UNITED STATES

SECURITIES AND EXCHANGE

COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended ~~July~~December 231, 2010

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

For the transition period from ________ to ________

Commission file number: 000-51928

CPI INTERNATIONAL, INC.

(Exact Name of Registrant as Specified in Its Charter)

Delaware (State or Other Jurisdiction of Incorporation or Organization)	75-3142681 (I.R.S. Employer Identification No.)
811 Hansen Way, Palo Alto, California 94303 (Address of Principal Executive Offices and Zip Code)
(650) 846-2900 (Registrant’s telephone number, including area code)
Not Applicable (Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.

Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes ¨ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	¨	Accelerated filer	x
Non-accelerated filer	¨ (Do not check if a smaller reporting company)	Smaller reporting company	¨

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

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding for each of the registrant’s classes of Common Stock, as of the latest practicable date: 16,~~809~~854,~~805~~595 shares of Common Stock, $0.01 par value, at ~~August~~February 51, ~~2010~~2011.

CPI INTERNATIONAL, INC.

and Subsidiaries

10-Q REPORT

INDEX

Page

Part I:	FINANCIAL INFORMATION		4
	Item 1.	Unaudited Condensed Consolidated Financial Statements	4
		Condensed Consolidated Balance Sheets	4
		Condensed Consolidated Statements of Income and Comprehensive Income	5
		Condensed Consolidated Statements of Cash Flows	6
		Notes to Unaudited Condensed Consolidated Financial Statements	7
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	3736
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	5147
	Item 4.	Controls and Procedures	5348
Part II:	OTHER INFORMATION		5449
	Item 1.	Legal Proceedings	5449
	Item 1A.	Risk Factors	5449
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	5550
	Item 3.	Defaults Upon Senior Securities	5550
	Item 4.	(Removed and Reserved)	5550
	Item 5.	Other Information	5550
	Item 6.	Exhibits	5651

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CPI INTERNATIONAL, INC.

and Subsidiaries

Cautionary Statements Regarding Forward-Looking Statements

This document contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that relate to future events or our future financial performance. In some cases, readers can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential” or “continue,” the negative of such terms or other comparable terminology. These statements are only predictions. Actual events or results may differ materially.

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of the forward-looking statements. Forward-looking statements are subject to known and unknown risks and uncertainties, which could cause actual results to differ materially from the results projected, expected or implied by the forward-looking statements. These risk factors include, without limitation, risks associated with our pending merger agreement with aan ~~subsidiary~~affiliate of ~~Comtech~~The ~~Telecommunications~~Veritas ~~Corp~~Capital Fund IV, L.P. (including ~~but not limited to~~ the risk that the ~~conditions to the consummation of the~~ merger may not be ~~fulfilled~~consummated),; competition in our end markets; ~~the~~our ~~impact~~significant amount of adebt ~~general~~and ~~slowdown~~our inability ~~the~~to ~~global~~refinance ~~economy;~~ our ~~significant amount of~~ debt; changes or reductions in the United States defense budget; currency fluctuations; goodwill impairment considerations; customer cancellations of sales contracts; U.S. Government contracts; export restrictions and other laws and regulations; international laws; changes in technology; the impact of unexpected costs; the impact of a general slowdown in the global economy; the impact of environmental laws and regulations; and inability to obtain raw materials and components. All written and oral forward-looking statements made in connection with this report that are attributable to us or persons acting on our behalf are expressly qualified in their entirety by the foregoing risk factors and other cautionary statements included herein ~~(including under Part II, Item 1A - Risk Factors)~~ and in our other filings with the Securities and Exchange Commission (“SEC”). We are under no duty to update any of the forward-looking statements after the date of this report to conform such statements to actual results or to changes in our expectations.

The information in this report is not a complete description of our business or the risks and uncertainties associated with an investment in our securities. You should carefully consider the various risks and uncertainties that impact our business and the other information in this report and in our other filings with the SEC before you decide to invest in our securities or to maintain or increase your investment.

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CPI INTERNATIONAL, INC.

and Subsidiaries

Part I: FINANCIAL INFORMATION

Item 1. Unaudited Condensed Consolidated Financial Statements

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data – unaudited)

	July 2,			October 2,
	December 31,			October 1,
	2010			~~2009~~2010
Assets
Current Assets:
Cash and cash equivalents	$	4759,~~183~~907		$	2642,~~152~~829
Restricted cash		13,~~040~~060			1,~~561~~804
Accounts receivable, net		4339,~~433~~423			45,~~145~~707
Inventories		78,~~407~~445			6675,~~996~~208
Deferred tax assets		1011,~~485~~887			811,~~652~~030
Prepaid and other current assets		46,~~321~~112			6,~~700~~459
Total current assets		~~184~~198,~~869~~834			~~155~~183,~~206~~037
Property, plant, and equipment, net		5452,~~650~~550			5754,~~912~~259
Deferred debt issue costs, net		21,~~607~~344			31,~~609~~604
Intangible assets, net		7371,~~218~~730			7572,~~430~~474
Goodwill		162,225			162,225
Other long-term assets		35,~~786~~465			34,~~872~~677
Total assets	$	~~481~~492,~~355~~148		$	~~458~~478,~~254~~276
Liabilities and stockholders’ equity
Current Liabilities:
Accounts payable	$	21,164		$	22,665
Current portion of long-term debt	$	66,000		$	66,000
Accrued expenses		27,955			19,015
Accounts payable		22,195			24,290
Product warranty		4,830			3,845
Accrued expenses		29,837			23,653
Income taxes payable		3,608			4,305
Product warranty		5,418			5,101
Deferred income taxes		328			-
Income taxes payable		3,522			5,022
Advance payments from customers		1221,~~899~~766			1214,~~996~~218
Total current liabilities		70148,~~784~~738			62138,~~826~~284
Deferred income taxes, non-current		23,997			24,726
Deferred income taxes		21,542			21,707
Long-term debt		194,931			194,922
Long-term debt, less current portion		128,937			128,934
Other long-term liabilities		25,~~009~~451			25,~~227~~411
Total liabilities		~~291~~304,~~721~~668			~~284~~294,~~701~~336
Commitments and contingencies
Stockholders’ equity
Common stock ($0.01 par value, 90,000 shares authorized; 17,016 and 16,807 shares issued; 16,810 and 16,601 shares outstanding)		170			168
Common stock ($0.01 par value, 90,000 shares authorized; 17,059 and 17,020 shares issued; 16,852 and 16,813 shares outstanding)		171			170
Additional paid-in capital		7981,~~257~~235			7580,~~630~~015
Accumulated other comprehensive income		506			598
Accumulated other comprehensive loss		(44	)		(141	)
Retained earnings		~~112~~108,~~501~~918			99106,~~957~~696
Treasury stock, at cost (206 shares)		(2,800	)		(2,800	)
Total stockholders’ equity		~~189~~187,~~634~~480			~~173~~183,~~553~~940
Total liabilities and stockholders' equity	$	~~481~~492,~~355~~148		$	~~458~~478,~~254~~276

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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CPI INTERNATIONAL, INC.

and Subsidiaries

CONDENSED CONSOLIDATED

STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(In thousands, except per share data – unaudited)

	Three Months Ended						Nine Months Ended
	Quarter Ended
	July 2, 2010			July 3, 2009			July 2, 2010			July 3, 2009
	December 31, 2010			January 1, 2010
Sales	$	9389,~~876~~020		$	82,~~520~~767		$	~~264,995~~		$	~~241,569~~
Cost of sales		64,~~953~~099			5859,~~236~~327			~~185,910~~			~~175,603~~
Gross profit		2824,~~923~~921			2423,~~284~~440			~~79,085~~			~~65,966~~
Operating costs and expenses:
Research and development		3,~~542~~130			2,~~731~~556			~~9,287~~			~~8,071~~
Selling and marketing		5,~~178~~244			45,~~762~~040			~~15,392~~			~~14,552~~
General and administrative		6,~~373~~316			5,~~073~~525			~~18,560~~			~~15,537~~
Amortization of acquisition-related intangible assets		~~688~~686			~~691~~687			~~2,062~~			~~2,076~~
Merger expenses		3,589			-			3,800			-
Strategic alternative transaction expenses		2,657			-
Total operating costs and expenses		1918,~~370~~033			13,~~257~~808			~~49,101~~			~~40,236~~
Operating income		96,~~553~~888			119,~~027~~632			~~29,984~~			~~25,730~~
Interest expense, net		3,~~780~~711			43,~~204~~881			~~11,516~~			~~12,965~~
Gain on debt extinguishment		-			(51	)		-			(248	)
Income before income taxes		3,177			5,751
Income before income taxes		5,773			6,874			18,468			13,013
Income tax expense		955			1,910
Income tax expense (benefit)		1,562			3,004			5,924			(2,201	)
Net income	$	2,222		$	3,841
Net income	$	4,211		$	3,870		$	12,544		$	15,214
Other comprehensive income, net of tax
Other comprehensive income, net of tax
Net unrealized gain on cash flow hedges and minimum pension liability adjustment		97			844
Net unrealized (loss) gain on cash flow hedges and minimum pension liability adjustment		(1,096	)		3,346			(92	)		84
Comprehensive income	$	2,319		$	4,685
Comprehensive income	$	3,115		$	7,216		$	12,452		$	15,298
Earnings per common share - Basic	$	0.13		$	0.23
Earnings per common share - Basic	$	0.25		$	0.23		$	0.75		$	0.92
Earnings per common share - Diluted	$	0.12		$	0.21
Earnings per common share - Diluted	$	0.23		$	0.22		$	0.69		$	0.86
Shares used to compute earnings per common share - Basic		16,695			16,452
Shares used to compute earnings per common share - Basic		16,631			16,362			16,534			16,316
Shares used to compute earnings per common share - Diluted		18,076			17,630
Shares used to compute earnings per common share - Diluted		17,961			17,535			17,787			17,402

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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CPI INTERNATIONAL, INC.

and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands – unaudited)

	Nine Months Ended
	Quarter Ended
	July 2,			July 3,
	December 31,			January 1,
	2010			~~2009~~2010
Cash flows from operating activities
Net cash provided by operating activities	$	2217,~~516~~487		$	209,~~308~~564
Cash flows from investing activities
Capital expenditures		(~~2,824~~447	)		(~~2,349~~811	)
Payment of patent application fees		(366	)		-
Net cash used in investing activities		(~~2,860~~453	)		(~~2,349~~811	)
Cash flows from financing activities
Repayments of debt		-			(12,358	)
Payment for Senior Credit Facilities agreement amendment (Note 6)		(379	)		-
Proceeds from issuance of common stock to employees		~~579~~217			~~781~~189
Proceeds from exercise of stock options		~~214~~136			8214
Excess tax benefit on stock option exercises		~~582~~70			512
Net cash provided by (used in) financing activities		1,375			(11,444	)
Net cash provided by financing activities		44			205
Net increase in cash and cash equivalents		2117,~~031~~078			68,~~515~~958
Cash and cash equivalents at beginning of period		2642,~~152~~829			2826,~~670~~152
Cash and cash equivalents at end of period	$	4759,~~183~~907		$	35,~~185~~110
Supplemental cash flow disclosures
Cash paid for interest	$	~~8,008~~800		$	91,~~742~~054
Cash paid for income taxes, net of refunds	$	83,~~069~~284		$	2,~~417~~273

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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CPI INTERNATIONAL, INC.

and Subsidiaries

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(All tabular dollar amounts in thousands except share and per share amounts)

1.	The Company and a Summary of its Significant Accounting Policies

The Company

Unless the context otherwise requires, “CPI International” means CPI International, Inc., and “CPI” means Communications & Power Industries, Inc. CPI is a direct subsidiary of CPI International. CPI International is a holding company with no operations of its own. The term “the Company” refers to CPI International and its direct and indirect subsidiaries on a consolidated basis.

The accompanying condensed consolidated financial statements represent the consolidated results and financial position of CPI International, which is controlled by affiliates of The Cypress Group L.L.C. ~~(“Cypress”).~~ CPI International, through its wholly owned subsidiary, CPI, develops, manufactures and distributes microwave and power grid Vacuum Electron Devices (“VEDs”), microwave amplifiers, modulators, antenna systems and various other power supply equipment and devices. The Company has two reportable segments: VED and satcom equipment.

Liquidity: The Company has historically financed, and intends to continue to finance, its capital and working capital requirements including debt service and internal growth, through a combination of cash flows from its operations and borrowings under its senior credit facilities. In addition, the Company is party to a merger agreement, as described in further details in Note 4, with Catalyst Acquisition, Inc., a wholly owned subsidiary of CPI International Acquisition, Inc. (formerly Catalyst Holdings, Inc.). Catalyst Acquisition, Inc. and CPI International Acquisition, Inc. are affiliates of The Veritas Capital Fund IV, L.P. (the “Veritas Fund”). If the merger closes, the Company expects to receive financing proceeds as a result of an equity contribution from the Veritas Fund and certain of its affiliates and net proceeds from the offering of senior notes and borrowings under the new term loan facility expected to be entered into by CPI International Acquisition, Inc. at the closing of the current pending merger.

If the merger closes, the Company believes that the financial resources from the refinancing taking place in connection with the merger, its cash on hand, and expected cash flows from operations will be sufficient to meet its business requirements, including capital expenditures and working capital requirements for the next 12 months, and to repay the $66.0 million outstanding under its senior credit facility term loan scheduled to come due on August 1, 2011, as well as the $117.0 million of its outstanding 8% senior subordinated notes and the $12.0 million of its outstanding floating rate senior notes prior to their scheduled maturity dates. It is anticipated that the amounts outstanding under the Company's existing senior credit facility term loan and under its currently outstanding notes will be repaid in connection with the merger.

Basis of Presentation and Consolidation

The Company’s fiscal year is the 52- or 53-week period that ends on the Friday nearest September 30. Fiscal years ~~2010~~2011 and ~~2009~~2010 ~~comprise~~comprised the 52-week periods ending ~~October~~September 130, ~~2010~~2011 and October 21, ~~2009~~2010, respectively. The first quarters of both fiscal years 2011 and 2010 include 13 weeks. All period references are to the Company’s fiscal periods unless otherwise indicated.

The accompanying unaudited condensed consolidated financial statements of the Company as of July 2, 2010 and for the three and nine months ended July 2, 2010 are unaudited and reflect all normal recurring adjustments which are, in the opinion of management, necessary for the fair presentation of such financial statements. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended October 2, 2009. The condensed consolidated balance sheet as of October 2, 2009 has been derived from the audited financial statements at that date. The results of operations and cash flows for the interim period ended July 2, 2010 are not necessarily indicative of results to be expected for the full year.

The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany balances, transactions and stockholdings have been eliminated in consolidation.

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CPI INTERNATIONAL, INC.

and Subsidiaries

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All tabular dollar amounts in thousands except share and per share amounts)

The accompanying unaudited condensed consolidated financial statements of the Company as of December 31, 2010 and for the first quarter of fiscal years 2011 and 2010 are unaudited and reflect all normal recurring adjustments which are, in the opinion of management, necessary for the fair presentation of such financial statements. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended October 1, 2010. The condensed consolidated balance sheet as of October 1, 2010 has been derived from the audited financial statements at that date. The results of operations and cash flows for the interim period ended December 31, 2010 are not necessarily indicative of results to be expected for the full year. Should the merger noted above and discussed in note 4 be completed, the Company anticipates the transaction will be accounted for as a business combination and result in a change in basis of its balance sheet as of the merger date. Such accounting will result in significant changes to the Company’s balance sheet and income statement in future periods including recording all assets and liabilities at fair value as of the merger date, recognition of additional goodwill and, in periods after the merger, increased amortization of intangible assets which will reduce net income.

Use of Estimates and Assumptions

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of sales and costs and expenses during the reporting period. On an ongoing basis, the Company evaluates its estimates, including those related to revenue recognition; inventory ~~valuation;~~and ~~provision~~inventory ~~for product warranty~~valuation; business combinations; recoverability and valuation of recorded amounts of long-lived assets and identifiable intangible assets, including goodwill; recognition ~~and measurement~~ of share-based compensation; and recognition and measurement of current and deferred income tax assets and liabilities. The Company bases its estimates on various factors and information, which may include, but are not limited to, history and prior experience, experience of other enterprises in the same industry, new related events, current economic conditions and information from third-party professionals that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

2. Recently Issued Accounting Standards

In the first quarter of fiscal year 2010, the Company adopted provisions of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 820, “Fair Value Measurements and Disclosures,” that specified the way in which fair value measurements should be made for non-financial assets and non-financial liabilities that are not measured and recorded at fair value on a recurring basis, and specified additional disclosures related to these fair value measurements. The adoption of this new standard did not have an impact on the Company’s consolidated results of operations, financial position or cash flows.

In June 2008, the FASB issued an update to ASC 260, “Earnings Per Share,” which addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and, therefore, need to be included in the earnings allocation in computing earnings per share under the two-class method. The update to ASC 260 requires unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) to be treated as participating securities and to be included in the computation of earnings per share pursuant to the two-class method. This guidance under ASC 260 was effective for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. All prior-period earnings per share data presented shall be adjusted retrospectively. The Company adopted the provisions of this guidance under ASC 260 effective October 3, 2009 and has included the required disclosures in Note 10 to the unaudited condensed consolidated financial statements. The adoption of this guidance did not have a material impact on the Company’s computation of earnings per share.

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CPI INTERNATIONAL, INC.

and Subsidiaries

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All tabular dollar amounts in thousands except share and per share amounts)

In October 2008, the FASB issued guidance codified under ASC 715, “Compensation—Retirement Benefits,” which requires that an employer disclose the following information about the fair value of plan assets: (1) the level within the fair value hierarchy in which fair value measurements of plan assets fall; (2) information about the inputs and valuation techniques used to measure the fair value of plan assets; and (3) a reconciliation of beginning and ending balances for fair value measurements of plan assets using significant unobservable inputs. AtRecently ~~initial~~Issued ~~adoption,~~Accounting application of this guidance would not be required for earlier periods that are presented for comparative purposes. The Company adopted the provisions of this guidance under ASC 715 effective October 3, 2009. The adoption did not have an impact on the Company’s consolidated results of operations, financial position or cash flows.Standards

In ~~April~~October 2009, the Financial Accounting Standards Board (“FASB”) ~~released~~issued anAccounting ~~amendment~~Standards toUpdate ~~ASC~~(“ASU”) ~~805~~2009-13, “~~Business~~Revenue ~~Combinations,”~~Recognition ~~which~~(Topic ~~requires~~605): anMultiple ~~acquirer~~Deliverable toRevenue ~~recognize~~Arrangements at– ~~fair~~A ~~value,~~Consensus atof the ~~acquisition~~FASB ~~date,~~Emerging anIssues ~~asset~~Task ~~acquired~~Force.” orThis aupdate ~~liability~~provides ~~assumed~~application ~~that~~guidance ~~arises~~on ~~from~~whether amultiple ~~contingency~~deliverables ifexist, how the ~~acquisition~~deliverables ~~date~~should ~~fair~~be ~~value~~separated ofand ~~that~~how ~~asset~~the orconsideration ~~liability~~should ~~can~~ be ~~determined~~allocated ~~during~~to ~~the~~one ~~measurement~~or ~~period.~~more Ifunits ~~the~~of ~~acquisition~~accounting. ~~date~~This ~~fair~~update ~~value~~eliminates ~~cannot~~the beresidual ~~determined~~method ~~during~~of ~~the~~allocation ~~measurement~~for ~~period~~multiple-deliverable revenue arrangements, anand ~~asset~~requires orthat ~~liability~~arrangement ~~shall~~consideration be ~~recognized~~allocated at the ~~acquisition~~inception ~~date~~of ifan ~~(1)~~arrangement ~~information~~to ~~available~~all ~~before~~deliverables. The ~~the~~selling ~~end~~price ofused ~~the~~for ~~measurement~~each ~~period~~deliverable ~~indicates~~will ~~that~~be itbased ison ~~probable~~vendor-specific ~~that~~objective anevidence ~~asset~~(“VSOE”), ~~existed~~if available, third-party evidence (“TPE”) if VSOE is not available, or ~~that~~estimated aselling ~~liability~~price ~~had~~if ~~been~~neither ~~incurred~~VSOE ator ~~the~~TPE ~~acquisition~~is ~~date~~available. Additionally, ~~and~~ASU ~~(2)~~2009-13 expands the ~~amount~~disclosure ofrequirements ~~the~~related ~~asset~~to ora ~~liability~~vendor’s ~~can~~multiple-deliverable berevenue ~~reasonably estimated~~arrangements. The Company adopted the provisions of ~~the~~this guidance under ~~ASC~~ASU ~~805~~2009-13 ~~and its amendment~~ effective October 32, ~~2009~~2010. The ~~impact~~adoption ofdid ~~the~~not ~~adoption~~have ~~will~~a ~~depend~~material impact on the ~~nature~~Company’s consolidated results of ~~acquisitions~~operations, ~~completed~~financial inposition ~~the~~or ~~future~~cash flows.

In ~~August~~ September 2009, the FASB issued ASU 2009-0514, “~~Measuring~~Certain ~~Liabilities~~Revenue atArrangements ~~Fair~~That ~~Value~~Include Software Elements,” an ~~update~~which tois ~~ASC~~included ~~820.~~in ~~This~~the ~~update~~Accounting ~~provides~~Standards ~~amendments~~Codification to(“ASC”) ~~reduce~~Topic ~~potential~~985, ~~ambiguity~~“Software.” inASU ~~financial~~2009-14 ~~reporting~~amends ~~when~~previous ~~measuring~~software ~~the~~revenue ~~fair~~recognition ~~value~~to ofexclude ~~liabilities.~~(a) non-software ~~Among~~components ~~other~~of ~~provisions,~~tangible ~~this~~products ~~update~~and ~~provides~~(b) software ~~clarification~~components ~~that~~of intangible ~~circumstances~~products inthat ~~which~~are asold, ~~quoted~~licensed, ~~price~~or inleased anwith ~~active~~tangible ~~market~~products ~~for~~when the ~~identical~~software ~~liability~~components isand ~~not~~non-software ~~available,~~components aof ~~reporting~~the ~~entity~~tangible isproduct ~~required~~function together to ~~measure~~deliver ~~fair value using one or more of~~ the ~~valuation~~tangible ~~techniques~~product’s ~~described~~essential ~~in ASU 2009-05~~functionality. The Company adopted the provisions of this ~~guidance~~update under ASU 2009-0514 effective October 32, ~~2009~~2010. The adoption did not have ana material impact on the Company’s consolidated results of operations, financial position or cash flows.

In ~~October~~ December 2009, the FASB issued ASU 2009-1317, “~~Revenue~~Improvements ~~Recognition~~to ~~(Topic~~Financial ~~605):~~Reporting ~~Multiple~~by ~~Deliverable~~Enterprises ~~Revenue~~Involved ~~Arrangements~~with –Variable AInterest ~~Consensus of the FASB Emerging Issues Task Force.~~Entities,” ~~This~~as ~~update~~a ~~provides~~further ~~application~~clarification ~~guidance~~to ~~on whether multiple deliverables exist~~ASC 810-10, ~~how~~“Consolidation ~~the~~of ~~deliverables~~Variable ~~should~~Interest ~~be separated and how the consideration should be allocated to one or more units of accounting~~Entities.” ~~This~~ASU ~~update eliminates the residual method of allocation for multiple~~2009-~~deliverable~~17, ~~revenue~~upon ~~arrangements~~adoption, ~~and~~ requires ~~that arrangement consideration be allocated at~~ the ~~inception~~use of ana ~~arrangement~~qualitative analysis to ~~all~~determine ~~deliverables using~~ the ~~relative~~primary ~~selling~~beneficiary ~~price~~of ~~method. The~~a ~~selling~~variable ~~price~~interest ~~used~~entity ~~for~~(“VIE”), ~~each~~amends ~~deliverable~~the ~~will~~guidance befor ~~based~~determining ~~on vendor-specific objective evidence,~~ if ~~available,~~an ~~third-party~~entity ~~evidence if vendor-specific objective evidence~~ is ~~not~~a ~~available,~~VIE orand ~~estimated~~enhances ~~selling~~the ~~price~~disclosure ifrequirements ~~neither~~regarding ~~vendor-specific~~an orenterprise’s ~~third-party~~involvement ~~evidence~~with isa ~~available~~VIE. ~~Additionally,~~The ~~ASU~~Company ~~2009-13~~adopted ~~expands~~ the ~~disclosure~~provisions ~~requirements~~of ~~related~~this toupdate aunder ~~vendor’s multiple-deliverable revenue arrangements.~~ ASU 2009-1317 is effective ~~prospectively~~October ~~for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15~~2, 2010 ~~and early adoption is permitted~~. ~~The~~Since the Company isdoes not currently ~~evaluating~~have ~~the~~variable ~~potential~~interest ~~impact~~entities, ~~that~~ this update ~~may~~did not have an impact on ~~its~~the Company’s consolidated results of operations, financial position or cash flows ~~but does not expect it will have a material effect~~.

In January 2010, the FASB issued ASU 2010-06, “Fair Value Measurements and Disclosures: Improving Disclosures About Fair Value Measurements.” This update requires reporting entities to make new disclosures about recurring or nonrecurring fair-value measurements including significant transfers into and out of Level 1 and Level 2 fair-value measurements and information on purchases, sales, issuances, and settlements on a gross basis in the reconciliation of Level 3 fair-value measurements. The Company adopted the provisions of this guidance under ASU 2009-06, except for Level 3 reconciliation disclosures, effective January 2, 2010 with no impact on the Company’s consolidated results of operations, financial position or cash flows. The level 3 reconciliation disclosures are effective for annual periods beginning after December 15, 2010, and for interim periods within those fiscal years. As the level 3 reconciliation is also disclosure-related, its adoption is not expected to have an impact on the Company’s consolidated results of operations, financial position or cash flows.

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Table of Contents

CPI INTERNATIONAL, INC.

and Subsidiaries

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All tabular dollar amounts in thousands except share and per share amounts)

In ~~September~~April ~~2009~~2010, the FASB issued ASU ~~2009~~2010-1417, “~~Certain~~ Revenue ~~Arrangements~~Recognition—Milestone ~~That~~Method ~~Include~~(Topic ~~Software~~605): ~~Elements,~~Milestone Method of Revenue Recognition.” ~~which~~ASU is2010-17 ~~included~~provides inguidance on applying the ~~ASC~~milestone ~~985,~~method ~~“Software.”~~to ~~ASU~~milestone ~~2009-14~~payments ~~amends~~for ~~previous~~achieving ~~software~~specified ~~revenue~~performance ~~recognition~~measures towhen ~~exclude~~those ~~(a) non-software~~payments ~~components~~are ofrelated ~~tangible~~to ~~products~~uncertain ~~and~~future ~~(b) software~~events. ~~components~~The scope of ~~tangible~~ASU ~~products~~2010-17 ~~that~~is ~~are~~limited ~~sold,~~to ~~licensed,~~transactions involving research or ~~leased~~development. ~~with~~This ~~tangible~~update ~~products~~further ~~when~~states that the ~~software~~milestone ~~components~~method ~~and~~is ~~non-software~~not ~~components~~the only acceptable method of ~~the~~revenue ~~tangible~~recognition ~~product~~for ~~function~~milestone ~~together~~payments. toAccordingly, ~~deliver~~entities ~~the~~can ~~tangible~~make ~~product’s~~an ~~essential~~accounting ~~functionality.~~policy ~~ASU~~election ~~2009-14~~to isrecognize ~~effective~~arrangement consideration received for ~~revenue~~achieving ~~arrangements~~specified ~~entered~~performance ~~into~~measures orduring ~~materially~~the ~~modified~~period in ~~fiscal~~which ~~years~~the ~~beginning~~milestones onare achieved, provided certain criteria are met. An entity’s policy for recognizing deliverable consideration or ~~after~~unit ~~June 15,~~of ~~2010~~accounting ~~and~~consideration contingent upon achievement of a milestone shall be applied onconsistently ato ~~prospective~~similar ~~basis.~~deliverables ~~Earlier~~or ~~application~~units isof ~~permitted~~accounting. asThe ofCompany adopted the ~~beginning~~provisions of anthis ~~entity’s~~update ~~fiscal~~under ~~year.~~ASU ~~The~~2010-17 ~~Company~~effective isOctober ~~currently~~2, ~~evaluating~~2010. ~~the~~The ~~potential~~adoption ~~impact~~did ~~that~~not ~~this~~have ~~update~~a ~~may~~material ~~have~~impact on ~~its~~the Company’s consolidated results of operations, financial position or cash flows ~~but does not expect it will have a material effect~~.

In December ~~2009~~ 2010, the FASB issued ASU ~~2009~~2010-1728, “~~Improvements~~Goodwill toand ~~Financial~~Other ~~Reporting~~(Topic by350): ~~Enterprises~~When ~~Involved~~to ~~with~~Perform ~~Variable~~Step ~~Interest~~2 ~~Entities,”~~of asthe aGoodwill ~~further~~Impairment ~~clarification~~Test ~~ASC 810-10,~~for ~~“Consolidation~~Reporting ofUnits ~~Variable~~with ~~Interest~~Zero ~~Entities~~or Negative Carrying Amounts.” ASU ~~2009~~2010-~~17,~~28 ~~upon~~modifies ~~adoption,~~Step ~~requires~~1 of the ~~use~~goodwill ofimpairment atest ~~qualitative~~for ~~analysis~~reporting tounits ~~determine~~with ~~the~~zero ~~primary~~or ~~beneficiary~~negative ofcarrying aamounts. ~~variable~~For ~~interest~~those ~~entity~~reporting ~~(“VIE”)~~units, ~~amends~~an ~~the~~entity ~~guidance~~is ~~for~~required ~~determining~~to ifperform anStep ~~entity~~2 isof athe ~~VIE~~goodwill ~~and~~impairment ~~enhances~~test ~~the~~if ~~disclosure~~it ~~requirements~~is ~~regarding~~more anlikely ~~enterprise’s~~than ~~involvement~~not ~~with~~that a ~~VIE~~goodwill impairment exists. In ~~ASU~~determining ~~2009-17~~whether it is ~~effective~~more aslikely ofthan ~~the~~not ~~beginning~~that of a ~~company’s~~goodwill ~~first~~impairment ~~fiscal~~exists, ~~year~~an ~~beginning~~entity ~~after~~must ~~November~~consider ~~15,~~whether ~~2009~~there are any adverse qualitative factors indicating an impairment may exist. ASU ~~Since~~2010-28 ~~the~~is ~~Company~~effective ~~does~~for ~~not~~fiscal ~~currently~~years, ~~have~~and ~~variable~~interim ~~interest~~periods ~~entities~~within those years, beginning December 15, 2010. The adoption of this ~~update~~ASU is not expected to have noa material impact on ~~its~~the Company’s consolidated results of operations, financial position or cash flows.

In ~~January~~ December 2010, the FASB issued ASU 2010-0629, “~~Fair~~Business ~~Value~~Combinations ~~Measurements~~(Topic ~~and Disclosures~~805): ~~Improving~~ ~~Disclosures~~Disclosure ~~About~~of ~~Fair~~Supplementary ~~Value~~Pro ~~Measurements.”~~Forma ~~This~~Information ~~update~~for ~~requires~~Business ~~reporting~~Combinations.” ASU ~~entities~~2010-29 torequires ~~make~~that ~~new~~if ~~disclosures~~a ~~about~~public ~~recurring~~entity orpresents ~~nonrecurring~~comparative ~~fair-value~~financial ~~measurements~~statements, ~~including~~the ~~significant~~entity ~~transfers~~should ~~into~~disclose revenue and ~~out~~earnings of ~~Level~~the 1combined ~~and~~entity ~~Level~~as 2though ~~fair-value~~the ~~measurements~~business ~~and~~combination(s) ~~information~~that onoccurred ~~purchases,~~during ~~sales,~~the ~~issuances,~~current ~~and~~year ~~settlements~~had onoccurred aas ~~gross~~of ~~basis~~the inbeginning of the ~~reconciliation~~comparable ofprior ~~Level~~annual 3reporting ~~fair-value~~period ~~measurements~~only. This ASU ~~2010-06~~also isexpands ~~effective~~the ~~for~~supplemental ~~interim~~pro ~~and~~forma ~~annual~~adjustments ~~reporting~~to ~~periods~~include ~~beginning~~a ~~after~~description ~~December~~of ~~15,~~the ~~2009~~nature and amount of material, ~~except~~nonrecurring ~~for~~pro ~~Level~~forma 3adjustments ~~reconciliation~~directly ~~disclosures~~attributable ~~which~~to ~~are~~the ~~effective~~business ~~for~~combination ~~annual~~included ~~periods~~in ~~beginning~~the ~~after~~reported ~~December~~pro ~~15,~~forma ~~2010~~revenue and earnings. ASU ~~The~~2010-29 ~~Company~~is ~~adopted~~effective prospectively for business combinations for which the ~~provisions~~acquisition ofdate ~~this~~is ~~guidance~~on ~~under~~or ~~ASU~~after ~~2009-06,~~the ~~except~~first ~~for~~annual ~~Level~~reporting 3period ~~reconciliation~~beginning ~~disclosures,~~on ~~effective~~or ~~January~~after 2December 15, 2010. As this ~~guidance~~ASU is disclosure-related, it ~~did~~is not expected to have ana material impact on the Company’s consolidated results of operations, financial position or cash flows.

In February 2010, the FASB issued ASU 2010-08, "Technical Corrections to Various Topics." This update eliminates inconsistencies and outdated provisions in U.S. generally accepted accounting principles (“GAAP”) and provides needed clarification on others. Amendments within ASU 2010-08 that may be applicable to the Company are effective as of the first reporting period beginning after February 2, 2010, the date this ASU was issued. The Company adopted the provisions of this guidance under ASU 2010-08 effective April 3, 2010 with no material impact on its consolidated results of operations, financial position or cash flows.

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Table of Contents

CPI INTERNATIONAL, INC.

and Subsidiaries

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All tabular dollar amounts in thousands except share and per share amounts)

In February 2010, the FASB issued ASU 2010-09, “Subsequent Events (Topic 855): Amendments to Certain Recognition and Disclosure Requirements.” This update retracts the requirement to disclose the date through which subsequent events have been evaluated and whether that date is the date the financial statements were issued or were available to be issued. ASU 2010-09 was effective immediately after its issuance and has been adopted by the Company with no material impact on its consolidated results of operations, financial position or cash flows.

In April 2010, the FASB issued ASU 2010-17, “Revenue Recognition—Milestone Method (Topic 605): Milestone Method of Revenue Recognition.” ASU 2010-17 provides guidance on applying the milestone method to milestone payments for achieving specified performance measures when those payments are related to uncertain future events. The scope of ASU 2010-17 is limited to transactions involving research or development. This update further states that the milestone method is not the only acceptable method of revenue recognition for milestone payments. Accordingly, entities can make an accounting policy election to recognize arrangement consideration received for achieving specified performance measures during the period in which the milestones are achieved, provided certain criteria are met. An entity’s policy for recognizing deliverable consideration or unit of accounting consideration contingent upon achievement of a milestone shall be applied consistently to similar deliverables or units of accounting. ASU 2010-17 is effective on a prospective basis for milestones achieved in interim and fiscal years beginning after June 15, 2010. Early adoption is permitted. The Company is currently evaluating the potential impact that this update may have on its consolidated results of operations, financial position or cash flows but does not expect it will have a material effect.

3. Supplemental Balance Sheet Information

Accounts Receivable: Accounts receivable are stated net of ~~allowance~~allowances for doubtful accounts as follows:

	July 2,			October 2,
	December 31,			October 1,
	2010			~~2009~~2010
Accounts receivable	$	4339,~~522~~498		$	45,~~240~~819
Less: Allowance for doubtful accounts		(8975	)		(95112	)
Accounts receivable, net	$	4339,~~433~~423		$	45,~~145~~707

Inventories: The following table provides details of inventories:

	December 31,		October 1,
	2010		2010
Raw material and parts	$	44,039	$	42,167
Work in process		25,803		24,531
Finished goods		8,603		8,510
	$	78,445	$	75,208

Reserve for loss contracts: The following table summarizes the activity related to reserves for loss contracts:

	Quarter Ended
	December 31,			January 1,
	2010			2010
Balance at beginning of period	$	3,737		$	4,068
Provision for loss contracts, charged to cost of sales		1,594			1,111
Credit to cost of sales upon revenue recognition		(426	)		(668	)
Balance at end of period	$	4,905		$	4,511

Reserve for loss contracts are reported in the condensed consolidated balance sheet in the following accounts:

	December 31,		January 1,
	2010		2010
Inventories	$	4,018	$	4,391
Accrued expenses		887		120
	$	4,905	$	4,511

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Table of Contents

CPI INTERNATIONAL, INC.

and Subsidiaries

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All tabular dollar amounts in thousands except share and per share amounts)

Inventories: The following table provides details of inventories:

	July 2,		October 2,
	2010		2009
Raw material and parts	$	43,933	$	38,205
Work in process		24,855		20,542
Finished goods		9,619		8,249
	$	78,407	$	66,996

Reserve for loss contracts: The following table summarizes the activity related to reserves for loss contracts:

	Nine Months Ended
	July 2,			July 3,
	2010			2009
Balance at beginning of period	$	4,068		$	1,928
Provision for loss contracts, charged to cost of sales		2,886			2,696
Credit to cost of sales upon revenue recognition		(3,347	)		(1,522	)
Balance at end of period	$	3,607		$	3,102

Reserve for loss contracts are reported in the condensed consolidated balance sheet in the following accounts:

	July 2,		July 3,
	2010		2009
Inventories	$	3,468	$	3,092
Accrued expenses		139		10
	$	3,607	$	3,102

Product Warranty: The following table summarizes the activity related to product warranty:

	Nine Months Ended
	Quarter Ended
	July 2,			July 3,
	December 31,			January 1,
	2010			~~2009~~2010
Beginning accrued warranty	$	35,~~845~~101		$	43,~~159~~845
Actual costs of warranty claims		(41,~~087~~334	)		(31,~~347~~170	)
Estimates for product warranty, charged to cost of sales		51,~~072~~651			21,~~990~~286
Ending accrued warranty	$	45,~~830~~418		$	3,~~802~~961

Accumulated Other Comprehensive Income: The following table provides the components of accumulated other comprehensive income in the condensed consolidated balance sheets:

	December 31,			October 1,
	2010			2010
Unrealized gain on cash flow hedges, net of tax	$	272		$	175
Unrealized actuarial loss and prior service credit for pension liability, net of tax		(316	)		(316	)
	$	(44	)	$	(141	)

4. Merger Agreement

The Company entered into an Agreement and Plan of Merger dated as of November 24, 2010 ("Merger Agreement") with Catalyst Acquisition, Inc. ("Merger Sub"), an indirect wholly owned subsidiary of CPI International Acquisition, Inc. (formerly Catalyst Holdings, Inc.). CPI International Acquisition, Inc. is an indirect wholly owned subsidiary of CPI International Holding Corp. (“Parent”). Parent, Merger Sub and CPI International Acquisition, Inc. are affiliates of the Veritas Fund.

The Merger Agreement contemplates that Merger Sub will be merged with and into the Company, with the Company surviving as a wholly-owned subsidiary of Parent (the "Merger"), and each outstanding share of the Company's common stock will be converted in the Merger into the right to receive $19.50 per share in cash.

The Company has made customary representations, warranties and covenants in the Merger Agreement, including (i) its agreement, subject to certain exceptions, to conduct business in the ordinary course and not to engage in certain activities between the execution of the Merger Agreement and the consummation of the merger and (ii) its agreement to not solicit or knowingly encourage alternative transactions or, subject to certain exceptions, enter into discussions concerning, or provide information in connection with, alternative transactions.

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Table of Contents

CPI INTERNATIONAL, INC.

and Subsidiaries

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All tabular dollar amounts in thousands except share and per share amounts)

~~Accumulated~~The ~~Other~~completion ~~Comprehensive~~of ~~Income: The~~the ~~following~~Merger ~~table~~is ~~provides~~subject to certain conditions, including, among others, (i) the ~~components~~adoption of ~~accumulated~~the ~~other~~Merger ~~comprehensive~~Agreement ~~income~~by inthe Company's stockholders, (ii) the ~~condensed~~absence ~~consolidated~~of ~~balance~~certain ~~sheets:~~legal impediments to the consummation of the merger, (iii) the expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and certain approvals under foreign anti-competition laws, (iv) subject to certain materiality exceptions, the accuracy of the representations and warranties made by Parent and the Company, respectively, and (v) compliance by Parent and the Company with the respective obligations under the Merger Agreement. The completion of the Merger is not subject to a financing condition. However, generally, Parent will not be required to close the merger until completion of a marketing period set forth in the Merger Agreement.

	July 2,			October 2,
	2010			2009
Unrealized gain on cash flow hedges, net of tax	$	742		$	828
Unrealized actuarial loss and prior service credit for pension liability, net of tax		(236	)		(230	)
	$	506		$	598

The Merger Agreement contains typical mutual termination rights, including termination by mutual agreement of the parties, for any final and nonappealable order or law enjoining or prohibiting or making illegal the Merger or for failure to obtain the Company’s stockholder approval. In addition, either party may terminate the Merger Agreement if the Merger is not consummated by April 15, 2011. In addition, the Merger Agreement may be terminated by Parent in the event that the Company's board of directors changes its recommendation. The Company may terminate the Merger Agreement in order to enter into a superior acquisition proposal. The Company may also terminate the Merger agreement if all of the conditions precedent to Parent’s obligation to close have been satisfied or waived (other than conditions that by their terms are to be satisfied at the closing) and Parent does not complete the closing by the required date.

4The Company has agreed to pay a termination fee upon termination of the merger agreement if, among other things, (i) Parent terminates the merger agreement due to a recommendation change by the Company's board of directors, (ii) either party terminates the merger agreement because of the failure to obtain stockholder approval and before termination, the Company's board of directors changes its recommendation, or (iii) the Company terminates the merger agreement to enter into a superior acquisition proposal. ~~Definitive~~ ~~Merger~~If ~~Agreement~~the merger agreement is terminated in connection with ~~Comtech~~a superior acquisition proposal, then the termination fee payable by the Company is $13 million. A termination by Parent following a change of recommendation resulting from certain events, circumstances or developments unknown or not understood as of the date of the merger agreement results in a termination fee of $15 million. In addition, if the termination by Parent following a change in recommendation resulting from certain events, circumstances or developments unknown or not understood as of the date of the merger agreement occurs after the stockholder meeting to approve the merger agreement and the stockholders fail to approve the merger agreement, the Company will also be required to reimburse up to $2.5 million of Parent's fees and expenses.

OnIf ~~May 10, 2010,~~ the Company ~~announced~~terminates the ~~signing of a definitive~~ merger agreement ~~with~~under ~~Comtech~~certain ~~Telecommunications~~circumstances ~~Corporation~~ (~~“Comtech”)~~including ~~under~~Parent's ~~which~~failure ~~Comtech agreed~~ to ~~acquire~~consummate the ~~Company in a~~ merger inby ~~which~~the ~~Company~~required ~~stockholders~~date ~~would~~following ~~receive~~satisfaction aor ~~combination~~waiver of ~~cash~~all ~~and~~conditions ~~stock~~precedent into ~~exchange~~Parent's ~~for~~obligation ~~their~~to ~~Company~~close ~~shares.~~(other ~~The~~than ~~ultimate~~conditions ~~amount of consideration~~ that aby ~~Company~~their ~~stockholder~~terms ~~will~~are ~~receive~~to ~~for each Company share will~~ be ~~equal~~satisfied toat athe ~~combination~~closing)), ofParent ~~$9.00~~must inpay ~~cash~~the ~~plus~~Company a ~~fraction~~termination offee ~~a share~~ of ~~Comtech common stock equal to~~ $822.105 ~~divided~~million; ~~by the average closing price of Comtech common stock over a specified period of time prior to closing,~~ provided that ~~the~~this ~~fraction~~termination ~~shall~~fee ~~not~~will be ~~greater~~increased ~~than~~to 0$27.~~2382~~5 ~~nor~~million ~~less~~if ~~than~~Parent ~~0.2132.~~has ~~Based~~committed onwillful ~~the~~breach ~~August 2, 2010 market closing price~~ of ~~Comtech stock of $21.79,~~ the ~~fraction~~merger ~~was equal to 0~~agreement.~~2382 and was currently valued at $5.19 per share of Company stock.~~

The transaction is subject to customary closing conditions, including, among others, adoption of the merger agreement by the Company’s stockholders, regulatory approvals, absence of any law or order prohibiting the transaction, effectiveness of the registration statement for the shares of Comtech common stock to be issued in the merger and the listing of such shares on Nasdaq, accuracy of certain representations and warranties and material compliance with covenants, and the absence of any material adverse effect (as defined) with respect to the Company or Comtech. On August 2, 2010, the Company and Comtech received a request for additional information and documents—often referred to as a second request—from the Department of Justice in connection with the proposed merger. The Company and Comtech are working to respond to the second request.

The merger agreement contains certain termination rights for both the Company and Comtech and further provides that, upon termination of the merger agreement, under specified circumstances, the Company will be required to pay Comtech a termination fee of up to $15 million.

For the three and nine months ended July 2, 2010, the Company has incurred transaction costs relating to the proposed merger in the amount of $3.6 million and $3.8 million, respectively. Such non-recurring transaction costs were comprised of fees for investment bankers, attorneys and other professional services rendered in connection with the proposed merger.

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Table of Contents

CPI INTERNATIONAL, INC.

and Subsidiaries

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All tabular dollar amounts in thousands except share and per share amounts)

~~5. Fair~~Other ~~Value~~Merger-Related ~~Measurements~~Transactions

~~FASB~~In ~~ASC~~connection ~~825~~with ~~establishes~~the aMerger, ~~framework~~Communications ~~for~~& ~~measuring~~Power ~~fair~~Industries, ~~value~~Inc. ~~and~~has ~~expands~~offered ~~disclosures~~to ~~about~~purchase ~~fair~~all ~~value~~$117.0 ~~measurements~~million byaggregate ~~establishing~~principal aamount ~~fair~~of ~~value~~its ~~hierarchy~~existing ~~that~~outstanding ~~prioritizes~~8% Senior Subordinated Notes due 2012 (the ~~inputs~~“8% Notes”), and CPII has offered to ~~valuation~~purchase ~~techniques~~all ~~used~~$12.0 million aggregate principal amount of its existing outstanding Floating Rate Senior Notes due 2015 (the “FR Notes’’) pursuant to ~~measure~~tender ~~fair~~offers ~~value~~and related consent solicitations. The ~~three~~outstanding ~~levels~~consents required to approve the proposed amendments to the indenture governing the 8% Notes and the FR Notes have been received. Any 8% Notes not tendered will be redeemed according to the terms of the ~~fair~~indenture ~~value~~governing ~~hierarchy~~the ~~under~~8% ~~ASC~~Notes. ~~825~~All ~~are~~holders ~~described~~of asthe ~~follows:~~FR Notes have validly tendered their notes and consents.

Level 1	Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2	Inputs reflect quoted prices for identical assets or liabilities in markets that are not active; quoted prices for similar assets or liabilities in active markets; inputs other than quoted prices that are observable for the asset or the liability; or inputs that are derived principally from or corroborated by observable market data by correlation or other means.
Level 3	Unobservable inputs reflecting the Company’s own assumptions incorporated in valuation techniques used to determine fair value. These assumptions are required to be consistent with market participant assumptions that are reasonably available.

At the closing of the Merger, the Company expects to refinance its existing senior credit facility. Parent has received an equity commitment letter from the Veritas Fund pursuant to which the Veritas Fund has committed to invest, or have its affiliates invest, up to $220.0 million, plus certain additional amounts, solely for the purpose of purchasing equity securities of an indirect parent of CPI International Acquisition, Inc. in order to provide a portion of the financing required for the Merger and the other transactions contemplated by the Merger Agreement. Actual funding from the Veritas Fund and its affiliates will depend on, among other things, the amount of the Company’s cash balances at the Merger closing date.

~~Fair~~In ~~value~~addition, is the ~~price~~remainder ~~that~~of ~~would~~the befunding ~~received~~for ~~upon~~the ~~sale~~Merger, ofthe anassociated ~~asset~~refinancing ~~or paid upon transfer~~ of ~~a liability in an orderly transaction between market participants at~~ the ~~measurement~~Company's ~~date~~debt and infees ~~the~~and ~~principal~~expenses oris ~~most~~expected ~~advantageous~~to ~~market~~come ~~for~~from ~~that~~a ~~asset or liability~~$215.0 ~~The~~million ~~fair~~aggregate ~~value~~principal ~~should~~amount benote ~~calculated~~offering ~~based~~by onParent ~~assumptions~~and ~~that~~a ~~market~~new ~~participants~~credit ~~would~~facility ~~use~~for inParent ~~pricing~~consisting ~~the~~of ~~asset~~a or$150.0 ~~liability,~~million ~~not~~six-year onterm ~~assumptions~~loan ~~specific~~facility toand ~~the~~a ~~entity~~$30.0 Inmillion ~~addition, the fair value of liabilities should include consideration of non~~five-~~performance~~year ~~risk,~~revolving ~~including the Company’s own~~ credit ~~risk~~facility.

~~The~~Strategic ~~Company’s~~Alternative ~~non-financial~~Transaction assets (including goodwill, intangible assets and long-lived assets) and liabilities are measured at fair value on a non-recurring basis; that is, the assets and liabilities are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances such as when they are deemed to be other-than-temporarily impaired. The fair values of these non-financial assets and liabilities are determined based on valuation techniques using the best information available, and may include quoted market prices, market comparables, and discounted cash flow projections. During the three and nine months ended July 2, 2010, no fair value adjustments or material fair value measurements were required for the Company’s non-financial assets or liabilities.Expenses

The Company ~~measures~~incurred ~~certain~~during ~~financial~~the ~~assets~~first ~~and~~quarter ~~liabilities~~of atfiscal ~~fair~~year ~~value~~2011 ~~on a~~ non-recurring ~~basis~~transaction costs, ~~including~~reported ~~cash~~as ~~equivalents,~~“strategic ~~restricted~~alternative ~~cash,~~transaction ~~available-for-sale~~expenses” ~~securities~~in ~~and~~the ~~derivative~~condensed ~~instruments.~~consolidated Asstatement of ~~July~~income 2,and ~~2010,~~comprehensive ~~financial assets utilizing Level 1 inputs included cash equivalents~~income, ~~such~~in asthe ~~money~~amount ~~market~~of ~~and~~$2.7 ~~overnight U~~million.S. ~~Government~~Such transaction ~~securities~~expenses comprised fees ~~and available-~~for~~-sale~~ investment ~~securities~~bankers, attorneys ~~such as mutual funds. Financial assets~~ and ~~liabilities~~other ~~utilizing~~professional services ~~Level~~rendered 2in ~~inputs~~connection ~~included~~with ~~foreign~~the ~~currency~~sale ~~derivatives~~of ~~and~~the ~~interest rate swap derivatives. The~~ Company, ~~does~~including ~~not have any financial assets or liabilities requiring~~ the ~~use of Level 3 inputs~~Merger.

5. Financial Instruments

The Company’s non-financial assets (including goodwill, intangible assets, inventories and long-lived assets) and liabilities are measured at fair value on a non-recurring basis; that is, the assets and liabilities are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances such as when they are deemed to be other-than-temporarily impaired. The fair values of these non-financial assets and liabilities are determined based on valuation techniques using the best information available, and may include quoted market prices, market comparables, and discounted cash flow projections. An impairment charge is recorded when the cost exceeds its fair value and this condition is determined to be other-than-temporary. During the first quarter of fiscal years 2011 and 2010, no fair value adjustments or material fair value measurements were required for the Company’s non-financial assets or liabilities.

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Table of Contents

CPI INTERNATIONAL, INC.

and Subsidiaries

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All tabular dollar amounts in thousands except share and per share amounts)

The Company measures certain financial assets and liabilities at fair value on a recurring basis, including cash equivalents, restricted cash, available-for-sale securities and derivative instruments. As of December 31, 2010, financial assets utilizing Level 1 inputs included cash equivalents, such as money market and overnight U.S. Government securities and available-for-sale securities, such as mutual funds. Financial assets and liabilities utilizing Level 2 inputs included foreign currency derivatives and interest rate swap derivatives. The Company does not have any financial assets or liabilities requiring the use of Level 3 inputs.

The following tables set forth financial instruments carried at fair value within the ASC 825 hierarchy:

				Fair Value Measurements at July 2, 2010 Using
			Fair Value Measurements at December 31, 2010 Using
			Quoted Prices in Active Markets for Identical Assets	~~Quoted Prices in Active Markets for Identical Assets~~		Significant Other Observable Inputs	~~Significant Other Observable Inputs~~		Significant Unobservable Inputs	~~Significant Unobservable Inputs~~
	Total		(Level 1)	~~(Level 1)~~		(Level 2)	~~(Level 2)~~		(Level 3)	~~(Level 3)~~
Assets:
Money market and overnight U.S. Government securities1	$	4146,~~650~~401	$	$46,401	~~41,650~~	$	$-	-	$	$-	-
Mutual funds2		~~153~~185		185	~~153~~		-	-		-	-
Foreign exchange forward derivatives3		~~659~~739		-	-		739	~~659~~		-	-
Total assets at fair value	$	4247,~~462~~325	$	$46,586	~~41,803~~	$	$739	~~659~~		-	-
Liabilities:
Foreign exchange forward derivatives4		20						20
Interest rate swap derivative4	$	493	$	-		$	493		$	-
Interest rate swap derivative4	$	1,109		$	-		$	1,109		$	-
Total liabilities at fair value	$	493	$	-		$	493		$	-
Total liabilities at fair value	$	1,129		$	-		$	1,129		$	-

1 The money market and overnight U.S. Government securities are classified as part of cash and cash equivalents and restricted cash in the condensed consolidated balance sheet. 2 The mutual funds are classified as part of other long-term assets in the condensed consolidated balance sheet. 3 The foreign currency derivatives are classified as part of prepaid and other current assets in the condensed consolidated balance sheet. 4 The ~~foreign currency and~~ interest rate swap derivatives are classified as part of accrued expenses in the condensed consolidated balance sheet.

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Table of Contents

CPI INTERNATIONAL, INC.

and Subsidiaries

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All tabular dollar amounts in thousands except share and per share amounts)

				Fair Value Measurements at October 2, 2009 Using
			Fair Value Measurements at October 1, 2010 Using
			Quoted Prices in Active Markets for Identical Assets	~~Quoted Prices in Active Markets for Identical Assets~~		Significant Other Observable Inputs	~~Significant Other Observable Inputs~~		Significant Unobservable Inputs	~~Significant Unobservable Inputs~~
	Total		(Level 1)	~~(Level 1)~~		(Level 2)	~~(Level 2)~~		(Level 3)	~~(Level 3)~~
Assets:
Money market and overnight U.S. Government securities1	$	2236,~~464~~420	$	$36,420	~~22,464~~	$	$-	-	$	$-	-
Mutual funds2		~~152~~171		171	~~152~~		-	-		-	-
Foreign exchange forward derivatives3		~~3,467~~437		-	-		437	~~3,467~~		-	-
Total assets at fair value	$	2637,~~083~~028	$	$36,591	~~22,616~~	$	$437	~~3,467~~		-	-
Liabilities:
Interest rate swap derivative4	$	~~2,323~~816	$	$-	-	$	$816	~~2,323~~	$	$-	-
Total liabilities at fair value	$	~~2,323~~816	$	$-	-	$	$816	~~2,323~~	$	$-	-

1 The money market and overnight U.S. Government securities are classified as part of cash and cash equivalents and restricted cash in the condensed consolidated balance sheet. 2 The mutual funds are classified as part of other long-term assets in the condensed consolidated balance sheet. 3 The foreign currency derivatives are classified as part of prepaid and other current assets in the condensed consolidated balance sheet. 4 The interest rate swap derivatives are classified as part of accrued expenses ~~and other long-term liabilities~~ in the condensed consolidated balance sheet.

Investments Other Than Derivatives

In general and where applicable, the Company uses quoted prices in active markets for identical assets or liabilities to determine fair value. This pricing methodology applies to the Company’s Level 1 investments, such as money market ~~securities~~, U.S. Government securities and mutual funds.

If quoted prices in active markets for identical assets or liabilities are not available to determine fair value, then the Company would use quoted prices for similar assets and liabilities or inputs other than the quoted prices that are observable either directly or indirectly. These investments would be included in Level 2.

Derivatives

The Company executes foreign exchange forward contracts to purchase Canadian dollars and holds a pay-fixed receive-variable interest rate swap contract, all executed in the retail market with its relationship banks. To determine the most appropriate value, the Company uses an in-exchange valuation premise which considers the assumptions that market participants would use in pricing the derivatives. The Company has elected to use the income approach and uses observable (Level 2) market expectations at the measurement date and standard valuation techniques to convert future amounts to a single present amount. Level 2 inputs for derivative valuations are midmarket quoted prices for similar assets or liabilities in active markets and inputs other than quoted prices that are observable for the asset or liability.

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Table of Contents

CPI INTERNATIONAL, INC.

and Subsidiaries

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All tabular dollar amounts in thousands except share and per share amounts)

Derivatives

Key inputs for currency derivatives are spot rates, forward rates, interest rates and credit derivative rates. The spot rate for the Canadian dollar is the same spot rate used for all balance sheet translations at the measurement date. Forward premiums/discounts and interest rates are interpolated from commonly quoted intervals. Once valued, each forward is identified as either an asset or liability. Assets are further discounted using counterparty annual credit default rates, and liabilities are valued using the Company’s credit as reflected in the spread paid over LIBOR on the term loan under the Company’s senior credit facilities.

Key inputs for valuing the interest rate swap are the cash rates used for the short term (under 3 months), futures rates for up to three years and LIBOR swap rates for periods beyond. These inputs are used to derive variable resets for the swap as well as to discount future fixed and variable cash flows to present value at the measurement date. A credit spread is used to further discount each net cash flow using, for assets, counterparty credit default rates and, for liabilities, the Company’s credit spread over LIBOR on the term loan under the Company’s senior credit facilities.

See Note 67 for further information regarding the Company’s derivative instruments.

Other Financial Instruments

The Company’s other financial instruments include cash, restricted cash, accounts receivable, accounts payable and long-term debt. Except for long-term debt, the carrying value of these financial instruments approximates fair values because of their relatively short maturity.

The fair values of the Company’s long-term debt were estimated using quoted market prices where available. For long-term debt not actively traded, fair values were estimated using discounted cash flow analyses, based on the Company’s current estimated incremental borrowing rates for similar types of borrowing arrangements. The estimated fair value of the Company’s long-term debt as of ~~July~~December 231, 2010 and October 21, ~~2009~~2010 was $~~192~~194.20 million and $~~188~~192.56 million, respectively, compared to the carrying value of $194.9 million as of both dates.

6. Derivative Instruments and Hedging Activities

Foreign Exchange Forward Contracts: Although the majority of the Company’s revenue and expense activities are transacted in U.S. dollars, the Company does transact business in foreign countries. The Company’s primary foreign currency cash flows are in Canada and several European countries. In an effort to reduce its foreign currency exposure to Canadian dollar denominated expenses, the Company enters into Canadian dollar forward contracts to hedge the Canadian dollar denominated costs for its manufacturing operation in Canada. The Company does not engage in currency speculation.

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Table of Contents

CPI INTERNATIONAL, INC.

and Subsidiaries

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All tabular dollar amounts in thousands except share and per share amounts)

~~The Company’s Canadian dollar forward contracts in effect as of July 2, 2010 have durations of 8 to 15 months~~6. Senior ~~These~~Credit ~~contracts~~Facilities ~~are~~Agreement designated as cash flow hedges and are considered highly effective, as defined by FASB ASC 815. Unrealized gains and losses from foreign exchange forward contracts are included in accumulated other comprehensive income in the condensed consolidated balance sheets. At July 2, 2010, the unrealized gain, net of tax of $0.7 million, was $1.4 million. The Company anticipates recognizing the entire unrealized gain or loss in operating earnings within the next four fiscal quarters. Changes in the fair value of foreign currency forward contracts due to changes in time value are excluded from the assessment of effectiveness and are immediately recognized in general and administrative expenses in the condensed consolidated statements of income. The time value was not material for the three and nine months ended July 2, 2010 and July 3, 2009. If the transaction being hedged fails to occur, or if a portion of any derivative is ineffective, then the Company immediately recognizes the gain or loss on the associated financial instrument in general and administrative expenses in the condensed consolidated statements of income. The gain recognized in general and administrative expenses due to hedge ineffectiveness for the three and nine months ended July 2, 2010 was zero and $0.1 million, respectively. No ineffective amounts were recognized due to hedge ineffectiveness for the three and nine months ended July 3, 2009.Amendment

AsIn ofNovember ~~July 2,~~ 2010, ~~the~~Communications ~~Company~~& ~~had~~Power Industries entered into ~~Canadian~~Amendment ~~dollar~~and ~~forward~~Waiver ~~contracts~~No. ~~for~~1 ~~approximately~~(the ~~$19~~“Amendment”) to its Senior Credit Facilities.2 ~~million~~The ~~(Canadian~~Senior ~~dollars)~~Credit Facilities will mature and become due and payable on August 1, 2011 if CPI does not refinance or ~~approximately~~repay 58its 8% Senior Subordinated Notes prior to such date. The Amendment effects several technical changes to the Senior Credit Facilities including, among other items: (1) as a result of ~~estimated~~the ~~Canadian~~potential ~~dollar~~maturity ~~denominated~~of ~~expenses~~the ~~for~~credit ~~July~~agreement ~~2010~~on ~~through~~August ~~March~~1, 2011, Communications & Power Industries is not currently permitted to have letters of credit under the credit agreement which extend beyond July 27, 2011; the Amendment permits Communications & Power Industries to obtain letters of credit outside the credit agreement (including depositing cash with the issuing banks to secure its obligations under those letters of credit) provided that the total amount of letters of credit that Communications & Power Industries may have outstanding at any time shall not exceed $10 million in the aggregate; (2) the Amendment clarifies that entering into a merger agreement and an ~~average~~associated ~~rate~~voting ofagreement ~~approximately~~would not trigger defaults under the credit agreement. The Company paid $0.924 Umillion for the Senior Credit Facilities agreement amendment.S. ~~dollars~~This toamount ~~Canadian~~is ~~dollars~~included in deferred debt issue costs, net in the condensed consolidated balance sheet as of December 31, 2010.

Interest Rate Contracts: The Company also uses derivative instruments in order to manage interest costs and risk associated with its long-term debt. During fiscal year 2007, the Company entered into an interest rate swap contract (the “2007 Swap”) to receive three-month USD-LIBOR-BBA (British Bankers’ Association) interest and pay 4.77% fixed rate interest. Net interest positions are settled quarterly. The Company has structured the 2007 Swap with decreasing notional amounts such that it is less than the balance of its term loan under its senior credit facilities. The notional value of the 2007 Swap was $35.0 million at July 2, 2010 and represented approximately 53% of the aggregate term loan balance. The Swap agreement is effective through June 30, 2011. Under the provisions of ASC 815, this arrangement was initially designated and qualified as an effective cash flow hedge of interest rate risk related to the term loan, which permitted recording the fair value of the 2007 Swap and corresponding unrealized gain or loss to accumulated other comprehensive income in the condensed consolidated balance sheets. At July 2, 2010, the unrealized loss, net of tax of $0.4 million, was $0.7 ~~million~~. Derivative ~~The~~Instruments ~~interest rate swap gain or loss is included in the assessment of hedge effectiveness. Gains~~ and ~~losses~~Hedging ~~representing hedge ineffectiveness are immediately recognized in interest expense, net, in the condensed consolidated statements of income.~~Activities

The Company’s Canadian dollar forward contracts in effect as of December 31, 2010 have durations of 3 to 12 months. These contracts are designated as a cash flow hedge and are considered highly effective, as defined by FASB ASC 815, “Derivatives and Hedging.” Unrealized gains and losses from foreign exchange forward contracts are included in accumulated other comprehensive income in the condensed consolidated balance sheets. At December 31, 2010, the unrealized gain, net of tax of $0.3 million, was $0.6 million. The Company anticipates recognizing the entire unrealized gain or loss in operating earnings within the next four fiscal quarters. Changes in the fair value of foreign currency forward contracts due to changes in time value are excluded from the assessment of effectiveness and are immediately recognized in general and administrative expenses in the consolidated statements of income. The time value was not material for the first quarter of fiscal years 2011 and 2010. If the transaction being hedged fails to occur, or if a portion of any derivative is ineffective, then the Company immediately recognizes the gain or loss on the associated financial instrument in general and administrative in the consolidated statements of income. No ineffective amounts were recognized due to hedge ineffectiveness in the first quarter of fiscal year 2011. The gain recognized in general and administrative due to hedge ineffectiveness was insignificant for the first quarter of fiscal year 2010.

- 18 -

Table of Contents

CPI INTERNATIONAL, INC.

and Subsidiaries

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All tabular dollar amounts in thousands except share and per share amounts)

~~The~~As ~~following~~of ~~table~~December ~~summarizes~~31, 2010, the ~~fair~~Company ~~value~~had ofentered ~~derivative~~into ~~instruments~~Canadian ~~designated~~dollar asforward ~~cash~~contracts ~~flow~~for ~~hedges~~approximately at$18.9 ~~July~~million 2(Canadian dollars), ~~2010~~or ~~and~~approximately ~~October~~53% 2of estimated Canadian dollar denominated expenses for January 2011 through September 2011, ~~2009:~~at an average rate of approximately 0.96 U.S. dollar to Canadian dollar.

	Asset Derivatives					Liability Derivatives
		Fair Value					Fair Value
	Balance Sheet Location	July 2, 2010		October 2, 2009		Balance Sheet Location	July2, 2010			October 2, 2009
Derivatives designated as hedging instruments
Interest rate contracts						Accrued expenses	$	(1,109	)	$	(1,766	)
Interest rate contracts						Other long-term liabilities		-			(557	)
Forward contracts	Prepaid and other current assets	$	659	$	3,467	Accrued expenses		(20	)
Total derivatives designated as hedging instruments		$	659	$	3,467		$	(1,129	)	$	(2,323	)

Interest Rate Contracts: The Company also uses derivative instruments in order to manage interest costs and risk associated with its long-term debt. During fiscal year 2007, the Company entered into an interest rate swap contract (the “2007 Swap”) to receive three-month USD-LIBOR-BBA (British Bankers’ Association) interest and pay 4.77% fixed rate interest. Net interest positions are settled quarterly. The Company has structured the 2007 Swap with decreasing notional amounts such that it is less than the balance of its term loan under its senior credit facilities. The notional value of the 2007 Swap was $25.0 million at December 31, 2010 and represented approximately 38% of the aggregate term loan balance. The Swap agreement is effective through June 30, 2011. Under the provisions of ASC 815, this arrangement was initially designated and qualified as an effective cash flow hedge of interest rate risk related to the term loan, which permitted recording the fair value of the 2007 Swap and corresponding unrealized gain or loss to accumulated other comprehensive income in the consolidated balance sheets. At December 31, 2010, the unrealized loss, net of tax of $0.2 million, was $0.3 million. The interest rate swap gain or loss is included in the assessment of hedge effectiveness. Gains and losses representing hedge ineffectiveness are immediately recognized in interest expense, net in the consolidated statements of income.

AsSee ofNote ~~July 2~~5, ~~2010~~Financial ~~and October 2~~Instruments, ~~2009,~~for ~~all~~further ofinformation regarding the Company’s derivative instruments ~~were classified as hedging instruments in accordance with ASC 815~~.

The following table summarizes the fair value of derivative instruments designated as cash flow hedges at December 31, 2010 and October 1, 2010:

	Asset Derivatives					Liability Derivatives
		Fair Value					Fair Value
	Balance Sheet Location	December 31, 2010		October 1, 2010		Balance Sheet Location	December 31, 2010		October 1, 2010
Derivatives designated as hedging instruments
Interest rate contracts						Accrued expenses	$	493	$	816

Forward contracts	Prepaid and other current assets	$	739	$	437
Total derivatives designated as hedging instruments		$	739	$	437		$	493	$	816

As of December 31, 2010 and October 1, 2010, all of the Company’s derivative instruments were classified as hedging instruments under ASC 815.

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Table of Contents

CPI INTERNATIONAL, INC.

and Subsidiaries

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All tabular dollar amounts in thousands except share and per share amounts)

The following table summarizes the effect of derivative instruments on the condensed consolidated statements of income and comprehensive income for the ~~three~~first ~~and~~quarter ~~nine~~of ~~months~~fiscal ~~ended~~years ~~July~~2011 ~~2, 2010~~ and ~~July 3, 2009~~2010:

Derivatives in Cash Flow Hedging Relationships	Amount of Gain (Loss) ~~Gain~~ Recognized in OCI on Derivative (Effective Portion)						Location of (Loss) Gain Reclassified from Accumulated OCI into Income (Effective Portion)	Amount of (Loss) Gain Reclassified from Accumulated OCI into Income (Effective Portion)						Location of (Loss) Gain Recognized in Income on Derivative (Ineffective and Excluded Portion)	Amount of (Loss) Gain Recognized in Income on Derivative (Ineffective and Excluded Portion )
	Three Months Ended							Three Months Ended							Three Months Ended
	July 2, 2010			July 3, 2009				July 2, 2010			July 3, 2009				July 2, 2010			July 3, 2009
	December 31, 2010			January 1, 2010				December 31, 2010			January 1, 2010				December 31, 2010			January 1, 2010
Interest rate contracts	$	~~(33~~46	)	$	(~~302~~84	)	Interest expense, net	$	(~~443~~277	)	$	(~~528~~550	)	Interest expense, net	$	(95	)	$	(1210	)
Forward contracts		~~(667~~507	)		~~3,591~~752		Cost of sales		~~149~~504			(6275	)	General and administrative(a)		333			~~(60~~2	)
							Research and development		6551			~~(33~~39	)
							Selling and marketing		9422			~~(101~~17	)
							General and administrative		6930			~~(121~~22	)
Total	$	~~(700~~553	)	$	~~3,289~~668			$	~~1,064~~330		$	(~~2,045~~547	)		$	(628	)	$	(728	)

(a) The amount of gain recognized in income during the three months ended July 2, 2010 represents a $3 loss related to the amount excluded from the assessment of hedge effectiveness. The amount of loss recognized in income during the three months ended July 3, 2009 represents a $64 loss related to the amount excluded from the assessment of hedge effectiveness, net of $4 gain related to the ineffective portion of the hedging relationships.
	Nine Months Ended							Nine Months Ended							Nine Months Ended
	July 2, 2010			July 3, 2009				July 2, 2010			July 3, 2009				July 2, 2010			July 3, 2009
Interest rate contracts	$	(281	)	$	(1,889	)	Interest expense, net	$	(1,495	)	$	(1,228	)	Interest expense, net	$	(28	)	$	(40	)
Forward contracts		888			(2,791	)	Cost of sales		1805			(3,167	)	General and administrative(b)		51			(285	)
							Research and development		307			(176	)
							Selling and marketing		134			(96	)
							General and administrative		185			(289	)
Total	$	607		$	(4,680	)		$	936		$	(4,956	)		$	23		$	(325	)

(a) The amount of gain recognized in income during the first quarter of fiscal year 2011 represents a $33 gain related to the amount excluded from the assessment of hedge effectiveness. The amount of gain recognized in income during the first quarter of fiscal year 2010 represents a $5 gain related to the ineffective portion of the hedging relationships, net of a $3 loss related to the amount excluded from the assessment of hedge effectiveness.

(b) The amount of gain recognized in income during the nine months ended July 2, 2010 represents a $62 gain related to the ineffective portion of the hedging relationships, net of a $11 loss related to the amount excluded from the assessment of hedge effectiveness. The amount of loss recognized in income during the nine months ended July 3, 2009 represents a $286 loss related to the amount excluded from the assessment of hedge effectiveness, net of a $1 gain related to the ineffective portion of the hedging relationships.

- 20 -

Table of Contents

CPI INTERNATIONAL, INC.

and Subsidiaries

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All tabular dollar amounts in thousands except share and per share amounts)

As a result of the use of derivative instruments, the Company is exposed to the risk that counterparties to derivative contracts will fail to meet their contractual obligations. The Company does not hold collateral or other security from its counterparties supporting its derivative instruments. To mitigate the counterparty credit risk, the Company has a policy of only entering into contracts with carefully selected major financial institutions based upon their credit ratings and other factors. The Company regularly reviews its credit exposure balances as well as the creditworthiness of its counterparties.

When the Company’s derivatives are in a net asset position, such as the case with the ~~majority of the~~ Company’s forward foreign exchange contract derivatives at ~~July~~December 231, 2010, the Company is exposed to credit loss from nonperformance by the counterparty. If the counterparty fails to perform, credit risk with such counterparty is equal to the extent of the fair value gain in the derivative. At ~~July~~December 231, 2010, the Company’s interest rate contract ~~derivative~~derivatives ~~was~~were in a liability position, and the Company, therefore, was not exposed to the interest rate contract counterparty credit risk.

78. Commitments and Contingencies

Leases: The Company is committed to minimum rentals under non-cancelable operating lease agreements, primarily for land and facility space, that expire on various dates through 2050. Certain of the leases provide for escalating lease payments. Future minimum lease payments for all non-cancelable operating lease agreements at ~~July~~December 231, 2010 were as follows:

Fiscal Year	Operating Leases
2010 (remaining three months)	$	482
2011 (remaining nine months)	$	1,173
2011		1,324
2012		1,301
2012		1,125
2013		882
2013		633
2014		467
2014		420
2015		287
Thereafter		2,~~634~~375
	$	6,~~618~~485

Real estate taxes, insurance, and maintenance are also obligations of the Company. Rental expense under non-cancelable operating leases amounted to $0.67 million ~~and $1.8 million~~ for the ~~three~~first ~~and~~quarter ~~nine~~of ~~months~~fiscal ~~ended~~years ~~July~~2011 ~~2, 2010, respectively,~~ and $02010.6 ~~million and $2.0 million for the corresponding periods of fiscal year 2009.~~ Assets subject to capital leases at ~~July~~December 231, 2010 and October 21, ~~2009~~2010 were not material.

Guarantees: The Company has restricted cash of $13.01 million and $1.68 million as of ~~July~~December 231, 2010 and October 21, ~~2009~~2010, respectively, consisting ~~primarily~~ of bank guarantees from customer advance payments to the Company’s international subsidiaries and cash collateral for certain performance bonds. The bank guarantees become unrestricted cash when performance under the sales or supply contract is complete. The cash collateral for the performance bonds will become unrestricted cash when the performance bonds expire.

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Table of Contents

CPI INTERNATIONAL, INC.

and Subsidiaries

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All tabular dollar amounts in thousands except share and per share amounts)

Purchase commitments: As of ~~July~~December 231, 2010, the Company had the following known purchase commitments, which include primarily future purchases for inventory-related items under various purchase arrangements as well as other obligations in the ordinary course of business that the Company cannot cancel or where it would be required to pay a termination fee in the event of cancellation:

Fiscal Year	Purchase Contracts
2010 (remaining nine months)	$	20,253
2011 (remaining nine months)	$	29,674
2011		9,710
2012		2,482
2012		166
2013		-
2013		37
2014		-
2014		25
2015		-
	$	3032,~~191~~156

Contingent Earnout Consideration: Under the terms of the purchase agreement for the acquisition of Malibu Research, Inc. (“Malibu”) in August 2007, in addition to the $20.5 million of net cash consideration paid for the acquisition, the Company could have also been required to pay a potential earnout to the former stockholders of Malibu of up to $14.0 million based on the achievement of certain financial objectives over the three years following the acquisition, ending July 2, 2010 (“Financial Earnout”). Based on financial performance through July 2, 2010, no Financial Earnout was earned for any of the three earnout periods.

In addition, the Company could have also been required to pay a discretionary earnout of up to $1.0 million to the former stockholders of Malibu contingent upon achievement of certain succession planning goals by June 30, 2010. However, the Company has determined that such goals were not attained and, as a result, no discretionary earnout was ultimately paid.

Merger Expense Commitment: For services rendered in connection with the merger agreement with Comtech, the Company has agreed to pay J.P. Morgan Securities, Inc. (“J.P. Morgan” ) a fee estimated to be approximately $5.0 million, of which $1.4 million has been accrued (accrued expenses) and $3.6 million will become payable only if the proposed merger is consummated. The Company has also agreed to reimburse J.P. Morgan for certain expenses incurred in connection with its services, including the fees and disbursements of counsel, and will indemnify J.P. Morgan against certain liabilities, including liabilities arising under the federal securities laws.

Contingencies: From time to time, the Company may be subject to claims that arise in the ordinary course of business. Except as noted below, in the opinion of management, all such matters involve amounts that would not have a material adverse effect on the Company's consolidated financial position if unfavorably resolved.

On July 1, 2010, a putative stockholder class action complaint was filed against the Company, the members of the Company’s board of directors, and Comtech Telecommunications Corp. (“Comtech”) in the Superior Court of the State of California in and for the County of Santa Clara, entitled Continuum Capital v. Michael Targoff, et al. (Case No. 110CV175940). The lawsuit ~~concerns~~concerned the proposed merger between the Company and Comtech, and generally ~~asserts~~asserted claims alleging, among other things, that each member of the Company’s board of directors breached his fiduciary duties by agreeing to the terms of the previously proposed merger and by failing to provide stockholders with allegedly material information related to the proposed merger, and that Comtech aided and abetted the breaches of fiduciary duty allegedly committed by the members of the Company’s board of directors. The lawsuit ~~seeks~~sought, among other things, class action certification and monetary relief. On July 28, 2010, the plaintiff filed an amended complaint, making generally the same claims against the same defendants, and seeking the same relief. In addition, the amended complaint generally alleged that the consideration that would have been paid to the Company’s stockholders under the terms of the proposed merger was inadequate. On September 7, 2010, the Company terminated the Comtech sale agreement. On November 24, 2010, as described in Note 4, the Company entered into an agreement and plan of merger with Merger Sub and CPI International Acquisition, Inc. (formerly Catalyst Holdings, Inc.), which are affiliates of the Veritas Fund. On December 15, 2010, the plaintiff filed a second amended complaint, which removed Comtech as a defendant, added allegations related to the Merger and to the Veritas Fund, and added a claim for attorneys' fees. On December 23, 2010, after the Company filed its preliminary proxy statement relating to a special meeting in connection with the approval of the Merger, the plaintiff filed a third amended complaint, adding allegations related to the disclosures in the preliminary proxy statement. The third amended complaint seeks, among other things, class action certification and monetary relief.

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Table of Contents

CPI INTERNATIONAL, INC.

and Subsidiaries

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All tabular dollar amounts in thousands except share and per share amounts)

~~generally~~The Company believes the ~~same~~action ~~claims~~is ~~against~~without merit; however, to avoid the ~~same~~cost ~~defendants,~~and uncertainty of litigation and ~~seeking~~to complete the ~~same~~proposed ~~relief~~merger without delay, the defendants have entered into a Memorandum of Understanding concerning settlement. InThe ~~addition~~settlement and any attorneys' fees award are subject to Court approval. Pursuant to the Memorandum of Understanding, among other things, the defendants will receive a release of claims and the plaintiff will dismiss the third amended complaint ~~generally~~with ~~alleges~~prejudice in exchange for, among other agreements, an agreement by the Company to make certain additional disclosures concerning the Merger, which disclosures have been included in a definitive proxy statement mailed to stockholders on or about January 12, 2011. The Memorandum of Understanding also provides that, upon Court approval and dismissal of the ~~consideration~~action, the Company, its insurers or its successor in interest will cause to be paid to the ~~Company~~plaintiff’s ~~stockholders~~counsel ~~under~~approximately ~~the~~$0.6 ~~terms~~million in full settlement of ~~the~~any ~~proposed~~claim ~~merger~~for isattorneys' ~~inadequate~~fees and all expenses. The Company ~~believes~~expects ~~all~~$0.4 ~~claims~~million ~~asserted~~of this payment to be borne by its insurance carrier. The $0.6 million full settlement and the $0.4 million insurance reimbursement are included in accrued liabilities and prepaid and other current assets, respectively, in the ~~lawsuit~~condensed toconsolidated bebalance ~~without~~sheet ~~merit~~as of December 31, 2010.

During fiscal year 2009, the Company received a notice from a customer purporting to terminate a sales contract due to alleged nonperformance. In April and June 2010, the Company received ~~another~~notices ~~notice~~ from the customer claiming additional cost incurred due to the alleged nonperformance. The ~~Company~~customer ~~plans~~has toinitiated ~~contest~~arbitration ~~this~~and ~~matter~~filed ~~vigorously~~a claim for damages of approximately $2.1 million. The Company ~~recorded~~has ~~certain~~filed ~~costs~~a incounterclaim ~~fiscal~~for ~~year~~damages ~~2008~~of asapproximately a$0.8 ~~result~~million. ofThe ~~the~~Company ~~termination;~~plans ~~however,~~to atcontest this ~~time,~~matter ~~the~~vigorously. ~~Company~~At ~~cannot~~this ~~estimate~~time, the ~~range~~Company ofbelieves that any ~~further possible~~ loss or gain with respect to this matter orwill ~~whether~~not ~~an unfavorable resolution of this matter would~~ have a material ~~adverse~~ effect on ~~the~~its ~~Company's~~ consolidated results of operations and cash flows.

~~8. Stock-based~~All ~~Compensation~~legal ~~Plans~~costs are expensed as incurred.

9. Stock-based ~~Options:~~Compensation The following table summarizes the status of the Company’s stock option awards as of July 2, 2010 and October 2, 2009 and changes during the nine months ended July 2, 2010 under the Company’s stock option plans:Plans

	Oustanding Options									Exercisable Options
	Number of Shares			Weighted-Average Exercise Price		Weighted-Average Remaining Contractual Term (Years)		Aggregate Intrinsic Value		Number of Shares		Weighted-Average Exercise Price		Weighted-Average Remaining Contractual Term (Years)		Aggregate Intrinsic Value
Balance at October 2, 2009		3,382,763		$	6.38		4.95	$	20,362		2,845,996	$	4.73		4.43	$	20,227
Granted		108,000			9.66
Exercised		(122,795	)		1.75
Forfeited or cancelled		(17,125	)		16.42
Balance at July 2, 2010		3,350,843		$	6.60		4.49	$	30,435		2,912,134	$	5.58		4.00	$	29,230

Stock Options: The following table summarizes the status of the Company’s stock option awards as of December 31, 2010 and October 1, 2010 and of changes during the first quarter of fiscal year 2011 under the Company’s stock option plans:

The aggregate intrinsic value in the preceding table represents the total intrinsic value, based on the Company’s closing stock price of $15.38 as of July 2, 2010, which would have been received by the option holders had all option holders exercised their options and sold the shares received upon such exercises as of that date. As of July 2, 2010, approximately 2.6 million exercisable options were in-the-money.

	Oustanding Options									Exercisable Options
	Number of Shares			Weighted-Average Exercise Price		Weighted-Average Remaining Contractual Term (Years)		Aggregate Intrinsic Value		Number of Shares		Weighted-Average Exercise Price		Weighted-Average Remaining Contractual Term (Years)		Aggregate Intrinsic Value
Balance at October 1, 2010		3,347,192		$	6.60		4.24	$	26,801		2,915,483	$	5.61		3.76	$	25,930
Granted		108,000			19.33
Exercised		(17,657	)		7.72
Forfeited or cancelled		-			-
Balance at December 31, 2010		3,437,535		$	7.00		4.18	$	42,462		3,081,368	$	6.06		3.72	$	40,960

~~During~~The ~~the~~aggregate ~~three~~intrinsic ~~and~~value ~~nine~~in ~~months~~the ~~ended~~preceding ~~July~~table 2,represents ~~2010,~~the ~~cash~~total ~~received~~intrinsic ~~from option exercises was approximately $0.1 million and $0.2 million~~value, ~~respectively,~~based ~~and~~on the ~~total~~Company’s ~~intrinsic~~closing ~~value~~stock price of ~~options exercised was~~ $019.935 ~~million~~as ~~and~~of ~~$1.5~~December ~~million~~31, ~~respectively.~~2010, ~~During~~which ~~the~~would ~~three~~have ~~and~~been ~~nine~~received ~~months~~by ~~ended~~the ~~July~~option 3,holders ~~2009,~~had ~~cash~~all ~~received from~~ option ~~exercises~~holders ~~was~~exercised ~~$46,448~~their ~~and~~options ~~$82,451, respectively,~~ and sold the ~~total~~shares ~~intrinsic~~received ~~value~~upon ofsuch ~~options~~exercises ~~exercised~~as ~~was~~of ~~approximately~~that $0date.4 ~~million.~~ As of ~~July~~December 231, 2010, ~~there was~~ approximately $23.01 million ofexercisable ~~total unrecognized compensation costs related to nonvested stock~~ options, ~~which~~were ~~is expected to be recognized over a weighted~~in-~~average vesting period of 1~~the-money.~~3 years.~~

Stock Purchase Plan: Employees purchased 15,662 shares for $0.2 million and 49,127 shares for $0.6 million in the three and nine months ended July 2, 2010, respectively, and 22,180 shares for $0.2 million and 93,031 shares for $0.8 million for the corresponding periods of fiscal year 2009 under the 2006 Employee Stock Purchase Plan (the “2006 ESPP”). As of July 2, 2010, there were no unrecognized compensation costs related to rights to acquire stock under the 2006 ESPP.

Restricted Stock and Restricted Stock Units: There were 311,341 and 218,298 shares outstanding of nonvested restricted stock and restricted stock units granted to directors and employees as of July 2, 2010 and October 2, 2009, respectively. The restricted stock and restricted stock units generally vest over periods of one to four years. Upon vesting, each restricted stock unit will automatically convert into one share of common stock of CPI International.

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Table of Contents

CPI INTERNATIONAL, INC.

and Subsidiaries

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All tabular dollar amounts in thousands except share and per share amounts)

ADuring ~~summary~~the first quarter of fiscal year 2011, cash received from option exercises was approximately $0.1 million, and the ~~status~~total intrinsic value of options exercised was $0.2 million. During the ~~Company’s~~first ~~nonvested~~quarter ~~restricted~~of ~~stock~~fiscal year 2010, cash received from option exercises was approximately $13,500, and ~~restricted~~the ~~stock~~total ~~unit~~intrinsic ~~awards~~value asof options exercised was $21,697. As of ~~July~~December 231, 2010, ~~and~~there ~~October~~was approximately $2,.5 ~~2009~~million ~~and~~ of ~~changes~~total ~~during~~unrecognized ~~the~~compensation ~~nine~~costs ~~months~~related ~~ended~~to ~~July~~nonvested 2stock options, ~~2010~~which is ~~presented~~expected ~~below:~~to be recognized over a weighted-average vesting period of 1.9 years.

	Number of Shares			Weighted-Average Grant-Date Fair Value Per Share
Nonvested at October 2, 2009		218,298		$	11.27
Granted		163,307		$	10.04
Vested		(65,914	)	$	11.87
Forfeited		(4,350	)	$	10.62
Nonvested at July 2, 2010		311,341		$	10.51

Stock Purchase Plan: Employees purchased approximately 13,000 shares in the first quarter of fiscal year 2011 for $0.2 million and approximately 17,000 shares in the first quarter of fiscal year 2010 for $0.2 million under the 2006 Employee Stock Purchase Plan (the “2006 ESPP”). As of December 31, 2010, there were no unrecognized compensation costs related to rights to acquire stock under the Company’s stock purchase plan.

~~During~~Restricted ~~the~~Stock ~~first~~and ~~quarter~~Restricted ofStock ~~fiscal~~Units: ~~year~~There ~~2010~~were 425,266 ~~the~~and ~~Company~~310,341 ~~granted~~shares ~~104,800~~outstanding of nonvested restricted stock ~~units~~and ~~with~~restricted ~~time~~stock ~~vesting~~units ~~criteria~~granted to ~~certain~~directors and employees as of ~~its~~December ~~non-executive~~31, ~~employees~~2010 and 36October 1,~~000~~ 2010, respectively. The restricted stock and restricted stock units ~~with~~generally ~~performance~~vest ~~vesting~~over ~~criteria~~periods of one to ~~its~~four ~~officers~~years. Upon vesting, each restricted stock unit will automatically convert into one share of common stock of CPI International.

~~During~~A ~~the~~summary ~~second quarter~~ of ~~fiscal~~the ~~year~~status ~~2010,~~of the Company’s ~~granted~~nonvested ~~certain~~restricted ~~members~~stock ofand ~~its~~restricted ~~board~~stock unit awards as of ~~directors~~December a31, ~~total~~2010 ofand 22October 1,~~507~~ ~~shares~~2010 and of ~~restricted~~changes ~~stock~~during ~~which~~the ~~will~~first ~~vest~~quarter ~~within~~of ~~the~~fiscal ~~following~~year ~~three~~2011 ~~years.~~is presented below:

Aggregate intrinsic value of the nonvested restricted stock and restricted stock unit awards at July 2, 2010 and October 2, 2009 was $4.8 million and $2.5 million, respectively. As of July 2, 2010, there was $2.6 million of unrecognized compensation costs related to restricted stock and restricted stock unit awards. The unrecognized compensation cost is expected to be recognized over a weighted average period of 1.8 years.

	Number of Shares			Weighted-Average Grant-Date Fair Value Per Share
Nonvested at October 1, 2010		310,341		$	10.51
Granted		138,700		$	19.33
Vested		(23,775	)	$	15.18
Forfeited		-		$	-
Nonvested at December 31, 2010		425,266		$	13.13

~~The~~During ~~Company~~the ~~settles~~first ~~stock~~quarter ~~option~~of ~~exercises~~fiscal year 2011, the Company granted 102,700 restricted stock ~~awards~~units with time vesting criteria to certain of its non-executive employees and 36,000 restricted stock units with ~~newly~~performance ~~issued~~vesting ~~common~~criteria ~~shares~~to its executive officers. The performance conditions are based on the achievement of specified EBITDA (earnings before net interest expense, provision for income taxes and depreciation and amortization) levels over a period of four years.

~~Valuation~~Aggregate intrinsic value of the nonvested restricted stock and ~~Expense~~restricted ~~Information~~stock unit awards at December 31, 2010 and October 1, 2010 was $8.2 million and $4.4 million, respectively. As of December 31, 2010, there was $4.6 million of unrecognized compensation costs related to restricted stock and restricted stock unit awards. The unrecognized compensation cost is expected to be recognized over a weighted average period of 3.2 years.

The ~~fair value of the~~ Company’s ~~time-based~~settles ~~option~~stock ~~awards is estimated on the date of grant using the Black-Scholes model. The fair value of each market performance-based (or combination of market performance- and time-based)~~ option, ~~restricted~~exercises ~~stock~~ and restricted stock ~~unit~~units ~~awards~~with isnewly ~~estimated~~issued oncommon ~~the date of grant using the Monte Carlo simulation technique in a risk-neutral framework~~shares.

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Table of Contents

CPI INTERNATIONAL, INC.

and Subsidiaries

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All tabular dollar amounts in thousands except share and per share amounts)

~~Stock~~Valuation ~~Options.~~and ~~Assumptions~~Expense used in the Black-Scholes model to estimate the fair value of time-based option grants during the nine months ended July 2, 2010 (specifically, the first quarter of fiscal year 2010) are presented below.Information

Expected term (in years)	7.79
Expected volatility	60.50	%
Risk-free rate	3.00	%
Dividend yield	0	%

Stock Options. The fair value of the Company’s stock options granted during the first quarter of fiscal years 2011 and 2010 was estimated on the date of grant using the Black-Scholes model with the following assumptions:

There were no time-based options granted during the three months ended July 2, 2010 nor during the three and nine months ended July 3, 2009.

	Quarter Ended
	December 31,			January 1,
	2010			2010
Expected term (in years)		8.14			7.79
Expected volatility		60.91	%		60.50	%
Risk-free rate		2.57	%		3.00	%
Dividend yield		0	%		0	%

~~Assumptions~~The ~~used~~weighted-average ingrant-date ~~the Monte Carlo simulation model to estimate the~~ fair value of ~~time-~~all ~~and~~the ~~market performance-based~~ options granted during the ~~nine~~first ~~months~~quarter ~~ended~~of ~~July~~fiscal 3,years ~~2009~~2011 ~~(specifically,~~and ~~the~~2010 ~~first~~was ~~quarter~~$12.65 ofand ~~fiscal~~$6.25 ~~year~~per ~~2009)~~share, ~~are presented below~~respectively.

Contractual term (in years)	10.00
Expected volatility	51.50	%
Risk-free rate	3.53	%
Dividend yield	0	%

Stock Purchase Plan. Based on the 15% discount received by the employees, the weighted-average fair value of shares issued under the 2006 ESPP was $2.90 and $1.99 per share during the first quarter of fiscal years 2011 and 2010, respectively.

~~There~~Restricted ~~were~~Stock noand Restricted Stock Units. The fair value of each time-based restricted stock and restricted stock unit award and each of performance-based restricted stock unit award is calculated using the market price of the Company’s common stock on the date of grant. The fair value of each performance-based ~~options~~restricted ~~granted~~stock ~~during~~unit award assumes that the ~~three~~relevant performance criteria will be met and ~~nine~~the ~~months~~target ~~ended~~payout ~~July~~level 2,will ~~2010~~be ~~nor~~achieved. ~~during~~Compensation cost is adjusted for subsequent changes in the ~~three~~outcome ~~months~~of ~~ended~~performance-related ~~July~~conditions 3,until ~~2009~~the award vests.

The weighted-average ~~grant-date~~estimated fair value of all ~~the~~restricted ~~options~~stock and restricted stock units granted during the ~~nine~~first ~~months~~quarter ~~ended~~of ~~July~~fiscal 2,years ~~2010~~2011 and ~~July~~2010 ~~3, 2009~~ was $619.2533 and $59.6166 per share, respectively.

~~Stock~~As ~~Purchase~~stock-based ~~Plan.~~compensation ~~Based~~expense onrecognized in the ~~15%~~condensed ~~discount~~consolidated ~~received~~statements byof ~~the~~income ~~employees,~~and ~~the~~comprehensive ~~weighted-average~~income ~~fair~~for ~~value~~the first quarter of ~~shares~~fiscal ~~issued~~years ~~under~~2011 ~~the~~and ~~2006~~2010 ~~ESPP~~is ~~was~~based ~~$2.31~~on ~~and~~awards ~~$2.08~~ultimately ~~per~~expected ~~share~~to ~~during~~vest, ~~the~~it ~~three~~has ~~and~~been ~~nine~~reduced ~~months~~for ~~ended~~estimated ~~July~~forfeitures. 2,FASB ~~2010,~~ASC ~~respectively~~718, ~~and~~“Compensation—Stock ~~$1.40~~Compensation,” ~~and~~requires ~~$1.48~~forfeitures ~~per~~to ~~share~~be ~~for~~estimated at the ~~corresponding~~time of grant and revised, if necessary, in subsequent periods ofif ~~fiscal~~actual ~~year~~forfeitures ~~2009~~differ from those estimates.

Restricted Stock and Restricted Stock Units. The fair value of each time-based restricted stock and restricted stock unit award and of each performance-based restricted stock unit award is calculated using the market price of the Company’s common stock on the date of grant. The fair value of each performance-based restricted stock unit award assumes that the relevant performance criteria will be met and the target payout level will be achieved. Compensation cost is adjusted for subsequent changes in the outcome of performance-related conditions until the award vests.

Assumptions used in the Monte Carlo simulation model to estimate the fair value of time- and market performance-based restricted stock and restricted stock units granted during the nine months ended July 3, 2009 (specifically, the first quarter of fiscal year 2009) are presented below.

Expected volatility	51.50	%
Risk-free rate	3.54	%
Dividend yield	0	%

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Table of Contents

CPI INTERNATIONAL, INC.

and Subsidiaries

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All tabular dollar amounts in thousands except share and per share amounts)

~~There~~The ~~were~~following notable ~~time-~~summarizes ~~and market performance~~stock-based ~~restricted~~compensation ~~stock~~expense ~~and~~for ~~restricted~~the ~~stock~~first ~~units~~quarter ~~granted~~of ~~during~~fiscal ~~the~~years ~~three~~2011 and ~~nine months ended July 2~~2010, ~~2010~~which ~~nor~~was ~~during~~allocated ~~the~~as ~~three months ended July 3, 2009.~~follows:

The weighted-average estimated fair value of all restricted stock and restricted stock units granted during the nine months ended July 2, 2010 and July 3, 2009 was $10.04 and $8.87, respectively.

	Quarter Ended
	December 31, 2010		January 1, 2010
Share-based compensation cost recognized in the income statement by caption:
Cost of sales	$	152	$	133
Research and development		55		49
Selling and marketing		77		73
General and administrative		506		475
	$	790	$	730

Share-based compensation cost capitalized in inventory	$	163	$	141
Share-based compensation cost remaining in inventory at end of period	$	108	$	94

Share-based compensation expense by type of award:
Stock options	$	428	$	456
Restricted stock and units		327		241
Stock purchase plan		35		33
	$	790	$	730

The tax benefit realized from option exercises and restricted stock vesting totaled approximately $0.2 million and $0.1 million during the first quarter of fiscal years 2011 and 2010, respectively.

AsEffect ~~stock-based compensation expense recognized in the condensed consolidated statements~~ of ~~income and comprehensive income for~~ the ~~three~~Pending ~~and~~Merger ~~nine months ended July 2, 2010 and for the corresponding periods of fiscal year 2009 is based~~ on ~~awards~~Stock ~~ultimately expected to vest~~Options, itRestricted ~~has been reduced for estimated forfeitures. FASB ASC 718, “Compensation—~~Stock ~~Compensation,” requires forfeitures to be estimated at the time of grant~~ and ~~revised,~~Restricted ifStock ~~necessary, in subsequent periods if actual forfeitures differ from those estimates.~~Units

~~The~~Pursuant ~~following~~to ~~table~~the ~~summarizes~~Company’s pending merger with Merger Sub described in Note 4, subject to certain exceptions described below, unvested options to purchase the Company’s common stock~~-based~~ ~~compensation~~will ~~expense~~become fully vested immediately prior to the effective time of the merger (“Effective Time”), and at (or, in the case of certain option holders, immediately after) the Effective Time, outstanding unexercised stock options will be cancelled in exchange for a cash payment in an amount equal to the ~~three~~product of (x) the number of shares subject to the option and ~~nine~~(y) the ~~months~~excess, ~~ended~~if ~~July~~any, 2of (A) $19.50 over (B) the exercise price per share subject to the option, ~~2010~~less any applicable taxes. Subject to certain exceptions described below, each share of the Company’s restricted stock and ~~July~~each 3of the Company’s restricted stock unit outstanding immediately prior to the Effective Time will vest in full and entitle the holder to receive $19.50 in cash, ~~2009~~less applicable taxes. With respect to options and restricted stock units granted in the first quarter of fiscal year 2011, ~~which~~only ~~was~~25% ~~allocated~~of assuch ~~follows:~~ options and restricted stock units will become vested upon the closing of the merger and the remaining 75% will be cancelled. The Company will account for the acceleration of vesting of stock options, restricted stock and restricted stock units in conjunction with a business combination in accordance with ASC 718.

	Three Months Ended				Nine Months Ended
	July 2, 2010		July 3, 2009		July 2, 2010		July 3, 2009
Share-based compensation cost recognized in the income statement by caption:
Cost of sales	$	152	$	131	$	432	$	375
Research and development		51		43		161		130
Selling and marketing		74		75		214		216
General and administrative		505		453		1,493		1,303
	$	782	$	702	$	2,300	$	2,024
Share-based compensation cost capitalized in inventory	$	153	$	131	$	444	$	386
Share-based compensation cost remaining in inventory at end of period	$	98	$	87	$	98	$	87
Share-based compensation expense by type of award:
Stock options	$	460	$	455	$	1,375	$	1,327
Restricted stock and units		286		215		823		599
Stock purchase plan		36		32		102		98
	$	782	$	702	$	2,300	$	2,024

The tax benefit realized from option exercises and restricted stock vesting totaled approximately $0.4 million and $0.8 million during the three and nine months ended July 2, 2010, respectively. The tax benefit realized from option exercises and restricted stock vesting totaled approximately $0.2 million for the corresponding periods of fiscal year 2009.

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Table of Contents

CPI INTERNATIONAL, INC.

and Subsidiaries

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All tabular dollar amounts in thousands except share and per share amounts)

910. Income Taxes

~~Income~~The income tax expense of $51.90 million ~~for the nine months ended July 2, 2010~~ and ~~income tax benefit of~~ $21.29 million for the ~~nine~~first ~~months~~quarter ~~ended~~of ~~July~~fiscal 3years 2011 and 2010, ~~2009~~respectively, reflect estimated federal, foreign and state taxes. The effective tax rate for the ~~nine~~first ~~months~~quarter ~~ended~~of ~~July~~fiscal 2,year ~~2010~~2011 was ~~32.1~~30% and diverged from the combined federal and state statutory tax rate primarily ~~due~~because toof ~~approximately~~Canadian foreign tax credits and a $0.82 million ~~for~~fiscal year 2010 discrete ~~income~~R&D tax ~~benefits~~benefit. The discrete benefit was a result of the retroactive extension of the R&D tax credit to calendar year 2010 through the enactment of the Tax Relief, ~~including~~Unemployment $0Insurance Authorization and Job Creation Act of 2010, signed into law on December 17, 2010.3 ~~million~~The toeffective ~~true-up~~tax rate for the first quarter of fiscal year ~~2009~~2010 ~~tax~~was ~~provision~~33% ~~estimate~~and todiverged from the ~~filed~~combined ~~fiscal~~federal ~~year~~and ~~2009~~state ~~U.S.~~statutory ~~income~~rate primarily because of Canadian foreign tax ~~return~~credits and a $0.3 million todiscrete ~~adjust~~tax benefit resulting from reduced Canadian deferred tax ~~accounts~~liabilities ~~for~~due to a reduction toin ~~future~~the ~~Canadian~~Ontario, ~~income~~Canada corporate tax ~~rates~~rate effective December 15, 2009.

~~The~~Consistent ~~effective~~with ~~tax~~FASB ~~rate~~ASC ~~for~~805, ~~the~~“Business ~~nine months ended July 3~~Combinations,” ~~2009~~acquisition-related ~~was~~costs ahave ~~negative~~been ~~17%~~charged ~~and diverged from the federal and state statutory rate primarily due~~ to ~~several~~expense ~~significant~~in ~~discrete tax benefits: (1) $5.1 million of unrecognized tax benefit relating to~~ the ~~Company’s~~period ~~position~~when ~~with regard to an outstanding audit by~~ the ~~Canada Revenue Agency (“CRA”), (2) $0.7 million~~ related toservices ~~certain~~are ~~provisions of the California Budget Act of 2008 signed on February 20~~rendered, ~~2009,~~although ~~which~~these ~~will~~costs ~~allow~~may anot ~~taxpayer~~be toimmediately ~~elect~~deductible ~~an alternative method to attribute taxable income to California~~ for tax ~~years beginning on or after January 1, 2011 and (3) $0~~purposes.9 ~~million~~For ~~for~~income ~~adjustments to Canadian deferred~~ tax ~~accounts.~~reporting ~~The~~purposes, ~~$0.9~~the ~~million~~company ~~adjustment~~recorded ~~to Canadian deferred tax accounts includes~~ a $01.61 million income tax benefit toand ~~reflect~~deferred ~~the reduction to Canadian corporate income~~ tax ~~rates~~asset ~~and~~for aall $02.37 million ~~tax benefit to correct the computation~~ of ~~certain~~strategic ~~deferred~~alternative ~~tax~~expenses ~~accounts.~~that ~~The~~were ~~$0.6~~incurred ~~million adjustment should have been recorded~~ in the first quarter of fiscal year ~~2008~~2011 ~~rather~~without ~~than~~assuming inthat ~~the~~a ~~first~~business ~~quarter~~combination ofwill ~~fiscal~~ultimately ~~year~~occur. ~~2009~~If ~~and~~ the ~~$0.3~~anticipated ~~million~~Merger ~~adjustment~~is ~~should~~consummated, ~~have~~it ~~been~~may ~~recorded~~be indetermined ~~several~~that ~~prior~~a ~~year~~portion ~~financial~~of ~~results.~~or ~~These~~all ~~adjustments~~of the strategic alternative expenses are ~~deemed~~not ~~immaterial~~deductible towhich ~~the~~would ~~Company’s~~result ~~results~~in ofa ~~operations~~charge ~~and~~to ~~financial~~income ~~condition~~tax inexpense ~~the~~upon ~~affected~~consummation ~~periods~~of the Merger.

The ~~effective~~Company files a U.S. federal income tax ~~rate~~return ~~for~~and ~~the~~state ~~three~~income ~~months~~tax ~~ended~~returns ~~July~~in 2California, ~~2010~~Massachusetts ~~was~~and 27several other U.1%S. ~~and~~states. ~~diverged~~The ~~from~~Company ~~the~~also ~~federal~~files income tax returns in Canada and ~~state~~other ~~statutory~~foreign ~~rate~~jurisdictions. ~~primarily~~In ~~due~~most of these jurisdictions, fiscal years 2006 to ~~approximately~~2009 $0remain open to examination by the various taxing authorities.3 ~~million~~The Company has not been audited for ~~discrete~~U.S. federal income tax ~~benefits~~matters. toThe ~~true-up~~Company has income tax audits in progress in Canada and in several international jurisdictions in which it operates. The years under examination by the Canadian tax authorities are fiscal ~~year~~years ~~2009~~2001 and 2002. The total unrecognized tax ~~provision~~benefit, ~~estimate~~which toexcludes ~~the~~any ~~filed~~related ~~fiscal~~interest ~~year~~accruals, ~~2009~~was US$6.8 ~~income~~million as of December 31, 2010. Of the total unrecognized tax ~~return~~benefit balance, $6.3 ~~The~~million ~~effective~~of unrecognized tax ~~rate~~benefits ~~for~~would reduce the ~~three~~effective ~~months~~tax ~~ended~~rate ~~July~~if 3,recognized ~~2009~~as ~~was~~of 43December 31, 2010.7% Estimated interest and ~~diverged~~penalties ~~from~~related to the ~~federal~~underpayment ~~and~~of ~~state~~income ~~statutory~~taxes ~~rate~~are ~~primarily~~classified ~~due~~as toa component of tax expense in the condensed consolidated statement of income and comprehensive income and totaled approximately $0.31 million for ~~several~~the ~~non-recurring~~first ~~discrete~~quarter ~~income~~of ~~tax~~fiscal ~~expense~~year ~~items~~2011. Accrued interest and penalties, net of interest benefits accrued on receivables anticipated as a result of the change in the U.S.-Canada treaty, were approximately $0.29 million ~~from~~as ~~foreign~~of ~~currency~~December ~~translation losses~~31, ~~primarily~~2010. ~~from~~The ~~Canadian~~Company has minimal penalties accrued in income tax ~~accounts~~expense.

The Company ~~files~~believes ~~U.S.~~that ~~federal~~it ~~income~~is ~~tax~~reasonably ~~returns~~possible that, asin ~~well~~the asnext ~~income~~12 months, the amount of unrecognized tax ~~returns~~benefits inrelated ~~California~~to ~~and~~the ~~other~~resolution ~~U.S.~~of ~~states~~federal, ~~Canada~~state and ~~other~~ foreign ~~jurisdictions.~~matters ~~Generally,~~could ~~fiscal~~be ~~years~~reduced ~~2006~~by to$2.9 ~~2009~~million ~~remain~~as ~~open~~audits toclose, ~~examination~~statutes byexpire ~~the~~and ~~various~~tax ~~taxing~~payments ~~jurisdictions~~are made. ~~The~~Any ~~Company~~prospective ~~has~~adjustments ~~not~~to ~~been~~the ~~audited~~Company’s ~~for~~unrecognized ~~U.S.~~tax ~~federal~~benefits ~~income~~will ~~tax~~be ~~matters.~~recorded ~~The~~as ~~Company~~an ~~has~~increase ~~income~~or ~~tax~~decrease ~~audits~~to inincome ~~progress~~tax inexpense ~~Canada~~ and incause ~~several~~a ~~international~~corresponding ~~jurisdictions~~change into ~~which~~the itCompany’s ~~operates.~~effective ~~The~~tax ~~years~~rate. ~~under~~Accordingly, ~~examination~~the byCompany’s ~~the~~effective ~~Canadian~~tax ~~taxing~~rate ~~authorities~~could ~~are~~fluctuate ~~fiscal~~materially ~~years~~from ~~2001~~period ~~and~~to ~~2002~~period.

The total unrecognized tax benefit, which excludes any related interest accruals, was $3.3 million as of July 2, 2010. Of the total unrecognized tax benefit balance, $2.4 million of unrecognized tax benefits would reduce the effective tax rate if recognized as of July 2, 2010. Estimated interest and penalties related to the underpayment of income taxes are classified as a component of tax expense in the condensed consolidated statement of income and comprehensive income and totaled approximately $0.1 million for the nine months ended July 2, 2010. Accrued interest and penalties, net of interest benefits accrued on receivables anticipated as a result of the change in the U.S.-Canada treaty, were approximately $0.7 million as of July 2, 2010. The Company had minimal penalties accrued in income tax expense

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CPI INTERNATIONAL, INC.

and Subsidiaries

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All tabular dollar amounts in thousands except share and per share amounts)

The Company believes that it is reasonably possible that, in the next 12 months, the amount of unrecognized tax benefits related to the resolution of federal, state and foreign matters could be reduced by $211.7 Earnings ~~million~~Per as audits close, statutes expire and tax payments are made. Any prospective adjustments to the Company’s unrecognized tax benefits will be recorded as an increase or decrease to income tax expense and cause a corresponding change to the Company’s effective tax rate. Accordingly, the Company’s effective tax rate could fluctuate materially from period to period.Share

10. Earnings Per Share

Earnings per share is computed using the two-class method, which is an earnings allocation method for computing earnings per share that treats a participating security as having rights to earnings that would otherwise have been available to common stockholders. Certain of the Company’s stock-based compensation awards pay nonforfeitable dividends to the participants during the vesting period and, as such, are deemed participating securities. Basic earnings per share are computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding that are increased for additional shares that would be outstanding if potentially dilutive non-participating securities were converted to common shares, pursuant to the treasury stock method.

Earnings per share for the respective periods were calculated as follows (amounts and shares in thousands, except per share data):

	Three Months Ended						Nine Months Ended
	Quarter Ended
	July 2, 2010			July 3, 20091			July 2, 2010			July 3, 20091
	December 31, 2010			January 1, 2010
Basic Earnings per Share
Net income	$	42,~~211~~222		$	3,~~870~~841		$	~~12,544~~		$	~~15,214~~
Income allocated to participating securities		(7846	)		(5257	)		~~(222~~	)		~~(175~~	)
Net income available to common shareholders	$	42,~~133~~176		$	3,~~818~~784		$	~~12,322~~		$	~~15,039~~
Basic weighted average common shares outstanding		16,~~631~~695			16,~~362~~452			~~16,534~~			~~16,316~~
Net income per common share - Basic	$	0.2513		$	0.23		$	~~0.75~~		$	~~0.92~~
Diluted Earnings per Share
Net income	$	42,~~211~~222		$	3,~~870~~841		$	~~12,544~~		$	~~15,214~~
Income allocated to participating securities		(7242	)		(4957	)		~~(206~~	)		~~(164~~	)
Net income available to common shareholders	$	42,~~139~~180		$	3,~~821~~784		$	~~12,338~~		$	~~15,050~~
Basic weighted average common shares outstanding		16,~~631~~695			16,~~362~~452			~~16,534~~			~~16,316~~
Effect of dilutive stock options		1,~~330~~381			1,~~173~~178			~~1,253~~			~~1,086~~
Diluted weighted average common shares outstanding		17,961			17,535			17,787			17,402
Diluted weighted averages common shares outstanding		18,076			17,630
Net income per common share - Diluted	$	0.2312		$	0.2221		$	~~0.69~~		$	~~0.86~~

1The ~~Restated~~calculation inof ~~accordance~~diluted ~~with~~net ~~ASC~~income ~~260~~per share excludes all anti-dilutive shares from stock options. For the first quarter of fiscal years 2011 and 2010, the number of anti-dilutive stock options, as calculated based on the weighted average closing price of the Company’s common stock for the periods, was approximately 0.5 million and 0.9 million shares, respectively.

The calculation of diluted net income per share excludes all anti-dilutive shares from stock options. For the three and nine months ended July 2, 2010, the number of anti-dilutive shares, as calculated based on the weighted average price of the Company’s common stock for the periods, was

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CPI INTERNATIONAL, INC.

and Subsidiaries

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All tabular dollar amounts in thousands except share and per share amounts)

~~approximately 0~~12.~~6 million and 0.8 million shares~~ Segments, ~~respectively.~~Geographic ~~For the three~~ and ~~nine~~Customer ~~months ended July 3, 2009, the number of anti-dilutive shares, as calculated based on the weighted average price of the Company’s common stock for the periods, was approximately 0.9 million shares.~~Information

11The Company’s reportable segments are VED and satcom equipment. ~~Segments~~ The VED segment develops, ~~Geographic~~manufactures and ~~Customer~~distributes ~~Information~~high-power/high-frequency microwave and radio frequency signal components. The satcom equipment segment manufactures and supplies high-power amplifiers and networks for satellite communication uplink, electronic warfare and industrial applications. Segment information reported below is consistent with the manner in which it is reviewed and evaluated by the Company’s chief operating decision maker (“CODM”), its chief executive officer, and is based on the nature of the Company’s operations and products offered to customers.

~~The~~Amounts ~~Company’s~~not ~~reportable~~reported ~~segments~~as ~~are~~ VED ~~and~~or satcom equipment. ~~The~~are ~~VED~~reported ~~segment~~as ~~develops,~~Other. ~~manufactures~~In accordance with quantitative and ~~distributes~~qualitative ~~high-power/high-frequency~~guidelines ~~microwave~~established ~~and~~by ~~radio~~FASB ~~frequency~~ASC ~~signal~~280, ~~components~~“Segment Reporting.” ~~The~~Other ~~satcom~~includes ~~equipment~~the ~~segment~~activities ~~manufactures~~of ~~and~~the ~~supplies~~Company’s ~~high-power~~Malibu ~~amplifiers~~division and ~~networks~~unallocated ~~for~~corporate ~~satellite~~expenses, ~~communication~~such ~~uplink~~as strategic ~~and~~alternative ~~industrial~~transaction ~~applications.~~expenses, ~~Segment~~share-based ~~information~~compensation ~~reported~~expense ~~below~~and iscertain ~~consistent~~non-recurring ~~with~~or ~~the~~unusual ~~manner~~expenses. inThe ~~which~~Malibu itdivision is ~~reviewed~~a ~~and~~designer, ~~evaluated~~manufacturer byand ~~the~~integrator ~~Company’s~~of ~~chief~~advanced ~~operating~~antenna ~~decision~~systems ~~maker~~for ~~(“CODM”)~~radar, ~~its~~radar ~~chief~~simulators ~~executive~~and ~~officer~~telemetry systems, ~~and~~as iswell ~~based~~as onfor ~~the~~data ~~nature~~links ofused ~~the~~in ~~Company’s~~ground, ~~operations~~airborne, ~~and~~unmanned ~~products~~aerial ~~offered~~vehicles to(“UAVs”) ~~customers~~and shipboard systems.

Amounts not reported as VED or satcom equipment are reported as Other. In accordance with quantitative and qualitative guidelines established by FASB ASC 280, “Segment Reporting,” Other includes the activities of the Company’s Malibu division and unallocated corporate expenses, such as business combination-related expenses, share-based compensation expense and certain non-recurring or unusual expenses. The Malibu division is a designer, manufacturer and integrator of advanced antenna systems for radar, radar simulators and telemetry systems, as well as for data links used in ground, airborne, unmanned aerial vehicles (“UAVs”) and shipboard systems.

Summarized financial information concerning the Company’s reportable segments is shown in the following tables:

Three Months Ended

Nine Months Ended

Quarter Ended

July 2,

July 3,

July 2,

July 3,

December 31,

January 1,

2010

~~2009~~2010

~~2010~~

~~2009~~

Sales to external customers

Sales from external customers

VED

6662,~~701~~863

6259,~~572~~077

~~191,006~~

~~180,269~~

Satcom equipment

2120,~~621~~731

1520,~~704~~127

~~62,666~~

~~49,329~~

Other

5,~~554~~426

43,~~244~~563

~~11,323~~

~~11,971~~

9389,~~876~~020

82,~~520~~767

~~264,995~~

~~241,569~~

Intersegment product transfers

VED

5,~~853~~807

36,~~536~~113

~~18,257~~

~~13,323~~

Satcom equipment

9436

5,~~947~~843

36,~~536~~113

~~18,352~~

~~13,332~~

EBITDA

VED

1713,~~744~~976

1512,~~248~~719

~~47,862~~

~~37,449~~

Satcom equipment

12,~~737~~008

12,~~078~~728

~~6,455~~

~~3,123~~

Other

(76,~~160~~273

)

(23,~~545~~080

)

~~(16,080~~

)

~~(6,514~~

)

129,~~321~~711

1312,~~781~~367

~~38,237~~

~~34,058~~

EBITDA is the measure used by the CODM to evaluate segment profit or loss. EBITDA represents earnings before net interest expense, provision for income taxes and depreciation and amortization. The Company believes that EBITDA is a more meaningful representation of segment operating performance for leveraged businesses like its own and therefore uses this metric as its internal measure of profitability. For the reasons listed below, the Company believes EBITDA provides investors better understanding of the Company’s financial performance in connection with their analysis of the Company’s business:

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CPI INTERNATIONAL, INC.

and Subsidiaries

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All tabular dollar amounts in thousands except share and per share amounts)

•

EBITDA is a component of the measures used by the Company’s board of directors and management team to evaluate the Company’s operating performance;

•

the Company’s Senior Credit Facilities contain a covenant that requires the Company to maintain a senior secured leverage ratio that contains EBITDA as a component, and the Company’s management team uses EBITDA to monitor compliance with this covenant;

•

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

•

EBITDA facilitates comparisons between the Company’s operating results and those of competitors with different capital structures and, therefore, is a component of the measures used by the Company’s management to facilitate internal comparisons to competitors’ results and the Company’s industry in general; and

•

the payment of management bonuses is contingent upon, among other things, the satisfaction by the Company of certain targets that contain EBITDA as a component.

Other companies may define EBITDA differently and, as a result, the Company’s measure of EBITDA may not be directly comparable to EBITDA of other companies. Although the Company uses EBITDA as a financial measure to assess the performance of its business, the use of EBITDA is limited because it does not include certain material costs, such as interest and taxes, necessary to operate the Company’s business. When analyzing the Company’s performance, EBITDA should be considered in addition to, and not as a substitute for or superior to, operating income, net income, cash flows from operating activities or other statements of income or statements of cash flows data prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). Operating income by the Company’s reportable segments was as follows:

	Three Months Ended						Nine Months Ended
	Quarter Ended
	July 2, 2010			July 3, 2009			July 2, 2010			July 3, 2009
	December 31,			January 1,
Operating income
	2010			2010
VED	$	16,232		$	13,788		$	43,367		$	33,128
Operating income
Satcom equipment		1,566			894			5,927			2,568
VED	$	12,425		$	11,232
Other		(8,245	)		(3,655	)		(19,310	)		(9,966	)
Satcom equipment		1,827			2,549
	$	9,553		$	11,027		$	29,984		$	25,730
Other		(7,364	)		(4,149	)
	$	6,888		$	9,632

The following table reconciles net income to EBITDA:

	Quarter Ended
	December 31,		January 1,
	2010		2010
Net income	$	2,222	$	3,841
Depreciation and amortization		2,823		2,735
Interest expense, net		3,711		3,881
Income tax expense		955		1,910
EBITDA	$	9,711	$	12,367

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CPI INTERNATIONAL, INC.

and Subsidiaries

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All tabular dollar amounts in thousands except share and per share amounts)

~~The~~13. Supplemental ~~following~~Guarantors ~~table~~Condensed ~~reconciles~~Consolidating ~~net~~Financial ~~income~~Information ~~to EBITDA:~~(Unaudited)

	Three Months Ended				Nine Months Ended
	July 2, 2010		July 3, 2009		July 2, 2010		July 3, 2009
Net income	$	4,211	$	3,870	$	12,544	$	15,214
Depreciation and amortization		2,768		2,703		8,253		8,080
Interest expense, net		3,780		4,204		11,516		12,965
Income tax expense (benefit)		1,562		3,004		5,924		(2,201	)
EBITDA	$	12,321	$	13,781	$	38,237	$	34,058

12. Supplemental Guarantors Condensed Consolidating Financial Information (Unaudited)

Issued on January 23, 2004, CPI’s 8% Senior Subordinated Notes due 2012 (“8% Notes”), the current balance of which is $117.0 million, are guaranteed by CPI International and all of CPI’s domestic subsidiaries. Separate financial statements of the guarantors are not presented because (i) the guarantors are wholly owned and have fully and unconditionally guaranteed the 8% Notes on a joint and several basis and (ii) the Company’s management has determined that such separate financial statements are not material to investors. Instead, presented below are the consolidating financial statements of: (a) the parent, CPI International, (b) the issuer, CPI, (c) the guarantor subsidiaries (all of the domestic subsidiaries), (d) the non-guarantor subsidiaries, (e) the consolidating elimination entries, and (f) the consolidated totals. The accompanying consolidating financial information should be read in connection with the condensed consolidated financial statements of CPI International.

Investments in subsidiaries are accounted for based on the equity method. The principal elimination entries eliminate investments in subsidiaries, intercompany balances, intercompany transactions and intercompany sales.

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Table of Contents

CPI INTERNATIONAL, INC.

and Subsidiaries

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All tabular dollar amounts in thousands except share and per share amounts)

CONDENSED CONSOLIDATING BALANCE SHEET

As of ~~July~~December 231, 2010

	Parent			Issuer			Guarantor		Non-Guarantor			Consolidating			Consolidated
	(CPI Int'l)			(CPI)			Subsidiaries		Subsidiaries			Eliminations			Total
Assets
Current assets:
Cash and cash equivalents	$	186		$	37,462		$	1,602	$	20,657		$	-		$	59,907
Cash and cash equivalents	$	689		$	33,092		$	683	$	12,719		$	-		$	47,183
Restricted cash		-			1,293			1,676		91			-			3,060
Restricted cash		-			-			952		88			-			1,040
Accounts receivable, net		-			17,193			8,539		13,691			-			39,423
Accounts receivable, net		-			19,403			9,490		14,540			-			43,433
Inventories		-			45,704			11,484		21,901			(644	)		78,445
Inventories		-			47,715			10,119		21,175			(602	)		78,407
Deferred tax assets		-			11,727			2		158			-			11,887
Deferred tax assets		-			10,467			2		16			-			10,485
Intercompany receivable		-			3,193			10,952		12,121			(26,266	)		-
Intercompany receivable		-			6,687			9,776		9,882			(26,345	)		-
Prepaid and other current assets		582			4,218			389		923			-			6,112
Prepaid and other current assets		25			3,052			476		768			-			4,321
Total current assets		768			120,790			34,644		69,542			(26,910	)		198,834
Total current assets		714			120,416			31,498		59,188			(26,947	)		184,869
Property, plant and equipment, net		-			37,504			2,824		12,222			-			52,550
Property, plant and equipment, net		-			39,413			2,902		12,335			-			54,650
Deferred debt issue costs, net		274			1,070			-		-			-			1,344
Deferred debt issue costs, net		302			2,305			-		-			-			2,607
Intangible assets, net		-			52,630			12,791		6,309			-			71,730
Intangible assets, net		-			53,534			13,074		6,610			-			73,218
Goodwill		-			93,307			20,973		47,945			-			162,225
Other long-term assets		-			35,~~559~~397			~~227~~68		-			-			35,~~786~~465
Investment in subsidiaries		~~229~~230,~~313~~910			~~117~~122,~~007~~547			-		-			(~~346~~353,~~320~~457	)		-
Total assets	$	~~230~~231,~~329~~952		$	~~429~~433,~~541~~245		$	6871,~~674~~300	$	~~126~~136,~~078~~018		$	(~~373~~380,~~267~~367	)	$	~~481~~492,~~355~~148
Liabilities and stockholders' equity
Current liabilities:
Current portion of long-term debt	$	-		$	66,000		$	-	$	-		$	-		$	66,000
Accounts payable	$	21		$	1110,~~223~~255		$	21,~~611~~705	$	710,~~328~~234		$	-		$	2122,~~164~~195
Accrued expenses		23,~~417~~555			1917,~~142~~831			13,~~801~~436		45,~~595~~015			-			2729,~~955~~837
Product warranty		-			2,~~378~~688			~~823~~1,034		1,~~629~~696			-			45,~~830~~418
Income taxes payable		-			~~(82~~586	)		~~201~~136		32,~~489~~800			-			3,~~608~~522
Deferred income taxes		-			-			-		328			-			328
Advance payments from customers		-			9,399			5,907		6,460			-			21,766
Advance payments from customers		-			4,261			4,492		4,146			-			12,899
Intercompany payable		26,266			-			-		-			(26,266	)		-
Intercompany payable		26,345			-			-		-			(26,345	)		-
Total current liabilities		29,822			106,759			12,218		26,205			(26,266	)		148,738
Total current liabilities		28,764			36,922			9,928		21,515			(26,345	)		70,784
Deferred income taxes		-			17,540			-		4,002			-			21,542
Deferred income taxes, non-current		-			20,064			-		3,933			-			23,997
Long-term debt, less current portion		11,937			117,000			-		-			-			128,937
Long-term debt		11,931			183,000			-		-			-			194,931
Other long-term liabilities		2,713			2,113			-		625			-			5,451
Other long-term liabilities		-			1,319			36		654			-			2,009
Total liabilities		44,472			243,412			12,218		30,832			(26,266	)		304,668
Total liabilities		40,695			241,305			9,964		26,102			(26,345	)		291,721
Common stock		171			-			-		-			-			171
Common stock		170			-			-		-			-			170
Parent investment		-			48,312			43,167		59,318			(150,797	)		-
Parent investment		-			54,939			43,167		59,077			(157,183	)		-
Additional paid-in capital		81,235			-			-		(8,211	)		8,211			81,235
Additional paid-in capital		79,257			-			-		(8,211	)		8,211			79,257
Accumulated other comprehensive loss		(44	)		(44	)		-		(187	)		231			(44	)
Accumulated other comprehensive income		506			506			-		786			(1,292	)		506
Retained earnings		108,918			141,565			15,915		54,266			(211,746	)		108,918
Retained earnings		112,501			132,791			15,543		48,324			(196,658	)		112,501
Treasury stock		(2,800	)		-			-		-			-			(2,800	)
Treasury stock, at cost		(2,800	)		-			-		-			-			(2,800	)
Total stockholders’ equity		187,480			189,833			59,082		105,186			(354,101	)		187,480
Total stockholders’ equity		189,634			188,236			58,710		99,976			(346,922	)		189,634
Total liabilities and stockholders' equity	$	231,952		$	433,245		$	71,300	$	136,018		$	(380,367	)	$	492,148
Total liabilities and stockholders' equity	$	230,329		$	429,541		$	68,674	$	126,078		$	(373,267	)	$	481,355

- 32 -

Table of Contents

CPI INTERNATIONAL, INC.

and Subsidiaries

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All tabular dollar amounts in thousands except share and per share amounts)

CONDENSED CONSOLIDATING BALANCE SHEET

CONDENSED CONSOLIDATING BALANCE SHEET
As of October 1, 2010

	Parent			Issuer			Guarantor		Non-Guarantor			Consolidating			Consolidated
	(CPI Int'l)			(CPI)			Subsidiaries		Subsidiaries			Eliminations			Total
Assets
Cash and cash equivalents	$	34		$	29,397		$	905	$	12,493		$	-		$	42,829
Restricted cash		-			-			1,710		94			-			1,804
Accounts receivable, net		-			20,107			10,225		15,375			-			45,707
Inventories		-			43,502			11,312		21,070			(676	)		75,208
Deferred tax assets		-			10,945			2		83			-			11,030
Intercompany receivable		-			1,261			8,399		16,677			(26,337	)		-
Prepaid and other current assets		-			4,666			466		1,327			-			6,459
Total current assets		34			109,878			33,019		67,119			(27,013	)		183,037
Property, plant and equipment, net		-			38,877			2,901		12,481			-			54,259
Deferred debt issue costs, net		288			1,316			-		-			-			1,604
Intangible assets, net		-			53,082			12,932		6,460			-			72,474
Goodwill		-			93,307			20,973		47,945			-			162,225
Other long-term assets		-			4,548			129		-			-			4,677
Investment in subsidiaries		226,142			120,475			-		-			(346,617	)		-
Total assets	$	226,464		$	421,483		$	69,954	$	134,005		$	(373,630	)	$	478,276

Liabilities and stockholders' equity
Current portion of long-term debt	$	-		$	66,000		$	-	$	-		$	-		$	66,000
Accounts payable		1			11,294			2,267		10,728			-			24,290
Accrued expenses		1,539			14,651			2,248		5,215			-			23,653
Product warranty		-			2,548			901		1,652			-			5,101
Income taxes payable		-			586			113		4,323			-			5,022
Advance payments from customers		-			4,803			5,450		3,965			-			14,218
Intercompany payable		26,337			-			-		-			(26,337	)		-
Total current liabilities		27,877			99,882			10,979		25,883			(26,337	)		138,284
Deferred income taxes		-			17,644			-		4,063			-			21,707
Long-term debt, less current portion		11,934			117,000			-		-			-			128,934
Other long-term liabilities		2,713			1,892			-		806			-			5,411
Total liabilities		42,524			236,418			10,979		30,752			(26,337	)		294,336
Common stock		170			-			-		-			-			170
Parent investment		-			46,868			43,167		59,180			(149,215	)		-
Additional paid-in capital		80,015			-			-		(8,211	)		8,211			80,015
Accumulated other comprehensive (loss) gain		(141	)		(141	)		-		84			57			(141	)
Retained earnings		106,696			138,338			15,808		52,200			(206,346	)		106,696
Treasury stock		(2,800	)		-			-		-			-			(2,800	)
Total stockholders’ equity		183,940			185,065			58,975		103,253			(347,293	)		183,940
Total liabilities and stockholders' equity	$	226,464		$	421,483		$	69,954	$	134,005		$	(373,630	)	$	478,276

As of October 2, 2009

	Parent			Issuer		Guarantor		Non-Guarantor			Consolidating			Consolidated
	(CPI Int'l)			(CPI)		Subsidiaries		Subsidiaries			Eliminations			Total
Assets
Cash and cash equivalents	$	10		$	15,055	$	759	$	10,328		$	-		$	26,152
Restricted cash		-			-		1,467		94			-			1,561
Accounts receivable, net		-			18,456		12,581		14,108			-			45,145
Inventories		-			41,877		7,622		18,117			(620	)		66,996
Deferred tax assets		-			8,494		2		156			-			8,652
Intercompany receivable		-			9,033		6,751		10,534			(26,318	)		-
Prepaid and other current assets		-			5,396		475		829			-			6,700
Total current assets		10			98,311		29,657		54,166			(26,938	)		155,206
Property, plant and equipment, net		-			42,048		3,001		12,863			-			57,912
Deferred debt issue costs, net		344			3,265		-		-			-			3,609
Intangible assets, net		-			54,891		13,477		7,062			-			75,430
Goodwill		-			93,307		20,973		47,945			-			162,225
Other long-term assets		-			3,645		227		-			-			3,872
Intercompany notes receivable		-			1,035		-		-			(1,035	)		-
Investment in subsidiaries		211,575			114,416		-		-			(325,991	)		-
Total assets	$	211,929		$	410,918	$	67,335	$	122,036		$	(353,964	)	$	458,254
Liabilities and stockholders' equity
Accounts payable	$	(1	)	$	11,100	$	2,730	$	8,836		$	-		$	22,665
Accrued expenses		137			13,293		1,634		3,951			-			19,015
Product warranty		-			1,893		452		1,500			-			3,845
Income taxes payable		-			1,683		151		2,471			-			4,305
Advance payments from customers		-			7,389		4,368		1,239			-			12,996
Intercompany payable		26,318			-		-		-			(26,318	)		-
Total current liabilities		26,454			35,358		9,335		17,997			(26,318	)		62,826
Deferred income taxes, non-current		-			20,342		-		4,384			-			24,726
Intercompany notes payable		-			-		-		1,035			(1,035	)		-
Long-term debt, less current portion		11,922			183,000		-		-			-			194,922
Other long-term liabilities		-			1,720		36		471			-			2,227
Total liabilities		38,376			240,420		9,371		23,887			(27,353	)		284,701
Common stock		168			-		-		-			-			168
Parent investment		-			52,241		43,167		58,615			(154,023	)		-
Additional paid-in capital		75,630			-		-		(211	)		211			75,630
Accumulated other comprehensive gain (loss)		598			598		-		(223	)		(375	)		598
Retained earnings		99,957			117,659		14,797		39,968			(172,424	)		99,957
Treasury stock		(2,800	)		-		-		-			-			(2,800	)
Total stockholders’ equity		173,553			170,498		57,964		98,149			(326,611	)		173,553
Total liabilities and stockholders' equity	$	211,929		$	410,918	$	67,335	$	122,036		$	(353,964	)	$	458,254

- 33 -

Table of Contents

CPI INTERNATIONAL, INC.

and Subsidiaries

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All tabular dollar amounts in thousands except share and per share amounts)

CONDENSED CONSOLIDATING STATEMENT OF INCOME

For the Three Months Ended ~~July~~December 231, 2010

	Parent			Issuer		Guarantor		Non-Guarantor			Consolidating			Consolidated
	(CPI Int'l)			(CPI)		Subsidiaries		Subsidiaries			Eliminations			Total
Sales	$	-		$	5751,~~946~~702	$	1917,~~237~~695	$	3538,~~629~~356		$	(18,~~936~~733	)	$	9389,~~876~~020
Cost of sales		-			4138,~~111~~664		1614,~~167~~922		2629,~~689~~278			(1918,~~014~~765	)		64,~~953~~099
Gross profit		-			1613,~~835~~038		32,~~070~~773		89,~~940~~078			7832			2824,~~923~~921
Operating costs and expenses:
Research and development		-			~~1,477~~831		12-		2,~~053~~299			-			3,~~542~~130
Selling and marketing		-			1,~~849~~882		1,~~068~~100		2,~~261~~262			-			5,~~178~~244
General and administrative		-			43,~~053~~232		1,~~116~~360		1,~~204~~724			-			6,~~373~~316
Amortization of acquisition-related intangible assets		-			~~390~~389		146		~~152~~151			-			~~688~~686
Merger expenses		2,256			1,333										3,589
Strategic alternative transaction expenses		1,412			1,245		-		-			-			2,657
Total operating costs and expenses		21,~~256~~412			97,~~102~~579		2,~~342~~606		56,~~670~~436			-			1918,~~370~~033
Operating income (loss)		(2,256	)		7,733		728		3,270			78			9,553
Operating (loss) income		(1,412	)		5,459		167		2,642			32			6,888
Interest expense (income), net		~~201~~208			3,~~581~~506		-		(23	)		-			3,~~780~~711
Income (loss) before income tax expense
(Loss) income before income tax expense
and equity in income of subsidiaries		(21,~~457~~620	)		41,~~152~~953		~~728~~167		32,~~272~~645			7832			53,~~773~~177
Income tax expense (benefit)		(134	)		632		258		806			-			1,562
Income tax (benefit) expense		(615	)		931		60		579			-			955
Equity in income of subsidiaries		63,~~534~~227			32,~~014~~205		-		-			(95,~~548~~432	)		-
Net income	$	42,~~211~~222		$	63,~~534~~227	$	~~470~~107	$	2,~~466~~066		$	(95,~~470~~400	)	$	42,~~211~~222

CONDENSED CONSOLIDATING STATEMENT OF INCOME

For the Three Months Ended ~~July~~January 31, ~~2009~~ 2010

Parent

Issuer

Guarantor

Non-Guarantor

Consolidating

Consolidated

(CPI Int'l)

(CPI)

Subsidiaries

Eliminations

Total

Sales

5347,~~852~~936

17,~~956~~419

3037,~~481~~119

(19,~~769~~707

)

82,~~520~~767

Cost of sales

3836,~~936~~880

14,~~826~~783

2427,~~379~~389

(19,~~905~~725

)

5859,~~236~~327

Gross profit

1411,~~916~~056

32,~~130~~636

69,~~102~~730

~~136~~18

2423,~~284~~440

Operating costs and expenses:

Research and development

~~881~~557

-20

1,~~850~~979

2,~~731~~556

Selling and marketing

1,~~830~~593

1,~~094~~173

12,~~838~~274

45,~~762~~040

General and administrative

-1

23,~~697~~323

~~805~~987

1,~~571~~214

5,~~073~~525

Amortization of acquisition-related intangible assets

~~387~~390

~~152~~146

~~152~~151

~~691~~687

Total operating costs and expenses

-1

5,~~795~~863

2,~~051~~326

5,~~411~~618

13,~~257~~808

Operating income

-(1

)

95,~~121~~193

~~1,079~~310

~~691~~4,112

~~136~~18

119,~~027~~632

Interest expense, net

~~237~~216

3,~~955~~638

-(1

)

1228

43,~~204~~881

Gain on debt extinguishment

(51

)

(51

)

(Loss) income before income tax expense

and equity in income of subsidiaries

(~~237~~217

)

51,~~217~~555

~~1,079~~311

~~679~~4,084

~~136~~18

65,~~874~~751

Income tax (benefit) expense

(8882

)

41,~~231~~348

~~209~~101

~~(1,348~~543

)

31,~~004~~910

Equity in income of subsidiaries

43,~~019~~976

3,~~033~~769

(7,~~052~~745

)

Net income

3,~~870~~841

43,~~019~~976

~~870~~210

23,~~027~~541

(67,~~916~~727

)

3,~~870~~841

- 34 -

Table of Contents

CPI INTERNATIONAL, INC.

and Subsidiaries

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All tabular dollar amounts in thousands except share and per share amounts)

CONDENSED CONSOLIDATING STATEMENT OF INCOME

For the Nine Months Ended July 2, 2010

	Parent			Issuer		Guarantor			Non-Guarantor		Consolidating			Consolidated
	(CPI Int'l)			(CPI)		Subsidiaries			Subsidiaries		Eliminations			Total
Sales	$	-		$	159,203	$	54,612		$	109,759	$	(58,579	)	$	264,995
Cost of sales		-			116,279		46,420			81,808		(58,597	)		185,910
Gross profit		-			42,924		8,192			27,951		18			79,085
Operating costs and expenses:
Research and development		-			2,911		79			6,297		-			9,287
Selling and marketing		-			5,248		3,415			6,729		-			15,392
General and administrative		1			11,462		3,055			4,042		-			18,560
Amortization of acquisition-related intangible assets		-			1,170		439			453		-			2,062
Merger expenses		2,256			1,544										3,800
Total operating costs and expenses		2,257			22,335		6,988			17,521		-			49,101
Operating (loss) income		(2,257	)		20,589		1,204			10,430		18			29,984
Interest expense (income), net		626			10,840		(2	)		52		-			11,516
(Loss) income before income tax expense
and equity in income of subsidiaries		(2,883	)		9,749		1,206			10,378		18			18,468
Income tax (benefit) expense		(295	)		3,737		460			2,022		-			5,924
Equity in income of subsidiaries		15,132			9,120		-			-		(24,252	)		-
Net income	$	12,544		$	15,132	$	746		$	8,356	$	(24,234	)	$	12,544

CONDENSED CONSOLIDATING STATEMENT OF INCOME

For the Nine Months Ended July 3, 2009

	Parent			Issuer			Guarantor			Non-Guarantor			Consolidating			Consolidated
	(CPI Int'l)			(CPI)			Subsidiaries			Subsidiaries			Eliminations			Total
Sales	$	-		$	152,707		$	54,740		$	92,714		$	(58,592	)	$	241,569
Cost of sales		-			115,000			45,563			73,690			(58,650	)		175,603
Gross profit		-			37,707			9,177			19,024			58			65,966
Operating costs and expenses:
Research and development		-			2,639			3			5,429			-			8,071
Selling and marketing		-			5,392			3,329			5,831			-			14,552
General and administrative		-			10,648			2,959			1,930			-			15,537
Amortization of acquisition-related intangible assets		-			1,167			456			453			-			2,076
Total operating costs and expenses		-			19,846			6,747			13,643			-			40,236
Operating income		-			17,861			2,430			5,381			58			25,730
Interest expense (income), net		768			12,153			(8	)		52			-			12,965
Gain on debt extinguishment		-			(248	)		-			-			-			(248	)
(Loss) income before income tax expense
and equity in income of subsidiaries		(768	)		5,956			2,438			5,329			58			13,013
Income tax (benefit) expense		(291	)		146			595			(2,651	)		-			(2,201	)
Equity in income of subsidiaries		15,691			9,881			-			-			(25,572	)		-
Net income	$	15,214		$	15,691		$	1,843		$	7,980		$	(25,514	)	$	15,214

- 35 -

Table of Contents

CPI INTERNATIONAL, INC.

and Subsidiaries

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(All tabular dollar amounts in thousands except share and per share amounts)

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

For the ~~Nine~~Three Months Ended ~~July~~December 231, 2010

	Parent			Issuer			Guarantor			Non-Guarantor			Consolidating		Consolidated
	(CPI Int'l)			(CPI)			Subsidiaries			Subsidiaries			Eliminations		Total
Cash flows from operating activities
Net cash (used in) provided by operating activities	$	(~~444~~201	)	$	198,~~972~~712		$	~~199~~755		$	28,~~789~~221		$	-	$	2217,~~516~~487
Cash flows from investing activities
Capital expenditures		-			(~~2,187~~338	)		(~~239~~52	)		(~~398~~57	)		-		(~~2,824~~447	)
Payment of patent application fees		-			-			(366	)		-			-		(366	)
Net cash used in investing activities		-			(~~2,187~~338	)		(~~275~~58	)		(~~398~~57	)		-		(~~2,860~~453	)
Cash flows from financing activities
Proceeds from issuance of common stock to employees		579			-			-			-			-		579
Payment for Senior Credit Facilities agreement amendment		-			(379	)		-			-			-		(379	)
Proceeds from exercise of stock options		214			-			-			-			-		214
Proceeds from issuance of common stock to employees		217			-			-			-			-		217
Excess tax benefit on stock option exercises		-			582			-			-			-		582
Proceeds from exercise of stock options		136			-			-			-			-		136
Intercompany dividends		330			(330	)		-			-			-		-
Excess tax benefit on stock option exercises		-			70			-			-			-		70
Net cash provided by financing activities		1,123			252			-			-			-		1,375
Net cash provided by (used in) financing activities		353			(309	)		-			-			-		44
Net increase (decrease) in cash and cash equivalents		679			18,037			(76	)		2,391			-		21,031
Net increase in cash and cash equivalents		152			8,065			697			8,164			-		17,078
Cash and cash equivalents at beginning of period		1034			1529,~~055~~397			~~759~~905			1012,~~328~~493			-		2642,~~152~~829
Cash and cash equivalents at end of period	$	~~689~~186		$	3337,~~092~~462		$	~~683~~1,602		$	1220,~~719~~657		$	-	$	4759,~~183~~907

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

For the ~~Nine~~Three Months Ended ~~July~~January 31, ~~2009~~2010

	Parent			Issuer			Guarantor			Non-Guarantor			Consolidating		Consolidated
	(CPI Int'l)			(CPI)			Subsidiaries			Subsidiaries			Eliminations		Total
Cash flows from operating activities
Net cash (used in) provided by operating activities	$	(~~1,266~~131	)	$	193,~~527~~972		$	~~423~~187		$	15,~~624~~536		$	-	$	209,~~308~~564
Cash flows from investing activities
Capital expenditures		-			(~~2,053~~616	)		(~~215~~101	)		(8194	)		-		(~~2,349~~811	)
Net cash used in investing activities		-			(~~2,053~~616	)		(~~215~~101	)		(8194	)		-		(~~2,349~~811	)
Cash flows from financing activities
Repayments of debt		-			(12,358	)		-			-			-		(12,358	)
Proceeds from issuance of common stock to employees		189			-			-			-			-		189
Proceeds from issuance of common stock to employees		781			-			-			-			-		781
Proceeds from exercise of stock options		14			-			-			-			-		14
Proceeds from exercise of stock options		82			-			-			-			-		82
Excess tax benefit on stock option exercises		-			2			-			-			-		2
Excess tax benefit on stock option exercises		-			51			-			-			-		51
Net cash provided by financing activities		203			2			-			-			-		205
Intercompany dividends / loan repayments		396			(8,607	)		-			8,211			-		-
Net increase in cash and cash equivalents		72			3,358			86			5,442			-		8,958
Net cash provided by (used in) financing activities		1,259			(20,914	)		-			8,211			-		(11,444	)
Cash and cash equivalents at beginning of period		10			15,055			759			10,328			-		26,152
Net (decrease) increase in cash and cash equivalents		(7	)		(3,440	)		208			9,754			-		6,515
Cash and cash equivalents at end of period	$	82		$	18,413		$	845		$	15,770		$	-	$	35,110
Cash and cash equivalents at beginning of period		84			26,272			493			1,821			-		28,670
Cash and cash equivalents at end of period	$	77		$	22,832		$	701		$	11,575		$	-	$	35,185

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

Our fiscal years are the 52- or 53-week periods that end on the Friday nearest September 30. Fiscal years ~~2010~~2011 and ~~2009~~2010 ~~comprise~~comprised the 52-week ~~period~~periods ending ~~October~~September 130, ~~2010~~2011 and October 21, ~~2009~~2010, respectively. The first quarters of both fiscal years 2011 and 2010 include 13 weeks. The following discussion should be read in conjunction with the accompanying unaudited condensed consolidated financial statements, and the notes thereto, of CPI International, Inc.

Overview

The discussion below represents the current business overview and strategy of the Company as of the date of this 10-Q filing. Our future business activities and strategy may be subject to change upon consummation of the proposed merger with Comtech. See Note 4 of our condensed consolidated financial statements appearing elsewhere in this Form 10-Q, which provides further information on the proposed merger.

CPI International, headquartered in Palo Alto, California, is the parent company of Communications & Power Industries, a provider of microwave, radio frequency, power and control solutions for critical defense, communications, medical, scientific and other applications. Communications & Power Industries develops, manufactures and distributes products used to generate, amplify, transmit and receive high-power/high-frequency microwave and radio frequency signals and/or provide power and control for various applications. End-use applications of these systems include the transmission of radar signals for navigation and location; transmission of deception signals for electronic countermeasures; transmission and amplification of voice, data and video signals for broadcasting, Internet and other types of commercial and military communications; providing power and control for medical diagnostic imaging; and generating microwave energy for radiation therapy in the treatment of cancer and for various industrial and scientific applications.

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

Merger Agreement

We entered into an Agreement and Plan of Merger dated as of November 24, 2010 ("Merger Agreement") with CPI International Acquisition, Inc. (formerly Catalyst Holdings, Inc.) ("Parent") and Catalyst Acquisition, Inc. ("Merger Sub"), an indirect wholly owned subsidiary of CPI International Acquisition, Inc. CPI International Acquisition, Inc. is an indirect wholly owned subsidiary of The Veritas Capital Fund IV, L.P. (the "Veritas Fund"). The Merger Agreement contemplates that Merger Sub will be merged with and into CPI International, Inc., with CPI International, Inc. surviving as a wholly-owned subsidiary of Parent (the "Merger"), and, subject to certain exceptions, each outstanding share of our common stock will be converted in the Merger into the right to receive $19.50 per share in cash. The Merger Agreement is subject to CPI stockholder approval, and is also subject to a number of customary regulatory and other closing conditions. The Merger Agreement is not subject to any financing conditions. See Note 4 to the accompanying unaudited condensed consolidated financial statements for more information regarding the Merger Agreement.

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Orders

We sell our products into five end markets: defense (radar and electronic warfare), medical, communications, industrial and scientific.

Our customer sales contracts are recorded as orders when we accept written customer purchase orders or contracts. Customer purchase orders with an undefined delivery schedule, or blanket purchase orders, are not reported as orders until the delivery date is determined. Our government sales contracts are not reported as orders until we have been notified that the contract has been funded. Total orders for a fiscal period represent the total dollar amount of customer orders recorded by us during the fiscal period, reduced by the dollar amount of any order cancellations or terminations during the fiscal period.

Our orders by market for the first quarter of fiscal years 2011 and 2010 are summarized as follows (dollars in millions):

	December 31, 2010					January 1, 2010					Increase (Decrease)
			% of					% of
	Amount		Orders			Amount		Orders			Amount			Percent
Radar and Electronic Warfare	$	45.3		46	%	$	33.5		36	%	$	11.8			35	%
Medical		13.6		14			15.6		17			(2.0	)		(13	)
Communications		30.0		30			35.1		38			(5.1	)		(15	)
Industrial		5.5		5			3.8		4			1.7			45
Scientific		4.7		5			4.7		5			-			0
Total	$	99.1		100	%	$	92.7		100	%	$	6.4			7	%

Orders of $99.1 million for the first quarter of fiscal year 2011 were $6.4 million, or approximately 7%, higher than orders of $92.7 million for the first quarter of fiscal year 2010. Explanations for the order increase or decrease by market for the first quarter of fiscal year 2011 compared to the first quarter of fiscal year 2010 are as follows:

Radar and Electronic Warfare: The majority of our products in the radar and electronic warfare markets are for domestic and international defense and government end uses. Orders in these markets are primarily comprised of many orders of less than $3.0 million by product or program, and the timing of these orders may vary from year to year. On a combined basis, orders for the radar and electronic warfare markets increased approximately 35% from an aggregate of $33.5 million in the first quarter of fiscal year 2010 to an aggregate of $45.3 million in the first quarter of fiscal year 2011. The increase in orders for these combined markets resulted primarily from an increase in demand for products to support a counter-improvised explosive device (“counter-IED”) program and the Aegis weapons system. These increases were partially offset by decreases in orders to support various weather radar programs due to the timing of those programs.

Medical: Orders for our medical products consist of orders for medical imaging applications, such as x-ray imaging, magnetic resonance imaging (“MRI”) and positron emission tomography (“PET”) applications, and for radiation therapy applications for the treatment of cancer. The 13% decrease in medical orders resulted primarily from a decrease in demand for products to support MRI applications, largely due to the typically irregular timing and size of orders to support those applications. Demand for products to support x-ray imaging applications also decreased due to the receipt of a large order in the first quarter of fiscal year 2010 that did not repeat in the first quarter of fiscal year 2011. These decreases were partially offset by an increase in orders to support radiation therapy applications.

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~~Our~~· ~~orders~~Communications: byOrders ~~market~~for our communications products consist of orders for ~~the~~commercial ~~nine~~communications ~~months~~applications ~~ended~~and ~~July~~military 2communications applications. The 15% decrease in communications orders was due, ~~2010~~in part, to a decrease in orders for military communications applications and ~~July~~other 3communications applications as a result of the timing of various programs. Over the long term, ~~2009~~we ~~are~~expect ~~summarized~~our asparticipation ~~follows~~in ~~(dollars~~military communications programs to continue to grow. These decreases were partially offset by an increase in ~~millions):~~demand for products to support satellite broadcast applications for commercial communications.

	Nine Months Ended
	July 2, 2010					July 3, 2009					Increase (Decrease)
			% of					% of
	Amount		Orders			Amount		Orders			Amount			Percent
Radar and Electronic Warfare	$	102.6		36	%	$	113.0		42	%	$	(10.4	)		(9	) %
Medical		52.5		19			49.5		18			3.0			6
Communications		98.3		35			91.0		33			7.3			8
Industrial		18.0		6			15.9		6			2.1			13
Scientific		12.0		4			1.9		1			10.1			532
Total	$	283.4		100	%	$	271.3		100	%	$	12.1			4	%

Industrial: Orders in the industrial market are cyclical and are generally tied to the state of the economy. The $1.7 million increase in industrial orders was due to the receipt of a development order for a nuclear magnetic resonance program, an increase in demand for products used in instrumentation applications due to program timing and an overall increase in demand for products to support various other industrial activities.

~~Orders~~· ofScientific: ~~$283.4~~Orders ~~million~~in ~~for~~ the ~~nine~~scientific ~~months~~market ~~ended~~are ~~July~~historically 2,one-time ~~2010~~projects ~~were~~and ~~$12.1~~can ~~million,~~fluctuate orsignificantly ~~approximately~~from ~~4%,~~period ~~higher~~to ~~than orders of $271~~period.3 ~~million~~However, ~~for~~in the ~~nine~~first ~~months~~quarter ~~ended~~of ~~July~~fiscal 3year 2011, ~~2009. Explanations for~~ the ~~order~~orders ~~increase~~level orin ~~decrease~~the byscientific market ~~for~~was ~~the~~essentially ~~first~~unchanged ~~nine~~in ~~months~~comparison ~~of fiscal year 2010 compared~~ to the first ~~nine~~quarter ~~months~~ of fiscal year ~~2009 are as follows:~~2010.

·Incoming ~~Radar~~order ~~and~~levels ~~Electronic~~can ~~Warfare:~~fluctuate ~~The~~significantly ~~majority~~on ofa ~~our~~quarterly products in the radar and electronic warfare markets are for domestic and international defense and government end uses. Orders in these markets are characterized by many smaller orders in the $0.5 million to $3.0 million range by product or ~~program,~~annual ~~and the timing of these orders may vary from year to year. On a combined~~ basis, ~~orders for the radar~~ and ~~electronic~~a ~~warfare~~particular ~~markets~~quarter’s ~~decreased~~or ~~approximately 9% from an aggregate of $113.0 million in the first nine months of fiscal~~ year’s ~~2009~~order torate anmay ~~aggregate~~not ofbe ~~$102.6~~indicative ~~million in the first nine months~~ of ~~fiscal~~future ~~year~~order ~~2010~~levels. ~~The~~In ~~decrease~~addition, inour ~~orders~~sales ~~for~~are ~~these~~highly ~~combined~~dependent ~~markets~~upon ~~was~~manufacturing ~~primarily~~scheduling ~~due to the timing of orders to support certain radar~~ and ~~electronic~~performance ~~warfare systems~~and, ~~including a foreign radar program~~accordingly, ~~several~~it ~~airborne~~is ~~electronic~~difficult ~~countermeasure~~to ~~systems~~accurately ~~and~~predict ~~the~~when ~~HAWK missile system. In the first nine months of fiscal year 2009, we received $4.1 million in~~ orders ~~for~~will abe ~~foreign~~recognized ~~radar~~as ~~program; this large order was not expected to, and did not, repeat in the first nine months of fiscal year 2010~~sales.

· Medical: Orders for our medical products consist of orders for medical imaging applications, such as x-ray imaging, magnetic resonance imaging (“MRI”) and positron emission tomography (“PET”) applications, and for radiation therapy applications for the treatment of cancer. The 6% increase in medical orders resulted from an increase in demand for products to support MRI applications, and was partially offset by a decrease in orders of products to support radiation therapy applications. In fiscal year 2009, orders to support radiation therapy applications were higher than the historical average, while sales of these products remained at normal levels.

· Communications: Orders for our communications products consist of orders for commercial communications applications and military communications applications. The 8% increase in communications orders was primarily due to increases in orders to support commercial communications applications, such as fixed satellite broadcast and commercial radio broadcast applications. Excluding the Warfighter Information Network – Tactical (“WIN-T”) military communications program, demand for products to support military communications programs also increased during the most recent period. Orders for the WIN-T program decreased $20 million in the most recent period due to the atypical receipt of multiple large orders in the first nine months of fiscal year 2009; the size and frequency of these large orders were not expected to, and did not, repeat in the first nine months of fiscal year 2010. Military communications is a relatively new sector of the overall communications market for us, and,

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with the exception of the WIN-T program, is characterized by numerous programs that are relatively modest in size and for which the timing may vary from year to year. Over the long-term, we expect our participation in military communications programs to continue to grow.

· Industrial: Orders in the industrial market are cyclical and are generally tied to the state of the economy. The $2.1 million increase in industrial orders was primarily due to an increase in demand for products used in semiconductor and liquid crystal display (“LCD”) screen manufacturing applications.

· Scientific: Orders in the scientific market are historically one-time projects and can fluctuate significantly from period to period. The $10.1 million increase in scientific orders was primarily the result of the receipt of orders for products to support fusion research and scientific accelerators at domestic and European laboratories.

Incoming order levels can fluctuate significantly on a quarterly or annual basis, and a particular quarter’s or year’s order rate may not be indicative of future order levels. In addition, our sales are highly dependent upon manufacturing scheduling and performance and, accordingly, it is not possible to accurately predict when orders will be recognized as sales.

Backlog

As of ~~July~~December 231, 2010, we had an order backlog of $~~245~~252.54 million compared to an order backlog of $~~232~~236.16 million as of ~~July~~January 31, ~~2009~~2010. Because our orders for government end-use products generally have much longer delivery terms than our orders for commercial business (which require quicker turn-around), our backlog is primarily composed of government end-use orders.

Backlog represents the cumulative balance, at a given point in time, of recorded customer sales orders that have not yet been shipped or recognized as sales. Backlog is increased when an order is received, and backlog is decreased when we recognize sales. We believe that backlog and orders information is helpful to investors because this information may be indicative of future sales results. Although backlog consists of firm orders for which goods and services are yet to be provided, customers can, and sometimes do, terminate or modify these orders. However, historically the amount of modifications and terminations has not been material compared to total contract volume.

Results of Operations

We derive our revenue primarily from the sale of microwave and radio frequency products, including high-power microwave amplifiers, satellite communications amplifiers, medical x-ray imaging subsystems and other related products. Our products generally have selling prices ranging from $2,000 to $200,000, with certain limited products priced up to $1,000,000.

Cost of goods sold generally includes costs for raw materials, manufacturing costs, including allocation of overhead and other indirect costs, charges for reserves for excess and obsolete inventory, warranty claims and losses on fixed price contracts. Operating expenses generally consist of research and development, selling and marketing and general and administrative expenses.

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Three Months Ended ~~July~~December 231, 2010 Compared to Three Months Ended ~~July~~January 31, ~~2009~~2010

The following table sets forth our historical results of operations for each of the periods indicated (dollars in millions):

	Three Months Ended
	Quarter Ended
	July 2, 2010					July 3, 2009						Increase (Decrease)
	December 31, 2010					January 1, 2010						Increase (Decrease)
			% of						% of
	Amount		Sales			Amount			Sales			Amount
Sales	$	9389.90		100.0	%	$	82.58			100.0	%	$	116.42
Cost of sales		6564.01		6972.20			5859.23			7071.56			64.8
Gross profit		2824.9		3028.80			2423.34			2928.53			41.65
Research and development		3.51		3.75			2.76			3.31			0.85
Selling and marketing		5.2		5.58			45.80			56.80			0.42
General and administrative		6.43		67.81			5.15			6.26			10.38
Amortization of acquisition-related intangibles		0.7		0.78			0.7			0.8			-
Merger expenses		3.6		3.8			-			-			3.6
Strategic alternative transaction expenses		2.7		3.0			-			-			2.7
Operating income		9.6.9		107.28			119.06			1311.36			(12.47	)
Interest expense, net		3.87		4.02			43.29			54.17			(0.42	)
Gain on debt extinguishment		-		-			(0.1	)		(0.1	)		0.1
Income before taxes		3.2		3.6			5.8			7.0			(2.6	)
Income before taxes		5.8		6.2			6.9			8.4			(1.1	)
Income tax expense		1.0		1.1			1.9			2.3			(0.9	)
Income tax expense		1.6		1.7			3.0			3.6			(1.4	)
Net income	$	2.2		2.5	%	$	3.8			4.6	%	$	(1.6	)
Net income	$	4.2		4.5	%	$	3.9			4.7	%	$	0.3
Other Data:
EBITDA (a)	$	129.37		1310.19	%	$	1312.84			1615.70	%	$	(12.57	)

Note: Totals may not equal the sum of the components due to independent rounding. Percentages are calculated based on rounded dollar amounts presented.

(a) EBITDA represents earnings before net interest expense, provision for income taxes and depreciation and amortization. For the reasons listed below, we believe that U.S. generally accepted accounting principles (“GAAP”) based financial information for leveraged businesses such as ours should be supplemented by EBITDA so that investors better understand our financial performance in connection with their analysis of our business:

information for leveraged businesses such as ours should be supplemented by EBITDA so that investors better understand our financial performance in connection with their analysis of our business:

•

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

•

our senior credit facilities contain a covenant that requires us to maintain a senior secured leverage ratio that contains EBITDA as a component, and our management team uses EBITDA to monitor compliance with this covenant;

•

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

•

EBITDA facilitates comparisons between our operating results and those of competitors with different capital structures and, therefore, is a component of the measures used by the management to facilitate internal comparisons to competitors’ results and our industry in general; and

•

the payment of management bonuses is contingent upon, among other things, the satisfaction by us of certain targets that contain EBITDA as a component.

Other companies may define EBITDA differently and, as a result, our measure of EBITDA may not be directly comparable to EBITDA of other companies. Although we use EBITDA as a financial measure to assess the performance of our business, the use of EBITDA is limited because it does not include certain material costs, such as interest and taxes, necessary to operate our business. When analyzing our performance, EBITDA should be considered in addition to, and not as a substitute for or superior to, net income, cash flows from operating activities or other statements of income or statements of cash flows data prepared in accordance with GAAP.

For a reconciliation of Net Income to EBITDA, see Note 1112 of the accompanying unaudited condensed consolidated financial statements.

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Sales: : Our sales by market for the first quarter of fiscal years 2011 and 2010 are summarized as follows (dollars in millions):

	Quarter Ended
	December 31, 2010					January 1, 2010					Increase (Decrease)
			% of					% of
	Amount		Sales			Amount		Sales			Amount			Percent
Radar and Electronic Warfare	$	31.7		36	%	$	28.2		34	%	$	3.5			12	%
Medical		17.0		19			19.4		23			(2.4	)		(12	)
Communications		30.6		34			28.7		35			1.9			7
Industrial		5.4		6			5.2		6			0.2			4
Scientific		4.3		5			1.3		2			3.0			231
Total	$	89.0		100	%	$	82.8		100	%	$	6.2			7	%

Sales of $89.0 million for the first quarter of fiscal year 2011 were $6.2 million, or approximately 7%, higher than sales of $82.8 million for the first quarter of fiscal year 2010. Explanations for the sales increase or decrease by market for the first quarter of fiscal year 2011 as compared to the first quarter of fiscal year 2010 are as follows:

Radar and Electronic Warfare: The majority of our products in the radar and electronic warfare markets are for domestic and international defense and government end uses. The timing of orders receipts and subsequent shipments in these markets may vary from year to year. On a combined basis, sales for these two markets increased 12% from an aggregate of $28.2 million in the first quarter of fiscal year 2010 to an aggregate of $31.7 million in the first quarter of fiscal year 2011. This increase was due to an increase in demand for products to support the Aegis weapons system, several electronic warfare systems and a counter-IED program.

Medical: Sales of our medical products consist of sales for medical imaging applications, such as x-ray imaging, MRI and PET applications, and for radiation therapy applications for the treatment of cancer. The 12% decrease in sales of our medical products in the first quarter of fiscal year 2011 was primarily due to a decrease in sales of products to support MRI applications, largely because of the typically irregular timing and size of orders to support those applications. Sales of products to support x-ray imaging applications also decreased, primarily as a result of the timing of various x-ray imaging programs.

Communications: Sales of our communications products consist of sales for commercial communications applications and military communications applications. The 7% increase in sales in the communications market was primarily due to increases in sales of products to support military communications applications, particularly tactical common data link (“TCDL”) products for intelligence, surveillance and reconnaissance (“ISR”) applications. Over the long term, we expect our participation in military communications programs to continue to grow. In commercial communications, sales of products to support satellite broadband applications increased while sales of products to support other direct-to-home broadcast applications decreased.

Industrial: Sales in the industrial market are cyclical and are generally tied to the state of the economy. The $0.2 million increase in sales of industrial products in the first quarter of fiscal year 2011 was primarily due to increases in sales to support semiconductor wafer fabrication applications.

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~~Sales~~· Scientific: ~~Our~~Sales ~~sales~~in bythe scientific market ~~for~~are ~~the~~historically ~~three~~one-time ~~months~~projects ~~ended~~and ~~July~~can 2,fluctuate ~~2010~~significantly ~~and~~from ~~July~~period to period. The $3,.0 ~~2009~~million ~~are~~increase ~~summarized~~in asscientific ~~follows~~sales ~~(dollars~~was inprimarily ~~millions):~~the result of increased sales for a fusion research program and various other scientific development programs.

	Three Months Ended
	July 2, 2010					July 3, 2009					Increase (Decrease)
			% of					% of
	Amount		Sales			Amount		Sales			Amount			Percent
Radar and Electronic Warfare	$	35.4		37	%	$	35.7		43	%	$	(0.3	)		(1	) %
Medical		17.7		19			15.5		19			2.2			14
Communications		32.6		35			24.0		29			8.6			36
Industrial		5.6		6			5.9		7			(0.3	)		(5	)
Scientific		2.6		3			1.4		2			1.2			86
Total	$	93.9		100	%	$	82.5		100	%	$	11.4			14	%

Gross Profit. Gross profit was $24.9 million, or 28.0% of sales, for the first quarter of fiscal year 2011 as compared to $23.4 million, or 28.3% of sales, for the first quarter of fiscal year 2010. The $1.5 million increase in gross profit for the first quarter of fiscal year 2011 as compared to the first quarter of fiscal year 2010 was primarily due to higher shipment volume in the first quarter of fiscal year 2011.

~~Sales~~Research ofand ~~$93~~Development.9 ~~million~~Research ~~for~~and ~~the~~development ~~three~~expenses ~~months ended July 2, 2010~~ were $113.41 million, or ~~approximately 14~~3.5% of sales, ~~higher~~for ~~than~~the ~~sales~~first quarter of fiscal year 2011, a $820.5 million ~~for~~increase ~~the~~from ~~three~~$2.6 ~~months~~million, ~~ended~~or ~~July~~ 3~~, 2009~~.1% ~~Explanations~~of sales, for the ~~sales~~first quarter of fiscal year 2010. The increase orin ~~decrease~~research byand ~~market~~development for the ~~third~~first quarter of fiscal year ~~2010~~2011 as compared to the ~~third~~first quarter of fiscal year ~~2009~~2010 ~~are~~was asprimarily ~~follows:~~due to increased investment for the development of communication amplifiers for commercial and military applications and the solid state and vacuum electron devices used in these amplifiers, and development of vacuum electron devices for the scientific and medical markets.

·Total ~~Radar~~spending ~~and~~on ~~Electronic~~research ~~Warfare: The majority of our products in the radar~~ and ~~electronic~~development, ~~warfare~~including ~~markets~~customer-sponsored ~~are~~research ~~for domestic~~ and ~~international defense and government end uses. The timing of orders receipts and subsequent shipments in these markets may vary from year to year. On a combined basis~~development, atwas ~~$35.4~~as ~~million~~follows (in the three months ended July 2, 2010, sales for these two markets were essentially unchanged from the $35.7 million in the three months ended July 3, 2009. An increase in sales of products to support the Aegis weapons system and electronic warfare systems in the most recent period largely offset a decrease in sales of products to support the APN-245 Automatic Carrier Landing System and the HAWK missile system.millions):

· Medical: Sales of our medical products consist of sales for medical imaging applications, such as x-ray imaging, MRI and PET applications, and for radiation therapy applications for the treatment of cancer. The 14% increase in sales of our medical products in the three months ended July 2, 2010 was due to increased sales of products to support MRI and x-ray imaging applications.

	Quarter Ended
	December 31,		January 1,
	2010		2010
Company sponsored	$	3.1	$	2.6
Customer sponsored, charged to cost of sales		3.7		3.7
	$	6.8	$	6.3

·Selling ~~Communications:~~and ~~Sales~~Marketing. ofSelling ~~our~~and ~~communications~~marketing ~~products~~expenses ~~consist~~were of$5.2 ~~sales~~million, ~~for~~or ~~commercial communications applications and military communications applications~~5. ~~The 36~~8% ~~increase~~of in sales, infor the ~~communications~~first ~~market~~quarter ~~was~~of ~~due~~fiscal toyear ~~increases in sales to support commercial communications applications~~2011, ~~particularly~~and ~~fixed~~$5.0 ~~satellite broadcast applications~~million, asor ~~well~~6.0% ~~as increases in sales to support a variety~~ of ~~military communications applications~~sales, ~~including~~for the ~~WIN-T~~first ~~program.~~quarter ~~Military communications is a relatively new sector~~ of ~~the~~fiscal ~~overall~~year ~~communications~~2010. ~~market~~There ~~for~~was ~~us,~~no ~~and,~~significant ~~with~~change ~~the exception of the WIN-T program, is characterized by numerous programs that are relatively modest~~ in ~~size~~selling and ~~for~~marketing ~~which~~expenses ~~the~~for ~~timing may vary from year to year. Over~~ the ~~long-term,~~first wefiscal ~~expect~~quarters ~~our~~of ~~participation~~2010 inand ~~military communications programs to continue to grow~~2011.

·General ~~Industrial:~~and ~~Sales~~Administrative. inGeneral ~~the~~and ~~industrial~~administrative ~~market~~expenses ~~are~~were ~~cyclical~~$6.3 ~~and~~million, ~~are~~or ~~generally~~7.1% ~~tied~~of tosales, for the ~~state~~first quarter of ~~the~~fiscal ~~economy.~~year ~~The~~2011, a $0.38 million ~~decrease~~increase infrom the $5.5 million, or 6.6% of sales, for the first quarter of ~~industrial~~fiscal ~~products~~year 2010. The increase in general and administrative expenses in the ~~most~~first ~~recent~~quarter ~~period~~of fiscal year 2011 was primarily due to ~~decreased~~a ~~sales~~$0.5 ofmillion ~~products~~loss contingency expense accrual for ~~instrumentation~~a ~~applications,~~customer ~~partially~~contract ~~offset~~termination byand ~~increased~~$0.2 ~~sales~~million tofor ~~support~~the ~~semiconductor~~unfavorable ~~manufacturing~~impact ~~applications~~from foreign currency translation.

Amortization of Acquisition-Related Intangibles. Amortization of acquisition-related intangibles consists of purchase accounting charges for technology and other intangible assets. Amortization of acquisition-related intangibles was $0.7 million for the first quarter of fiscal years 2011 and 2010.

Strategic Alternative expense. Merger expenses of $2.7 million for the first quarter of fiscal year 2011 comprised non-recurring transaction costs, such as fees for investment bankers, attorneys and other professional services, rendered in connection with the pending sale of the company.

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·Interest ~~Scientific:~~Expense, ~~Sales~~net in(“Interest ~~the~~Expense”). ~~scientific~~Interest ~~market~~Expense ~~are~~was ~~historically~~$3.7 ~~one-time~~million, ~~projects~~or ~~and~~4.2% ~~can~~of ~~fluctuate~~sales, ~~significantly~~for ~~from~~the ~~period~~first toquarter ~~period.~~of ~~The~~fiscal year 2011, a $10.2 million ~~increase~~decrease infrom ~~scientific~~the ~~sales~~$3.9 ~~was~~million, ~~primarily~~or 4.7% of sales, for the ~~result~~first quarter of ~~increased~~fiscal ~~sales~~year 2010. The reduction in interest expense for athe ~~fusion~~first ~~research~~quarter ~~program~~of fiscal year 2011 was primarily due to lower interest rates on our variable rate debt agreements over the past year, as debt levels remained unchanged.

~~Gross~~Income ~~Profit.~~Tax ~~Gross~~Expense ~~profit~~(Benefit). ~~was~~We ~~$28.9~~recorded ~~million,~~an orincome ~~30.8%~~tax expense of ~~sales,~~$1.0 million for the ~~three~~first ~~months~~quarter ~~ended~~of ~~July~~fiscal 2,year ~~2010~~2011 asand ~~compared~~an toincome ~~$24.3~~tax ~~million,~~expense orof 29$1.5%9 ofmillion ~~sales,~~ for the ~~three~~first ~~months~~quarter ~~ended~~of ~~July~~fiscal 3,year ~~2009~~2010. The ~~$4.6~~effective ~~million~~income ~~increase~~tax inrate ~~gross~~for ~~profit~~the infirst ~~the~~quarter ~~three~~of ~~months~~fiscal ~~ended~~years ~~July~~2011 2,and 2010 aswas ~~compared~~30% toand ~~the~~33%, ~~three~~respectively. ~~months~~The ~~ended~~lower ~~July~~effective 3,income ~~2009~~tax ~~was~~rate in fiscal year 2011 is primarily due to higher ~~shipments~~U.S. research and ~~improved~~development ~~operating~~tax ~~efficiencies~~credits, ~~from~~an increase in the ~~higher~~U.S. ~~shipment~~domestic ~~volume~~manufacturing deduction and an increase in Canadian foreign tax credits. As a result of the ~~favorable~~enactment ~~impact~~of ~~from~~the ~~translation~~Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of ~~Canadian~~2010, ~~costs~~effective December 17, ~~net~~2010, the first quarter of ~~currency~~fiscal ~~hedge~~year ~~contracts~~2011 includes a $0.2 million discrete tax benefit due to the retroactive reinstatement of the research and development tax credit to calendar year 2010.

~~Research~~Net ~~and Development~~Income. ~~Research~~Net ~~and~~income ~~development~~was ~~expenses were~~ $32.52 million, or 32.75% of sales, for the ~~three~~first ~~months~~quarter ~~ended~~of ~~July~~fiscal 2,year ~~2010,~~2011 ~~and~~as compared to $23.78 million, or 34.36% of sales, ~~for~~in the ~~three~~first ~~months~~quarter ~~ended~~of ~~July~~fiscal 3year 2010. The $1.6 million decrease in net income in the first quarter of fiscal year 2011 as compared to the first quarter of fiscal year 2010 was primarily due to $2.7 million of strategic alternative expenses in the first quarter of fiscal year 2011, ~~2009~~net of income tax benefits of $1.1 ~~Total~~million. The $6.2 million increase in shipment volume and $1.5 million increase in gross profit during the first quarter of fiscal year 2011 was partially offset by higher spending on research and development, ~~including~~and ~~customer-sponsored~~the ~~research~~loss ~~and~~contingency ~~development,~~accrual ~~was~~for asa ~~follows~~fiscal ~~(in~~year ~~millions):~~2009 terminated sales contract.

	Three Months Ended
	July 2,		July 3,
	2010		2009
Company sponsored	$	3.5	$	2.7
Customer sponsored, charged to cost of sales		4.0		4.8
	$	7.5	$	7.5

EBITDA. EBITDA was $9.7 million, or 10.9% of sales, for the first quarter of fiscal year 2011 as compared to $12.4 million, or 15.0% of sales, for the first quarter of fiscal year 2010. The $2.7 million decrease in EBITDA in the first quarter of fiscal year 2011 as compared to the first quarter of fiscal year 2010 was due primarily to $2.7 million of strategic alternative expenses in the first quarter of fiscal year 2011. The $6.2 million increase in shipment volume and $1.5 million increase in gross profit during the first quarter of fiscal year 2011 was partially offset by higher spending on research and development and the loss contingency accrual for a fiscal year 2009 terminated sales contract.

Selling and Marketing. Selling and marketing expenses were $5.2 million, or 5.5% of sales, for the three months ended July 2, 2010, a $0.4 million increase from the $4.8 million, or 5.8% of sales, for the three months ended July 3, 2009. The increase in selling and marketing expenses in the three months ended July 2, 2010 was primarily due to higher sales incentive expenses and expiration of certain cost reduction initiatives.

General and Administrative. General and administrative expenses were $6.4 million, or 6.8% of sales, for the three months ended July 2, 2010, a $1.3 million increase from the $5.1 million, or 6.2% of sales, for the three months ended July 3, 2009. The increase in general and administrative expenses in the three months ended July 2, 2010 was primarily due to higher management incentive expense as a result of improved operating performance in the three months ended July 2, 2010.

Amortization of Acquisition-related Intangibles. Amortization of acquisition-related intangibles consists of purchase accounting charges for technology and other intangible assets. Amortization of acquisition-related intangibles was $0.7 million for the third quarter of fiscal years 2010 and 2009.

Merger Expenses. Merger expenses of $3.6 million for the three months ended July 2, 2010 comprised non-recurring transaction costs, such as fees for investment bankers, attorneys and other professional services rendered in connection with the Comtech merger agreement.

Interest Expense, Net (“Interest Expense”). Interest Expense was $3.8 million, or 4.0% of sales, for the three months ended July 2, 2010, a $0.4 million decrease from the $4.2 million, or 5.1% of sales, for the three months ended July 3, 2009. The reduction in interest expense for the three months ended July 2, 2010 was primarily due to repayments of debt over the past year, which resulted in lower outstanding debt obligations during the three months ended July 2, 2010 compared to the three months ended July 3, 2009.

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Gain on Debt Extinguishment. The gain on debt extinguishment of $0.1 million in the three months ended July 3, 2009 resulted from the repurchase of $5.0 million of our 8% senior subordinated notes at a discount of $138,000, or 2.75% of par value, partially offset by an $86,000 non-cash write-off of deferred debt issue costs.

Income Tax Expense. We recorded an income tax expense of $1.6 million for the three months ended July 2, 2010 and an income tax expense of $3.0 million for the three months ended July 3, 2009. Our effective tax rate was approximately 27% for the three months ended July 2, 2010 as compared to approximately 44% for the three months ended July 3, 2009.

Income tax expense for the three months ended July 2, 2010 includes approximately $0.3 million for a discrete income benefit to true-up the fiscal year 2009 tax provision estimate to the filed fiscal year 2009 U.S. income tax return tax. Income tax expense for the three months ended July 3, 2009 included approximately $0.3 million for several non-recurring discrete income tax expense items and $0.2 million from foreign currency translation losses primarily from Canadian tax accounts.

Net Income. Net income was $4.2 million, or 4.5% of sales, in the three months ended July 2, 2010 as compared to $3.9 million, or 4.7% of sales, in the three months ended July 3, 2009. The $0.3 million increase in net income in the three months ended July 2, 2010 as compared to the three months ended July 3, 2009 was primarily due to higher shipment volume, the favorable impact of Canadian dollar hedge contracts and lower income tax expense, partially offset by $3.6 million of transaction expenses related to the Comtech merger agreement and higher research and development, selling and marketing expenses and management incentive expenses in the three months ended July 2, 2010.

EBITDA. EBITDA was $12.3 million, or 13.1% of sales, for the three months ended July 2, 2010 as compared to $13.8 million, or 16.7% of sales, for the three months ended July 3, 2009. The $1.5 million decrease in EBITDA in the three months ended July 2, 2010 as compared to the three months ended July 3, 2009 was primarily due to $3.6 million of transaction expenses related to the Comtech merger agreement and higher research and development expenses, selling and marketing expenses and management incentive expenses in the three months ended July 2, 2010, partially offset by higher shipment volume and the favorable impact of Canadian dollar hedges.

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Nine months ended July 2, 2010 Compared to Nine months ended July 3, 2009

The following table sets forth our historical results of operations for each of the periods indicated (dollars in millions):

	Nine Months Ended
	July 2, 2010					July 3, 2009						Increase (Decrease)
			% of						% of
	Amount		Sales			Amount			Sales			Amount
Sales	$	265.0		100.0	%	$	241.6			100.0	%	$	23.4
Cost of sales		185.9		70.2			175.6			72.7			10.3
Gross profit		79.1		29.8			66.0			27.3			13.1
Research and development		9.3		3.5			8.1			3.4			1.2
Selling and marketing		15.4		5.8			14.6			6.0			0.8
General and administrative		18.6		7.0			15.6			6.5			3.0
Amortization of acquisition-related intangibles		2.1		0.8			2.1			0.9			-
Merger expense		3.8		1.4			-			-			3.8
Operating income		30.0		11.3			25.7			10.6			4.3
Interest expense, net		11.5		4.3			13.0			5.4			(1.5	)
Gain on debt extinguishment		-		-			(0.2	)		(0.1	)		0.2
Income before taxes		18.5		7.0			13.0			5.4			5.5
Income tax expense (benefit)		5.9		2.2			(2.2	)		(0.9	)		8.1
Net income	$	12.5		4.7	%	$	15.2			6.3	%	$	(2.7	)
Other Data:
EBITDA (a)	$	38.2		14.4	%	$	34.1			14.1	%	$	4.1

Note: Totals may not equal the sum of the components due to independent rounding. Percentages are calculated based on rounded dollar amounts presented.

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

• our senior credit facilities contain a covenant that requires us to maintain a senior secured leverage ratio that contains EBITDA as a component, and our management team uses EBITDA to monitor compliance with this covenant;

• EBITDA is a component of the measures used by our management team to make day-to-day operating decisions;

• EBITDA facilitates comparisons between our operating results and those of competitors with different capital structures and, therefore, is a component of the measures used by the management to facilitate internal comparisons to competitors’ results and our industry in general; and

• the payment of management bonuses is contingent upon, among other things, the satisfaction by us of certain targets that contain EBITDA as a component.

For a reconciliation of Net Income to EBITDA, see Note 11 of the accompanying unaudited condensed consolidated financial statements.

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Sales. Our sales by market for the nine months ended July 2, 2010 and July 3, 2009 are summarized as follows (dollars in millions):

	Nine Months Ended
	July 2, 2010					July 3, 2009					Increase (Decrease)
			% of					% of
	Amount		Sales			Amount		Sales			Amount			Percent
Radar and Electronic Warfare	$	96.9		36	%	$	98.0		41	%	$	(1.1	)		(1	) %
Medical		54.6		21			46.9		19			7.7			16
Communications		90.4		34			75.5		31			14.9			20
Industrial		16.0		6			15.8		7			0.2			1
Scientific		7.1		3			5.4		2			1.7			31
Total	$	265.0		100	%	$	241.6		100	%	$	23.4			10	%

Sales of $265.0 million for the nine months ended July 2, 2010 were $23.4 million, or approximately 10%, higher than sales of $241.6 million for the nine months ended July 3, 2009. Explanations for the sales increase or decrease by market are as follows:

· Radar and Electronic Warfare: The majority of our sales in the radar and electronic warfare markets are for products for domestic and international defense and government end uses. The timing of the receipt of orders and subsequent shipments in these markets may vary from year to year. On a combined basis, sales for these markets were essentially unchanged at $96.9 million in the nine months ended July 2, 2010 as compared to $98.0 million in the nine months ended July 3, 2009. In the most recent period, an increase in sales to support electronic warfare systems and certain radar systems partially offset a decrease in sales to support foreign radar systems and the HAWK missile system.

· Medical: Sales of our medical products consist of sales for medical imaging applications, such as x-ray imaging, MRI and PET applications, and for radiation therapy applications for the treatment of cancer. The 16% increase in sales of our medical products was primarily due to increased sales to support MRI applications. Sales of products for x-ray imaging applications also increased.

· Communications: The 20% increase in sales in the communications market was attributable to increases in sales to support a variety of commercial communications applications, particularly fixed satellite broadcast applications, and military communications applications, including the WIN-T program. Military communications is a relatively new sector of the overall communications market for us, and, with the exception of the WIN-T program, is characterized by numerous programs that are relatively modest in size and for which the timing may vary from year to year. Over the long term, we expect our participation in military communications programs to continue to grow.

· Industrial: Sales in the industrial market are cyclical and are generally tied to the state of the economy. The $0.2 million increase in industrial sales was due to an increase in sales of products for cargo screening and semiconductor manufacturing applications, partially offset by a decrease in sales of products for instrumentation applications.

· Scientific: Sales in the scientific market are historically one-time projects and can fluctuate significantly from period to period. The $1.7 million increase in scientific sales was primarily the result of increased sales for a fusion research program.

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Gross Profit. Gross profit was $79.1 million, or 29.8% of sales, for the nine months ended July 2, 2010, a $13.1 million increase from $66.0 million, or 27.3% of sales, in the nine months ended July 3, 2009. The increase in gross profit for the nine months ended July 2, 2010 as compared to the nine months ended July 3, 2009 was primarily due to higher shipments and improved operating efficiencies from the higher shipment volume and the favorable impact from translation of Canadian costs, net of currency hedge contracts.

Research and Development. Research and development expenses were $9.3 million, or 3.5% of sales, for the nine months ended July 2, 2010, a $1.2 million increase from $8.1 million, or 3.4% of sales, for the nine months ended July 3, 2009. The increase in research and development for the nine months ended July 2, 2010 was primarily due to development efforts on broadband communication products and solid state devices for commercial and military applications.

Total spending on research and development, including customer-sponsored research and development, was as follows (in millions):

	Nine Months Ended
	July 2,		July 3,
	2010		2009
Company sponsored	$	9.3	$	8.1
Customer sponsored, charged to cost of sales		11.7		12.1
	$	21.0	$	20.2

Selling and Marketing. Selling and marketing expenses were $15.4 million, or 5.8% of sales, for the nine months ended July 2, 2010, a $0.8 million increase from the $14.6 million, or 6.0% of sales, for the nine months ended July 3, 2009. The increase in selling and marketing expenses in the nine months ended July 2, 2010 was primarily due to higher sales incentive expenses and the expiration of certain cost reduction initiatives.

General and Administrative. General and administrative expenses were $18.6 million, or 7.0% of sales, for the nine months ended July 2, 2010, a $3.0 million increase from the $15.6 million, or 6.5% of sales, for the nine months ended July 3, 2009. The increase in general and administrative expenses in the nine months ended July 2, 2010 was primarily due unfavorable currency translation expense and higher management incentive expense as a result of improved operating performance in the nine months ended July 2, 2010.

Amortization of Acquisition-related Intangibles. Amortization of acquisition-related intangibles consists of purchase accounting charges for technology and other intangible assets. Amortization of acquisition-related intangibles was $2.1 million for the nine months ended July 2, 2010 and the nine months ended July 3, 2009.

Merger Expenses. Merger expenses of $3.8 million for the nine months ended July 2, 2010 comprised non-recurring transaction costs, such as fees for investment bankers, attorneys and other professional services, rendered in connection with the Comtech merger agreement.

Interest Expense, Net (“Interest Expense”). Interest Expense of $11.5 million for the nine months ended July 2, 2010 was $1.5 million lower than interest expense of $13.0 million for the nine months ended July 3, 2009. The reduction in interest expense for the nine months ended July 2, 2010 was primarily due to repayments of debt over the past year which resulted in lower interest expense during the nine months ended July 2, 2010 as compared to the nine months ended July 3, 2009.

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Gain on Debt Extinguishment. The gain on debt extinguishment of $0.2 million in the nine months ended July 3, 2009 resulted from the repurchase of $8.0 million of our 8% senior subordinated notes at a discount of $0.4 million, partially offset by a $0.2 million non-cash write-off of deferred debt issue costs.

Income Tax (Benefit) Expense. We recorded an income tax expense of $5.9 million for the nine months ended July 2, 2010 and an income tax benefit of $2.2 million for the nine months ended July 3, 2009. Our estimated effective income tax rate for fiscal year 2010 is expected to be approximately 34.0% to 34.5%.

Income tax expense for the nine months ended July 2, 2010 includes approximately $0.8 million for discrete income tax benefits, including $0.3 million to true-up the fiscal year 2009 tax provision estimate to the filed fiscal year 2009 U.S. income tax return and $0.3 million to adjust deferred tax accounts for a reduction to future Canadian income tax rates.

The nine months ended July 2, 2009 included several significant discrete tax benefits: (1) $5.1 million of unrecognized tax benefit related to an outstanding audit by the Canada Revenue Agency (“CRA”), (2) $0.7 million related to certain provisions of the California Budget Act of 2008, signed on February 20, 2009, which will allow a taxpayer to elect an alternative method to attribute taxable income to California for tax years beginning on or after January 1, 2011, and (3) $0.9 million for adjustments to Canadian deferred tax accounts.

In December 2008, a new tax treaty protocol between Canada and the U.S. became effective. The new treaty requires mandatory arbitration for the resolution of double taxation disputes not settled through the competent authority process. As a result of this new treaty, our tax position on an outstanding audit by the CRA has become more favorable, and we reduced our tax contingency reserve in Canada by $3.0 million, and established an income tax receivable and recognized an income tax benefit in the U.S. for $2.8 million; this tax benefit was partially offset by a related increase in deferred tax liabilities of $0.7 million.

The $0.9 million adjustment to Canadian deferred tax accounts included a $0.6 million tax benefit to reflect the reduction to Canadian corporate income tax rates, and a $0.3 million tax benefit to correct the computation of certain deferred tax accounts. The $0.6 million adjustment should have been recorded in the first quarter of fiscal year 2008 rather than in the nine months ended July 3, 2009, and the $0.3 adjustment million should have been recorded in several prior year’s financial results. These adjustments are deemed immaterial to our results of operations and financial condition for all affected periods.

Net Income. Net income was $12.5 million, or 4.7% of sales, in the nine months ended July 2, 2010 as compared to $15.2 million, or 6.3% of sales, in the nine months ended July 3, 2009. The decrease in net income in the nine months ended July 2, 2010 as compared to the nine months ended July 3, 2009 was primarily due to discrete income tax benefits that were recorded in the nine months ended July 3, 2009. Excluding discrete income tax benefits that were recorded in the nine months ended July 3, 2009, the higher net income in the nine months ended July 2, 2010 was primarily due to higher shipment volume, the favorable impact of Canadian dollar hedge contracts and lower interest expense, partially offset by $3.8 million of transaction expenses related to the Comtech merger agreement, and higher research and development, selling and marketing expenses, management incentive expenses and unfavorable currency translation expense in the nine months ended July 2, 2010.

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EBITDA. EBITDA was $38.2 million, or 14.4% of sales, for the nine months ended July 2, 2010 as compared to $34.1 million, or 14.1% of sales, for the nine months ended July 3, 2009. The $4.1 million increase in EBITDA for the nine months ended July 2, 2010 as compared to the corresponding period of fiscal year 2009 was primarily due to higher shipment volume and the favorable impact of Canadian dollar hedge contracts, partially offset by $3.8 million of transaction expenses related to the Comtech merger agreement, and higher research and development expenses, selling and marketing expenses, management incentive expenses and unfavorable currency translation expense in the nine months ended July 2, 2010.

Liquidity and Capital Resources

Overview

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

If our current pending merger with Catalyst Acquisition, Inc. (as described above under the heading “Merger Agreement”) closes, we expect to receive funding through an equity contribution from the Veritas Fund and certain of its affiliates and net proceeds from the public offering of senior notes and borrowings under the new senior credit facilities expected to be entered into by CPI International Acquisition, Inc. See Note 4 to the accompanying unaudited condensed consolidated financial statements for more details. We believe that weif ~~have~~the merger closes, the financial resources from the merger, our cash on hand, and expected cash flows from operations will be sufficient to meet our business requirements, including capital expenditures and working capital requirements, for the next 12 months, and to repay the $66.0 million outstanding under our senior credit facilities scheduled to come due on August 1, 2011, as well as the $117.0 million of our outstanding 8% senior subordinated notes and the $12.0 million of our outstanding floating rate senior notes prior to their scheduled maturity dates in connection with the merger. It is anticipated that the amounts outstanding under our existing senior credit facility term loan and under its currently outstanding notes will be repaid in connection with the merger.

If the pending merger with Catalyst Acquisition is not consummated and our existing debt is not repaid, we intend to seek replacement refinancing and repay the $66.0 million outstanding under our senior credit facility term loan scheduled to come due on August 1, 2011, as well as the $117.0 million of our outstanding 8% senior subordinated notes, on or prior to their due dates in 2011. While we believe that, based on our cash flow from operations and past history, we will be successful in obtaining the replacement financing necessary to repay our debt scheduled to mature in 2011, there are no assurances that such refinancing will be successful. If we are unable to refinance our senior credit facilities, we will need to seek to implement other alternatives such as issuing common stock or securities convertible into common stock to repay our indebtedness. If implemented, these actions could negatively impact our business or dilute our existing stockholders.

Cash and Working Capital

The following summarizes our cash and cash equivalents and working capital (in millions):

	July 2,		October 2,
	December 31,		October 1,
	2010		~~2009~~2010
Cash and cash equivalents	$	4759.29	$	2642.28
Working capital	$	~~114~~50.1	$	9244.48

We- ~~invest~~43 cash balances in excess of operating requirements in overnight U.S. Government securities and money market accounts. In addition to the above cash and cash equivalents, we have restricted cash of $1.0 million as of July 2, 2010, consisting primarily of bank guarantees from customer advance payments to our international subsidiaries. The bank guarantees become unrestricted cash when performance under the sales contract is complete.-

The significant factors underlying the net increase in cash and cash equivalents during the nine months ended July 2, 2010 were the net cash provided by our operating activities of $22.5 million and proceeds and tax benefits of $1.4 million from employee stock purchases and stock exercises, partially offset by capital expenditures of $2.8 million.

As of July 2, 2010 and October 2, 2009, we had $195.0 million in total principal amount of debt outstanding. As of July 2, 2010, we had borrowing availability of $55.4 million under the revolver under our senior credit facilities.

As more fully described below, our most significant debt covenant compliance requirement is maintaining a secured leverage ratio of less than 3.75:1. Our current secured leverage ratio is approximately 0.31:1. Our senior credit facilities will mature in the fourth quarter of fiscal year 2011 unless we refinance our 8% senior subordinated notes due 2012 prior to July 31, 2011.

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We invest cash balances in excess of operating requirements in overnight U.S. Government securities and money market accounts. In addition to the above cash and cash equivalents, we have restricted cash of $3.1 million as of December 31, 2010, consisting of bank guarantees from customer advance payments to our international subsidiaries and cash collateral for certain performance bonds. The bank guarantees become unrestricted cash when performance under the sales contract is complete. The cash collateral for the performance bonds will become unrestricted cash when the performance bonds expire.

The significant factors underlying the net increase in cash and cash equivalents during the first quarter of fiscal year 2011 were the net cash provided by our operating activities of $17.5 million and proceeds and tax benefits of $0.4 million from employee stock purchases and exercise of stock options, partially offset by capital expenditures of $0.4 million and the payment for amendment to our senior credit facilities of $0.4 million.

As of December 31, 2010 and October 1, 2010, we had $195.0 million in total principal amount of debt outstanding. As of December 31, 2010, we had borrowing availability of $55.5 million under the revolver under our senior credit facilities.

In December 2010, our European subsidiary entered into a $2.0 million bank guarantee facility to be used for issuance of bank guarantees for advanced payments from customers and for securing certain of our obligations in projects under customer contracts. No guarantees were outstanding under such facility at December 31, 2010.

As more fully described below, our most significant debt covenant compliance requirement is maintaining a secured leverage ratio of 3.75:1. Our current secured leverage ratio is approximately 0.10:1.

Historical Operating, Investing and Financing Activities

In summary, our cash flows were as follows (in millions):

	Nine Months Ended
	Quarter Ended
	July 2,			July 3,
	December 31,			January 1,
	2010			~~2009~~2010
Net cash provided by operating activities	$	2217.5		$	209.36
Net cash used in investing activities		(20.94	)		(20.38	)
Net cash provided by (used in) financing activities		1.4			(11.5	)
Net cash provided by financing activities		-			0.2
Net increase in cash and cash equivalents	$	2117.01		$	69.50

~~Operating~~- ~~Activities~~44 -

During the nine months ended July 2, 2010 and July 3, 2009, we funded our operating activities through cash generated internally. Cash provided by operating activities is net income adjusted for certain non-cash items and changes to working capital items.

Net cash provided by operating activities of $22.5 million in the nine months ended July 2, 2010 was attributable to net income of $12.5 million, depreciation, amortization and other non-cash charges of $10.9 million, partially offset by net cash used in working capital of $0.9 million. The primary working capital uses of cash in the nine months ended July 2, 2010 were an increase in inventories and a decrease in accounts payable. The increase in inventories resulted primarily from increased inventory purchases to support increased orders and the higher sales level anticipated for the fourth quarter of fiscal year 2010 and the first half of fiscal year 2011. The decrease in accounts payable was primarily due to timing of payments of vendor invoices. The aforementioned uses of working capital were partially offset by an increase in accrued liabilities due to costs incurred in connection with the Comtech merger agreement, increased payroll and paid-time off accruals and timing of interest payments. The uses of working capital were also partially offset by a decrease in accounts receivable due to the timing of billings and improved cash collections, and an increase in the product warranty liability.

Net cash provided by operating activities of $20.3 million in the nine months ended July 3, 2009 was attributable to net income of $15.2 million, depreciation, amortization and other non-cash charges of $8.8 million, partially offset by $3.7 million net cash used for working capital. The primary working capital uses of cash in the nine months ended July 3, 2009 were the net change in income tax receivable and payable attributable to discrete tax benefits related to an outstanding audit by the Canada Revenue Agency, an increase in inventories and a decrease in accounts payable. The increase in inventories was primarily due to selective increases of certain work-in-progress and finished goods to meet anticipated customer delivery requirements. The decrease in accounts payable related primarily to the timing of vendor payments. These uses of cash were partially offset by a decrease in accounts receivable resulting primarily from decreased sales.

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Operating Activities

During the first quarter of fiscal years 2011 and 2010, we funded our operating activities through cash generated internally. Cash provided by operating activities is net income adjusted for certain non-cash items and changes to working capital items.

Net cash provided by operating activities of $17.5 million in the first quarter of fiscal year 2011 was attributable to net income of $2.2 million, depreciation, amortization and other non-cash charges of $2.5 million and net cash provided by working capital of $12.8 million. The primary working capital sources of cash in the first quarter of fiscal year 2011 were an increase in advance payments from customers, an increase in accrued expenses and a decrease in accounts receivable. Advanced payments from customers increased due to an increase in certain sales orders, which allow for billings at the beginning of the contract term. Accrued expense increased due to expenses incurred in connection with the pending Merger Agreement that remained unpaid as of December 31, 2010 and due to the timing of interest payments on our debt. Accounts receivable decreased due to a decline in sales for the first quarter of fiscal year 2011 as compared to the immediately preceding quarter and due to improvement in collection efficiency. The aforementioned working capital sources of cash were partially offset by an increase in inventories, a decrease in accounts payable, an increase in restricted cash and a decrease in net income tax payable. The increase in inventories resulted from increased inventory purchases to support increased orders and the sales level anticipated for the remaining quarters of fiscal year 2011. Accounts payable decreased mainly due to timing of payments to trade vendors. Restricted cash increased due to cash collateral obtained for certain performance bonds. The decrease in income tax payable, net, primarily reflects lower taxable income compared to the immediately preceding quarter and tax payments made during the quarter.

Net cash provided by operating activities of $9.6 million in the first quarter of fiscal year 2010 was attributable to net income of $3.8 million, depreciation, amortization and other non-cash charges of $4.5 million and net cash provided by working capital of $1.3 million. The primary working capital sources of cash in the first quarter of fiscal year 2010 were a decrease in accounts receivable and an increase in accrued expenses. The decrease in accounts receivable resulted primarily from the decreased sales volume during the first quarter of fiscal year 2010 as compared to the fourth quarter of fiscal year 2009, while the increase in accrued expenses was primarily due to an increase in interest payable related to the timing of interest payments on our debt. The aforementioned working capital sources of cash were partially offset by an increase in inventories and a decrease in accounts payable. The increase in inventories resulted from increased purchases in anticipation of higher sales volume for the remaining quarters of fiscal year 2010. Accounts payable decreased mainly due to timing of payments to trade vendors.

Investing Activities

Investing activities for the ~~nine~~first ~~months~~quarter ~~ended~~of ~~July~~fiscal 2,years ~~2010~~2011 and ~~July~~2010 3,comprised ~~2009~~$0.4 ~~comprised~~million ~~mainly~~and $0.8 million, respectively, of capital expenditures.

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Financing Activities

Net cash provided by financing activities for the ~~nine~~first ~~months~~quarter ~~ended~~of ~~July~~fiscal 2,year ~~2010~~2011 ~~was~~consisted ~~attributable~~of toproceeds ~~$0.6~~and ~~million~~tax inbenefits ~~proceeds~~ from employee stock purchases and exercise of stock options with an aggregate total of $0.84 million, inoffset ~~proceeds~~by the payment of fees and ~~tax~~expenses ~~benefit~~for ~~from~~an ~~employee~~amendment ~~stock~~to ~~option~~our ~~exercises~~senior credit facilities of $0.4 million.

Net cash ~~used~~provided inby financing activities for the ~~nine~~first ~~months~~quarter ~~ended July 3, 2009 consisted primarily~~ of ~~senior~~fiscal ~~term~~year ~~loan~~2010 ~~repayment~~was ofattributable ~~$4.75~~to ~~million and senior subordinated notes repurchase of~~ $~~7.6 million, net of $~~0.42 million ~~discount, partially offset by $0.9 million~~ in proceeds from employee stock purchases ~~and exercise of stock options~~.

If the leverage ratio under our amended and restated senior credit facilities exceeds 3.5:1 at the end of any fiscal year, then we are required to make an annual prepayment within 90 days after the end of the fiscal year based on a calculation of excess cash flow, as defined in the senior credit facilities, multiplied by a factor of 50%, less any optional prepayments made during the fiscal year. There was no excess cash flow payment due for fiscal year ~~2009~~2010, and therefore, no excess cash flow payment was made in the ~~nine~~first ~~months~~quarter ~~ended~~of ~~July~~fiscal 2,year ~~2010~~2011.

Contractual Obligations

The following table summarizes our significant contractual obligations as of ~~July~~December 231, 2010 and the effect that such obligations are expected to have on our liquidity and cash flows in future periods (in thousands):

Fiscal Year

Total

~~2010~~2011 (remaining ~~three~~nine months)

~~2011~~2012 - ~~2012~~2013

~~2013~~2014 - ~~2014~~2015

Thereafter

Operating leases

6,~~618~~485

~~482~~1,173

2,~~449~~183

~~1,053~~754

2,~~634~~375

Purchase commitments

3032,~~191~~156

2029,~~253~~674

92,~~876~~482

62-

Debt obligations

195,000

-66,000

~~183~~117,000

-12,000

~~12,000~~-

Interest on debt obligations

2114,~~011~~473

38,~~358~~916

154,~~963~~547

1,~~452~~010

~~238~~-

Uncertain tax positions

27,~~672~~322

23,~~672~~262

-4,060

Total cash obligations

255,~~492~~436

26109,~~765~~025

~~211~~130,~~288~~272

213,~~567~~764

142,~~872~~375

Standby letters of credit

4,~~571~~544

The amounts for debt obligations and interest on debt obligations assume (1) that the respective debt instruments will be outstanding until their scheduled maturity dates, except for the term loan under our senior credit facilities, which is assumed to mature on the earlier date of August 1, 2011 as prescribed in the senior credit facilities agreement, (2) that interest rates in effect on ~~July~~December 231, 2010 remain constant for future periods, and (3) a debt level based on mandatory repayments according to the contractual amortization schedule.

-The 50expected -timing of payment amounts of the obligations in the above table is estimated based on current information; timing of payments and actual amounts paid may be different.

As of December 31, 2010, there were no material changes to our other contractual obligations from what we disclosed in our Annual Report on Form 10-K for the fiscal year ended October 1 2010. See also Note 8 of the accompanying unaudited condensed consolidated financial statements for details on certain of our commitments and contingencies.

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Merger Expense Commitment. In addition to the obligations in the above table, we have agreed to pay J.P. Morgan Securities, Inc. (“J.P. Morgan” ), for services rendered in connection with the merger agreement with Comtech, a fee estimated to be approximately $5.0 million, of which $1.4 million has been accrued (accrued expenses) and $3.6 million will become payable only if the proposed merger is consummated. We have also agreed to reimburse J.P. Morgan for certain expenses incurred in connection with its services, including the fees and disbursements of counsel, and will indemnify J.P. Morgan against certain liabilities, including liabilities arising under the federal securities laws.

The expected timing of payment amounts of the above obligations is estimated based on current information; timing of payments and actual amounts paid may be different.

As of July 2, 2010, there were no material changes to our other contractual obligations from what we disclosed in our Annual Report on Form 10-K for the fiscal year ended October 2, 2009. See also Note 7 of the accompanying unaudited condensed consolidated financial statements for details on certain of our commitments and contingencies.

Capital Expenditures

Our continuing operations typically do not have large recurring capital expenditure requirements. Capital expenditures are generally made to replace existing assets, increase productivity, facilitate cost reductions or meet regulatory requirements. Total capital expenditures for the ~~nine~~first ~~months~~quarter ~~ended~~of ~~July~~fiscal 2,year ~~2010~~2011 were $20.84 million. Total capital expenditures for fiscal year ~~2010~~2011 are expected to be approximately $45.0 to $46.50 million.

Recent Accounting Pronouncements

See Note 2 to the accompanying unaudited condensed consolidated financial statements for information regarding the effect of new accounting pronouncements on our financial statements.

Critical Accounting Policies and Estimates

Our Critical Accounting Policies and Estimates have not changed from those reported in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Form 10-K for the fiscal year ended October 21, ~~2009~~2010.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

Interest rate risk

Our exposure to market risk for changes in interest rates relates primarily to our long-term debt. As of ~~July~~December 231, 2010, we had fixed rate senior subordinated notes of $117.0 million due in 2012, bearing interest at 8% per year, variable rate debt consisting of $12.0 million floating rate senior notes due in 2015, and a $66.0 million term loan under our senior credit facilities due in 2014. Our variable rate debt is subject to changes in the prime rate and the LIBOR rate. As of December 31, 2010, the variable interest rate on the floating rate senior notes and on the term loan under the senior credit facilities, including the impact of our interest rate swap contract described below, was 6.43% and 6.77%, respectively.

We use derivative instruments from time to time in order to manage interest costs and risk associated with our long-term 51debt. In September 2007, we entered into an interest rate swap contract to receive three-month USD-LIBOR-BBA (British Bankers’ Association) interest and pay 4.77% fixed rate interest. Net interest positions are settled quarterly. We have structured the swap with decreasing notional amounts such that it is less than the balance of the term loan. The notional value of the swap was $25.0 million at December 31, 2010 and represented approximately 38% of the aggregate term loan balance. The swap agreement is effective through June 30, 2011. Under the provisions of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 815, “Derivatives and Hedging,” this arrangement was initially designated and qualified as an effective cash flow hedge of interest rate risk related to the term loan under our senior credit facilities which permitted recording the fair value of the swap and corresponding unrealized gain or loss to accumulated other comprehensive income in the condensed consolidated balance sheets. The interest rate swap gain or loss is included in the assessment of hedge effectiveness. At December 31, 2010, the fair value of the swap was a short-term liability of $0.5 million (accrued expenses).

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We use derivative instruments from time to time in order to manage interest costs and risk associated with our long-term debt. In September 2007, we entered into an interest rate swap contract to receive three-month USD-LIBOR-BBA (British Bankers’ Association) interest and pay 4.77% fixed rate interest. Net interest positions are settled quarterly. We have structured the swap with decreasing notional amounts such that it is less than the balance of the term loan. The notional value of the swap was $35.0 million at July 2, 2010 and represented approximately 53% of the aggregate term loan balance. The swap agreement is effective through June 30, 2011. Under the provisions of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 815, “Derivatives and Hedging,” this arrangement was initially designated and qualified as an effective cash flow hedge of interest rate risk related to the term loan under our senior credit facilities which permitted recording the fair value of the swap and corresponding unrealized gain or loss to accumulated other comprehensive income in the condensed consolidated balance sheets. The interest rate swap gain or loss is included in the assessment of hedge effectiveness. At July 2, 2010, the fair value of the swap was a short-term liability of $1.1 million (accrued expenses).

We performed a sensitivity analysis to assess the potential loss in future earnings that a 10% increase in the variable portion of interest rates over a one-year period would have on our floating rate senior notes and term loan under our senior credit facilities. The impact was determined based on the hypothetical change from the end of period market rates over a period of one year and would result in an immaterial increase in future interest expense.

Foreign currency exchange risk

Although the majority of our revenue and expense activities are transacted in U.S. dollars, we do transact business in foreign countries. Our primary foreign currency cash flows are in Canada and several European countries. In an effort to reduce our foreign currency exposure to Canadian dollar denominated expenses, we enter into Canadian dollar forward contracts to hedge the Canadian dollar denominated costs for our manufacturing operation in Canada. Our Canadian dollar forward contracts are designated as a cash flow hedge and are considered highly effective, as defined by FASB ASC 815, “Derivatives and Hedging.” The unrealized gains and losses from foreign exchange forward contracts are included in accumulated other comprehensive income in the condensed consolidated balance sheets. If the transaction being hedged fails to occur, or if a portion of any derivative is ineffective, then we promptly recognize the gain or loss on the associated financial instrument in general and administrative in the condensed consolidated statements of income. ~~The~~No ~~gain~~ineffective ~~recognized~~amounts inwere ~~general~~recognized ~~and administrative~~ due to hedge ineffectiveness ~~for~~in the ~~three~~first ~~and~~quarter ~~nine~~of ~~months~~fiscal ~~ended~~year ~~July~~2011.The 2,gain ~~2010~~recognized ~~was~~in ~~zero~~general and ~~$0.1~~administrative ~~million, respectively. No ineffective amounts were recognized~~ due to hedge ineffectiveness was insignificant for the ~~three~~first ~~and~~quarter ~~nine~~of ~~months~~fiscal ~~ended~~year ~~July 3, 2009~~2010.

As of ~~July~~December 231, 2010, we had entered into Canadian dollar forward contracts for approximately $1918.29 million (Canadian dollars), or approximately 5853% of our estimated Canadian dollar denominated expenses for ~~July~~January ~~2010~~2011 through ~~March~~September 2011, at an average rate of approximately $0.9296 U.S. dollar to Canadian dollar. We estimate the impact of a 1 cent change in the U.S. dollar to Canadian dollar exchange rate (without giving effect to our Canadian dollar forward contracts) to be approximately $0.3 million annually to our net income or approximately 2 cents annually to basic and diluted earnings per ~~common~~ share.

At ~~July~~December 231, 2010, the fair value of foreign currency forward contracts was a short-term asset of $0.7 million (prepaid and other current assets) ~~and a short-term liability of $20,000 (accrued expenses)~~.

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Item 4. Controls and Procedures

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

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

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Part II: OTHER INFORMATION

Item 1. Legal Proceedings

WeOn ~~are~~July ~~not~~1, ~~presently~~2010, ~~involved~~a inputative ~~any~~stockholder ~~legal~~class ~~proceedings~~action ~~that~~complaint wewas ~~believe~~filed ~~would~~against ~~have~~CPI International, the directors of CPI International and Comtech Telecommunications, Corp., a ~~material~~Delaware ~~adverse~~corporation ~~effect~~(“Comtech”), onin ~~our~~the ~~consolidated~~Superior ~~financial~~Court ~~statements~~of the State of California in and for the County of Santa Clara entitled Continuum Capital v. ~~However~~Michael Targoff, weet ~~are~~al. (Case No. 110CV175940). The lawsuit concerned the proposed merger between us and Comtech, ~~from~~and ~~time~~generally toasserted ~~time~~claims alleging, ~~threatened~~among ~~with~~other things, orthat ~~may~~each ~~become~~member aof ~~party~~our board of directors breached his fiduciary duties by agreeing to the terms of the previously proposed merger and by failing to provide stockholders with allegedly material information related to the proposed merger, ~~legal~~and ~~actions~~that Comtech aided and abetted the breaches of fiduciary duty allegedly committed by the members of our board of directors. The lawsuit sought, among other ~~proceedings~~things, ~~including~~class action certification and monetary relief. On July 28, 2010, the ~~matter~~plaintiff ~~discussed~~filed ~~below~~an amended complaint, making generally the same claims against the same defendants, and seeking the same relief. In addition, the amended complaint generally alleged that the consideration that would have been paid to our stockholders under the terms of the proposed merger was inadequate. On September 7, 2010, we terminated the Comtech sale agreement.

On ~~July~~November 124, 2010, awe ~~putative~~entered ~~stockholder~~into ~~class~~an ~~action~~agreement ~~complaint~~and ~~was~~plan ~~filed against CPI International, the members~~ of ~~the~~merger ~~CPI~~with ~~International~~Catalyst ~~board of directors~~Acquisition, ~~and Comtech Telecommunications Corp~~Inc., ~~(“Comtech”)~~an inindirect ~~the~~wholly ~~California~~owned ~~Superior~~subsidiary ~~Court for the County~~ of ~~Santa~~CPI ~~Clara,~~International ~~entitled Continuum Capital v. Michael Targoff~~Acquisition, ~~et al~~Inc. (~~Case~~formerly ~~No.~~Catalyst ~~110CV175940). The lawsuit concerns the proposed merger between us and Comtech~~Holdings, and generally asserts claims alleging, among other things, that each member of our board of directors breached his fiduciary duties by agreeing to the terms of the proposed merger and by failing to provide stockholders with allegedly material information related to the proposed merger, and that Comtech aided and abetted the breaches of fiduciary duty allegedly committed by the members of our board of directorsInc.). ~~The~~CPI ~~lawsuit~~International ~~seeks~~Acquisition, ~~among other things, class action certification and monetary relief~~Inc. Onis ~~July 28, 2010, the plaintiff filed~~ an ~~amended~~indirect ~~complaint,~~wholly ~~making~~owned ~~generally~~subsidiary of ~~the~~The ~~same~~Veritas ~~claims~~Capital ~~against~~Fund ~~the same defendants~~IV, ~~and seeking the same relief~~L. ~~In addition, the amended complaint generally alleges that the consideration to be paid to CPI International’s stockholders under the terms of the proposed merger is inadequate~~P. ~~We believe all claims asserted in~~ (the ~~lawsuit~~"Veritas ~~to be without merit~~Fund").

On December 15, 2010, the plaintiff filed a second amended complaint, which removed Comtech as a defendant, added allegations related to the current pending merger and to the Veritas Fund, and added a claim for attorneys' fees. On December 23, 2010, after we filed our preliminary proxy statement relating to a special meeting in connection with the approval of the current pending merger, the plaintiff filed a third amended complaint, adding allegations related to the disclosures in the preliminary proxy statement. The third amended complaint seeks, among other things, class action certification and monetary relief.

We believe the action is without merit; however, to avoid the cost and uncertainty of litigation and to complete the proposed merger without delay, the defendants have entered into a Memorandum of Understanding concerning settlement. The settlement and any attorneys' fees award are subject to Court approval. Pursuant to the Memorandum of Understanding, among other things, the defendants will receive a release of claims and the plaintiff will dismiss the third amended complaint with prejudice in exchange for, among other agreements, our agreement to make certain additional disclosures concerning the current pending merger, which disclosures have been included in a definitive proxy statement we filed on January 11, 2011. The Memorandum of Understanding also provides that, upon Court approval and dismissal of the action, we, our insurers or our successor in interest will cause to be paid to the plaintiff’s counsel approximately $0.6 million in full settlement of any claim for attorneys' fees and all expenses. We expect $0.4 million of this payment to be borne by our insurance carrier.

Item 1A. Risk Factors

~~There~~ For ~~have~~a ~~been~~discussion noof ~~material~~risk ~~changes~~factors, tosee ~~the~~“Part ~~risk~~I. ~~factors~~Item ~~previously~~1A. ~~disclosed~~Risk Factors” in our Annual Report on Form 10-K for the year ended October 21, ~~2009,~~2010. ~~except~~There ~~for~~have ~~the~~been ~~additional~~no material changes from the risk ~~factor~~factors ~~below~~disclosed in the “Risk Factors” section of our 2010 Form 10-K.

On- ~~May~~49 8, 2010, we entered into an Agreement and Plan of Merger with Comtech Telecommunications Corp. (“Comtech”) providing for Comtech to acquire the Company in a merger for a purchase price consisting of a mix of cash and Comtech common stock. The Company and its stockholders are exposed to several risks relating to the planned merger between the Company and Comtech, including the following:-

· We and Comtech may be unable to obtain the regulatory approvals or satisfy other closing conditions required to complete the merger. We and Comtech have received a request for additional information and documents—often referred to as a second request—from the Department of Justice in connection with the proposed merger. Failure to complete the merger could negatively impact our stock price and our future business and financial results.

· Although we and Comtech expect that the merger will result in benefits to the combined company, the combined company may not realize those benefits because of various challenges.

· The price of Comtech common stock may decline, which would decrease the value of the total merger consideration to be received by our stockholders in the merger.

· The merger agreement limits our ability to pursue alternatives to the merger.

· The merger agreement imposes customary restrictions on the conduct of our business outside of the ordinary course prior to the closing of the transaction or the termination of the merger agreement, which may also adversely affect our ability to manage our operations effectively in light of changes in economic or market conditions or to execute our business strategy and meet our financial goals.

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· The pendency of the proposed merger, whether or not consummated, may result in a diversion of management’s attention from day-to-day operations, a loss of key personnel, and a disruption of our operations. The announcement and pendency of the proposed transaction may also affect our relationships with third parties.

· Under certain circumstances, we may be required under the merger agreement to pay Comtech a termination fee of up to $15 million.

· Certain of our directors and executive officers have interests in the merger that may be different from, or in addition to, the interests of our stockholders.

· A lawsuit has been filed and other lawsuits may be filed against us and Comtech challenging the merger, and an adverse ruling in any such lawsuit may prevent the merger from being completed.

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

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. (Removed and Reserved)

Item 5. Other Information

None.

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Item 6. Exhibits

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

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

CPI INTERNATIONAL, INC.

	CPI INTERNATIONAL, INC.



Dated: February 9, 2011	/s/ JOEL A. LITTMAN
	Joel A. Littman Chief Financial Officer, Treasurer and Secretary (Duly Authorized Officer and Chief Financial Officer)

~~Dated:~~- ~~August~~52 ~~11, 2010 /s/ JOEL A. LITTMAN Joel A. Littman Chief Financial Officer, Treasurer and Secretary (Duly Authorized Officer and Chief Financial Officer)~~-

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Filing Compare · CPI INTERNATIONAL, INC.