,981 |    |
| Econcoacquisition                           |  |             | — |             |  |   | 729   |    |
| Inventoryprovision, charged to cost ofsales |  |             | 316     |             |  |   | 218   |    |
| Inventorywrite-offs                         |  |             | (28     | )           |  |   | (218  | )  |
| Endingbalance                               |  | $                | 8,943   |             |  | $      | 9,710 |    |
|                                             |

**Reservefor loss contracts and cost in excess of market inventory:**    Thefollowing table summarizes the activity related to reserves for losscontracts and cost in excess of market inventory during the firstquarter of fiscal years 2006 and 2005 (inthousands):

|                                                                                             |  |                  |       |                  |  |        |       |         |  |  |
|---------------------------------------------------------------------------------------------|--|------------------|-------|------------------|--|--------|-------|---------|--|--|
|                                                                                        |  | QuarterEnded     |
|                                                                                        |  | December30, 2005 |       | December 31,2004 |
| Beginningbalance                                                                            |  | $                | 1,430 |             |  | $      | 2,845 |    |
| Provisionfor loss contracts and cost in excess of market inventory, charged tocost of sales |  |             | 306   |             |  |   | 447   |    |
| Reservedinventory sold or otherwise disposedof                                              |  |             | (222  | )           |  |   | (874  | )  |
| Endingbalance                                                                               |  | $                | 1,514 |             |  | $      | 2,418 |    |
|                                                                                             |

**Productwarranty:**    The following table summarizes the activity relatedto product warranty during the first quarter of fiscal years 2006 and2005 (inthousands):

|                             |  |                  |        |                  |  |        |       |         |  |  |
|-----------------------------|--|------------------|--------|------------------|--|--------|-------|---------|--|--|
|                        |  | QuarterEnded     |
|                        |  | December30, 2005 |        | December 31,2004 |
| Beginning accruedwarranty   |  | $                | 6,359  |             |  | $      | 6,074 |    |
| Accrualsfor productwarranty |  |             | 1,048  |             |  |   | 731   |    |
| Cost ofwarrantyclaims       |  |             | (1,217 | )           |  |   | (741  | )  |
| Endingaccruedwarranty       |  | $                | 6,190  |             |  | $      | 6,064 |    |
|                             |

**Goodwill:**    Asof December  30,  2005 and September  30,  2005the Company had $145.5  million of goodwill, $131.6million of which has been allocated to the VED segment and $13.9million of which has been allocated to the satcom equipment segment.There were no changes in the carrying amount of goodwill for thequarter ended December  30,  2005.

**Intangibleassets:**    The following tables present the details of theCompany’s total purchased intangible assets (inthousands):

|                                  |  |        |        |                         |  |        |         |         |  |        |         |        |  |  |
|----------------------------------|--|--------|--------|-------------------------|--|--------|---------|---------|--|--------|---------|--------|--|--|
| December30,2005                  |  | Cost   |        | AccumulatedAmortization |  | Net    |
| Technology                       |  | $      | 58,500 |                    |  | $      | (3,775  | )  |  | $      | 54,725  |   |
| Customerbacklog                  |  |   | 17,450 |                    |  |   | (17,450 | )  |  |   | — |   |
| Landlease                        |  |   | 11,810 |                    |  |   | (510    | )  |  |   | 11,300  |   |
| Tradename                        |  |   | 5,800  |                    |  |   | — |    |  |   | 5,800   |   |
| Customerlist andprograms         |  |   | 5,700  |                    |  |   | (281    | )  |  |   | 5,419   |   |
| Noncompeteagreement              |  |   | 110    |                    |  |   | (27     | )  |  |   | 83      |   |
| Netidentifiable intangibleassets |  | $      | 99,370 |                    |  | $      | (22,043 | )  |  | $      | 77,327  |   |
|                                  |

8

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**CPIInternational, Inc.**andSubsidiaries

NOTES TO CONDENSED CONSOLIDATEDFINANCIALSTATEMENTS , continued(unaudited)

|                                  |  |        |        |                         |  |        |         |         |  |        |         |        |  |  |
|----------------------------------|--|--------|--------|-------------------------|--|--------|---------|---------|--|--------|---------|--------|--|--|
| September30,  2005               |  | Cost   |        | AccumulatedAmortization |  | Net    |
| Technology                       |  | $      | 58,500 |                    |  | $      | (3,317  | )  |  | $      | 55,183  |   |
| Customerbacklog                  |  |   | 17,450 |                    |  |   | (17,450 | )  |  |   | — |   |
| Landlease                        |  |   | 11,810 |                    |  |   | (444    | )  |  |   | 11,366  |   |
| Tradename                        |  |   | 5,800  |                    |  |   | — |    |  |   | 5,800   |   |
| Customerlist andprograms         |  |   | 5,700  |                    |  |   | (197    | )  |  |   | 5,503   |   |
| Noncompeteagreement              |  |   | 110    |                    |  |   | (21     | )  |  |   | 89      |   |
| Netidentifiable intangibleassets |  | $      | 99,370 |                    |  | $      | (21,429 | )  |  | $      | 77,941  |   |
|                                  |

Theestimated future amortization expense of purchased intangibles as ofDecember  30,  2005 was as follows (inthousands):

|                             |  |        |        |        |  |  |
|-----------------------------|--|--------|--------|--------|--|--|
| FiscalYear                  |  | Amount |
| 2006 (remaining ninemonths) |  | $      | 1,837  |   |
| 2007                        |  |   | 2,451  |   |
| 2008                        |  |   | 2,451  |   |
| 2009                        |  |   | 2,451  |   |
| 2010                        |  |   | 2,429  |   |
| Thereafter                  |  |   | 59,908 |   |
| Total                       |  | $      | 71,527 |   |
|                             |

3.Long-Term Debt

Long-term debt comprises the following (inthousands):

|                                                                                                  |  |                 |         |                    |  |        |         |        |  |  |
|--------------------------------------------------------------------------------------------------|--|-----------------|---------|--------------------|--|--------|---------|--------|--|--|
|                                                                                             |  | December30,2005 |         | September 30, 2005 |
| Termloan, expiring2010                                                                           |  | $               | 90,000  |               |  | $      | 80,000  |   |
| 8%Senior subordinated notes due2012                                                              |  |            | 125,000 |               |  |   | 125,000 |   |
| Floating ratesenior notes due 2015, net of amortized issue discount of $756 and$769,respectively |  |            | 79,244  |               |  |   | 79,231  |   |
|                                                                                             |  | $               | 294,244 |               |  |   | 284,231 |   |
|                                                                                                  |

**Seniorcredit facility and term loan of CPI:**    In connection with theMerger, CPI entered into a $130.0  million credit agreement,which was amended and restated on November  29,  2004, andfurther amended on February  16,  2005, April13,  2005, and December  15,  2005 (the‘‘Senior Credit Facility’’). The SeniorCredit Facility consists of a $40.0  million revolvingcommitment, with a sub-facility of $15.0  million for letters ofcredit 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 December  30,  2005, theCompany had no outstanding borrowings under the Revolver and$90.0  million outstanding under the Term Loan, including anadditional $10  million of borrowings made in connection with theDecember  15,  2005 amendment. There are no scheduledprincipal payments due on the Term Loan during the 2006 fiscal yearbecause of the optional Term Loan prepayments made by the Company infiscal year 2005. Upon specified conditions, CPI may seek commitmentsfor a new class of term loans, not to exceed $65  million. TheSenior Credit Facility is guaranteed by CPI International and all ofCPI’s domestic subsidiaries and is secured by substantially allof their assets.

9

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**CPIInternational, Inc.**andSubsidiaries

NOTES TO CONDENSED CONSOLIDATEDFINANCIALSTATEMENTS , continued(unaudited)

On December 15, 2005, CPI Internationaland CPI entered into Amendment No. 3 (theAmendment"),to the Senior Credit Facility. The Amendment increased the commitmentsunder the Term Loan by $10 million, and CPI borrowed an additional $10million thereunder. In addition, among other things, the Amendment (1)permitted CPI to pay a dividend (not to exceed $20 million) to CPIInternational to fund a dividend by CPI International to itsstockholders, (2) amended the definition of Excess Cash Flow in theSenior Credit Facility to decrease Excess Cash Flow for CPI'sfiscal year 2006 by the excess of the amount of the dividend describedin clause (1) over the gross proceeds of the $10 million additionalborrowing, and (3) permitted CPI or CPI International to use up to $70million of the proceeds of the first equity issuance by CPIInternational to repurchase or redeem the FR Notes or CPI's8% Senior Subordinated Notes due 2012 (the"8% Notes").

Any borrowingsunder the Revolver would currently bear interest at a rate equal to, atCPI’s option, LIBOR plus 2.75% per annum, or theAlternate Base Rate (‘‘ABR’’) plus1.75% per annum. Available borrowings under the Revolver arereduced by any amounts secured through letters of credit; atDecember  30,  2005, we had letters of credit commitmentsfor $4.5  million. The Term Loan borrowings currently bearinterest at a rate equal to, at CPI’s option, LIBOR plus2.25% per annum or the ABR plus 1.25% per annum, payablequarterly. The ABR is the greater of (a) the Prime Rate and (b) theFederal Funds Rate plus 0.50%. In addition to customary frontingand administrative fees under the Senior Credit Facility, CPI paysletter of credit participation fees equal to the applicable RevolverLIBOR margin per annum on the average daily amount of the letter ofcredit exposure, and a commitment fee of 0.50% per annum on theaverage daily unused amount of revolving commitment. As ofDecember  30,  2005 (1) the Term Loan borrowing consistedof one tranche of $90  million with interest payable onJanuary  17,  2006, at 6.62% per annum and (2) aRevolving commitment of $4.5  million for letter of creditexposure, with letter of credit participation fees and fronting feespayable quarterly at a combined interest rate of 3.0% perannum.

The Senior Credit Facility requires 1.0% of theoriginal Term Loan amount to be repaid annually in quarterlyinstallments 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 outstandingloans, subject to certain exceptions and limitations, with net cashproceeds received from certain events, including, without limitation(1) all such proceeds received from certain asset sales by CPIInternational, CPI or any of CPI’s subsidiaries; (2) all suchproceeds received from issuances of debt (other than certain specifiedpermitted debt) or preferred stock by CPI International, CPI or any ofCPI’s subsidiaries, (3) all such proceeds paid to CPIInternational, CPI or any of CPI’s subsidiaries from casualtyand condemnation events in excess of amounts applied to replace,restore or reinvest in any properties for which proceeds were paidwithin a specified period and (4) 50% of such proceeds receivedfrom issuances of common equity by, or equity contributions to, CPIInternational, except in the case of the first equity issuance wherebyCPI or CPI International are permitted to use up to $70  millionof the proceeds to repurchase or redeem its 8% SeniorSubordinated Notes (‘‘8% Notes’’) orits Floating Rate Senior Notes (‘‘FRNotes’’).

CPI is also required to make an annualprepayment within 90 days after the end of each fiscal year based on acalculation of Excess Cash Flow (‘‘ECF’’),as defined in the Senior Credit Facility, multiplied by a factor of25%, 50% or 75% depending on the leverage ratio atthe end of the fiscal year, less optional prepayments made during thefiscal year. On December  30,  2004, CPI made an ECFpayment of $3.9  million. The ECF payment was applied pro rata,in accordance with the provisions of the Senior Credit Facility,against the remaining scheduled installments of Term Loan principal dueup to, but not including, the September  30,  2009scheduled principal installment.

CPI can make optionalprepayments on the outstanding loans at any time without premium orpenalty, except for customary ‘‘breakage’’costs with respect to LIBOR loans. On March  31,  2005, CPI

10

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**CPIInternational, Inc.**andSubsidiaries

NOTES TO CONDENSED CONSOLIDATEDFINANCIALSTATEMENTS , continued(unaudited)

made an optional prepayment of $5.7million, in addition to the quarterly scheduled Term Loan amortizationpayment. The optional prepayment was applied pro rata, in accordancewith the provisions of the Senior Credit Facility, against theremaining scheduled installments of Term Loan principal due up toJune  30,  2009, with the balance applied to theSeptember  30,  2009 installment.

The Senior CreditFacility contains a number of covenants that, among other things,restrict, subject to certain exceptions, the ability of CPIInternational, CPI and CPI’s domestic subsidiaries to: sellassets; engage in mergers and acquisitions; pay dividends anddistributions or repurchase their capital stock; incur additionalindebtedness or issue equity interests; make investments and loans;create liens or further negative pledges on assets; engage in certaintransactions with affiliates; enter into sale and leasebacktransactions; amend agreements or make prepayments relating tosubordinated indebtedness; and amend or waive provisions of charterdocuments in a manner materially adverse to the lenders. CPI andCPI’s subsidiaries must comply with: a minimum interest coverageratio; a maximum total leverage ratio; a minimum fixed charge coverageratio; and a maximum capital expenditures limitation, each calculatedon a consolidated basis for CPI and CPI’s subsidiaries. CPIInternational must also comply with a minimum interest coverage ratio,a minimum fixed charge coverage ratio and a maximum leverage ratio,each calculated on a consolidated basis for CPI International and itssubsidiaries. As of December  30,  2005, CPI and CPIInternational were in compliance with all Senior Credit Facilityfinancial covenants.

Subject in certain cases to applicablenotice provisions and grace periods, events of default under the SeniorCredit Facility include, among other things: failure to make paymentswhen due; breaches of representations and warranties in the documentsgoverning the Senior Credit Facility; non-compliance by CPIInternational, CPI and/or CPI’s subsidiaries with certaincovenants; failure by CPI International, CPI and/or CPI’ssubsidiaries to pay certain other indebtedness or to observe any othercovenants or agreements that would allow acceleration of suchindebtedness, collectively in excess of $5.0  million at anytime; events of bankruptcy or insolvency of CPI International, CPIand/or CPI’s subsidiaries; certain uninsured and unstayedjudgments of $5.0  million or more against CPI International;impairment of the security interests in the collateral or theguarantees under the Senior Credit Facility; and a change in control,as defined in the documents governing the Senior CreditFacility.

**8% Senior subordinated notes ofCPI:**    In connection with the Merger on January 23, 2004,CPI issued $125  million in aggregate principal amount of its8% Notes. The proceeds of the 8% Notes were used toredeem the Predecessor’s outstanding indebtedness and pay partof the Merger consideration. The 8% Notes have no sinking fundrequirements.

The 8% Notes bear interest at the rate of8.0% per year, payable on February 1 and August 1of each year. The 8% Notes will mature on February 1,2012. The 8% Notes are unsecured obligations, jointly andseverally guaranteed by CPI International and each of CPI’sdomestic subsidiaries. The payment of all obligations relating to the8% Notes are subordinated in right of payment to the priorpayment in full in cash or cash equivalents of all senior debt (asdefined in the indenture governing the 8% Notes) of CPI,including debt under the Senior Credit Facility. Each guarantee of the8% Notes is and will be subordinated to guarantor senior debt(as defined in the indenture governing the 8% Notes) on the samebasis as the 8% Notes are subordinated to CPI’s seniordebt.

At any time or from time to time on or afterFebruary 1, 2008, CPI, at its option, may redeem the 8%Notes, in whole or in part, at the redemption prices (expressed aspercentages of principal amount) set forth below, together with accruedand unpaid interest thereon, if any, to the redemption date, ifredeemed during the 12-month period beginning on February 1 ofthe years indicated below:

11

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**CPIInternational, Inc.**andSubsidiaries

NOTES TO CONDENSED CONSOLIDATEDFINANCIALSTATEMENTS , continued(unaudited)

|                    |  |                         |  |  |  |  |
|--------------------|--|-------------------------|--|--|--|--|
| Year               |  | OptionalRedemptionPrice |
| 2008               |  | 104%                    |
| 2009               |  | 102%                    |
| 2010and thereafter |  | 100%                    |
|                    |

At any time orfrom time to time prior to February  1,  2007, and subjectto certain conditions, CPI may redeem up to 35% of the aggregateprincipal amount of the 8% Notes at a redemption price equal to108% of the principal amount of the 8% Notes to beredeemed, plus accrued and unpaid interest to the date of redemption,with the net cash proceeds of one or more qualified equity offerings.At any time on or prior to February 1, 2008, the 8% Notesmay also be redeemed or purchased (by CPI or any other person) in wholebut not in part, at CPI’s option, upon the occurrence of achange of control (as defined in the indenture governing the 8%Notes) at a price equal to 100% of the principal amount of the8% Notes, plus a ‘‘make-whole’’premium (as defined in the indenture governing the 8% Notes) tothe redemption price on February 1, 2008, and accrued and unpaidinterest, if any, to, the date of redemption or purchase.

Upon achange of control, CPI may be required to purchase all or any part ofthe 8% Notes for a cash price equal to 101% of theprincipal amount, plus accrued and unpaid interest thereon, if any, tothe date of purchase.

The indenture governing the 8% Notescontains a number of covenants that, among other things, restrict,subject to certain exceptions, the ability of CPI and its restrictedsubsidiaries (as defined in the indenture governing the 8%Notes) to incur additional indebtedness, sell assets, consolidate ormerge with or into other companies, pay dividends or repurchase orredeem capital stock or subordinated indebtedness, make certaininvestments, issue capital stock of their subsidiaries, incur liens andenter into certain types of transactions with their affiliates.

Events of default under the indenture governing the 8% Notesinclude: failure to make payments on the 8% Notes when due;failure to comply with covenants in the indenture governing the8% Notes; a default under certain other indebtedness of CPI orany of its restricted subsidiaries that is caused by a failure to makepayments on such indebtedness or that results in the acceleration ofthe maturity of such indebtedness; the existence of certain finaljudgments or orders against CPI or any of the restricted subsidiaries;and the occurrence of certain insolvency or bankruptcyevents.

**Floating rate senior notes of CPIInternational:**    On February  22,  2005, CPIInternational issued $80.0  million in principal amount of its FRNotes. The FR Notes were issued at a 1% discount. The proceedsfrom the issuance of FR Notes were used to make a distribution tostockholders of CPI International of approximately $75.8  millionand to pay fees and expenses of approximately $3.5  millionassociated with the issuance of FR Notes. The FR Notes have no sinkingfund requirements.

The FR Notes require interest payments at anannual interest rate, reset at the beginning of each semi-annualperiod, equal to the then six-month LIBOR plus 5.75%, payablesemiannually on February  1 and August  1 of each year. CPIInternational may, at its option, elect to pay interest through theissuance of additional FR Notes for any interest payment date on orafter August 1, 2006 and on or before February 1, 2010.If CPI International elects to pay interest through the issuance ofadditional FR Notes, the annual interest rate on the FR Notes willincrease by an additional 1% step-up, with the step-upincreasing by an additional 1% for each interest payment madethrough the issuance of additional FR Notes (up to a maximum of4%). The FR Notes will mature on February  1,2015.

12

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**CPIInternational, Inc.**andSubsidiaries

NOTES TO CONDENSED CONSOLIDATEDFINANCIALSTATEMENTS , continued(unaudited)

The FR Notes are general unsecuredobligations of CPI International. The FR Notes are not guaranteed byany of CPI International’s subsidiaries and are structurallysubordinated to all existing and future indebtedness and otherliabilities of CPI International’s subsidiaries. The FR Notesare senior in right of payment to CPI International’s existingand future indebtedness that is expressly subordinated to the FRNotes.

Because CPI International is a holding company with nooperations of its own, CPI International relies on distributions fromCPI to satisfy its obligations under the FR Notes. The Senior CreditFacility and the indenture governing the 8% Notes restrictCPI’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 CreditFacility and CPI International and CPI satisfy certain leverage ratios.The indenture governing the 8% Notes prohibits CPI from makingdistributions to CPI International unless, among other things, there isno default under the indenture and the amount of the proposed dividendplus all previous Restricted Payments (as defined in the indenturegoverning the 8% Notes) does not exceed a specifiedamount.

At any time or from time to time prior to February1,  2007, CPI International, at its option, may redeem the FRNotes in whole or in part at a ‘‘makewhole’’ premium, plus accrued and unpaid interest to thedate of redemption. At any time or from time to time on or afterFebruary  1,  2007, CPI International, at its option, mayredeem the Notes in whole or in part at the redemption prices(expressed as percentages of principal amount) set forth below,together with accrued and unpaid interest thereon, if any, to theredemption date, if redeemed during the 12-month period beginning onFebruary  1 of the years indicatedbelow:

|                    |  |                    |     |         |  |  |
|--------------------|--|--------------------|-----|---------|--|--|
| Year               |  | OptionalRedemption |
| 2007               |  |               | 103 | %  |
| 2008               |  |               | 102 | %  |
| 2009               |  |               | 101 | %  |
| 2010and thereafter |  |               | 100 | %  |
|                    |

At any time orfrom time to time prior to February  1,  2007, and subjectto certain conditions, CPI International, at its option, may redeem upto 35% of the aggregate principal amount of the FR Notes at aredemption price equal to 100% of the principal amount of the FRNotes to be redeemed, plus a premium equal to the interest rate perannum on the FR Notes applicable on the date on which the notice ofredemption is given, plus accrued and unpaid interest to the date ofredemption, with the net cash proceeds of one or more qualified equityofferings.

Upon a change of control, as defined in the indenturegoverning the FR Notes, CPI International may be required to purchaseall or any part of the outstanding FR Notes for a cash price equal to101% of the principal amount, plus accrued and unpaid interestthereon, if any, to the date of purchase.

The indenture governingthe FR Notes contains certain covenants that, among other things, limitthe ability of CPI International and its restricted subsidiaries (asdefined in the indenture governing the FR Notes) to incur additionalindebtedness, sell assets, consolidate or merge with or into othercompanies, pay dividends or repurchase or redeem capital stock orsubordinated indebtedness, make certain investments, issue capitalstock of their subsidiaries, incur liens and enter into certain typesof transactions with their affiliates.

Events of default underthe indenture governing the FR Notes include: failure to make paymentson the FR Notes when due; failure to comply with covenants in theindenture governing the FR Notes; a default under certain otherindebtedness of CPI International or any of its restricted

13

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**CPIInternational, Inc.**andSubsidiaries

NOTES TO CONDENSED CONSOLIDATEDFINANCIALSTATEMENTS , continued(unaudited)

subsidiaries that is caused by a failure tomake payments on such indebtedness or that results in the accelerationof the maturity of such indebtedness; the existence of certain finaljudgments or orders against CPI International or any of the restrictedsubsidiaries; and the occurrence of certain insolvency or bankruptcyevents.

**Debt maturities:**    As of December30,  2005, maturities on long-term debt were as follows (inthousands):

|            |  |        |         |        |  |  |
|------------|--|--------|---------|--------|--|--|
| FiscalYear |  | Amount |
| 2006       |  | $      | — |   |
| 2007       |  |   | — |   |
| 2008       |  |   | — |   |
| 2009       |  |   | 18,825  |   |
| 2010       |  |   | 71,175  |   |
| Thereafter |  |   | 205,000 |   |
| Total      |  | $      | 295,000 |   |
|            |

4.Derivative Financial Instruments

The Company uses forwardexchange contracts to hedge the foreign currency exposure associatedwith forecasted manufacturing costs in Canada. As of December30,  2005, CPI had outstanding forward contract commitments topurchase Canadian dollars for an aggregate U.S. notional amount of$5.0  million; the last forward contract expires on March10,  2006. At December  30,  2005, the fair value offoreign currency forward contracts was $0.8  million and theunrealized gain was approximately $0.8  million, net of relatedtax expense.

The Company’s foreign currency forwardcontracts are designated as a cash flow hedge and are considered‘‘highly effective’’, as defined byStatement of Financial Accounting Standards(‘‘SFAS’’) No. 133,‘‘Accounting for Derivative Instruments and HedgingActivities.’’ The unrealized gains and losses fromforeign exchange forward contracts are included in‘‘Accumulated other comprehensive income’’in the Condensed Consolidated Balance Sheets, and the Companyanticipates recognizing the entire unrealized gain in operatingearnings within the next six months. Realized gains and losses fromforeign currency exchange contracts are recognized in Cost of sales andGeneral and administrative in the Condensed Consolidated Statements ofOperations and Comprehensive Income. For the quarter endedDecember  30,  2005 and December  31,  2004,net income includes forward currency gains of $0.4  million and$0.2  million, respectively.

In April  2005, theCompany 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, whichwhen combined with the 5.75% margin, results in a fixed rate of9.9% on the FR Notes through January  31,  2008. TheSwap interest payments are made semi-annually, beginning with the firstpayment on February  1,  2006. The Swap matures onJanuary  31,  2008. The Swap is designated as a cash flowhedge under SFAS No. 133, and the gain or loss from changes in fairvalue is expected to be highly effective at offsetting the gain or lossfrom changes in fair value of the FR Notes attributable to changes ininterest rates over the contract period. The Company deposited$1.0  million as collateral for the Swap, which is included asOther long-term assets in the accompanying Condensed ConsolidatedBalance Sheets. The amount of collateral fluctuates based on the fairvalue of the Swap. The unrealized gains and losses from the Swap areincluded in ‘‘Accumulated other comprehensiveincome’’ in the Condensed Consolidated Balance Sheets. AtDecember  30,  2005, the fair value of the Swap was$1.1  million and the unrealized gain was approximately$0.6  million, net of related tax 

14

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**CPIInternational, Inc.**andSubsidiaries

NOTES TO CONDENSED CONSOLIDATEDFINANCIALSTATEMENTS , continued(unaudited)

expense. At september 30, 2005, the fairvalue of the Swap was $0.7 million and the unrealized gain wasapproximately $0.4 million, net of related tax expense.

5.Share-Based Compensation

At the beginning of fiscal year 2006,we adopted SFAS No. 123R (‘‘Share-BasedPayments’’) (‘‘SFAS No.123R’’), and Staff Accounting Bulletin No. 107,‘‘Share-Based Payment,’’ for our existingstock option plans under the prospective method. Previously, we appliedthe intrinsic value-based method of accounting prescribed by AccountingPrinciples Board (‘‘APB’’) Opinion No. 25,‘‘Accounting for Stock Issued toEmployees,’’ and related interpretations. Under theintrinsic value-based method, compensation expense was recorded only ifthe market price of the stock exceeded the exercise price at themeasurement date. Since the Company’s stock is not publiclytraded and therefore does not have a quoted market price, the Companycomputes an estimated market price of its stock based on valuationtechniques for determining the fair value of closely held stock. Theexercise prices of all stock options issued by CPI International wereat, or above, the estimated market price of the underlying stock at thedate of issuance.

As a nonpublic entity prior to the adoption ofSFAS No. 123R, we will continue to account for stock option awardsoutstanding at September  30,  2005 using the intrinsicvalue-based method of measuring equity share options. There is nounrecognized compensation cost relating to awards outstanding atSeptember  30,  2005 and we have not granted any new stockoption awards since the adoption of SFAS No. 123R. Therefore, there wasno share-based compensation cost in the first quarter of fiscal year2006. The application of SFAS No. 123R had no impact on our cashposition.

The Company charges stock-based compensation expenseagainst income under the caption ‘‘General andadministrative’’ in the Condensed Consolidated Statementsof Operations and Comprehensive Income because the majority of holdersof stock options are in administrative functions.

The Companyhas two stock plans: the 2004 Stock Incentive Plan (‘‘the2004 Plan’’) and the 2000 Stock Option Plan(‘‘the 2000 Plan’’).

Awards underthe 2004 Plan may include stock options, stock appreciation rights,restricted stock, stock awards or any combination thereof. Optionsgranted under the 2004 Plan shall be non-qualified stock options orincentive stock options, as determined by the Compensation Committee ofthe Board of Directors (‘‘the Committee’’),and as evidenced by the related award agreements. The option priceshall be determined by the Committee, but with respect to incentivestock options, shall not be less than the fair market value on the dateof grant. To date, only non-qualified stock options have been grantedunder the 2004 Plan. Option awards vest at a rate of 20% to25% per year and expire 10 years after the grant date. All stockoption grants under the 2004 Plan were issued at exercise prices equalto or greater than the estimated market price of the Company’scommon stock at option grant date.

The 2000 Plan was establishedby the Predecessor, and no furthur options are available for issuancethereunder. In accordance with the terms of the stock optionagreements, the unvested stock options outstanding under thePredecessor’s 2000 Plan became fully vested at the Mergerclosing date. The 2000 Plan option holders were offered the opportunityto either roll over their stock options into options to purchase commonstock of CPI International (‘‘RolloverOptions’’) or exercise their stock options. Managementelected to rollover options to purchase 298,341 shares of common stockat prices ranging from $0.62 to $2.25 per share. The Rollover Optionsare otherwise subject to the terms of the 2000 Plan, and, among otherthings, have a ten year expiration period and are subject totransferability restrictions and continuedemployment.

15

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**CPIInternational, Inc.**andSubsidiaries

NOTES TO CONDENSED CONSOLIDATEDFINANCIALSTATEMENTS , continued(unaudited)

A summary of the status of theCompany’s stock option activity for the quarter endingDecember  30,  2005, is presentedbelow:

|                                   |  |                          |         |                    |  |                               |         |        |  |        |         |        |  |  |
|-----------------------------------|--|--------------------------|---------|--------------------|--|-------------------------------|---------|--------|--|--------|---------|--------|--|--|
|                              |  | OptionsAvailableforGrant |         | OptionsOutstanding |  | Weighted-AverageExercisePrice |
| Outstanding at beginning ofperiod |  |                     | 61,540  |               |  |                          | 946,529 |   |  | $      | 9.58    |   |
| Granted                           |  |                     | — |               |  |                          | — |   |  |   | — |   |
| Forfeited                         |  |                     | — |               |  |                          | — |   |  |   | — |   |
| Exercised                         |  |                     | — |               |  |                          | — |   |  |   | — |   |
| Outstandingat end ofperiod        |  |                     | 61,540  |               |  |                          | 946,529 |   |  | $      | 9.58    |   |
|                                   |

Thefollowing table summarizes information about stock options outstandingat December  30,2005:

|               |  |                                         |         |                                                      |  |        |         |        |  |        |         |        |  |        |      |        |  |  |
|---------------|--|-----------------------------------------|---------|------------------------------------------------------|--|--------|---------|--------|--|--------|---------|--------|--|--------|------|--------|--|--|
| ExercisePrice |  |     Numberof Shares |         | Weighted-Average Remaining ContractualLife (inyears) |
| Vested        |  | Unvested                                |         | Total                                                |
| $0.62         |  |                                    | 230,372 |                                                 |  |   | — |   |  |   | 230,372 |   |  |   | 7.17 |   |
| $2.25         |  |                                    | 65,297  |                                                 |  |   | — |   |  |   | 65,297  |   |  |   | 4.59 |   |
| $3.30         |  |                                    | 2,642   |                                                 |  |   | — |   |  |   | 2,642   |   |  |   | 8.08 |   |
| $13.21        |  |                                    | 394,329 |                                                 |  |   | 226,079 |   |  |   | 620,408 |   |  |   | 8.24 |   |
| $20.21        |  |                                    | 17,810  |                                                 |  |   | — |   |  |   | 17,810  |   |  |   | 8.75 |   |
| $21.34        |  |                                    | 5,000   |                                                 |  |   | 5,000   |   |  |   | 10,000  |   |  |   | 9.22 |   |
|          |  |                                    | 715,450 |                                                 |  |   | 231,079 |   |  |   | 946,529 |   |  |   | 7.75 |   |
|               |

AtDecember  30,  2005, the intrinsic value of vested andunvested stock options based on the estimated fair value of CPIInternational's common stock was $24.2  million and$6.6  million, respectively.

6. Income Taxes

Incometax expense for the first quarter of fiscal year 2006 includes a$315,000 charge attributable to the fourth quarter of fiscal year 2005,consisting of $505,000 to correct the overstatement of tax benefitsrecorded in the fourth quarter of fiscal year 2005 for stock-basedcompensation expense that is not deductible for income tax purposes ina foreign tax jurisdiction, offset by reversal of a $190,000 taxcontingency reserve. The effective tax rates were approximately48% and 40% for the first quarter of fiscal years 2006and 2005, respectively.   Without the correction to theoverstatement of tax benefits, the Company's effective tax ratefor the first quarter of fiscal year 2006 would have been41%.

7. Net Income per share

Basic net income pershare is computed using the weighted-average number of common sharesoutstanding during the period. Diluted net income per share is computedusing the weighted-average number of common and dilutive potentialcommon equivalent shares outstanding during the period. Potentialcommon equivalent shares consist of common stock issuable upon exerciseof stock options using the treasury stock method.

16

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**CPIInternational, Inc.**andSubsidiaries

NOTES TO CONDENSED CONSOLIDATEDFINANCIALSTATEMENTS , continued(unaudited)

The following table is a reconciliationof the shares used to calculate basic and diluted net income pershare:

|                                           |  |                  |           |                   |  |        |           |        |  |  |
|-------------------------------------------|--|------------------|-----------|-------------------|--|--------|-----------|--------|--|--|
|                                      |  | QuarterEnded     |
|                                      |  | December30, 2005 |           | December 31, 2004 |
| Basicweighted average sharesoustanding    |  |             | 4,275,566 |              |  |   | 4,275,566 |   |
| Dilutivestockoptions                      |  |             | 555,575   |              |  |   | 213,714   |   |
| Dilutedweighted average sharesoutstanding |  |             | 4,831,141 |              |  |   | 4,489,280 |   |
|                                           |

TheCompany excludes stock options from the computation of diluted weightedaverage shares outstanding if the exercise price of the option isgreater than the average market price of the shares because theinclusion of these options would be antidilutive to earnings per share.Accordingly, options to purchase 17,810 shares, at a weighted averageexercise price of $20.21, were excluded from the computation of dilutedweighted average shares outstanding during the first quarter of fiscalyear 2005. For the first quarter fiscal year 2006, all stock optionsare dilutive.

8. Segments and Related Information

Inaccordance with SFAS No. 131, the Company has six divisions that meetthe criteria of an operating segment, and the Company has tworeportable segments: VED and satcom equipment. Amounts not reported asVED or satcom equipment are reported as other. The CEO evaluatesperformance and allocates resources to each of these divisions based onthe Company's principal performance measure, earnings beforeinterest, income taxes, depreciation and amortization(‘‘EBITDA’’).

Summarized financialinformation concerning the Company’s reportable segments isshown in the following table (in thousands):

|                                 |  |                  |         |                  |  |        |        |         |  |  |
|---------------------------------|--|------------------|---------|------------------|--|--------|--------|---------|--|--|
|                            |  | QuarterEnded     |
|                            |  | December30, 2005 |         | December 31,2004 |
| Revenues from externalcustomers |  |             |    |             |  |   |   |    |
| VEDs                            |  | $                | 63,196  |             |  | $      | 62,268 |    |
| Satcomequipment                 |  |             | 19,183  |             |  |   | 11,465 |    |
| Total                           |  | $                | 82,379  |             |  | $      | 73,733 |    |
| Intersegmentproducttransfers    |  |             |    |             |  |   |   |    |
| VEDs                            |  | $                | 6,208   |             |  | $      | 5,752  |    |
| Satcomequipment                 |  |             | — |             |  |   | 2      |    |
| Total                           |  | $                | 6,208   |             |  | $      | 5,754  |    |
| EBITDA                          |  |             |    |             |  |   |   |    |
| VEDs                            |  | $                | 16,065  |             |  | $      | 16,542 |    |
| Satcomequipment                 |  |             | 2,891   |             |  |   | 1,378  |    |
| Other                           |  |             | (6,441  | )           |  |   | (2,444 | )  |
| Total                           |  | $                | 12,515  |             |  | $      | 15,476 |    |
|                                 |

The‘‘Other’’ category for EBITDA consistsprimarily of corporate operating expenses and international subsidiarysales expenses. Corporate operating expenses include headquartersgeneral and administrative expenses, Merger expenses, stock-basedcompensation expenses, management 

17

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**CPIInternational, Inc.**andSubsidiaries

NOTES TO CONDENSED CONSOLIDATEDFINANCIALSTATEMENTS , continued(unaudited)

bonuses, and purchase accounting chargesrelated to the Merger and Econco acquisition and certain othernon-operating expenses. Intersegment product transfers are recorded atcost. The ‘‘Other’’ category of EBITDA forthe quarter ended December  30,  2005 includes a$3.25  million bonus to employees and directors and move relatedexpenses of $1.1  million associated with the relocation of theSan Carlos, California manufacturing division to Palo Alto, California.On December  15,  2005, CPI's Board of Directorsapproved a payment of $3.25  million in bonuses to CPI employeesand directors (other than directors who are employees or affiliates ofCypress), to reward them for the increase in Company value.

Forthe reasons listed below, we believe that GAAP-based financialinformation for highly leveraged businesses such as ours should besupplemented by EBITDA so that investors better understand ourfinancial performance in connection with their analysis of ourbusiness:

|  |              |                                                                                                                              |
|--|--------------|------------------------------------------------------------------------------------------------------------------------------|
|  | •  | EBITDA is a component of themeasure used by our board of directors and management team to evaluateour operating performance; |

|  |              |                                                                                                                                                                                                                                                |
|--|--------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | our SeniorCredit Facility contains covenants that require us to maintain certaininterest expense coverage and leverage ratios that contain EBITDA as acomponent, and our management team uses EBITDA to monitor compliancewith such covenants; |

|  |              |                                                                                                        |
|--|--------------|--------------------------------------------------------------------------------------------------------|
|  | •  | EBITDA is acomponent of the measure used by our management team to make day-to-dayoperating decisions; |

|  |              |                                                                                                                                                                                                                                                                                   |
|--|--------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | EBITDA facilitatescomparisons between our operating results and those of competitors withdifferent capital structures and therefore is a component of themeasure used by the management to facilitate internal comparisons tocompetitors' results and our industry in general;and |

|  |              |                                                                                                                                                                            |
|--|--------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | the payment of bonuses to certainmembers of management is contingent upon, among other things, thesatisfaction by us of certain targets that contain EBITDA as acomponent. |

Other companies may define EBITDA differently and, asa result, our measure of EBITDA may not be directly comparable toEBITDA of other companies. Although we use EBITDA as a financialmeasure to assess the performance of our business, the use of EBITDA islimited because it does not include certain material costs, such asinterest and taxes, necessary to operate our business. When analyzingour performance, EBITDA should be considered in addition to, and not asa substitute for, net income (loss), cash flows from operatingactivities or other statements of operations or statements of cashflows data prepared in accordance with GAAP. The following tablereconciles net income to EBITDA (inthousands):

|                             |  |                  |        |                   |  |        |        |        |  |  |
|-----------------------------|--|------------------|--------|-------------------|--|--------|--------|--------|--|--|
|                        |  | Quarterended     |
|                        |  | December30, 2005 |        | December 31, 2004 |
| Netincome                   |  | $                | 2,215  |              |  | $      | 3,098  |   |
| Depreciationandamortization |  |             | 2,156  |              |  |   | 6,219  |   |
| Interestexpense, net        |  |             | 6,064  |              |  |   | 4,080  |   |
| Income taxexpense           |  |             | 2,080  |              |  |   | 2,079  |   |
| EBITDA                      |  | $                | 12,515 |              |  | $      | 15,476 |   |
|                             |

18

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**CPIInternational, Inc.**andSubsidiaries

NOTES TO CONDENSED CONSOLIDATEDFINANCIALSTATEMENTS , continued(unaudited)

Geographic sales by customer locationwere as follows (inthousands):

|                      |  |                  |        |                   |  |        |        |        |  |  |
|----------------------|--|------------------|--------|-------------------|--|--------|--------|--------|--|--|
|                 |  | Quarterended     |
|                 |  | December30, 2005 |        | December 31, 2004 |
| UnitedStates         |  | $                | 51,000 |              |  | $      | 50,633 |   |
| All foreigncountries |  |             | 31,379 |              |  |   | 23,100 |   |
| Totalsales           |  | $                | 82,379 |              |  | $      | 73,733 |   |
|                      |

TheUnited States Government is the only customer that accounted for10% or more of the Company’s consolidated sales. Directsales to the United States Government were $12.7  million, and$13.6  million of the Company’s consolidated sales for thequarters ended December  30,  2005 and December31,  2004, respectively.

9. San Carlos SaleAgreement

The Company has entered into an agreement to sell theland and close its facilities located in San Carlos, California. Thepurchase price is $23.8  million. Under the sale agreement, thebuyer has paid the Company a $13.0  million deposit on thepurchase price, which the Company is using to fund the capitalexpenditures and costs of moving its San Carlos operations to its PaloAlto facility and to a new location in the Palo Alto area. The$13.0  million deposit is nonrefundable unless the Companybreaches the sale agreement. The San Carlos facility has preexistingsoil and groundwater contamination that has been the subject of someremediation and is expected to undergo additional remediation by thepurchaser after the sale closes. In connection with the sale agreement,the Company entered into an agreement regarding environmentalconditions at the property and was named as an additional insured on apollution liability insurance policy obtained by the purchaser that isintended to fund the remediation of the contamination of the San Carlosproperty to permit hospital and other‘‘unrestricted’’ uses under the directionof the applicable environmental regulatory agency.

The closingof the sale is subject to a number of conditions, including therequirement that the Company vacate its facilities and obtainregulatory closure of certain permitted equipment located on theproperty. Although there can be no assurance that the sale of the SanCarlos property will occur, the Company expects to close the sale ofthe property in fiscal year 2007.

Pursuant to the stock saleagreement by and between Varian Associates, Inc., the predecessor ofVarian Medical Systems, Inc. (‘‘Varian’’),and the Company dated June  9,  1995, as amended, theCompany had agreed to certain development restrictions affecting theSan Carlos property. In connection with the San Carlos property saleagreement, Varian agreed to waive certain of the developmentrestrictions on the San Carlos property in the event that the salecloses, subject to certain conditions, and further agreed to pay theCompany $1.0  million, of which $0.5  million was paid asof December  30,  2005. The payments from Varian are beingaccounted for as part of the sale of the property, with the aggregatesales price, including the $23.8  million from the buyer,totaling $24.8  million. In addition, the Company has agreed torelieve Varian of certain of its indemnity obligations to the Companyfor certain environmental liabilities related to the San Carlosproperty relating to periods prior to August  1995 and toreimburse Varian for certain potential environmental costs related tothe San Carlos property that are not covered by insurance. The Companyand Varian have also agreed to certain use restrictions andenvironmental cost-sharing provisions related to the Company’sproperty in Beverly, Massachusetts, and the Company has relinquishedits right to redevelop that property for residential or similaruse.

19

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**CPIInternational, Inc.**andSubsidiaries

NOTES TO CONDENSED CONSOLIDATEDFINANCIALSTATEMENTS , continued(unaudited)

As of December  30,  2005,the San Carlos land and building was classified as held for use inproperty, plant and equipment and the advance payments from the sale ofthe property, aggregating $13.5  million, are classified as along-term liability in the accompanying Condensed Consolidated BalanceSheets. As of December  30,  2005, the Company had deferredexpenses of $0.7  million relating to the sale of the San Carlosproperty and classified these amounts as other long-term assets in theaccompanying Condensed Consolidated Balance Sheets. The San Carlos landand building had a net book value of $23.6  million as ofDecember  30,  2005 and the building continues to bedepreciated over its remaining useful life. Based on currentprojections of costs, the Company does not expect to recognize a losson the sale of the San Carlos property.

10. EconcoAcquisition

On October  8,  2004, the Companypurchased all of the outstanding stock of Econco Broadcast Service,Inc. (‘‘Econco’’) of Woodland, Californiafor cash consideration of approximately $18.3  million. Thepreliminary Econco purchase price estimate of $18.7  million wasfinalized and adjusted in our financial results in the third quarter offiscal year 2005. Econco is a provider of rebuilding service for VEDs,allowing broadcasters and other users of these critical products toextend the life of their devices at a cost that is lower than buying anew VED.

The Econco acquisition was accounted for using thepurchase method of accounting as required by Financial AccountingStandards Board (‘‘FASB’’) Statement No.141, ‘‘Business Combinations.’’ Accordingly, the assets and liabilities of Econco were adjustedto their fair values, and the excess of the purchase price over thefair value of the assets acquired was recorded as goodwill. Theallocation of the purchase price to specific assets and liabilities wasbased, in part, upon internal estimates of cash flow andrecoverability.

The following table summarizes the finalallocation of fair value of the Econco assets acquired and liabilitiesassumed at October  8,  2004 (inthousands):

|                               |  |        |        |        |  |  |
|-------------------------------|--|--------|--------|--------|--|--|
| Netcurrent assets             |  | $      | 2,049  |   |
| Property, plant andequipment  |  |   | 3,239  |   |
| Identifiable intangibleassets |  |   | 7,210  |   |
| Goodwill                      |  |   | 5,848  |   |
| Total                         |  | $      | 18,346 |   |
|                               |

Netcurrent assets include $0.4  million for the revaluation ofinventory. The following table presents details of the purchasedintangible assets acquired (inthousands):

|                           |  |                                   |  |        |       |        |  |  |  |  |
|---------------------------|--|-----------------------------------|--|--------|-------|--------|--|--|--|--|
|                      |  | Weighted−AverageUseful Life |  | Amount |
| Non-competeagreement      |  | 5years                            |  | $      | 110   |   |
| Tradename                 |  | indefinite                        |  |   | 1,400 |   |
| Customerlist and programs |  | 25years                           |  |   | 5,700 |   |
| Total                     |  |                              |  | $      | 7,210 |   |
|                           |

11.Special Cash Dividends

In December  2005, the Board ofDirectors declared and paid a special cash dividend to stockholders of$17  million. This dividend was paid using (a) the $10million in net proceeds obtained from the additional borrowing underthe Senior Credit Facility in connection with the December  2005

20

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**CPIInternational, Inc.**andSubsidiaries

NOTES TO CONDENSED CONSOLIDATEDFINANCIALSTATEMENTS , continued(unaudited)

amendment thereto, and (b) available cash.The cash dividend was made on the basis of the stockholders’relative ownership of CPI International’s outstanding commonstock.

12. Recent Accounting Pronouncements

InNovember  2004, the FASB issued SFAS No. 151,‘‘Inventory Costs — an amendment of ARB No. 43,Chapter 4’’, which is the result of the FASB’sproject to reduce differences between U.S. and international accountingstandards. SFAS No. 151 requires idle facility costs, abnormal freight,handling costs, and amounts of wasted materials (spoilage) to betreated as current-period costs. Under this concept, if the costsassociated with the actual level of spoilage or production defects aregreater than the costs associated with the range of normal spoilage ordefects, then the difference would be charged to current-periodexpense, and not included in inventory costs. We adopted SFAS No. 151in the beginning of fiscal year 2006 and its adoption did not have asignificant impact on our results of operations or financialcondition.

In March  2005, the FASB issued InterpretationNo. 47, ‘‘Accounting for Conditional Asset RetirementObligations,’’ which clarifies that an entity is requiredto recognize a liability for the fair value of a conditional assetretirement obligation if the fair value can be reasonably estimatedeven though uncertainty exists about the timing and (or) method ofsettlement. We are required to adopt Interpretation No. 47 by the endof fiscal year 2006. We do not expect the implementation ofInterpretation No. 47 to have a significant impact on our results ofoperations or financial condition.

In May  2005, the FASBissued SFAS No. 154, ‘‘Accounting Changes and ErrorCorrections.’’ SFAS No. 154 replaces APB Opinion No. 20,‘‘Accounting Changes,’’ and SFAS No. 3,‘‘Reporting Accounting Changes in Interim FinancialStatement,’’ and changes the requirements for theaccounting for and reporting of a change in accounting principle. Weare required to adopt SFAS No. 154 for accounting changes and errorcorrections in fiscal year 2007. Our results of operations andfinancial condition will only be impacted by SFAS No. 154 if weimplement changes in accounting principle that are addressed by thestandard or correct accounting errors in future periods.

13.Supplemental Guarantors Condensed Consolidating Financial Information(Unaudited)

On January  23,  2004, CPI issued$125.0  million of 8% Notes that are guaranteed by CPIInternational and all of CPI's domestic subsidiaries. Separatefinancial statements of the guarantors are not presented because (i)the guarantors are wholly-owned and have fully and unconditionallyguaranteed the 8% Notes on a joint and several basis, and (ii)the Company’s management has determined that such separatefinancial statements are not material to investors. Instead, presentedbelow are the consolidating condensed financial statements of: (a) theparent, CPI International, (b) the issuer, CPI, (c) the guarantorsubsidiaries, our domestic subsidiaries (d) the non-guarantorsubsidiaries, (e) the consolidating elimination entries, and (f) theconsolidated total. The accompanying condensed consolidating financialstatements should be read in connection with the condensed consolidatedfinancial statements of CPI International.

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

21

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CPIInternational, Inc.and Subsidiaries

NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued(unaudited)

CONDENSED CONSOLIDATINGBALANCE SHEETAs of December 30, 2005(inthousands)

|                                                 |  |        |         |        |  |                       |         |                           |  |                           |         |                   |  |        |         |        |  |        |          |         |  |        |         |        |  |  |
|-------------------------------------------------|--|--------|---------|--------|--|-----------------------|---------|---------------------------|--|---------------------------|---------|-------------------|--|--------|---------|--------|--|--------|----------|---------|--|--------|---------|--------|--|--|
|                                            |  | Parent |         | Issuer |  | GuarantorSubsidiaries |         | Non-GuarantorSubsidiaries |  | ConsolidatingEliminations |         | ConsolidatedTotal |
| **Assets**                                      |  |   |    |   |  |                  |    |                      |  |                      |    |              |  |   |    |   |  |   |     |    |  |   |    |   |
| Cashand cashequivalents                         |  | $      | 2       |   |  |                  | 11,564  |                      |  |                      | 515     |              |  |   | 4,680   |   |  |   | —  |    |  |   | 16,761  |   |
| Restrictedcash                                  |  |   | — |   |  |                  | — |                      |  |                      | 941     |              |  |   | 103     |   |  |   | —  |    |  |   | 1,044   |   |
| Accountsreceivable,net                          |  |   | — |   |  |                  | 22,379  |                      |  |                      | 6,335   |              |  |   | 12,895  |   |  |   | —  |    |  |   | 41,609  |   |
| Inventories                                     |  |   | — |   |  |                  | 33,149  |                      |  |                      | 2,028   |              |  |   | 16,062  |   |  |   | (1,102   | )  |  |   | 50,137  |   |
| Deferredtaxassets                               |  |   | — |   |  |                  | 12,948  |                      |  |                      | 7       |              |  |   | 35      |   |  |   | —  |    |  |   | 12,990  |   |
| Intercompanyreceivable                          |  |   | — |   |  |                  | 29,892  |                      |  |                      | 1,383   |              |  |   | — |   |  |   | (31,275  | )  |  |   | — |   |
| Prepaidand other currentassets                  |  |   | 499     |   |  |                  | 2,090   |                      |  |                      | 100     |              |  |   | 765     |   |  |   | —  |    |  |   | 3,454   |   |
| Totalcurrentassets                              |  |   | 501     |   |  |                  | 112,022 |                      |  |                      | 11,309  |              |  |   | 34,540  |   |  |   | (32,377  | )  |  |   | 125,995 |   |
| Property,plant and equipment,net                |  |   | — |   |  |                  | 73,899  |                      |  |                      | 3,113   |              |  |   | 7,946   |   |  |   | —  |    |  |   | 84,958  |   |
| Deferreddebt issue costs,net                    |  |   | 3,270   |   |  |                  | 7,434   |                      |  |                      | — |              |  |   | — |   |  |   | —  |    |  |   | 10,704  |   |
| Intangibleassets,net                            |  |   | — |   |  |                  | 61,100  |                      |  |                      | 6,902   |              |  |   | 9,325   |   |  |   | —  |    |  |   | 77,327  |   |
| Goodwill                                        |  |   | — |   |  |                  | 92,041  |                      |  |                      | 5,848   |              |  |   | 47,573  |   |  |   | —  |    |  |   | 145,462 |   |
| Otherlong-termassets                            |  |   | 1,937   |   |  |                  | 1,041   |                      |  |                      | — |              |  |   | — |   |  |   | —  |    |  |   | 2,978   |   |
| Intercompanynotesreceivable                     |  |   | — |   |  |                  | 1,035   |                      |  |                      | — |              |  |   | — |   |  |   | (1,035   | )  |  |   | — |   |
| Investmentinsubsidiaries                        |  |   | 143,780 |   |  |                  | 51,676  |                      |  |                      | — |              |  |   | — |   |  |   | (195,456 | )  |  |   | — |   |
| Totalassets                                     |  | $      | 149,488 |   |  |                  | 400,248 |                      |  |                      | 27,172  |              |  |   | 99,384  |   |  |   | (228,868 | )  |  |   | 447,424 |   |
| **Liabilitiesand stockholders'equity**          |  |   |    |   |  |                  |    |                      |  |                      |    |              |  |   |    |   |  |   |     |    |  |   |    |   |
| Accountspayable                                 |  | $      | — |   |  |                  | 8,391   |                      |  |                      | 349     |              |  |   | 8,292   |   |  |   | —  |    |  |   | 17,032  |   |
| Accruedexpenses                                 |  |   | 3,648   |   |  |                  | 23,744  |                      |  |                      | 1,192   |              |  |   | 4,713   |   |  |   | (10      | )  |  |   | 33,287  |   |
| Productwarranty                                 |  |   | — |   |  |                  | 3,651   |                      |  |                      | 164     |              |  |   | 2,375   |   |  |   | —  |    |  |   | 6,190   |   |
| Incometaxespayable                              |  |   | — |   |  |                  | 2,021   |                      |  |                      | 57      |              |  |   | 1,666   |   |  |   | —  |    |  |   | 3,744   |   |
| Advancepayments fromcustomers                   |  |   | — |   |  |                  | 4,599   |                      |  |                      | 1,953   |              |  |   | 1,805   |   |  |   | —  |    |  |   | 8,357   |   |
| Intercompanypayable                             |  |   | 27,372  |   |  |                  | — |                      |  |                      | — |              |  |   | 3,893   |   |  |   | (31,265  | )  |  |   | — |   |
| Totalcurrentliabilities                         |  |   | 31,020  |   |  |                  | 42,406  |                      |  |                      | 3,715   |              |  |   | 22,744  |   |  |   | (31,275  | )  |  |   | 68,610  |   |
| Deferredincometaxes                             |  |   | 422     |   |  |                  | 25,999  |                      |  |                      | — |              |  |   | 6,999   |   |  |   | —  |    |  |   | 33,420  |   |
| Intercompanynotespayable                        |  |   | — |   |  |                  | — |                      |  |                      | — |              |  |   | 1,035   |   |  |   | (1,035   | )  |  |   | — |   |
| Advancepayments from sale of San Carlosproperty |  |   | — |   |  |                  | 13,450  |                      |  |                      | — |              |  |   | — |   |  |   | —  |    |  |   | 13,450  |   |
| Long-termdebt                                   |  |   | 79,244  |   |  |                  | 215,000 |                      |  |                      | — |              |  |   | — |   |  |   | —  |    |  |   | 294,244 |   |
| Totalliabilities                                |  |   | 110,686 |   |  |                  | 296,855 |                      |  |                      | 3,715   |              |  |   | 30,778  |   |  |   | (32,310  | )  |  |   | 409,724 |   |
| Commonstock                                     |  |   | 43      |   |  |                  | — |                      |  |                      | — |              |  |   | — |   |  |   | —  |    |  |   | 43      |   |
| Parentinvestment                                |  |   | — |   |  |                  | 78,180  |                      |  |                      | 22,228  |              |  |   | 57,216  |   |  |   | (157,624 | )  |  |   | — |   |
| Additionalpaid-incapital                        |  |   | 17,684  |   |  |                  | — |                      |  |                      | — |              |  |   | — |   |  |   | —  |    |  |   | 17,684  |   |
| Othercomprehensiveincome                        |  |   | 1,438   |   |  |                  | 804     |                      |  |                      | — |              |  |   | 584     |   |  |   | (1,388   | )  |  |   | 1,438   |   |
| Retainedearnings                                |  |   | 19,637  |   |  |                  | 24,409  |                      |  |                      | 1,229   |              |  |   | 10,806  |   |  |   | (37,546  | )  |  |   | 18,535  |   |
| Netstockholders’equity                    |  |   | 38,802  |   |  |                  | 103,393 |                      |  |                      | 23,457  |              |  |   | 68,606  |   |  |   | (196,558 | )  |  |   | 37,700  |   |
| Totalliabilities and stockholders'equity        |  | $      | 149,488 |   |  |                  | 400,248 |                      |  |                      | 27,172  |              |  |   | 99,384  |   |  |   | (228,868 | )  |  |   | 447,424 |   |
|                                                 |

22

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CPIInternational, Inc.and Subsidiaries

NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued(unaudited)

CONDENSED CONSOLIDATING BALANCESHEETAs of September 30, 2005(in thousands)

|                                                 |  |        |         |        |  |                       |         |                           |  |                           |         |                    |  |        |         |        |  |        |          |         |  |        |         |        |  |  |
|-------------------------------------------------|--|--------|---------|--------|--|-----------------------|---------|---------------------------|--|---------------------------|---------|--------------------|--|--------|---------|--------|--|--------|----------|---------|--|--------|---------|--------|--|--|
|                                            |  | Parent |         | Issuer |  | GuarantorSubsidiaries |         | Non-GuarantorSubsidiaries |  | ConsolidatingEliminations |         | Consolidated Total |
| **Assets**                                      |  |   |    |   |  |                  |    |                      |  |                      |    |               |  |   |    |   |  |   |     |    |  |   |    |   |
| Cashand cashequivalents                         |  | $      | 33      |   |  |                  | 25,528  |                      |  |                      | 323     |               |  |   | 627     |   |  |   | —  |    |  |   | 26,511  |   |
| Restrictedcash                                  |  |   | — |   |  |                  | — |                      |  |                      | 1,180   |               |  |   | 107     |   |  |   | —  |    |  |   | 1,287   |   |
| Accountsreceivable,net                          |  |   | — |   |  |                  | 21,982  |                      |  |                      | 5,531   |               |  |   | 11,782  |   |  |   | —  |    |  |   | 39,295  |   |
| Inventories                                     |  |   | — |   |  |                  | 33,746  |                      |  |                      | 2,135   |               |  |   | 15,755  |   |  |   | (1,016   | )  |  |   | 50,620  |   |
| Deferredtaxassets                               |  |   | — |   |  |                  | 12,339  |                      |  |                      | 7       |               |  |   | — |   |  |   | —  |    |  |   | 12,346  |   |
| Intercompanyreceivable                          |  |   | — |   |  |                  | 17,849  |                      |  |                      | 2,278   |               |  |   | 8,064   |   |  |   | (28,191  | )  |  |   | — |   |
| Prepaidand other currentassets                  |  |   | 165     |   |  |                  | 3,930   |                      |  |                      | 127     |               |  |   | 791     |   |  |   | (1,032   | )  |  |   | 3,981   |   |
| Totalcurrentassets                              |  |   | 198     |   |  |                  | 115,374 |                      |  |                      | 11,581  |               |  |   | 37,126  |   |  |   | (30,239  | )  |  |   | 134,040 |   |
| Property,plant and equipment,net                |  |   | — |   |  |                  | 72,462  |                      |  |                      | 3,166   |               |  |   | 7,996   |   |  |   | —  |    |  |   | 83,624  |   |
| Deferreddebt issue costs,net                    |  |   | 3,326   |   |  |                  | 7,735   |                      |  |                      | — |               |  |   | — |   |  |   | —  |    |  |   | 11,061  |   |
| Intangibleassets,net                            |  |   | — |   |  |                  | 61,500  |                      |  |                      | 6,965   |               |  |   | 9,476   |   |  |   | —  |    |  |   | 77,941  |   |
| Goodwill                                        |  |   | — |   |  |                  | 92,041  |                      |  |                      | 5,848   |               |  |   | 47,573  |   |  |   | —  |    |  |   | 145,462 |   |
| Otherlong-termassets                            |  |   | 1,515   |   |  |                  | 901     |                      |  |                      | — |               |  |   | — |   |  |   | —  |    |  |   | 2,416   |   |
| Intercompanynotesreceivable                     |  |   | — |   |  |                  | 7,635   |                      |  |                      | — |               |  |   | — |   |  |   | (7,635   | )  |  |   | — |   |
| Investmentinsubsidiaries                        |  |   | 157,658 |   |  |                  | 49,587  |                      |  |                      | — |               |  |   | — |   |  |   | (207,245 | )  |  |   | — |   |
| Totalassets                                     |  | $      | 162,697 |   |  |                  | 407,235 |                      |  |                      | 27,560  |               |  |   | 102,171 |   |  |   | (245,119 | )  |  |   | 454,544 |   |
| **Liabilitiesand stockholders'equity**          |  |   |    |   |  |                  |    |                      |  |                      |    |               |  |   |    |   |  |   |     |    |  |   |    |   |
| Accountspayable                                 |  | $      | — |   |  |                  | 13,223  |                      |  |                      | 368     |               |  |   | 7,830   |   |  |   | —  |    |  |   | 21,421  |   |
| Accruedexpenses                                 |  |   | 1,320   |   |  |                  | 21,610  |                      |  |                      | 1,078   |               |  |   | 3,239   |   |  |   | —  |    |  |   | 27,247  |   |
| Productwarranty                                 |  |   | — |   |  |                  | 3,698   |                      |  |                      | 164     |               |  |   | 2,497   |   |  |   | —  |    |  |   | 6,359   |   |
| Incometaxespayable                              |  |   | — |   |  |                  | — |                      |  |                      | 11      |               |  |   | 2,567   |   |  |   | (1,032   | )  |  |   | 1,546   |   |
| Advancepayments fromcustomers                   |  |   | — |   |  |                  | 4,744   |                      |  |                      | 1,834   |               |  |   | 5,489   |   |  |   | —  |    |  |   | 12,067  |   |
| Intercompanypayable                             |  |   | 28,191  |   |  |                  | — |                      |  |                      | — |               |  |   | — |   |  |   | (28,191  | )  |  |   | — |   |
| Totalcurrentliabilities                         |  |   | 29,511  |   |  |                  | 43,275  |                      |  |                      | 3,455   |               |  |   | 21,622  |   |  |   | (29,223  | )  |  |   | 68,640  |   |
| Deferredincometaxes                             |  |   | 272     |   |  |                  | 28,240  |                      |  |                      | — |               |  |   | 7,044   |   |  |   | —  |    |  |   | 35,556  |   |
| Intercompanynotespayable                        |  |   | — |   |  |                  | — |                      |  |                      | — |               |  |   | 7,635   |   |  |   | (7,635   | )  |  |   | — |   |
| Advancepayments from sale of San Carlosproperty |  |   |    |   |  |                  | 13,450  |                      |  |                      |    |               |  |   |    |   |  |   |     |    |  |   | 13,450  |   |
| Long-termdebt                                   |  |   | 79,231  |   |  |                  | 205,000 |                      |  |                      | — |               |  |   | — |   |  |   | —  |    |  |   | 284,231 |   |
| Totalliabilities                                |  |   | 109,014 |   |  |                  | 289,965 |                      |  |                      | 3,455   |               |  |   | 36,301  |   |  |   | (36,858  | )  |  |   | 401,877 |   |
| Commonstock                                     |  |   | 43      |   |  |                  | — |                      |  |                      | — |               |  |   | — |   |  |   | —  |    |  |   | 43      |   |
| Parentinvestment                                |  |   | — |   |  |                  | 95,179  |                      |  |                      | 22,228  |               |  |   | 57,216  |   |  |   | (174,623 | )  |  |   | — |   |
| Additionalpaid-incapital                        |  |   | 34,683  |   |  |                  | — |                      |  |                      | — |               |  |   | — |   |  |   | —  |    |  |   | 34,683  |   |
| Othercomprehensiveincome                        |  |   | 1,621   |   |  |                  | 1,213   |                      |  |                      | — |               |  |   | 360     |   |  |   | (1,573   | )  |  |   | 1,621   |   |
| Retainedearnings                                |  |   | 17,336  |   |  |                  | 20,878  |                      |  |                      | 1,877   |               |  |   | 8,294   |   |  |   | (32,065  | )  |  |   | 16,320  |   |
| Netstockholders’equity                    |  |   | 53,683  |   |  |                  | 117,270 |                      |  |                      | 24,105  |               |  |   | 65,870  |   |  |   | (208,261 | )  |  |   | 52,667  |   |
| Totalliabilities and stockholders'equity        |  | $      | 162,697 |   |  |                  | 407,235 |                      |  |                      | 27,560  |               |  |   | 102,171 |   |  |   | (245,119 | )  |  |   | 454,544 |   |
|                                                 |

23

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CPIInternational, Inc.and Subsidiaries

NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued(unaudited)

CONDENSED CONSOLIDATING STATEMENT OFOPERATIONS For the Quarter Ended December 30, 2005(inthousands — unaudited)

|                                                                            |  |        |         |         |  |                       |        |                           |  |                           |         |                   |  |        |         |        |  |        |         |         |  |        |         |        |  |  |
|----------------------------------------------------------------------------|--|--------|---------|---------|--|-----------------------|--------|---------------------------|--|---------------------------|---------|-------------------|--|--------|---------|--------|--|--------|---------|---------|--|--------|---------|--------|--|--|
|                                                                       |  | Parent |         | Issuer  |  | GuarantorSubsidiaries |        | Non-GuarantorSubsidiaries |  | ConsolidatingEliminations |         | ConsolidatedTotal |
| Sales                                                                      |  | $      | — |    |  |                  | 52,004 |                      |  |                      | 12,942  |              |  |   | 34,808  |   |  |   | (17,375 | )  |  |   | 82,379  |   |
| Costof sales                                                               |  |   | — |    |  |                  | 38,289 |                      |  |                      | 10,702  |              |  |   | 25,469  |   |  |   | (17,289 | )  |  |   | 57,171  |   |
| Grossprofit                                                                |  |   | — |    |  |                  | 13,715 |                      |  |                      | 2,240   |              |  |   | 9,339   |   |  |   | (86     | )  |  |   | 25,208  |   |
| Operatingcosts andexpenses:                                                |  |   |    |    |  |                  |   |                      |  |                      |    |              |  |   |    |   |  |   |    |    |  |   |    |   |
| Researchand development                                                    |  |   | — |    |  |                  | 844    |                      |  |                      | — |              |  |   | 1,066   |   |  |   | — |    |  |   | 1,910   |   |
| Sellingand marketing                                                       |  |   | — |    |  |                  | 2,165  |                      |  |                      | 869     |              |  |   | 1,990   |   |  |   | — |    |  |   | 5,024   |   |
| Generaland administrative                                                  |  |   | — |    |  |                  | 4,786  |                      |  |                      | 299     |              |  |   | 2,217   |   |  |   | — |    |  |   | 7,302   |   |
| Amortizationof acquisition-related intangible assets                       |  |   | — |    |  |                  | 334    |                      |  |                      | 63      |              |  |   | 151     |   |  |   | — |    |  |   | 548     |   |
| Netloss on disposition of assets                                           |  |   | — |    |  |                  | 29     |                      |  |                      | — |              |  |   | 36      |   |  |   | — |    |  |   | 65      |   |
| Totaloperating costs and expenses                                          |  |   | — |    |  |                  | 8,158  |                      |  |                      | 1,231   |              |  |   | 5,460   |   |  |   | — |    |  |   | 14,849  |   |
| Operatingincome                                                            |  |   | — |    |  |                  | 5,557  |                      |  |                      | 1,009   |              |  |   | 3,879   |   |  |   | (86     | )  |  |   | 10,359  |   |
| Interestexpense (income), net                                              |  |   | 2,048   |    |  |                  | 4,007  |                      |  |                      | (5      | )            |  |   | 14      |   |  |   | — |    |  |   | 6,064   |   |
| (Loss)income before income tax expenseand equity in income of subsidiaries |  |   | (2,048  | )  |  |                  | 1,550  |                      |  |                      | 1,014   |              |  |   | 3,865   |   |  |   | (86     | )  |  |   | 4,295   |   |
| Incometax (benefit) expense                                                |  |   | (819    | )  |  |                  | 1,240  |                      |  |                      | 306     |              |  |   | 1,353   |   |  |   | — |    |  |   | 2,080   |   |
| Equityin income of subsidiaries                                            |  |   | 3,444   |    |  |                  | 3,220  |                      |  |                      | — |              |  |   | — |   |  |   | (6,664  | )  |  |   | — |   |
| Netincome                                                                  |  | $      | 2,215   |    |  |                  | 3,530  |                      |  |                      | 708     |              |  |   | 2,512   |   |  |   | (6,750  | )  |  |   | 2,215   |   |
|                                                                            |

CONDENSEDCONSOLIDATING STATEMENT OF OPERATIONS For the Quarter EndedDecember 31, 2004(in thousands — unaudited)

|                                                                    |  |        |         |        |  |                        |        |                           |  |                           |         |                    |  |        |         |         |  |        |         |         |  |        |         |        |  |  |
|--------------------------------------------------------------------|--|--------|---------|--------|--|------------------------|--------|---------------------------|--|---------------------------|---------|--------------------|--|--------|---------|---------|--|--------|---------|---------|--|--------|---------|--------|--|--|
|                                                               |  | Parent |         | Issuer |  | Guarantor Subsidiaries |        | Non-GuarantorSubsidiaries |  | ConsolidatingEliminations |         | Consolidated Total |
| Sales                                                              |  | $      | — |   |  |                   | 54,133 |                      |  |                      | 9,573   |               |  |   | 25,110  |    |  |   | (15,083 | )  |  |   | 73,733  |   |
| Costof sales                                                       |  |   | — |   |  |                   | 38,119 |                      |  |                      | 8,069   |               |  |   | 18,924  |    |  |   | (15,083 | )  |  |   | 50,029  |   |
| Grossprofit                                                        |  |   | — |   |  |                   | 16,014 |                      |  |                      | 1,504   |               |  |   | 6,186   |    |  |   | — |    |  |   | 23,704  |   |
| Operatingcosts andexpenses:                                        |  |   |    |   |  |                   |   |                      |  |                      |    |               |  |   |    |    |  |   |    |    |  |   |    |   |
| Researchand development                                            |  |   | — |   |  |                   | 418    |                      |  |                      | — |               |  |   | 1,030   |    |  |   | — |    |  |   | 1,448   |   |
| Sellingand marketing                                               |  |   | — |   |  |                   | 1,722  |                      |  |                      | 832     |               |  |   | 1,514   |    |  |   | — |    |  |   | 4,068   |   |
| Generaland administrative                                          |  |   | — |   |  |                   | 2,777  |                      |  |                      | 270     |               |  |   | 922     |    |  |   | — |    |  |   | 3,969   |   |
| Amortizationof acquisition-relatedintangible assets                |  |   | — |   |  |                   | 4,242  |                      |  |                      | 58      |               |  |   | 606     |    |  |   | — |    |  |   | 4,906   |   |
| Netloss on disposition of assets                                   |  |   | — |   |  |                   | 56     |                      |  |                      | — |               |  |   | — |    |  |   | — |    |  |   | 56      |   |
| Totaloperating costs and expenses                                  |  |   | — |   |  |                   | 9,215  |                      |  |                      | 1,160   |               |  |   | 4,072   |    |  |   | — |    |  |   | 14,447  |   |
| Operatingincome                                                    |  |   | — |   |  |                   | 6,799  |                      |  |                      | 344     |               |  |   | 2,114   |    |  |   | — |    |  |   | 9,257   |   |
| Interestexpense (income), net                                      |  |   | — |   |  |                   | 3,770  |                      |  |                      | (5      | )             |  |   | 315     |    |  |   | — |    |  |   | 4,080   |   |
| Incomebefore income tax expense and equity in loss of subsidiaries |  |   | — |   |  |                   | 3,029  |                      |  |                      | 349     |               |  |   | 1,799   |    |  |   | — |    |  |   | 5,177   |   |
| Incometax expense (benefit)                                        |  |   | — |   |  |                   | 2,202  |                      |  |                      | — |               |  |   | (123    | )  |  |   | — |    |  |   | 2,079   |   |
| Equityin income of subsidiaries                                    |  |   | 3,098   |   |  |                   | 2,271  |                      |  |                      | — |               |  |   | — |    |  |   | (5,369  | )  |  |   | — |   |
| Netincome                                                          |  | $      | 3,098   |   |  |                   | 3,098  |                      |  |                      | 349     |               |  |   | 1,922   |    |  |   | (5,369  | )  |  |   | 3,098   |   |
|                                                                    |

24

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CPIInternational, Inc.and Subsidiaries

NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, continued(unaudited)

CONDENSED CONSOLIDATING STATEMENT OF CASHFLOWSFor the Quarter Ended December 30, 2005(in thousands—unaudited)

|                                                        |  |        |         |         |  |                       |         |                           |  |                           |         |                   |  |        |         |         |  |        |                                 |        |  |        |         |         |  |  |
|--------------------------------------------------------|--|--------|---------|---------|--|-----------------------|---------|---------------------------|--|---------------------------|---------|-------------------|--|--------|---------|---------|--|--------|---------------------------------|--------|--|--------|---------|---------|--|--|
|                                                   |  | Parent |         | Issuer  |  | GuarantorSubsidiaries |         | Non-GuarantorSubsidiaries |  | ConsolidatingEliminations |         | ConsolidatedTotal |
| **OperatingActivities**                                |  |   |    |    |  |                  |    |                      |  |                      |    |              |  |   |    |    |  |   |                            |   |  |   |    |    |
| Netcash (used in) provided by operatingactivities      |  | $      | (31     | )  |  |                  | (4,181  | )                    |  |                      | 217     |              |  |   | 4,193   |    |  |   |     — |   |  |   | 198     |    |
| **InvestingActivities**                                |  |   |    |    |  |                  |    |                      |  |                      |    |              |  |   |    |    |  |   |                            |   |  |   |    |    |
| Expensesrelating to sale of San CarlosProperty         |  |   | — |    |  |                  | (3      | )                    |  |                      | — |              |  |   | — |    |  |   | —                         |   |  |   | (3      | )  |
| Capitalexpenditures                                    |  |   | — |    |  |                  | (2,780  | )                    |  |                      | (25     | )            |  |   | (140    | )  |  |   | —                         |   |  |   | (2,945  | )  |
| Netcash used in investingactivities                    |  |   | — |    |  |                  | (2,783  | )                    |  |                      | (25     | )            |  |   | (140    | )  |  |   | —                         |   |  |   | (2,948  | )  |
| **FinancingActivities**                                |  |   |    |    |  |                  |    |                      |  |                      |    |              |  |   |    |    |  |   |                            |   |  |   |    |    |
| Proceedsfrom senior termloan                           |  |   | — |    |  |                  | 10,000  |                      |  |                      | — |              |  |   | — |    |  |   | —                         |   |  |   | 10,000  |    |
| Specialcashdividend                                    |  |   | (17,000 | )  |  |                  | — |                      |  |                      | — |              |  |   | — |    |  |   | —                         |   |  |   | (17,000 | )  |
| Intercompanydividends                                  |  |   | 17,000  |    |  |                  | (17,000 | )                    |  |                      | — |              |  |   | — |    |  |   | —                         |   |  |   | — |    |
| Netcash used in financingactivities                    |  |   | — |    |  |                  | (7,000  | )                    |  |                      | — |              |  |   | — |    |  |   | —                         |   |  |   | (7,000  | )  |
| **Net(Decrease) Increase in Cash and CashEquivalents** |  |   | (31     | )  |  |                  | (13,964 | )                    |  |                      | 192     |              |  |   | 4,053   |    |  |   | —                         |   |  |   | (9,750  | )  |
| Cashand cash equivalents at beginning ofperiod         |  |   | 33      |    |  |                  | 25,528  |                      |  |                      | 323     |              |  |   | 627     |    |  |   | —                         |   |  |   | 26,511  |    |
| Cashand cash equivalents at end ofperiod               |  | $      | 2       |    |  |                  | 11,564  |                      |  |                      | 515     |              |  |   | 4,680   |    |  |   | —                         |   |  |   | 16,761  |    |
|                                                        |

CONDENSEDCONSOLIDATING STATEMENT OF CASH FLOWSFor the Quarter EndedDecember 31, 2004(in thousands —unaudited)

|                                                        |  |        |                                 |        |  |                       |         |                           |  |                           |         |                   |  |        |         |         |  |        |                                 |        |  |        |         |         |  |  |
|--------------------------------------------------------|--|--------|---------------------------------|--------|--|-----------------------|---------|---------------------------|--|---------------------------|---------|-------------------|--|--------|---------|---------|--|--------|---------------------------------|--------|--|--------|---------|---------|--|--|
|                                                   |  | Parent |                                 | Issuer |  | GuarantorSubsidiaries |         | Non-GuarantorSubsidiaries |  | ConsolidatingEliminations |         | ConsolidatedTotal |
| **OperatingActivities**                                |  |   |                            |   |  |                  |    |                      |  |                      |    |              |  |   |    |    |  |   |                            |   |  |   |    |    |
| Netcash provided by operatingactivities                |  | $      |     — |   |  |                  | 7,609   |                      |  |                      | 864     |              |  |   | 1,760   |    |  |   |     — |   |  |   | 10,233  |    |
| **InvestingActivities**                                |  |   |                            |   |  |                  |    |                      |  |                      |    |              |  |   |    |    |  |   |                            |   |  |   |    |    |
| Expensesrelating to sale of San Carlosproperty         |  |   | —                         |   |  |                  | (8      | )                    |  |                      | — |              |  |   | — |    |  |   | —                         |   |  |   | (8      | )  |
| Purchaseof Econco, net of cashacquired                 |  |   | —                         |   |  |                  | (18,685 | )                    |  |                      | — |              |  |   | — |    |  |   | —                         |   |  |   | (18,685 | )  |
| Capitalexpenditures                                    |  |   | —                         |   |  |                  | (1,090  | )                    |  |                      | (38     | )            |  |   | (66     | )  |  |   | —                         |   |  |   | (1,194  | )  |
| Netcash used in investingactivities                    |  |   | —                         |   |  |                  | (19,783 | )                    |  |                      | (38     | )            |  |   | (66     | )  |  |   | —                         |   |  |   | (19,887 | )  |
| **FinancingActivities**                                |  |   |                            |   |  |                  |    |                      |  |                      |    |              |  |   |    |    |  |   |                            |   |  |   |    |    |
| Repaymentson senior termloan                           |  |   | —                         |   |  |                  | (3,878  | )                    |  |                      |    |              |  |   |    |    |  |   |                            |   |  |   | (3,878  | )  |
| Repaymentson capitalleases                             |  |   | —                         |   |  |                  | — |                      |  |                      | (20     | )            |  |   | — |    |  |   | —                         |   |  |   | (20     | )  |
| Netcash provided by financingactivities                |  |   | —                         |   |  |                  | (3,878  | )                    |  |                      | (20     | )            |  |   | — |    |  |   | —                         |   |  |   | (3,898  | )  |
| **Net(Decrease) Increase in Cash and CashEquivalents** |  |   | —                         |   |  |                  | (16,052 | )                    |  |                      | 806     |              |  |   | 1,694   |    |  |   | —                         |   |  |   | (13,552 | )  |
| Cashand cash equivalents at beginning ofperiod         |  |   | —                         |   |  |                  | 38,131  |                      |  |                      | 113     |              |  |   | 2,232   |    |  |   | —                         |   |  |   | 40,476  |    |
| Cashand cash equivalents at end ofperiod               |  | $      | —                         |   |  |                  | 22,079  |                      |  |                      | 919     |              |  |   | 3,926   |    |  |   | —                         |   |  |   | 26,924  |    |
|                                                        |

25

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Item 2.Management’s Discussion and Analysis of Financial Condition andResults of Operations

Our fiscal years are the 52- or 53-weekperiods that end on the Friday nearest September  30. Fiscal year2006 comprises the 52-week period ending September  29,2006 and fiscal year 2005 comprised the 52-week period endedSeptember  30,  2005. The following discussion should beread in conjunction with the accompanying condensed consolidatedfinancial statements, and the notes thereto, of CPI International,Inc.

Overview

We supply high power microwave andRadio Frequency (‘‘RF’’) products and highvoltage power generation and control components and subsystems forapplications and programs in defense and commercial markets. Ourproducts are used within these end markets primarily to generate,control and transmit high power and high-frequency microwave and RFsignals. We supply similar high power microwave components andsubsystems for use in commercial radar, communications, medical,industrial and scientific markets. We provide high voltage powergenerators and control systems to the medical and industrialmarkets.

Unless the context otherwise requires, (1)‘‘CPI International’’ or the‘‘Successor’’ means CPI International,Inc., (2) ‘‘Predecessor’’ meansCommunications & Power Industries Holding Corporation, thepredecessor to CPI International, (3)‘‘CPI’’ means Communications & PowerIndustries, Inc. and (4) ‘‘Merger’’ meansthe January  23,  2004 merger pursuant to which CPIInternational acquired the Predecessor. CPI is a direct subsidiary ofCPI International. CPI International is a holding company with nooperations of its own. The terms ‘‘we,’’‘‘us,’’ ‘‘our’’and the ‘‘Company’’ refer to CPIInternational, or the Predecessor, as applicable, and its direct andindirect subsidiaries on a consolidated basis.

    EconcoAcquisition

On October  8,  2004, we purchased allof the outstanding stock of Econco Broadcast Service, Inc. of Woodland,California for cash consideration of approximately $18.3million. Econco is a provider of rebuilding service for high powermicrowave devices, allowing broadcasters and other users of thesecritical products to extend the life of their devices at a cost that islower than buying a new device.

Orders

Total ordersrecorded in the first quarter of fiscal year 2006 of $86.4million were similar to the comparable quarter of fiscal year 2005. Ourcustomer sales contracts are recorded as orders when we accept writtencustomer purchase orders or contracts. Customer purchase orders with anundefined delivery schedule, or blanket purchase orders, are notreported as orders until the delivery date is determined. Ourgovernment sales contracts are not reported as orders until we havebeen notified that the contract has been funded. Total orders for afiscal quarter represent the total dollar amount of customer ordersrecorded by us during the fiscal quarter, reduced by the dollar amountof any order cancellations or terminations during the fiscalquarter.

26

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The following table compares total ordersby market recorded for the first quarter of fiscal years 2006 and 2005(inmillions):

|                   |  |                  |      |                          |  |        |     |                           |  |                    |      |        |  |        |     |         |  |        |      |         |  |        |     |          |  |  |
|-------------------|--|------------------|------|--------------------------|--|--------|-----|---------------------------|--|--------------------|------|--------|--|--------|-----|---------|--|--------|------|---------|--|--------|-----|----------|--|--|
|              |  | QuarterEnded     |      |                     |  |   |
|              |  | December30, 2005 |      | December 31,2004         |  |   |     |                      |
|              |  | Amount           |      | Percentageof TotalOrders |  | Amount |     | Percentage ofTotal Orders |  | Increase(Decrease) |
|              |  | Amount           |      | Percentage               |
| Radar             |  | $                | 36.4 |                     |  |   | 42  | %                    |  | $                  | 31.4 |   |  |   | 36  | %  |  | $      | 5.0  |    |  |   | 16  | %   |
| ElectronicWarfare |  |             | 4.7  |                     |  |   | 5   | %                    |  |               | 11.1 |   |  |   | 13  | %  |  |   | (6.4 | )  |  |   | (58 | %)  |
| Medical           |  |             | 10.5 |                     |  |   | 12  | %                    |  |               | 8.1  |   |  |   | 9   | %  |  |   | 2.4  |    |  |   | 30  | %   |
| Communications    |  |             | 28.8 |                     |  |   | 34  | %                    |  |               | 28.3 |   |  |   | 33  | %  |  |   | 0.5  |    |  |   | 2   | %   |
| Industrial        |  |             | 4.7  |                     |  |   | 5   | %                    |  |               | 5.1  |   |  |   | 6   | %  |  |   | (0.4 | )  |  |   | (8  | %)  |
| Scientific        |  |             | 1.3  |                     |  |   | 2   | %                    |  |               | 2.2  |   |  |   | 3   | %  |  |   | (0.9 | )  |  |   | (41 | %)  |
| Totalorders       |  | $                | 86.4 |                     |  |   | 100 | %                    |  | $                  | 86.2 |   |  |   | 100 | %  |  | $      | 0.2  |    |  |   | 0   | %   |
|                   |

Explanationsfor the order increase or decrease by market from the first quarter offiscal year 2005 to the first quarter of fiscal year 2006 are asfollows:

|  |              |                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|--|--------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | **Radar:**    The increasein radar orders was due to both increased order levels and the timingof order receipts for several programs. The increase in order levels,representing approximately half of the increase in radar orders,includes a $1.9  million increase for Vacuum Electron Device(‘‘VED’’) products that are used on theTPQ-37 Firefinder Artillery Locating Radarprogram. |

|  |              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|--|--------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | **ElectronicWarfare:**    The decrease in electronic warfare orders wasprimarily due to the timing of order levels on certain programs thatdid not repeat in the first quarter of fiscal year 2006. In the firstquarter of fiscal year 2005, we recorded a multi-year delivery order of$3.4  million for the ALQ-187 Electronic Countermeasure Systemprogram. While this order is not expected to repeat in the currentfiscal year, we are expecting follow-on orders at lower levels for thisprogram. |

In the first quarter of fiscal year 2005, werecorded orders totaling $1.5 million for two different Active Denialdevelopment programs. On one of the programs we received a $7 millioncontract, with additional options of $4.5 million, for which werecorded orders of $0.9 million based on the amount of contract fundingthat we received in the first quarter of fiscal year 2005. Since thefirst quarter of fiscal year 2005, we have received incremental fundingon this program and recorded additional orders of $1.4 million. Overthe next three years, we expect to record additional orders on thisprogram as we complete certain contract milestones and receiveadditional funding. 

|  |              |                                                                                                                                                                                                                                                                                            |
|--|--------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | **Medical:**    The increase inmedical orders was primarily due to the continued growth in orders forx-ray generators, control systems, and power supply products used inx-ray imaging systems, including a $1.3  million order from anoriginal equipmentmanufacturer. |

|  |              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|--|--------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | **Communications:**    Theincrease in communications orders was attributable to strength of thedirect-to-home broadcast market and a $2.9  million militaryorder for ground-based satellite uplink stations using our VEDamplifiers that was received in the first quarter of fiscal year 2006,partially offset by a large order in fiscal year 2005 for terrestrialmicrowave relays that did not repeat in the first quarter of fiscalyear 2006. |

|  |              |                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|--|--------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | **Industrial:**    Thedecrease in industrial orders was primarily attributable to the timingof order receipts. In fiscal year 2005, we received a $0.5million order for a multi-year development and prototyping effort foran industrial medical sterilization program which did not recur infiscal year 2006. However, we are expecting to receive productionorders for this program beginning in fiscal year2007. |

|  |        |                                                                                                                                                                                                                                                                                                                                                                                        |
|--|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | • | **Scientific:**    Thedecrease in scientific orders was primarily attributable to the timingof two large orders in the first quarter of fiscal year 2005 that didnot repeat in the first quarter of fiscal year 2006. Orders in thescientific market, our smallest market, are historically one-timeprojects and can fluctuate significantly from period toperiod. |

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Incoming order levels fluctuatesignificantly on a quarterly or annual basis and a particular quarteror year’s order rate may not be indicative of future orderlevels. In addition, our sales are highly dependent upon manufacturingscheduling and performance and, accordingly, it is not possible toaccurately predict when orders will be recognized assales.

Backlog

As of December  30,  2005, wehad an order backlog of $197.1  million compared to an orderbacklog of $193.2  million as of December  31,  2004.Backlog represents the cumulative balance, at a given point in time, ofrecorded customer sales orders that have not yet been shipped orrecognized as sales. Backlog is increased when an order is received,and backlog is decreased when we recognize sales. We believe backlogand orders information is helpful to investors because this informationmay be indicative of future sales results. Although the backlogconsists of firm orders for which goods and services are yet to beprovided, customers can, and sometimes do, terminate or modify theseorders. However, historically the amount of modifications andterminations has not been material compared to total contractvolume.

Results of Operations

We derive our revenueprimarily from the sale of microwave and radio frequency products,including high power microwave amplifiers, satellite communicationsamplifiers, medical x-ray imaging subsystems, and other relatedproducts. Our products generally have selling prices ranging from$2,000 to $100,000, with certain limited products priced up to$1,000,000.

Cost of goods sold generally includes costs for rawmaterials, manufacturing costs, including allocation of overhead andother indirect costs, charges for reserves for excess and obsoleteinventory, warranty claims and losses on fixed price contracts.Operating expenses generally consist of research and development,selling and marketing and general and administrativeexpenses.

The following table sets forth our historical resultsof operations for each of the periods indicated:

|                                               |  |                     |        |                    |  |                    |        |                   |  |        |        |        |  |        |        |         |  |  |
|-----------------------------------------------|--|---------------------|--------|--------------------|--|--------------------|--------|-------------------|--|--------|--------|--------|--|--------|--------|---------|--|--|
|                                          |  | QuarterEnded        |
|                                          |  | December30, 2005    |        | December 31,2004   |
|                                          |  | Amount (Inmillions) |        | Percentage ofSales |  | Amount(Inmillions) |        | PercentageofSales |
| Sales                                         |  | $                   | 82.4   |               |  |               | 100.0  | %            |  | $      | 73.7   |   |  |   | 100.0  | %  |
| Costof sales(a)                               |  |                | 57.2   |               |  |               | 69.4   |              |  |   | 50.0   |   |  |   | 67.8   |    |
| Grossprofit                                   |  |                | 25.2   |               |  |               | 30.6   |              |  |   | 23.7   |   |  |   | 32.2   |    |
| Researchanddevelopment                        |  |                | 1.9    |               |  |               | 2.3    |              |  |   | 1.4    |   |  |   | 1.9    |    |
| Sellingand marketing(a)                       |  |                | 5.0    |               |  |               | 6.1    |              |  |   | 4.1    |   |  |   | 5.6    |    |
| Generaland administrative(a)                  |  |                | 7.3    |               |  |               | 8.9    |              |  |   | 4.0    |   |  |   | 5.4    |    |
| Amortizationof acquisition-relatedintangibles |  |                | 0.5    |               |  |               | 0.6    |              |  |   | 4.9    |   |  |   | 6.6    |    |
| Netloss on disposition ofassets               |  |                | 0.1    |               |  |               | 0.1    |              |  |   | 0.1    |   |  |   | 0.1    |    |
| Operatingincome                               |  |                | 10.4   |               |  |               | 12.6   |              |  |   | 9.3    |   |  |   | 12.6   |    |
| Interestexpense,net                           |  |                | 6.1    |               |  |               | 7.4    |              |  |   | 4.1    |   |  |   | 5.6    |    |
| Incomebeforetaxes                             |  |                | 4.3    |               |  |               | 5.2    |              |  |   | 5.2    |   |  |   | 7.1    |    |
| Incometaxexpense                              |  |                | 2.1    |               |  |               | 2.5    |              |  |   | 2.1    |   |  |   | 2.8    |    |
| Netincome                                     |  | $                   | 2.2    |               |  |               | 2.7    | %            |  |   | 3.1    |   |  |   | 4.2    | %  |
| OtherData:                                    |  |                |   |               |  |               |   |              |  |   |   |   |  |   |   |    |
| EBITDA(b)                                     |  | $                   | 12.5   |               |  |               | 15.2   | %            |  | $      | 15.5   |   |  |   | 21.0   | %  |
|                                               |

|     |                                                                                                                                                                                      |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (a) | Includesa special bonus expense (see "Special Bonus"below) of $2.7 million for General and administrative, $0.3 million forCost of sales, and $0.2 million for Selling andmarketing. |

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|     |                                                                                                                                                                                                                                                                                                                                                                                                |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (b) | EBITDA represents earningsbefore provision for income taxes, interest expense, net anddepreciation and amortization. For the reasons listed below, we believethat GAAP-based financial information for highly leveraged businessessuch as ours should be supplemented by EBITDA so that investors betterunderstand our financial performance in connection with their analysisof our business: |

|  |        |                                                                                                                             |
|--|--------|-----------------------------------------------------------------------------------------------------------------------------|
|  | • | EBITDA is acomponent of the measure used by our board of directors and managementteam to evaluate our operatingperformance; |

|  |        |                                                                                                                                                                                                                                               |
|--|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | • | our Senior CreditFacility contain covenants that require us to maintain certain interestexpense coverage and leverage ratios that contain EBITDA as acomponent, and our management team uses EBITDA to monitor compliancewith such covenants; |

|  |        |                                                                                                       |
|--|--------|-------------------------------------------------------------------------------------------------------|
|  | • | EBITDA isa component of the measure used by our management team to makeday-to-day operatingdecisions; |

|  |        |                                                                                                                                                                                                                                                                                   |
|--|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | • | EBITDA facilitatescomparisons between our operating results and those of competitors withdifferent capital structures and therefore is a component of themeasure used by the management to facilitate internal comparisons tocompetitors' results and our industry in general;and |

|  |        |                                                                                                                                                                            |
|--|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | • | the payment of bonuses tocertain members of management is contingent upon, among other things,the satisfaction by us of certain targets that contain EBITDA as acomponent. |

Other companies may define EBITDAdifferently and, as a result, our measure of EBITDA may not be directlycomparable to EBITDA of other companies. Although we use EBITDA as afinancial measure to assess the performance of our business, the use ofEBITDA is limited because it does not include certain material costs,such as interest and taxes, necessary to operate our business. Whenanalyzing our performance, EBITDA should be considered in addition to,and not as a substitute for, net income (loss), cash flows fromoperating activities or other statements of operations or statements ofcash flows data prepared in accordance withGAAP.

|  |  |                                                                                                                     |
|--|--|---------------------------------------------------------------------------------------------------------------------|
|  |  | For a reconciliation of EBITDA to Net Income,see Note 8 of the Notes to Condensed Consolidated FinancialStatements. |

**Sales:**    The following table comparestotal sales by market for the first quarter of fiscal years 2006 and2005 (dollars inmillions):

|                   |  |                  |      |                          |  |        |     |                           |  |                    |      |        |  |        |     |         |  |        |      |         |  |        |     |          |  |  |
|-------------------|--|------------------|------|--------------------------|--|--------|-----|---------------------------|--|--------------------|------|--------|--|--------|-----|---------|--|--------|------|---------|--|--------|-----|----------|--|--|
|              |  | QuarterEnded     |      |                     |
|              |  | December30, 2005 |      | December 31,2004         |  |   |
|              |  | Amount           |      | Percentageof TotalOrders |  | Amount |     | Percentage ofTotal Orders |  | Increase(Decrease) |
|              |  | Amount           |      | Percentage               |
| Radar             |  | $                | 27.6 |                     |  |   | 33  | %                    |  | $                  | 27.0 |   |  |   | 37  | %  |  | $      | 0.6  |    |  |   | 2   | %   |
| ElectronicWarfare |  |             | 5.8  |                     |  |   | 7   | %                    |  |               | 5.9  |   |  |   | 8   | %  |  |   | (0.1 | )  |  |   | (2  | %)  |
| Medical           |  |             | 13.2 |                     |  |   | 16  | %                    |  |               | 11.8 |   |  |   | 16  | %  |  |   | 1.4  |    |  |   | 12  | %   |
| Communications    |  |             | 30.1 |                     |  |   | 37  | %                    |  |               | 21.1 |   |  |   | 29  | %  |  |   | 9.0  |    |  |   | 43  | %   |
| Industrial        |  |             | 4.4  |                     |  |   | 5   | %                    |  |               | 5.4  |   |  |   | 7   | %  |  |   | (1.0 | )  |  |   | (19 | %)  |
| Scientific        |  |             | 1.3  |                     |  |   | 2   | %                    |  |               | 2.5  |   |  |   | 3   | %  |  |   | (1.2 | )  |  |   | (48 | %)  |
| Totalsales        |  | $                | 82.4 |                     |  |   | 100 | %                    |  | $                  | 73.7 |   |  |   | 100 | %  |  | $      | 8.7  |    |  |   | 12  | %   |
|                   |

Salesfor the first quarter of fiscal year 2006 of $82.4  million were$8.7  million, or 12%, higher than the comparable periodof fiscal year 2005. The sales increase was primarily related toincreases in the communications and medical markets. The communicationssales increase was due to increased shipments of amplifiers fordirect-to-home broadcast and other satellite communicationapplications. The medical market increase was due to increasedshipments of x-ray generators for diagnostic imaging. All other salesincreases or decreases by market were primarily due to the timing ofproduct shipments based on sales order commitments and manufacturingscheduling.

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During the first quarter of fiscal year2006, due to manufacturing disruptions from the relocation of our Eimacdivision from our San Carlos, California facility to our Palo Alto,California facility (the ‘‘San CarlosMove’’), we rescheduled approximately $3  millionof shipments to the communications and industrial markets to the secondhalf of fiscal year 2006. The Eimac division is highly dependent uponcustom production equipment. The production equipment is beingdecommissioned in San Carlos and configured, installed and tested priorto production readiness in Palo Alto. We expect that our Eimac divisionwill resume full production capacity after we complete the San CarlosMove. We currently expect that the San Carlos Move will be completed inthe second half of fiscal year 2006.

**GrossProfit:**    Gross profit of $25.2  million, or 30.6%of sales, for the first quarter of fiscal year 2006 was $1.5million higher than the prior year’s level of $23.7million, or 32.2% of sales. The increase in gross profit wasprimarily due to higher sales volume in the first quarter of fiscalyear 2006, offset by $0.8  million of expenses associated withthe San Carlos Move, $0.3  million of special bonus expenses (see‘‘Special Bonus’’ below) and $0.7million of unfavorable overhead cost variances at our Eimac division.The unfavorable overhead cost variance at our Eimac division resultedfrom having similar overhead cost structures in the first quarter offiscal years 2005 and 2006, which when combined with approximately25% lower sales volume resulted in lower inventory costabsorption in the first quarter of fiscal year 2006. The lower salesvolume in 2006 is due to manufacturing disruptions caused by the SanCarlos Move. After the San Carlos Move is completed, we expect torealize operational savings from the consolidation of productionfacilities in Palo Alto, which we believe will improve our gross profitpercentage.

**Research and Development:**    Research anddevelopment expenses of $1.9  million, or 2.3% of sales,for the first quarter of fiscal year 2006 was $0.5  millionhigher than fiscal year 2005. The increase in research and developmentexpense was due to additional engineering efforts on research anddevelopment projects in fiscal year 2006 compared to the first quarterof fiscal year 2005, in which a larger portion of engineering effortswere spent on customer-funded development contracts, which costs areclassified as cost of sales. Total spending on research anddevelopment, including company-sponsored amounts charged to researchand development, and customer-sponsored amounts charged to cost ofsales, increased from $2.9  million, or 3.9% of sales, inthe first quarter of fiscal year 2005 to $3.6  million, or4.4% of sales, in the first quarter of fiscal year 2006.

**Selling and Marketing:**    Selling and marketing expenses of$5.0  million, or 6.1% of sales, for the first quarter ofthe fiscal year 2006 increased from $4.1  million, or 5.6%of sales, for the first quarter of fiscal year 2005. The increase inselling and marketing expenses in fiscal year 2006 was primarily due toadditional selling costs to support the increase in sales volume infiscal year 2006 and $0.2  million for the special bonus,described below.

**Special Bonus:**    On December15,  2005, CPI's Board of Directors approved a payment of$3.25  million in bonuses (the ‘‘SpecialBonus’’) to CPI employees and directors (other thandirectors who are employees or affiliates of Cypress) to reward themfor the increase in Company value. The Special Bonus was charged to theCondensed Consolidated Statement of Operations and Comprehensive Incomein the same lines as cash compensation paid to the same employees anddirectors, as follows: $2.7  million to General andadministrative, $0.3  million to Cost of sales, and $0.2million to Selling and marketing.

**General andAdministrative:**    General and administrative expenses of$7.3  million, or 8.9% of sales, for the first quarter ofthe fiscal year 2006 were $3.3  million higher than the$4.0  million, or 5.4% of sales, for the first quarter offiscal year 2005. The first quarter of fiscal year 2006 included$2.7  million for the Special Bonus. In addition, the firstquarter of fiscal year 2005 included $0.3 for San Carlos Move expensescompared to $0.1  million in fiscal year 2005.

**Amortization of Acquisition-RelatedIntangibles:**    Amortization of acquisition-related intangiblesof $0.5  million for the first quarter of the fiscal year 2006was $4.4  million lower than for fiscal year 2005. Amortizationof acquisition-related intangibles consists of purchase accountingcharges, primarily for customer backlog and other intangible assets.The first quarter of fiscal year 2005 included $4.4  million forthe amortization of customer backlog, which was fully amortized inJanuary  2005. Acquisition-related intangible assets willcontinue to be amortized over periods of up to 50years.

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**Interest Expense,net:**    Interest expense, net of $6.1  million, or7.4% of sales, for the first quarter of fiscal year 2006 was$2.0  million higher than the $4.1  million, or 5.6%of sales, for the first quarter of fiscal year 2005. The increase ininterest expense in the first quarter of fiscal year 2006 was primarilydue to additional interest expense for CPI International'sFloating Rate Senior Notes due 2015 (the ‘‘FRNotes’’) issued on February  22,2005.

**Income Tax Expense:**     The Company recordedincome tax expense of $2.1 million for the first quarter of fiscalyears 2006 and 2005.   The effective tax rates were approximately48% and 40% for the first quarter of fiscal years 2006and 2005, respectively.   Income tax expense for the firstquarter of fiscal year 2006 includes a $315,000 charge attributable tothe fourth quarter of fiscal year 2005, consisting of $505,000 tocorrect the overstatement of tax benefits recorded in the fourthquarter of fiscal year 2005 for stock-based compensation expense thatis not deductible for income tax purposes in a foreign taxjurisdiction, offset by reversal of a $190,000 tax contingency reserve.Without this correction, the Company's effective tax rate for thefirst quarter of fiscal year 2006 would have been41%.

**Net Income:**    Net income of $2.2million for the first quarter of fiscal year 2006 was $0.9million lower than the first quarter of fiscal year 2005 primarily dueto the Special Bonus expense of $3.25  million, higher San CarlosMove expenses in first quarter of fiscal year 2006, unfavorableoverhead cost variances at the Eimac division and higher interestexpense, partially offset by lower amortization of acquisition-relatedintangibles and higher gross profit due to higher sales in the firstquarter of fiscal year 2006.

**EBITDA:**    EBITDA for thefirst quarter of fiscal year 2006 was $12.5  million, a decreaseof $3.0  million compared to $15.5  million for the firstquarter of fiscal year 2005. The decrease in EBITDA from fiscal year2005 to 2006 resulted primarily from the $3.25  million SpecialBonus expense in fiscal year 2006, $1.0  million higher SanCarlos move expenses in fiscal year 2006, unfavorable overhead costvariances of $0.7  million at the Eimac division, partiallyoffset by higher gross profit due to higher sales in fiscal year2006.

Liquidity and CapitalResources

Overview

Our liquidity is affected bymany factors, some of which are based on normal ongoing operations ofour business and others that are related to uncertainties in themarkets in which we compete and other global economic factors. We havehistorically financed, and intend to continue to finance, our capitaland working capital requirements including debt service and internalgrowth, through a combination of cash flows from our operations andborrowings under CPI's senior credit agreement (the‘‘Senior Credit Facility’’), which consistsof a $40.0  million revolving commitment, with a sub-facility of$15.0  million for letters of credit and $5.0  million forswingline loans (‘‘Revolver’’), and a$90.0  million term loan (the ‘‘TermLoan’’). Our primary uses of cash are cost of sales,operating expenses, debt service and capital expenditures.

As ofDecember  30,  2005, we had availability of $35.5million under the Revolver under our Senior Credit Facility. We believethat cash and cash equivalents on hand and cash expected to begenerated from operations will be sufficient to meet our currentlyanticipated cash requirements for the remainder of this fiscal year.Thereafter, our ability to fund our cash requirements and to complywith the financial covenants under our debt agreements will depend onour results of future operations, performance and cash flows and willbe subject to uncertainties in the markets in which we compete andother factors, many of which are beyond our control.

As ofDecember  30,  2005, we had cash and equivalents of$16.8  million compared to $26.5  million as ofSeptember  30,  2005. Cash balances in excess of operatingrequirements are invested daily in overnight U.S. Governmentsecurities.

Operating, Investing and Financing Activities

Operating Activities:    In the first quarter offiscal year 2006, we funded our operating activities through cashgenerated internally. Net cash provided by operating activities was$0.2  million for the 

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first quarter of fiscal year 2006, comparedto $10.2  million for the first quarter of fiscal year 2005. The$10.0  million decrease in net cash provided by operatingactivities for the first quarter of fiscal year 2006 compared to thefirst quarter of fiscal year 2005 was primarily due to the reductionsin advanced payments from customers due to increased shipments in thefirst quarter of fiscal year 2006 for sales contracts in which we hadpreviously received advanced payments, and reductions in accountspayable due to the timing of payments on supplier invoices.

Working capital of $57.7  million at December30,  2005 was $7.7  million lower than the working capitalbalance of $65.4  million at September  30,  2005 dueprimarily to the $7  million in cash used to pay a portion of a$17  million special cash dividend to shareholders inDecember  2005.

Investing Activities:    For thefirst quarter of fiscal year 2006, net cash used in investingactivities was $2.9  million compared to $19.9  million forthe first quarter of fiscal year 2005. Investing activities for fiscalyear 2006 were for capital expenditures, including $2.3  millionfor capital equipment, building and land lease improvements related tothe San Carlos move. Investing activities for the first quarter offiscal year 2005 included $18.7  million for the purchase pricefor Econco and $1.2  million for capital expenditures, including$0.8  million for capital equipment, building and land leaseimprovements related to the San Carlos move.

FinancingActivities:    For the first quarter of fiscal year 2006, netcash used in financing activities was $7.0  million compared tonet cash used in financing activities of $3.9  million for thefirst quarter of fiscal year 2005. For the first quarter of fiscal year2006, CPI used the $10  million proceeds of the additional TermLoan borrowing to fund a portion of a special cash dividend of$17  million paid to the holders of CPI International’scommon stock on December  15,  2005. The remainder of thedividend was financed from cash on hand. Financing activities for thefirst quarter of fiscal year 2005 consisted primarily of a $3.9million required annual repayment on the Term Loan.

The SeniorCredit Facility requires an annual prepayment to be made within 90 daysafter the end of the fiscal year based on a calculation of excess cashflow (‘‘ECF’’), as defined in the SeniorCredit Facility, multiplied by a factor of 25%, 50% or75% depending on the leverage ratio at the end of the fiscalyear, less any optional prepayments made during the fiscal year. Therewas no ECF payment due in the first quarter of fiscal year2006.

Amendment to Senior Credit Facility

OnDecember  15,  2005, CPI International and CPI entered intoAmendment No. 3 (the ‘‘Amendment’’), to theSenior Credit Facility. The Amendment increased the commitments underthe Term Loan by $10  million, and CPI borrowed an additional$10  million thereunder. In addition, among other things, theAmendment (1) permitted CPI to pay a dividend (not to exceed $20million) to CPI International to fund a dividend by CPI Internationalto its stockholders, (2) amended the definition of Excess Cash Flow inthe Senior Credit Facility to decrease Excess Cash Flow forCPI’s fiscal year 2006 by the excess of the amount of thedividend described in clause (1) over the gross proceeds of the$10  million additional borrowing, and (3) permitted CPI or CPIInternational to use up to $70  million of the proceeds of thefirst equity issuance by CPI International to repurchase or redeem theFR Notes or CPI's 8% Senior Subordinated Notes due 2012(the ‘‘8% Notes’’).

SanCarlos Sale Agreement 

In February  2003, we enteredinto an agreement to sell the land and close our facilities located inSan Carlos, California. The purchase price is $23.8  million.Under the sale agreement, the buyer has paid us a $13.0  milliondeposit on the purchase price, which we are using to fund the capitalexpenditures and costs of moving our San Carlos operations to our PaloAlto facility and to a new location in the Palo Alto area. The$13.0  million deposit is nonrefundable unless we breach the saleagreement.

The closing of the sale is subject to a number ofconditions, including the requirement that we vacate our facilities andobtain regulatory closure of certain permitted equipment located on theproperty. Although there can be no assurance that the sale of the SanCarlos property will occur, we expect to close the sale of the propertyin fiscal year 2007.

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As of December  30,  2005, theSan Carlos land and building was classified as held for use inproperty, plant and equipment, and the advance payments from the saleof the property, aggregating $13.5  million, are classified as along-term liability in the accompanying Condensed Consolidated BalanceSheets. As of December  30,  2005, we had capitalizedrecoverable selling costs of $0.7  million relating to the saleof the San Carlos property and classified these amounts as otherlong-term assets in the Condensed Consolidated Balance Sheets. As ofDecember  30,  2005, the San Carlos land and building had anet book value of $23.6  million and the building continues to bedepreciated over its remaining useful life. Based on currentprojections, we do not expect to recognize a loss on the sale of theSan Carlos property.

Capital Expenditures

Ourcontinuing operations typically do not have large recurring capitalexpenditure requirements. Capital expenditures are generally made toreplace existing assets, increase productivity, facilitate costreductions or meet regulatory requirements. The relocation of the SanCarlos operations is expected to be completed in the second half offiscal year 2006. Total capital expenditures for fiscal year 2006 areexpected to be approximately $14  million, includingapproximately $5  million for the relocation of the San Carlosoperations, $4  million for a proposed expansion of the Canadianfacility to accommodate its expected growth and $5  million forongoing capital expenditures.

Recent AccountingPronouncements

In November  2004, the FinancialAccounting Standards Board ("FASB") issuedStatement of Financial Accountings Standards("SFAS") No. 151, ‘‘InventoryCosts — an amendment of ARB No.  43, Chapter4’’, which is the result of the FASB’s project toreduce differences between U.S. and international accounting standards.SFAS No. 151 requires idle facility costs, abnormal freight, handlingcosts, and amounts of wasted materials (spoilage) to be treated ascurrent-period costs. Under this concept, if the costs associated withthe actual level of spoilage or production defects are greater than thecosts associated with the range of normal spoilage or defects, then thedifference would be charged to current-period expense, and not includedin inventory costs. We adopted SFAS No. 151 in the beginning of fiscalyear 2006 and its adoption did not have a significant impact on ourresults of operations or financial condition.

In March2005, the FASB issued Interpretation No. 47, ‘‘Accountingfor Conditional Asset Retirement Obligations,’’ whichclarifies that an entity is required to recognize a liability for thefair value of a conditional asset retirement obligation if the fairvalue can be reasonably estimated even though uncertainty exists aboutthe timing and (or) method of settlement. We are required to adoptInterpretation No. 47 by the end of fiscal year 2006. We do not expectthe implementation of Interpretation No. 47 to have a significantimpact on our results of operations or financial condition.

InMay  2005, the FASB issued SFAS No. 154,‘‘Accounting Changes and ErrorCorrections.’’ SFAS No. 154 replaces APB Opinion No. 20,‘‘Accounting Changes,’’ and SFAS No. 3,‘‘Reporting Accounting Changes in Interim FinancialStatement,’’ and changes the requirements for theaccounting for and reporting of a change in accounting principle. Weare required to adopt SFAS No. 154 for accounting changes and errorcorrections in fiscal year 2007. Our results of operations andfinancial condition will only be impacted by SFAS No. 154 if weimplement changes in accounting principle that are addressed by thestandard or correct accounting errors in future periods.

Critical Accounting Policies

Our Condensed ConsolidatedFinancial Statements are based on the selection and application ofsignificant accounting policies. The preparation of these financialstatements and application of these policies requires management tomake estimates and assumptions that affect the reported amounts ofassets and liabilities and the disclosure of contingent assets andliabilities at the date of the financial statements, as well as thereported amounts of revenues and expenses during the reporting period.Actual results could differ from these estimates. However, we are notcurrently aware of any reasonably likely events or circumstances thatwould result in materially different results from currentestimates.

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We believe the following criticalaccounting policies are the most significant to the presentation of ourfinancial statements and require the most subjective and complexjudgments. These matters, and the judgments and uncertainties affectingthem, are also essential to understanding our reported and futureoperating results. For a more comprehensive discussion of oursignificant accounting policies, see Note 2 to the Company’sAnnual Report on Form 10-K for the year ended September30,  2005.

Revenue recognition:    We generallyrecognize revenue upon shipment of product, following receipt ofwritten purchase orders, when the price is fixed or determinable, titlehas transferred, and collectibility is reasonably assured.Approximately 1% of our sales during fiscal year 2005 were basedon the percentage of completion method of accounting, and we expect asimilar portion in fiscal year 2006. Sales on percentage of completioncontracts are determined on the basis of costs incurred and estimatesof costs at completion, which require management estimates of futurecosts. Changes in estimated costs at completion over time could have amaterial impact on our operating results.

Inventoryreserves:    We assess the valuation of inventory andperiodically write down the value for estimated excess and obsoleteinventory based upon actual usage and estimates about future demand.The excess balance determined by this analysis becomes the basis forour excess inventory charge. Management personnel play a key role inour excess inventory review process by providing updated salesforecasts, managing product rollovers and working with manufacturing tomaximize recovery of excess inventory. If our estimates regardingdemand are inaccurate or changes in technology affect demand forcertain products in an unforeseen manner, we may incur losses or gainsin excess of our established markdown reserve that could bematerial.

Management also reviews the carrying value of inventoryfor lower of cost or market on an individual product or contract basis.A loss reserve is charged to cost of sales if the estimated productcost or the contract cost at completion is in excess of net realizablevalue (selling price less estimated cost of disposal). If the actualcontract cost at completion is different than originally estimated,then a loss or gain provision adjustment would be recorded that couldhave a material impact on our operating results.

Productwarranty:    Our products are generally warranted for a varietyof periods, typically one to three years or a predetermined productusage life. A provision for estimated future costs of repair,replacement or customer accommodations is reflected in the accompanyingconsolidated financial statements. We assess the adequacy of ourpreexisting warranty liabilities and adjust the balance based on actualexperience and changes in future expectations. The determination ofproduct warranty reserves requires us to make estimates of productreturn rates and expected cost to repair or replace the products underwarranty. If actual repair and replacement costs differ significantlyfrom our estimates, then adjustments to recognize additional cost ofsales may be required.

**Business combination:**    InJanuary  2004, as a result of our merger, assets acquired andliabilities assumed by the successor company were adjusted to reflectfair value, and the excess of the purchase price over the fair valuewas recorded as goodwill. We recorded goodwill of $140  millionas a result of the merger. Accounting for business combinationsrequires the allocation of purchase price to identifiable tangible andintangible assets and liabilities based upon their fair value. Theallocation of purchase price is a matter of judgment and requires theuse of estimates and fair value assumptions. The allocation of purchaseprice to finite-lived assets can have a significant impact on operatingresults because finite-lived assets are depreciated or amortized overtheir remaining useful lives.

Recoverability of long-livedassets:    We assess the recoverability of the carrying value ofgoodwill and other intangible assets with indefinite useful lives atleast annually or whenever events or changes in circumstances indicatethat the carrying amount of the asset may not be fully recoverable.Recoverability of goodwill is measured at the reporting unit level (oursix divisions) based on a two-step approach. First, the carrying amountof the reporting unit is compared to the fair value as estimated by thefuture net discounted cash flows expected to be generated by thereporting unit. To the extent that the carrying value of the reportingunit exceeds the fair value of the reporting unit, a second step isperformed, wherein the reporting unit's assets and liabilitiesare valued. The implied fair value of goodwill is calculated as thefair value of the reporting unit in excess of the fair value of allnon-goodwill assets and liabilities allocated to the reporting unit. Tothe extent the reporting unit's 

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carrying value of goodwill exceeds itsimplied fair value, impairment exists and must be recognized. Thisprocess requires the use of discounted cash flow models that utilizeestimates of future revenue and expenses as well as the selection ofappropriate discount rates. There is inherent uncertainty in theseestimates, and changes in these factors over time could result in animpairment charge.

A prolonged general economic downturn and,specifically, a prolonged downturn in the defense, communications ormedical markets, or technological changes, as well as other marketfactors could intensify competitive pricing pressure, create animbalance of industry supply and demand, or otherwise diminish volumesor profits. Such events, combined with changes in interest rates, couldadversely affect our estimates of future net cash flows to be generatedby our long-lived assets. Consequently, it is possible that our futureoperating results could be materially and adversely affected byadditional impairment charges related to the recoverability of ourlong-lived assets.

Accounting for stock-basedcompensation:    For stock options granted prior to the adoptionof SFAS No. 123R in the first quarter of fiscal year 2006, we recordeddeferred stock-based compensation to the extent the fair value of thecommon stock that we granted to employees exceeded the exercise priceat the measurement date. We granted both stock options with vestingover time (time options) as well as stock options that vest upon theperformance of certain goals (performance options). As ofSeptember  30,  2005, all performance options were fullyvested.

Since our common stock has not been publicly traded, andtherefore does not have a quoted market price, we compute an estimatedmarket price of our stock based on valuation techniques for determiningthe fair value of closely held stock. On the closing date of eachfiscal quarter, we have performed a contemporaneous valuation of thefair value of common stock.

We did not record stock-basedcompensation expense for time options because the estimated fair valueof common stock was equal to or higher than the option exercise priceat the option grant dates. We recorded $7.0  million ofstock-based compensation expense for performance options in fiscal year2005, in part due to the acceleration of the vesting of thoseoptions.

The valuation techniques used for determining the fairvalue of stock of a privately owned company requires making complex andsubjective judgments. We have used a methodology that weights theincome approach and the market approach to measure the fair value ofour capital stock. The income approach involves applying appropriatediscount rates to estimated cash flows that are based on a forecast ofrevenue and costs. Our revenue forecasts are based on expected annualgrowth rates for each of our divisions and are consistent with ourbusiness plans. The market approach uses multiples of sales, grossprofit, earnings before interest, taxes, depreciation and amortization,and earnings before income taxes based on an analysis of multiples ofpublicly traded companies in the same or similar lines of businesseswith similar economic factors. There is inherent uncertainty in theseestimates.

Item 3. Quantitative and Qualitative DisclosuresAbout Market Risk

We do not enter into derivative financialinstruments for trading or speculative purposes.

InterestRate Risk:    Our exposure to market risk for changes ininterest rates relates primarily to our long-term debt and ourinvestment in overnight government securities.

We have variablerate debt that comprises a $90  million term loan due in 2010under our Senior Credit Facility and $80  million in FR Notes.Our variable rate debt is subject to changes in the prime rate and theLIBOR rate. We entered into an interest rate swap contract (the‘‘Swap’’) with a notional amount of$80.0  million to effectively convert the FR Notes to a fixedrate of 9.9% through the Swap maturity date in January2008. We also have $125  million of fixed rate 8%Notes.

Foreign Currency Exchange RateRisk**:**    Although the majority of our revenue and expenseactivities are transacted in U.S. dollars, we do transact business inforeign countries. Our primary foreign currency cash flows are inCanada and several European countries. We have limited market riskexposure from foreign currency financial instruments.

In aneffort to reduce our foreign currency exposure to Canadian dollardenominated expenses, we entered into Canadian dollar forward contractsto hedge the Canadian dollar denominated costs 

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for our manufacturing operation in Canada.Net income includes recognized gains from foreign currency forwardcontracts of $0.4  million and $0.2  million for the firstquarter of fiscal years 2006 and 2005, respectively. As ofDecember  30,  2005, we had outstanding forward contractcommitments to purchase Canadian dollars for an aggregate U.S. notionalamount of $5.0  million. The last forward contract expires onMarch  10,  2006. At December  30,  2005, thefair value of unrealized foreign currency forward contracts was$0.8  million, and the unrealized gain was approximately$0.8  million, net of related tax expense. We anticipaterecognizing the entire unrealized gain in operating earnings within thenext six months.

Item 4. Controls andProcedures

Management, including the our principal executiveofficer and principal financial officer, has evaluated, as of the endof the period covered by this report, the effectiveness of the designand operation of our disclosure controls and procedures with respect tothe information generated for use in this report. Based upon, and as ofthe date of that evaluation, the principal executive officer andprincipal financial officer concluded that the disclosure controls andprocedures were effective to provide reasonable assurances thatinformation required to be disclosed in the reports filed or submittedunder the Securities Exchange Act of 1934, as amended, is recorded,processed, summarized and reported within the time periods specified inthe Securities and Exchange Commission's rules and forms.

There have been no changes in our internal control over financialreporting that occurred during the most recent fiscal quarter that havematerially affected, or are reasonably likely to materially affect, ourinternal control over financialreporting.

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Part II: OtherInformation

|          |  |                                                            |  |  |  |  |
|----------|--|------------------------------------------------------------|--|--|--|--|
| Item1.   |  | LegalProceedings                                           |
|     |  | None.                                                      |
| Item 1A. |  | Risk Factors                                               |
|     |  | None.                                                      |
| Item2.   |  | Unregistered Sales of Equity Securities and Use ofProceeds |
|     |  | None.                                                      |
| Item 3.  |  | Defaults Upon SeniorSecurities                             |
|     |  | None.                                                      |
| Item 4.  |  | Submission of Matters to aVote of Security Holders         |
|     |  | None.                                                      |
| Item 5.  |  | Other Information                                          |
|     |  | None.                                                      |
| Item6.   |  | Exhibits                                                   |
|          |

|      |  |                                                                                                                                                                         |  |  |  |  |
|------|--|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--|--|--|--|
| No.  |  | Description                                                                                                                                                             |
| 3.1  |  | Certificate of Amendment of Restated Certificateof Incorporation of CPI Holdco, Inc., as filed with the Secretary ofState of the State of Delaware on January 17, 2006. |
| 31.1 |  | Certification of Chief Executive Officer pursuantto Rule 13a-15(e) and Rule 15d-15(e), promulgated under the SecuritiesExchange Act of 1934, as amended.                |
| 31.2 |  | Certification of Chief Financial Officer pursuantto Rule 13a-15(e) and Rule 15d-15(e), promulgated under the SecuritiesExchange 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 906of 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 906of the Sarbanes-Oxley Act of 2002.                      |
|      |

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SIGNATURES

Pursuantto the requirements of the Securities Exchange Act of 1934, theregistrant has duly caused this report to be signed on its behalf bythe undersigned, thereunto duly authorized.

|  | CPIINTERNATIONAL,INC. |
|--|-----------------------|

|        |  |                                                                                                                                                                                                                                                                                                                                                                            |  |  |  |  |
|--------|--|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--|--|--|--|
| By:    |  |                         /s/    O.Joe Caldarelli                                                        |
|   |  | O. Joe CaldarelliChief ExecutiveOfficerDate:   February  13,2006                                                                                                                                                                                                                                                                                            |
| By:    |  |                              /s/JoelLittman                              |
|   |  | JoelLittmanChief Financial Officer, Treasurer andSecretary(Principal Financial and Accounting Officer)Date:   February 13,2006                                                                                                                                                                                                                              |
|        |

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