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SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549




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FORM 10-K



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(Mark One)


|  |  |                                                                                             
|- |  | --------------------------------------------------------------------------------------------
|þ |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934    
|  |  | For the fiscal year ended March 31,
    2003                                                
|  |  | or                                                                                          
|o |  | 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: 0-23576

Celeritek, Inc.

(Exact name of registrant as specified in its
charter)


|                                                                   |  |                                         
|------------------------------------------------------------------ |  | ----------------------------------------
|California                                                         |  | 77-0057484                              
|(State or other jurisdiction of
    incorporation or organization) |  | (I.R.S. Employer
    Identification No.)

3236 Scott Boulevard, Santa Clara, California
95054

(Address of principal executive offices,
including zip code)


Registrants telephone number including
area code: (408) 986-5060

Securities registered pursuant to
Section 12(b) of the Act:

None

Securities registered pursuant to
Section 12(g) of the Act:

Common Stock, no par value

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 þ  No o.

Indicate by a check mark if disclosure of
delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be
contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to
this
Form 10-K.  o

Indicate by check mark whether the registrant is
an accelerated filer (as defined in Rule 12b-2 of the
Exchange
Act).  Yes o  No þ

The aggregate market value of the outstanding
common equity held by non-affiliates of the registrant as of
September 30, 2002 (the last business day of the
registrants most recently completed second fiscal quarter)
was approximately $56,078,000. Shares of the registrants
common stock held by each executive officer and director and by
each person who owns more than 5% of the registrants
outstanding common stock have been excluded in that such persons
may be deemed to be affiliates. This determination of affiliate
status is not necessarily a conclusive determination for other
purposes.

On May 23, 2003, approximately 12,344,819
shares of the registrants Common Stock were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive Proxy Statement to be
filed pursuant to Regulation 14A promulgated by the
Securities and Exchange Commission under the Securities Exchange
Act of 1934, which is anticipated to be filed within 120 days
after the end of the registrants fiscal year ended
March 31, 2003, are incorporated by reference in
Part III of this Form 10-K.



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TABLE OF CONTENTS



|                                                                               |  |  |  |  |  |  |  | 
|------------------------------------------------------------------------------ |  |  |  |  |  |  |  | 
|PART I                                                                        
|PART II                                                                       
|PART III                                                                      
|PART IV                                                                       
|CONSOLIDATED BALANCE SHEETS (In thousands, except share amounts)              
|CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts)
|CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY (In thousands)                
|CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)                          
|POWER OF ATTORNEY                                                             
|INDEX OF EXHIBITS                                                             
|EXHIBIT 3.2                                                                   
|EXHIBIT 21                                                                    
|EXHIBIT 23.1                                                                  
|EXHIBIT 99.1                                                                  



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PART I

The Business section and the
section entitled Managements Discussion and Analysis
of Financial Condition and Results of Operations contained
in this Annual Report on Form 10-K contain forward-looking
statements within the meaning of the Private-Securities
Litigation Reform Act of 1995. These forward-looking statements
include, without limitation, statements regarding our
expectations about: the implementation of 3G technologies; our
intention to use our GaAs and integration expertise to address
trends in the wireless communication markets; our ability to
design products to address our customers needs; our
ability to become the leading provider of GaAs semiconductor
components and GaAs-based subsystems for the wireless
communications and defense markets and our ability to further
penetrate our target markets; our strategy of vertical
integration of design and manufacturing processes; forming
lasting customer relationships; revenue from the wireless
infrastructure market in fiscal 2004 and our decision not to
pursue business in this market for our subsystem products;
future semiconductor revenues; our expectations regarding the
lack of recovery in the handset market in the upcoming fiscal
year; research and development expenses in fiscal 2004; the
competitive advantage resulting from our acquisition of Tavanza;
selling our building in Lincoln, United Kingdom; expected cost
savings as a result of our restructuring activities; and the
sufficiency of our cash resources and borrowings available from
our equipment financing sources to meet our liquidity
requirements through at least the next twelve months. These, and
other forward-looking statements, are subject to business and
economic risks and uncertainties that could cause our actual
results of operations to differ materially from those contained
in the forward-looking statements. Please see the section of
this Annual Report entitled Risk Factors for a
description of the risks and uncertainties that could cause our
actual results to differ materially from those contained in the
forward-looking statements. Unless required by law, we undertake
no obligation to update publicly any forward-looking statements,
whether as a result of new information, future events, or
otherwise

Item 1.     Business

Overview

Formed as a California corporation in 1984, we
design and manufacture gallium arsenide, or GaAs, semiconductor
components and GaAs-based subsystems used in the transmission of
voice, video and data over wireless communication networks and
systems. Our semiconductor products are designed to facilitate
broadband voice and data transmission in mobile handsets and
wireless communications network infrastructure. The focus of our
GaAs semiconductor components has been mainly on power amplifier
modules for mobile handsets, which employ code division multiple
access, or CDMA, wireless technology. Our GaAs-based subsystems
are used in a variety of defense applications such as tactical
aircraft, ground based and ship board radar systems, electronic
countermeasures and satellite communications systems.

The continued slowdown in the overall economy,
and more particularly in the telecommunications industry,
resulted in a challenging year for us in fiscal 2003. Although
sales of semiconductor products for the handset market were
strong in the first half of the year, our largest customer,
Motorola, chose not to include our semiconductors in the next
generation of its handset platforms, which resulted in lower
semiconductor revenues in fiscal 2003 as compared to fiscal
2002. In addition, we formerly sold GaAs-based subsystems into
both the commercial wireless infrastructure market and the
defense market. Due to continued weakness in the
telecommunications industry, we no longer supply subsystem
products for use in the wireless infrastructure market. Defense
revenues from subsystem products were flat in fiscal 2003 as
compared to fiscal 2002 because of delayed funding of various
defense programs due to the political uncertainties of the past
year. As a result of this combination of factors, our revenues
declined from $57.1 million in fiscal 2002 to
$49.4 million in fiscal 2003 and we incurred a net loss of
$17.0 million in fiscal 2003.

To better align our business with changing market
conditions and to increase our addressable market, we have
focused our semiconductor product design efforts on standard
products for the handset and wireless infrastructure markets. To
facilitate the sale of these products, we have supplemented our
current sales organization by contracting with Richardson
Electronics, Ltd. to distribute our products worldwide. We

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believe this combination of efforts is necessary
for us to increase our market share, increase our revenue levels
and return to profitability.


In October 2002, to accelerate our new product
introductions for the handset market, we acquired Tavanza, Inc.,
a privately held, fabless designer of power amplifier modules
and components for cellular and wireless LAN products. The total
purchase price was $6.1 million, of which $4.4 million
of in-process research and development was charged to earnings
in the third quarter of fiscal 2003.

As a result of the decline in revenues in fiscal
2003, we closed our design center in Lincoln, United Kingdom,
and restructured various operations in the United States,
resulting in $2.8 million in special charges for operating
lease and fixed asset impairments and employee termination
charges in the third quarter of fiscal 2003. Our headcount has
declined from 281 employees at March 31, 2002 to 221 employees
at March 31, 2003.

Industry Background

Growth
in the Wireless Communications Industry

The wireless communications industry has grown
rapidly over the last decade as the result of technological
advances, changes in telecommunications regulations and the
allocation of radio spectrum. Wireless communications are used
by consumers for mobile voice and data. Wireless communication
is also an important element of modern networks as service
providers are using wireless technology as an effective and less
costly means of transmitting voice and data over portions of
their networks.

The wireless communications market is constantly
changing, with the advent of new applications such as digital
wireless phones, personal communications systems (PCS), handheld
navigation products based on the global positioning satellite
(GPS) standard, satellite communications and wireless local
area networks (WLAN).

The proliferation of some of these new
applications has led to increased communication traffic causing
a congestion of the existing assigned frequency bands.
Consequently, wireless communications are moving to higher, less
congested frequency bands. The advantages of wireless
communications systems, as well as the increasing demand for
wireless communications at higher frequency, continue to drive
worldwide growth in existing systems and continue to drive the
emergence of new markets and applications.

Challenges
Facing Mobile Handset Manufacturers

Consumer demand for smaller handset size, longer
battery life and additional services such as data access, has
increased the complexity of mobile handsets. The increased
functionality of these devices, combined with customer demand
for smaller handset size, means that manufacturers of mobile
handsets must add more components to existing devices without
compromising size and weight. Many manufacturers are seeking to
find third party providers that have both semiconductor and
systems level expertise to design and supply these solutions.
Also, these factors have caused some mobile handset
manufacturers to look to higher levels of integration for
components. In addition to performance advantages, the
integration of these components permits manufacturers to reduce
both the parts count and the number of suppliers.

Handset manufacturers also must adapt to changing
wireless technologies. The two primary digital wireless
technologies are known as code division multiple access, or
CDMA, and time division multiple access, or TDMA, which includes
a variation called global system for mobile communications, or
GSM. TDMA, including GSM, is currently the most widely used
digital wireless technology, although CDMA is the fastest
growing technology due primarily to its clearer signal and
greater capacity for the transmission of data.

The next generation of wireless technology, known
as third generation technology or 3G, is expected to be based on
CDMA technology. 3G technologies are being designed to provide
increased capacity, high bandwidth for multimedia applications
and global roaming capabilities. The increased capacity and data
speeds of 3G networks are expected to permit wireless
transmission of integrated voice, video and data traffic. With
speeds up to 2 megabits per second, or Mbps, which is 30 times
faster then a typical 56 kilobits per

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second, or Kbps, modem, applications such as
broadband wireless access to the Internet and mobile video
conferencing are expected to become a reality. We believe
service providers should be able to implement this technology
with new infrastructure or as an equipment overlay to existing
networks. Service providers are expected to begin to upgrade
their networks to 3G levels over the next few years, and
regulatory agencies in some countries have allocated additional
frequency bands for 3G services. To date, however, the market
transition to 2.5G and 3G technology has not proceeded as
rapidly as the industry expected.


Wireless
Infrastructure Network Buildout

In recent years service providers have been
upgrading their existing networks or developing new networks to
take advantage of new wireless technologies as they emerge.
Service providers must choose between constructing their
networks using traditional wireline infrastructure, wireless
infrastructure or a combination of both. Traditional wireline
connectivity solutions typically require significant
installation periods and may be relatively expensive to install.
Many service providers are installing wireless networks because
they are generally faster to install and may be less expensive
than traditional wireline networks. As a result, many service
providers are deploying wireless networks as an alternative to
the construction of traditional wireline networks.
Notwithstanding the relatively lower cost of wireless networks,
there is still a significant period of investment in network
installation before subscriber revenues reach a substantial
level. Many service providers have continued to deferred capital
expenditures in 2002, upgrading rather than replacing equipment,
because of the current depressed state of the telecommunications
industry.



| |                                                                                                      
| | -----------------------------------------------------------------------------------------------------
| | GaAs Semiconductor Components Increasingly
    Address the Requirements of Broadband Wireless Systems

Manufacturers of mobile handsets and
telecommunications systems are increasingly looking to GaAs
solutions because of their requirements for efficient power
consumption and faster integrated circuits for high bandwidth,
high performance communications products. GaAs has inherent
physical properties that allow electrons to move several times
faster than does silicon. This translates into improved linear
efficiency and higher frequency performance. The
linearity, or ability to amplify a signal with
minimal distortion, and efficiency, a measure of
the strength of an amplified signal relative to the amount of
power consumed, are criteria that become more challenging to
establish in broadband wireless applications. For example, GaAs
semiconductor components in mobile handsets used in transmitter
applications are more power efficient than silicon based
components. This efficiency allows for longer battery life or
use of smaller batteries.

Defense
Electronics Market

Military forces worldwide are dependant on
sophisticated electronic equipment. Military aircraft and naval
vessels generally contain extensive electronic countermeasure
equipment for defense against enemy missile and radar systems.
These systems typically provide protection for the aircraft or
the ship from incoming enemy missiles by jamming the missile
tracking systems through various RF and microwave signal
processing techniques. Major missile systems such as the
Air-to-Air Missile (AMRAAM), Patriot Ground-to-Air Missile and
Theater High Altitude Area Defense (THAAD) also require
sophisticated signal processing equipment for targeting and
guidance purposes. Amplifiers are key transceiver components
that determine many of the basic performance characteristics of
a signal processing system. Low noise amplifiers are used to
receive low-level signals and increase their level to a usable
range. Power amplifiers are used to increase signal level to the
required transmission power range. For missile guidance and
radar applications, broadband amplifiers capable of receiving a
range of frequencies are necessary given that the incoming
frequencies are not known in advance.

The Celeritek Solution

We design and manufacture GaAs semiconductor
components and GaAs-based subsystems used in the transmission of
voice, video and data over wireless communication networks and
defense communications systems. Our products are designed to
facilitate broadband voice and data transmission in mobile
handsets,

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wireless communications networks and defense
applications. We believe our core competencies, as outlined
below, enable us to successfully address the existing and
emerging opportunities in our target market:


Extensive
Expertise in GaAs Technologies

We believe our 18 years of experience with
GaAs technology enables us to manufacture high performance GaAs
semiconductor components and GaAs-based subsystems. Our
expertise allows us to deliver high quality products to our
customers by incorporating the latest GaAs technology with
advanced manufacturing techniques. In particular, we are able to
manufacture GaAs semiconductor components that meet the more
challenging CDMA linearity requirements, as well as TDMA
requirements. This ability stems from our proficiency with
different GaAs semiconductor processes, such as metal
semiconductor field effect transistor, or MESFET, pseudo-morphic
high electron mobility transistor, or pHEMT, and the indium
gallium phosphide method of heterojunction bipolar transistor,
or InGaP HBT.

Millimeter
Wave Frequency Expertise

Many of our subsystem products operate in
millimeter wave frequency ranges as high as 40 gigahertz, or
GHz. Higher frequencies offer more data transmission capacity.
Wireless solutions at these frequencies require individual
building blocks with demanding tolerances and specifications,
which can be difficult to produce in volume. We believe our
circuit design expertise, internally produced GaAs semiconductor
components, extensive experience and understanding in how to
better integrate functionality at these frequencies provides us
with a technical advantage. We believe that our expertise
results in simpler, more robust, and higher performance
solutions for our subsystem customers.

Linear
Efficiency Expertise

We have developed technology competencies in
multiple disciplines, including pHEMT and InGaP HBT GaAs
technologies, which enable us to achieve high linear efficiency
in our GaAs semiconductor components and GaAs-based subsystems.
These competencies and disciplines include RF integrated circuit
technology, solid state device physics, thermal mechanical
packaging design, advance circuit design, linearity enhancement
techniques, advanced signal processing techniques, and computer
aided design and modeling. We believe the linear efficiency of
GaAs allows our subsystem products to be packaged in smaller
enclosures due to a reduced need for heat removal. We also
believe our linear efficiency expertise provides us with an
important technology advantage, particularly with respect to
products addressing the rapidly growing CDMA market. CDMA tends
to have more stringent power requirements than other digital
standards and is very sensitive to any distortion, which places
greater demands on the linearity characteristics of CDMA power
amplifiers.

Vertically
Integrated Manufacturing

The vertical integration of our design and
production process improves our ability to address wireless
equipment providers quantity and time to market
requirements for GaAs semiconductor components and GaAs-based
subsystems. We believe our in-house ability to design and
manufacture our products in a modular fashion is critical to
introduce new products meeting the evolving needs of our
customers in a rapid and cost effective manner. We also design
our products to be manufactured in high volumes in modular
manufacturing lines, which we believe improves our ability to
secure volume orders from our customers. In addition, common
architectures are used for multiple applications resulting in
faster development times and manufacturing efficiencies
associated with common material content. We have developed
relationships with third party manufacturers throughout our
supply chain, in order to improve our ability to increase volume
production to meet customers needs and optimize the
utilization of our in-house capacity.

Design
Expertise

Our expertise in RF and microwave design allows
us to effectively select and integrate appropriate circuit
blocks to achieve high-level functionality with cost-effective
performance for our customers. This is typically a

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very difficult problem as bandwidth, or data
rate, requirements of these systems increase. We believe our
technical advantage stems from selecting appropriate high-level
functionality with low parts count and complexity. This
advantage translates into reliable, simple and more
manufacturable products. In addition to the vertical integration
benefits that come from our in-house GaAs fabrication, we also
produce our own circuits and components for subsystem
applications. These capabilities support higher levels of
integration for our products. For example, our design expertise
enabled us to develop our semiconductor InGaP HBT power modules
for mobile handsets.


Strategy

Our objective is to become the leading provider
of GaAs semiconductor components and GaAs-based subsystems for
the wireless communications and defense markets. We target
leading OEMs in growing voice and data driven markets and align
our technologies and products to address their needs. The
following are the key elements of our strategy:

Leverage
our Expertise in Linear Efficient GaAs Technology and
Integration

We intend to continue to use our expertise in
GaAs and integration to address emerging trends in wireless
communication markets. For example, our new 3mm x 3mm InGaP HBT
power amplifier modules offer our mobile handset customers an
integrated solution involving fewer parts, greater ease of use,
smaller size and higher linear efficiency as compared to other
power amplifier modules currently on the market. We believe our
modules will also address our customers needs for reduced
parts count and number of suppliers. Also, to better align our
business with changing market conditions and to increase our
addressable market, we have focused our semiconductor product
design efforts on standard products for the handset and wireless
infrastructure markets. To facilitate the sale of these
products, we have supplemented our current sales organization by
contracting with Richardson Electronics, Ltd. to distribute our
products worldwide. We believe this combination of efforts is
necessary for us to increase our market share, increase our
revenue levels and return to profitability. Our GaAs-based
subsystem products, such as our amplifiers for defense products,
integrate circuits produced in-house and GaAs semiconductor
components to address customer demand for compact subsystems.

Further
Penetrate Broadband Markets

We target both existing and emerging high-growth
wireless communications markets. We seek to further increase the
penetration of our GaAs semiconductor components in the existing
and growing voice driven market for mobile handsets. Our
strategy is to further penetrate emerging wireless
communications markets, which include data handsets, wireless
local area networks (WLAN) and network infrastructure.

We believe frequencies and, correspondingly, data
rates in the WLAN market will increase with the acceptance of
new standards. For example, the current standard, 802.11b,
operates at 2.4 GHz and has data rates up to 11 MBps and the
newer standard, 802.11a, operates at 5 GHz and has data rates up
to 54 MBps. We believe our GaAs processing and high frequency
design expertise will allow us to develop products for this
market that have excellent linearity and lower power consumption.



| |                                                                                            
| | -------------------------------------------------------------------------------------------
| | Capitalize on Vertical Integration in Design
    and Manufacturing of Integrated Components

We are currently pursuing a strategy of vertical
integration of our design and manufacturing processes, from
design and development of the semiconductor integrated circuit
through assembly and automated testing. We believe our expertise
in the design and manufacturing of integrated components
benefits us in the wireless subsystems market because GaAs
semiconductor components are a critical part of these GaAs-based
subsystems. We also believe our control over each of these steps
contributes to improved linear efficiency, shortens our time to
market, reduces unit costs and increases our control over
quality and reliability.

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| |                                                                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Expand Relationships with Leading Worldwide
    Manufacturers of Mobile Handsets, Wireless Local Area Networks,
    Network Infrastructure Equipment and Defense Systems

Our strategy is to form lasting customer
relationships by working closely with our customers early in the
development process. By working with our customers throughout
the entire development process, we believe we are able to
provide final solutions tailored to their cost and performance
goals. We believe that our customer relationships also allow us
to develop insight into their requirements and to design
specific products that meet their needs by rapidly delivering
product designs and volume production. In addition, we do not
generally compete with our customers and we believe, as a
result, they are more willing to openly discuss with us their
proprietary technologies and development plans.



| |                                                                                                                        
| | -----------------------------------------------------------------------------------------------------------------------
| | Build on Expertise in Broadband Microwave
    Amplifiers to Develop Multifunction Assemblies for the Defense
    Market

We target defense electronics programs such as
missile guidance, radar and satellite systems in which microwave
signal processing expertise is a key performance factor. Our
strategy is to build on our expertise in broadband microwave
amplifiers to develop multifunction assemblies to increase our
available market.

Products

GaAs
Semiconductor Components

We offer our GaAs semiconductor components to
customers for use in the wireless communications markets, and
integrate them into our own GaAs-based subsystems.

|                                       |  |                                                                                                                                                         |  |                                                                                                                        |  |                                                                                                                                                 
|-------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------
|                                      
|                                      
|Market                                 |  | Semiconductor Components                                                                                                                                |  | Applications                                                                                                           |  | Product Benefits                                                                                                                                
|                                      
|                                      
|Mobile Handsets                        |  |  Power amplifier RFICs
     HBT Power Modules
     Driver RFICs                                                                                      |  | Transmitter portion of cellular and PCS CDMA,
    TDMA, and, in the future, 3G mobile handsets, for voice and data     |  |  Lengthens talk time
     Increases data capacity
     Decreases size of handsets
     Decreases battery voltage
     Increases integration
|Wireless Infrastructure                |  |  Power amplifier RFICs
     Power transistors
     Low noise transistors                                                                             |  | Transmitter and receiver portions of cellular,
    GSM, and PCS wireless infrastructure equipment                      |  |  Increases range
     Increases data capacity
     Reduces size of base stations                                                             
|Fixed Wireless and WLAN 802.11 a/b/g   |  |  Power amplifier RFICs
     Power transistors
     Low noise transistors
     Driver RFICs
     Transmit/receive switches
     Diversity switches |  | Transmitter portion of 1.9 GHz, 2.4 GHz, 3.5 GHz
    and 5.8 GHz fixed wireless base stations and subscriber terminals |  |  Increases data capacity
     Lengthens battery back up
     Reduces size of base stations                                                   
|Test and Measurement Equipment         |  |  Frequency Multiplexers
     Switch filters                                                                                                           |  | Broadband frequency sources and RF analyzers                                                                           |  |  Increase frequency range and
    performance                                                                                                  
|Point to Point and Point to Multipoint |  |  Millimeter wave microwave monolithic
    integrated circuits (MMICs)                                                                                  |  | Transmitter and receiver portions of our GaAs-
    based subsystems                                                    |  |  Provides a secure source of supply
    and reduces the cost of our GaAs- based subsystems                                                     
|                                      

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|               |  |                                                |  |                                                                |  |                                                     
|-------------- |  | ---------------------------------------------- |  | -------------------------------------------------------------- |  | ----------------------------------------------------
|              
|              
|Market         |  | Semiconductor Components                       |  | Applications                                                   |  | Product Benefits                                    
|              
|              
|Satellite(1)   |  |  Microwave and millimeter wave MMICs          |  | Transmitter portion of ground-based satellite.                 |  |  Increases reliability
     Increases integration 
|Fiber Optic(1) |  |  Driver amplifier MMICs                       |  | OC-192, 40 GHz fiber optic external modulator
    applications |  |  Increases data capacity
     Reduces data errors 
|CATV(1)        |  |  High gain, high dynamic range
    amplifiers |  | CATV distribution cable modem and laser diode
    drivers      |  |  Lowers distortion
     Reduces installation costs
|              

|    |                                                                 
|--- | ----------------------------------------------------------------
|(1) | Products that are not currently generating
    material revenue.

Revenue from semiconductor components was
$29.3 million in fiscal 2003, $30.4 million in fiscal
2002 and $42.0 million in fiscal 2001. The majority of our
revenue from semiconductor products in fiscal 2003 was derived
from products we supplied to the handset market. Although the
wireless infrastructure market is currently in a downturn, we
have historically generated a significant portion of our revenue
from that market. We believe the other markets in the table
provide opportunities for us to expand our customer base as we
are developing new products.

GaAs-based
Subsystems

Our GaAs-based subsystems address a variety of
demands from the defense electronics market.

|        |  |                               |                   |                             |                                  |                         |              
|------- |  | ----------------------------- | ----------------- | --------------------------- | -------------------------------- | ----------------------- | -------------
|       
|       
|Market  |  | Subsystem Product             |                   | Applications                |                                  | Product Benefits       
|       
|       
|Defense |  |  Amplifiers                  |                   | Electronic countermeasures, |                                  |  Increases integration
|        |  |                               |  Low noise       |                             | warning systems and radar decoys |                         |  Lower costs
|        |  |                               |  Low phase noise |                             |                                  |                         |  Ease of use
|        |  |                               |  Power           |                             |                                  |                         |              
|        |  |                               |  Limiting        |                             |                                  |                         |              
|        |  |  Switches                    |                   |                             |                                  |                        
|        |  |  Down converters             |                   |                             |                                  |                        
|        |  |  Up converters               |                   |                             |                                  |                        
|        |  |  Phase locked oscillators    |                   |                             |                                  |                        
|        |  |  Variable attenuators        |                   |                             |                                  |                        
|        |  |  Phase compensators          |                   |                             |                                  |                        
|        |  |  Equalizer                   |                   |                             |                                  |                        
|        |  |  Filters                     |                   |                             |                                  |                        
|        |  |  Power and control functions |                   |                             |                                  |                        
|        |  |  Multi-function modules      |                   |                             |                                  |                        
|        |  |  Power dividers              |                   |                             |                                  |                        
|        |  |  Couplers                    |                   |                             |                                  |                        
|       

Revenue from GaAs-based subsystems was
$20.1 million in fiscal 2003, $26.7 million in fiscal 2002
and $43.1 million in fiscal 2001.

Customers

We sell our GaAs semiconductor components and
GaAs-based subsystems primarily to defense and commercial OEMs,
who integrate these products into wireless mobile handsets,
wireless infrastructure networks and defense systems.

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A relatively limited number of customers have
historically accounted for a substantial portion of our sales.
During the fiscal year ended March 31, 2003, Motorola
accounted for approximately 41% of net sales. During the fiscal
year ended March 31, 2002, Motorola accounted for
approximately 43% of net sales. During the fiscal year ended
March 31, 2001, Motorola accounted for approximately 21% of
net sales, and DMC Stratex Network accounted for approximately
10% of net sales. Sales to our top ten customers accounted for
approximately 75% of our net sales in fiscal 2003, 76% of our
net sales in fiscal 2002 and 72% of our net sales in fiscal
2001. We expect that sales of our products to a limited number
of customers will continue to account for a high percentage of
our sales in the foreseeable future, although, as discussed
elsewhere in this annual report, Motorola chose not to include
our semiconductors in the next generation of its handset
platforms. Please see the section of this Report entitled
Risk Factors for a description of risks related to
our backlog and customer concentration.

In fiscal 2003, sales to international customers
were $33.1 million, which accounted for 67% of net sales.
In fiscal 2002, sales to international customers were
$17.5 million, which accounted for 31% of net sales. In
fiscal 2001 sales to international customers were
$35.3 million, which accounted for 41% of net sales. In
addition, many of our domestic customers sell their products
outside of the United States. For a breakdown of our
international sales by region, please see Note 15 to our
financial statements included in this Report. The increase in
sales to China was the result of Motorola transferring
production of the handset, which our power amplifiers were used
in, from Mexico to China. Please also see the section of this
Report entitled Risk Factors for a description of
risks related to our international sales and operations.

Technology

We utilize GaAs technology expertise, advanced
integration and packaging technologies, RF and microwave circuit
design and high frequency competency to offer what we believe
are superior wireless solutions. We also employ advanced
simulation and modeling tools to offer wireless customers
advanced semiconductor RF integrated circuits, or RFICs, and
power amplifier modules, as well as GaAs-based subsystems that
bring the benefits of the latest technologies to market quickly.

Gallium
Arsenide

GaAs is a semiconductor material that has an
electron mobility several times faster than silicon. As a
result, it is possible to design GaAs circuits that operate at
significantly higher frequencies than silicon circuits. GaAs
circuits can be designed to consume less power, amplify with
more linearity, and operate more efficiently at lower voltages
than silicon circuits. This means that transceiver products
operate with smaller batteries for a longer period of time. Low
voltage linear efficiency makes GaAs circuits well suited for
power amplifiers operating in CDMA, TDMA and 3G systems. High
frequency GaAs technology supports millimeter wave MMICs for
transceivers and other components for integration into
GaAs-based subsystem products. High frequency GaAs technology
also facilitates the support of the high-speed fiber optic
market. Our GaAs technology provides repeatability and control
through our proprietary 0.25 micron semiconductor fabrication
process.

GaAs
Processes

We utilize a broad range of GaAs production
processes, which provide us with flexibility in designing
products to suit the needs of our customers, including the
following:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Metal semiconductor field effect transistor, or
    MESFET, is a production process characterized by lower initial
    wafer costs and fewer processing steps than newer processes,
    such as InGaP HBT. Semiconductor products manufactured using
    MESFET need two power supplies, a positive and negative, and
    have a larger die size. These products are generally used in
    infrastructure and defense applications.
|
| |  | Pseudo-morphic high electron mobility transistor,
    or pHEMT, is a production process characterized by low voltage
    and high frequency performance, which is superior to the MESFET
    process. pHEMT also requires a positive and negative power
    supply like MESFET. pHEMT is used in amplifiers for
    infrastructure applications, satellite ground-based applications
    and defense products.                     

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Heterojunction bipolar transistor, or HBT,
    processes have a bipolar structure, similar to that used in
    traditional high frequency analog applications, rather than the
    FET structure utilized in MESFET and pHEMT processes. The
    bipolar structure of HBT enables the use of a single power
    supply and can be disabled with a digital control signal in
    contrast with MESFET and pHEMT, both of which require two
    supplies and supply switching components. Additionally, HBT
    devices generally have superior linear efficiency relative to
    MESFET and pHEMT. HBT devices generally involve more processing
    steps than MESFET or pHEMT processes, which tend to make the
    cost of processing a single wafer more expensive. However, the
    smaller die size of an HBT device, and therefore the greater
    number of devices per wafer, tend to offset this additional
    cost. These devices are used in current generation CDMA power
    amplifier modules.

InGaP
HBT versus AlGaAs HBT

The most commonly utilized HBT process today uses
aluminum to create aluminum GaAs, or AlGaAs. Our HBT process
uses indium and phosphide to create indium gallium phosphide, or
InGaP. The primary advantages of InGaP are better performance
over temperature, reliability and low voltage linear efficiency.
As a result, we believe InGaP is the preferred technology for
CDMA broadband applications.

Integration
Expertise

We have developed technologies to enhance our
expertise at higher levels of integration. We believe these
technologies allow us to offer a higher level of functionality,
in smaller form factors, to our customers.

Modular Design.Our
subsystem assemblies use modular building blocks to provide
high-level functionality. These assemblies are produced with
common system architectures for multiple applications to enable
cost effective and flexible integration. Our module products can
use a common die supply for multiple applications allowing us to
dynamically allocate material as demand changes.

Packaging

We have developed proprietary RFIC and power
module packaging techniques to enhance the linear efficiency of
our products, while using commercially available cost effective
manufacturing processes. These packaging technologies are
compatible with subcontract assembly capacity, and offer reduced
size, and higher levels of functionality to our customers.

Low
Phase Noise Sources

We have developed a proprietary approach to
produce low phase noise sources to support high capacity
wireless data applications. The approach is designed to be a
cost effective and robust design. We believe our approach offers
a technical advantage over competing approaches, which when
subjected to vibration, can induce critical errors in high
capacity data transmission at millimeter wave frequencies.

Simulation
and Modeling

We believe that our long history of solving
complex integration problems gives us a strong basis from which
to address new applications. This experience is enhanced with
in-house and commercially available simulation techniques. For
example, we have an advanced non-linear model for InGaP HBT that
enables better prediction of end performance on a first design
attempt.

Amplifier

Linear amplifiers amplify signals so that they
will have sufficient strength to reach the next location, but do
so in such a way as to not induce distortion in transmitted
voice or data. Amplifiers are typically the most challenging
component in any RF and microwave system. They were our first
product and continue to be a core technology. Millimeter wave
power amplifiers up to one watt of power are needed for higher
bandwidth voice and data applications, and our expertise in this
area enables these applications to transmit higher

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capacity data. GaAs semiconductor RFICs and power
amplifier modules are an important part of the transmit chain in
a handset, and we believe our leadership in linear efficiency in
this product area is a result of amplifier technology which in
turn enables higher capacity mobile voice and data solutions.


Millimeter
Wave

We have developed millimeter wave technologies to
help simplify and improve the performance of our components.
These include careful control over the geometries to produce
GaAs MMICs with our 0.25 micron semiconductor fabrication
process, tolerance control over in-house thin film circuits, and
correct circuit implementations that allow centering of design
performance to specifications.

Sales and Marketing

We market our products worldwide to customers in
commercial markets and prime contractors in the defense
industry, primarily through a network of manufacturers
representatives managed by our internal sales force. As of
March 31, 2003, we had contracts with 10
manufacturers representatives in the United States and 9
international representatives located in Western Europe, the
Middle East and Asia. As part of our marketing efforts, we
advertise in major trade publications and attend major industry
shows.

In the fourth quarter of fiscal 2003, to
facilitate the sales of our new standard products, we
supplemented our current sales organization by entering into an
agreement with Richardson Electronics Ltd. to distribute
our products worldwide. Sales to Richardson were not significant
in fiscal 2003, but we believe the agreement with Richardson
will allow us to market our products to a wider customer base.

After we have identified key potential customers
in our market segments, we make sales calls with our
manufacturers representatives and our own sales,
management and engineering personnel. Many of the companies
entering the wireless communications markets possess expertise
in digital processing and wired systems but relatively little
experience in analog signal processing and wireless
transmission. To promote widespread acceptance of our
transceiver products and provide customers with support for
their wireless transmission needs, our sales and engineering
teams work closely with our customers to develop tailored
solutions to these needs.

Backlog

We generally include in our backlog all purchase
orders and contracts for products with requested delivery dates
within one year.

Our backlog at March 31, 2003 was
approximately $10.4 million, of which 88% was from defense
customers and 12% was from commercial customers. The backlog at
March 31, 2002 was $28.0 million. Generally, purchase
orders in our backlog are subject to cancellation without
penalty at the option of the customer, and from time to time we
have experienced cancellation of orders in backlog. In the
fourth quarter of fiscal 2001 and throughout fiscal 2002, a
significant portion of our backlog was cancelled due to changing
market conditions. Some of our customers in the wireless
infrastructure market delayed and cancelled long-standing
contracts in response to declining market demand.

Most of our quarterly net sales have resulted
from orders obtained in prior quarters. Our backlog is subject
to fluctuations and is not necessarily indicative of our future
sales. There can be no assurance that current backlog will
necessarily lead to sales in any future period.

Research and Development

Our research and development efforts are focused
on the design of new GaAs semiconductor components and
GaAs-based subsystems, improvement of existing device
performance, process improvements in GaAs wafer fabrication and
improvements in packaging and integration. As of March 31,
2003, we employed 51 people to support our research and
development efforts. In addition to their design and development
activities, the engineering staff participates with our
marketing department in proposal preparation and applications
support for customers. We have developed an extensive library of
circuit designs and architectures that can be

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integrated into higher level systems. We believe
our ability to leverage this library of modules reduces product
time to market and development costs.


In the third quarter of fiscal 2003, in response
to current market conditions, we closed one of our design
centers in the United Kingdom and terminated 8 employees. We
also purchased Tavanza, Inc., a privately held, fabless
designer of power amplifier modules and components for cellular
and wireless LAN products. As a result of this acquisition, we
increased our engineering staff and broadened the skills in our
research and development group.

Our total expenses for research and development
were $10.8 million for the fiscal year ended March 31,
2003, $9.2 million for the fiscal year ended March 31,
2002 and $10.2 million for the fiscal year ended
March 31, 2001.

Manufacturing

We manufacture our GaAs semiconductor components
and GaAs-based subsystems, and in addition, supplement our
manufacturing capacity by selectively outsourcing wafer
fabrication, assembly and test manufacturing functions to third
parties. Our manufacturing lines are designed to meet increased
customer demand without sacrificing our high quality standards.
Our manufacturing strategy consists of five key elements:



| |   |                                                                                                                                 
| | - | --------------------------------------------------------------------------------------------------------------------------------
| |  | control and optimization of the key technologies
    and manufacturing processes at all levels of vertical
    integration;     
|
| |  | multiple sourcing where possible in the supply
    line for outside purchased material and strategic development of
    vendors;
|
| |  | commonality in design to leverage common
    materials and processes;                                                           
|
| |  | strategic use of subcontract services to optimize
    internal utilization and provide additional capacity as needed;
    and   
|
| |  | use of modular manufacturing lines, using
    commercially available equipment, and low risk proven processes.                  

We maintain manufacturing control of our products
through the use of our in-house GaAs wafer production facility.
The fabrication of semiconductor products is highly complex and
sensitive to dust and other contaminants, requiring production
in a highly controlled, clean environment. Our facility includes
clean rooms with class 10 performance for fabrication
operations. A class 10 clean room has no more than ten particles
larger than 0.5 microns in size per cubic foot of air. To
maximize wafer yields and quality, we test our products at
various stages in the fabrication process, maintain reliability
monitoring, and conduct numerous quality control inspections
throughout the entire production flow using analytical
manufacturing controls.

In addition to fabricating our own GaAs
semiconductor components, we have the ability to outsource a
portion of the semiconductor fabrication to a subcontractor
foundry. We believe that having the ability to outsource a
portion of the fabrication allows us to achieve benefits. For
example, outsourcing provides us with a redundant source of
semiconductors. In addition, it allows us to better use our own
facility by providing us with an increased ability to manage our
in-house capacity. Further, the ability to outsource a portion
of the fabrication allows us to recognize cost efficiencies that
may be present to a greater degree in the independent
subcontract fabrication facility.

We use a number of third party vendors in Asia to
package and test our GaAs semiconductor components. Although we
strive to maintain more than one vendor for each process, this
is not always possible due to volume and quality issues. To the
extent that any of the vendors are not able to provide a
sufficient level of service with an acceptable quality level, we
could have difficulty meeting our delivery commitments, which
could seriously harm our business and operating results.

We use our high frequency test expertise to test
our high volume RFICs, power amplifier modules, and subsystem
products. We believe our test process results in higher
throughput, shorter cycle times and overall

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capacity control. Test equipment is commercially
available and supports the need to scale capacity to meet
increased demand. Internal test capability is also augmented
with offshore subcontractors.


We acquire some of the components for our
existing products from single sources, and some of the other
components for our products are presently available or acquired
only from a limited number of suppliers. For example, our
single-sourced components include millimeter wave components and
semiconductor packages.

Competition

Our current and potential competitors include
specialized manufacturers of RF and microwave signal processing
components, large vertically integrated systems producers that
manufacture their own GaAs components, and independent suppliers
of silicon and GaAs integrated circuits that compete with our
GaAs devices. Furthermore, we currently supply components to
customers that are continuously evaluating whether to
manufacture their own components or purchase them from outside
sources. We expect significantly increased competition both from
existing competitors and a number of companies that may enter
the wireless communications market.

In the semiconductor product market, we compete
primarily with ANADIGICS, RF Micro Devices, Skyworks
Solutions and TriQuint Semiconductor. In the area of subsystems
products, we compete primarily with CTT, M/A-COM, Miteq, and
Remec.

We believe that competition in our markets is
based primarily on price, performance, security of supply, the
ability to support rapid development cycles, and design wins.
Many of our current and potential competitors have significantly
greater financial, technical, manufacturing and marketing
resources than we have and have achieved market acceptance of
their existing technologies. We cannot assure you that we will
be able to compete successfully with our existing or new
competitors. If we are unable to compete successfully in the
future, our business, operating results and financial condition
will be harmed.

Government Regulation

Our products are incorporated into wireless
communications systems that are subject to various United States
regulations and similar laws and regulations adopted by
regulatory authorities in other countries. Regulatory changes,
including changes in the allocation of available frequency
spectrum, could significantly impact our operations by
restricting development efforts by our customers, making
obsolete current products or increasing the opportunity for
additional competition. Changes in, or the failure to comply
with, applicable domestic and international regulations could
have an adverse effect on our business, operating results and
financial condition. In addition, the increasing demand for
wireless communications has exerted pressure on regulatory
bodies worldwide to adopt new standards for these products and
services, generally following extensive investigation of and
deliberation over competing technologies. The delays inherent in
this government approval process have caused in the past, and
may cause in the future, the cancellation, postponement or
rescheduling of the installation of communications systems by
our customers, which in turn may negatively affect the sale of
our products to those customers. We are also subject to a
variety of federal, state, and local laws, rules and regulations
related to the discharge and disposal of toxic, volatile and
other hazardous chemicals used in our manufacturing process. Any
failure to comply with such requirements currently in effect or
subsequently adopted could result in the imposition of fines on
us, the suspension of production or a cessation of operations.
In addition, such requirements could restrict our ability to
expand our facilities or require us to acquire costly equipment
or incur other significant expenses to comply with environmental
regulations or clean up discharges. We believe that costs
arising from existing environmental laws will not have a
material adverse effect on our financial position or results of
operations. However, environmental laws may become more
stringent in the future and may require us to incur significant
expenses in the future to maintain our compliance.

Proprietary Rights

Our ability to compete depends, in part, on our
ability to obtain and enforce intellectual property protection
for our technology in the United States and internationally.
Although we have several patent

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applications pending related to the Tavanza
acquisition, we currently rely primarily on a combination of
trade secrets, copyrights, trademarks and contractual rights to
protect our intellectual property. To protect our trade secrets
and other proprietary information, we require our employees to
sign agreements providing for maintenance of confidentiality and
also the assignment of rights to inventions made by them while
in our employ.


The steps taken by us may be inadequate to deter
misappropriation or impede third party development of our
technology. In addition, the laws of some foreign countries in
which our products are or may be sold do not protect our
intellectual property rights to the same extent, as do the laws
of the United States. Our failure to protect our proprietary
information could cause our business and operating results to
suffer.

From time to time, third parties have asserted
exclusive patent, copyright and other intellectual property
rights to technologies that are used in our business. We cannot
assure you that third parties will not assert infringement
claims against us in the future, that assertions by third
parties will not result in costly litigation or that we would
prevail in any litigation or be able to license any valid and
infringed patents from third parties on commercially reasonable
terms or at all. Litigation, regardless of its outcome, could
result in substantial cost and diversion of our resources. Any
infringement claim or other litigation against or by us could
seriously harm our business and operating results.

Employees

As of March 31, 2003, we had a total of 221
employees including 9 in marketing, sales and related customer
support services, 51 in research and development, 143 in
manufacturing and 18 in administration and finance. None of our
employees are represented by a labor union. We consider our
relations with our employees to be good.

Raw Materials

We acquire some of the components for our
existing products from single sources, and some of the other
components for our products are presently available or acquired
only from a limited number of suppliers. For example, our
single-sourced components include millimeter wave components and
semiconductor packages. In the event that any of these suppliers
are unable to fulfill our requirements in a timely manner, we
may experience an interruption in production until we locate
alternative sources of supply. If we encounter shortages in
component supply, we may be forced to adjust our product designs
and production schedules. The failure of one or more of our key
suppliers or vendors to fulfill our orders in a timely manner
and with acceptable quality and yields could cause us to not
meet our contractual obligations, could damage our customer
relationships and could harm our business. For example, a
single-sourced supplier of substrates ceased operations at the
end of the second quarter of fiscal 2002, but we were able to
find a replacement supplier. If we had not been able to find
another supplier, the delivery of our products to our customers,
including our major customers, would have been delayed and our
relationship with such customers would have been harmed and our
business would have suffered.

Where You Can Find More Information

We make our annual report on Form 10-K,
quarterly reports on Form 10-Q, current reports on
Form 8-K, and all amendments to such reports filed pursuant
to Section 13(a) or 15(d) of the Exchange Act, available,
free of charge, on or through our Internet website located at
www.celeritek.com, as soon as reasonably practicable after they
are filed with or furnished to the SEC.

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Executive Officers of the Registrant

Our executive officers as of March 31, 2003
are as follows:

|                  |  |     |    |          |  |                                                            
|----------------- |  | --- | -- | -------- |  | -----------------------------------------------------------
|Name              |  | Age |    | Position
|                  |  |     |    |         
|Tamer Husseini    |  |     | 60 |          |  | Chairman, President and Chief Executive Officer            
|Margaret E. Smith |  |     | 55 |          |  | Vice President, Finance and Chief Financial
    Officer    
|Gary J. Policky   |  |     | 61 |          |  | Vice President, Engineering and Chief Technical
    Officer
|Richard G. Finney |  |     | 53 |          |  | Vice President, Subsystem Division                         
|Perry A. Denning  |  |     | 56 |          |  | Vice President, Semiconductor Division                     
|Thurman Dobbs     |  |     | 59 |          |  | Vice President, Sales                                      
|Damian M. McCann  |  |     | 41 |          |  | Vice President, Advanced Marketing and Technology          

Tamer Husseini,a
founder of our company, has served as our Chairman of the Board,
President and Chief Executive Officer since our organization in
1984. Prior to founding our company, Mr. Husseini was
employed by Granger Associates, a telecommunications company, as
Vice President from 1982 until 1984. Before joining Granger
Associates, Mr. Husseini was employed by Avantek, Inc., a
manufacturer of integrated circuits and components for wireless
communications applications and now a division of
Hewlett-Packard Company, from 1972 until 1982, most recently as
General Manager of the Microwave Transistor Division.

Margaret E. Smithjoined us in November 1989 as Controller and served as Vice
President, Finance and Chief Financial Officer from January 1994
until December 1998. After a brief departure, Ms. Smith
rejoined us in November 1999, again as Vice President, Finance
and Chief Financial Officer. Prior to joining us, Ms. Smith
was employed by Avantek from 1980 until September 1989 where she
served most recently as a Divisional Controller.

Gary J. Policky,a
founder of our company, has served as Vice President, Signal
Processing Operations since our organization in 1984. In 1997,
Mr. Policky was appointed Vice President, Engineering and
Chief Technical Officer. Prior to founding our company,
Mr. Policky was employed from 1969 until 1984 at Avantek as
Engineering Manager of Microwave Components and Amplifiers.

Richard G. Finneyjoined us in 1985 as Director of Manufacturing and has served as
Vice President, Manufacturing from January 1996 to 1997. In
1997, Mr. Finney was appointed Vice President, Subsystem
Division. Prior to joining us, Mr. Finney was employed by
Loral, Western Operations in 1984 as Director of Operations.
Before joining Loral, Western Operations, Mr. Finney was
employed by Avantek from 1974 to 1984, most recently as a
manufacturing manager.

Perry A. Denningjoined us in July 1997 as Vice President, Semiconductor
Division. Prior to joining us, Mr. Denning was employed by
Monolithic Systems Technology, Inc. as the Vice President
of Operations. Before joining Monolithic Systems,
Mr. Denning worked for 13 years for VLSI
Technology, Inc. where he started the companys entire
wafer manufacturing operations and managed its foundry relations
with Taiwan Semiconductor Manufacturing Corporation and
Chartered Semiconductor. Prior to VLSI, Mr. Denning worked
13 years for Texas Instruments where he was responsible for
multiple high volume manufacturing facilities.

Thurman Dobbsjoined
us in April 2002 as Vice President, Sales. Prior to joining us,
Mr. Dobbs was employed by Lightspeed Semiconductor as Vice
President, Sales. Before joining Lightspeed Semiconductor,
Mr. Dobbs worked for 15 years for Oki Semiconductor,
where he developed a team of 25 direct sales managers at 10
North American locations and oversaw manufacturers
representatives and the distribution channel. Prior to Oki,
Mr. Dobbs worked 11 years for Texas Instruments where he
was the design manager for integrated circuits.

Damian M. McCannjoined us in 1991 as a design engineer and served as Director,
Semiconductor Product Development from 1997 to 2001. He was
appointed Vice President, Advanced Marketing and Technology in
June 2001. Prior to joining us, Mr. McCann was employed by
Marconi Electronic Devices, Ltd. as a design engineer.
Mr. McCann has a degree from Queens University in
Belfast.

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Item 2.     Properties

Our principal administrative, sales, marketing,
research and development and manufacturing facility is located
in an approximately 57,000 square foot building in Santa Clara,
California, which is leased through September 30, 2005. We
lease an additional 25,000 square foot building in Santa Clara,
California to house our wireless subsystems manufacturing
operation. We also lease a sales office in Seoul, South Korea
and we have two facilities in the United Kingdom. One of the
United Kingdom facilities houses a design center, and is a
leased facility in Belfast, Northern Ireland. During fiscal
2003, we closed the second facility located in Lincoln, United
Kingdom. We own the building in Lincoln and it is currently for
sale and included in Prepaid and other current assets on the
consolidated balance sheet as of March 31, 2003. We believe
our existing facilities are adequate for our current needs and
that additional space will be available as needed.

Item 3.     Legal
Proceedings

We operate in the semiconductor industry and may
from time to time become party to litigation. We are currently
not aware of any potential or pending litigation that could
reasonably be expected to have a material adverse affect on our
financial condition or result of operations.



|        |                                                        
|------- | -------------------------------------------------------
|Item 4. | Submission of Matters to a Vote of Security
    Holders

No matters were submitted to a vote of our
security holders during the fourth quarter ended March 31,
2003.




PART II

Item 5.     Market
for Registrants Common Stock and Related Stockholder
Matters

Our common stock started trading on the Nasdaq
National Market in December 1995 under the symbol CLTK. The
following table sets forth, for the periods indicated, the high
and low closing sales prices for our common stock, as reported
on the Nasdaq National Market System:

|              |                |      |   |       |  |  |   |       | 
|------------- | -------------- | ---- | - | ----- |  |  | - | ----- | 
|Quarter Ended |                | High |   | Low  
|              |                |      |   |      
|Fiscal 2002   |                |      |   |       |  |  |   |      
|              | First Quarter  |      | $ | 14.95 |  |  | $ | 10.19 | 
|              | Second Quarter |      |   | 16.54 |  |  |   | 11.46 | 
|              | Third Quarter  |      |   | 14.35 |  |  |   | 11.20 | 
|              | Fourth Quarter |      |   | 13.74 |  |  |   | 8.95  | 
|Fiscal 2003   |                |      |   |       |  |  |   |      
|              | First Quarter  |      | $ | 10.79 |  |  | $ | 6.60  | 
|              | Second Quarter |      |   | 9.15  |  |  |   | 6.65  | 
|              | Third Quarter  |      |   | 7.38  |  |  |   | 5.40  | 
|              | Fourth Quarter |      |   | 7.67  |  |  |   | 6.32  | 

At June 20, 2003 there were approximately
172 shareholders of record. We have never declared nor paid cash
dividends on shares of our common stock.

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##### Table of Contents



Item 6.     Selected
Financial Data

The following selected financial data for the
five-year period ended March 31, 2003, should be read in
conjunction with our Consolidated Financial Statements and notes
thereto and Managements Discussion and Analysis of
Financial Condition and Results of Operations.

|                                                  |                   |                                       |        |       |  |      |        |       |  |      |         |        |  |   |         |        |  |   |         |        | 
|------------------------------------------------- | ----------------- | ------------------------------------- | ------ | ----- |  | ---- | ------ | ----- |  | ---- | ------- | ------ |  | - | ------- | ------ |  | - | ------- | ------ | 
|                                                  |                   |                                      
|                                                  |                   | Fiscal Years Ended March 31,         
|                                                  |                   |                                      
|                                                  |                   | 1999                                  |        | 2000  |  | 2001 |        | 2002  |  | 2003
|                                                  |                   |                                       |        |       |  |      |        |       |  |     
|                                                  |                   |                                      
|                                                  |                   | (In thousands, except per share data)
|Net sales                                         |                   | $                                     | 41,128 |       |  | $    | 48,211 |       |  | $    | 85,062  |        |  | $ | 57,050  |        |  | $ | 49,423  |       
|Gross profit                                      |                   |                                       | 4,528  |       |  |      | 8,373  |       |  |      | 7,580   |        |  |   | 5,211   |        |  |   | 10,322  |       
|Loss from operations                              |                   |                                       | (9,887 | )     |  |      | (7,154 | )     |  |      | (15,695 | )      |  |   | (24,592 | )      |  |   | (17,975 | )     
|                                                  |                   |                                       |        |       |  |      |        |       |  |      |         |        |  |   |         |        |  |   |         |       
|Net loss                                          |                   | $                                     | (7,538 | )     |  | $    | (6,824 | )     |  | $    | (10,602 | )      |  | $ | (22,618 | )      |  | $ | (17,027 | )     
|                                                  |                   |                                       |        |       |  |      |        |       |  |      |         |        |  |   |         |        |  |   |         |       
|Basic and diluted net loss per share              |                   | $                                     | (1.04  | )     |  | $    | (0.88  | )     |  | $    | (0.94   | )      |  | $ | (1.87   | )      |  | $ | (1.39   | )     
|                                                  |                   |                                       |        |       |  |      |        |       |  |      |         |        |  |   |         |        |  |   |         |       
|Shares used in net loss per share calculation(1): |                   |                                       |        |       |  |      |        |       |  |      |         |        |  |   |         |        |  |   |         |       
|                                                  | Basic and diluted |                                       |        | 7,265 |  |      |        | 7,736 |  |      |         | 11,272 |  |   |         | 12,076 |  |   |         | 12,285 | 



---



|    |                                                                                                                                                      
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | See note 1 of notes to consolidated
    financial statements for a description of the computation of the
    number of shares and net loss per share.

Fiscal 2003 results of operations include a
charge of approximately $4.4 million for In-process
research and development and $2.8 million of special
charges. Net loss includes a $0.4 million strategic
investment write-down.

Fiscal 2002 results of operations include a fixed
asset impairment charge of approximately $11.0 million. Net
loss includes a $1.7 million strategic investment
write-down.

Fiscal 2001 results of operations include a fixed
asset impairment charge of approximately $1.3 million. Net
loss includes a write-down of short-term investments of
$0.5 million.

|                                |  |                |        |      |  |      |        |      |  |      |         |  |  |   |         |  |  |   |         | 
|------------------------------- |  | -------------- | ------ | ---- |  | ---- | ------ | ---- |  | ---- | ------- |  |  | - | ------- |  |  | - | ------- | 
|                                |  |               
|                                |  | At March 31,  
|                                |  |               
|                                |  | 1999           |        | 2000 |  | 2001 |        | 2002 |  | 2003
|                                |  |                |        |      |  |      |        |      |  |     
|                                |  |               
|                                |  | (In thousands)
|Consolidated Balance Sheet Data |  |                |        |      |  |      |        |      |  |      |         |  |  |   |         |  |  |   |         | 
|Total assets                    |  | $              | 40,210 |      |  | $    | 63,655 |      |  | $    | 170,525 |  |  | $ | 139,688 |  |  | $ | 122,460 | 
|Long-term obligations           |  |                | 257    |      |  |      | 636    |      |  |      | 5,578   |  |  |   | 6,015   |  |  |   | 2,919   | 



|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|Item 7. | Managements Discussion and Analysis
    of Financial Condition and Results of Operations

You should read this discussion together with
the financial statements and other financial information
included in this Form 10-K. This discussion and analysis
contains forward-looking statements that involve risks,
uncertainties and assumptions. Our actual results may differ
materially from those anticipated in these forward-looking
statements as a result of a number of factors, including those
described under Risk Factors and elsewhere in this
Form 10-K.

Overview

We design and manufacture gallium arsenide, or
GaAs, semiconductor components and GaAs-based subsystems used in
the transmission of voice, video and data over wireless
communication networks and systems. Our products are designed to
facilitate broadband voice and data transmission in mobile
handsets and wireless communications network infrastructure. Our
GaAs semiconductor components mainly consist of power amplifiers
for mobile handsets, which employ code division multiple access,
or CDMA, wireless technology. Our GaAs-based subsystems are used
in a variety of defense applications such as tactical aircraft,
ground based and ship board radar systems, electronic counter
measures and satellite applications.

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Since our inception in 1984, we have supplied
transceiver products to the defense industry. RF and microwave
transmission systems are well suited for military applications
because higher frequency transmissions have shorter wavelengths,
which afford greater accuracy for detection and guidance systems
and allow for small lightweight transmission equipment.

In fiscal 2003, our business continued to be
negatively affected by the overall slowdown in the economy and
overcapacity in the wireless infrastructure markets. Due to
continued weakness in the telecommunications industry, we no
longer supply subsystem products for use in the wireless
infrastructure market.

Although our business in power amplifier modules
for handsets was strong in the first half of the fiscal year,
our largest customer, Motorola, chose not to include our
semiconductors in the next generation of its handset platforms
and as a result, our handset related revenue declined in the
second half of the fiscal year. Additionally, due to political
uncertainty during the year, various defense programs on which
we participate were funded later in the year than expected. As a
result, our fiscal 2003 revenue declined to $49.4 million
from $57.1 million in fiscal 2002, and we recorded a net
loss of $17.0 million.

As a response to these conditions, we reduced
work hours, reduced headcount by 22%, closed our design office
in Lincoln, United Kingdom and impaired certain assets and
leases. We have however, increased our engineering staff in
certain areas, such as defense design, to focus on those
opportunities that we believe will allow us to return to
profitability.

In the third quarter of fiscal 2003, we purchased
Tavanza, Inc. a privately held, fabless designer of power
amplifier modules and components for cellular and wireless LAN
products. This acquisition accelerated our ability to develop
and introduce new products for the handset market.

A limited number of customers have historically
accounted for a substantial portion of our sales. Sales to our
top ten customers accounted for approximately 75% of net sales
in fiscal 2003, 76% of net sales in fiscal 2002 and 72% of net
sales in fiscal 2001. In fiscal 2003, Motorola accounted for
approximately 41% of net sales, in fiscal 2002, Motorola
accounted for 43% of net sales and in fiscal 2001, Motorola
accounted for 21% of net sales. We expect that sales of our
products to a limited number of customers will continue to
account for a high percentage of our net sales for the
foreseeable future, although Motorola has decided not to
purchase our semiconductors in the next generation of its
handset platforms. The loss of Motorola led to significantly
reduced revenues, and if we were to lose another major customer,
or if orders by any of our remaining major customers were to
otherwise decrease or be delayed, our business, operating
results and financial condition would be seriously harmed.

Our gross margins in any period are affected by a
number of different factors. Gross margins for some of our
products, primarily our semiconductor components, are strongly
impacted by production volume. The fabrication and packaging of
GaAs semiconductor components are highly complex and precise
processes. Minute impurities, defects in the masks used to print
circuits on a wafer, difficulties in the fabrication or
packaging processes, or other factors could result in lower than
expected production yields, which could adversely affect gross
margins. Gross margins for our products are also affected by
pricing pressure, market demand for lower cost products in
commercial markets and adequate production volumes. Because
gross margins on our products differ due to, among other things,
the stage of the life cycles of the products, changes in product
mix can impact gross margins in any particular time period. In
addition, in the event that we are not able to adequately
respond to pricing pressures, our current customers may
decrease, postpone or cancel current or planned orders, and we
might be unable to secure new customers. As a result, we may not
be able to achieve desired production volumes or gross margins.

In addition, average selling prices for our
products generally fluctuate from period to period due to a
number of factors, including product mix, competition and unit
volumes. The average selling prices of a specific product also
tend to decrease over that products life cycle. To offset
these decreases, we rely primarily on obtaining design and yield
improvements and corresponding cost reductions in the
manufacture of existing products.

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Critical Accounting Policies

The preparation of financial statements in
conformity with generally accepted accounting principles in the
United States requires us to make estimates and assumptions that
affect the reported amounts. Some of the estimation processes
affect current assets and liabilities and are therefore critical
in assessing our financial and operating status. These estimates
involve certain assumptions that if incorrect could create a
material adverse impact on our operations and financial position.

We review our estimates, including, but not
limited to, allowance for doubtful accounts, inventory
write-downs, and impairments of long-lived assets and
investments on a regular basis and make adjustments based on
historical experiences and existing and expected future
conditions. These evaluations are performed regularly and
adjustments are made, as information is available. We believe
that these estimates are reasonable; however, actual results
could differ from these estimates. The following paragraphs
describe the methodology we use in making some of our principal
accounting estimates, in evaluating some of the uncertainties
inherent in accounting estimates and in evaluating some of the
ways that our estimates may impact our financial condition.

Revenue Recognition.Revenue related to product sales is
recognized when the products are shipped to the customer, title
has transferred and no obligations remain. In circumstances
where the collection of payment is not probable at the time of
shipment, we defer recognition of the revenue until payment is
collected. We provide for expected returns based on past
experience as well as current customer activities. Our customers
do not have rights of return outside of products returned under
warranty and, to date, returns have not been material. Shipping
and handling costs are included in costs of goods sold for all
periods presented.

Allowance for Doubtful Accounts.We establish an allowance for doubtful
accounts for estimated losses resulting from the inability of
our customers to make required payments. We evaluate our
customers financial position and order level to determine
if an allowance should be established. Any change in the
allowance from our assessment of the likelihood of receiving
payment is reflected in the selling, general, and administrative
costs in the period the change in assessment is made.

Inventory Write-downs.We record inventory write-downs for
estimated obsolescence or unmarketable inventory. Our
write-downs for excess and obsolete inventory are primarily
based upon forecasted demand and our backlog of orders for the
product. Any inventory write-downs are reflected in cost of
sales in the period the write-downs are made.

Long-lived Assets and Strategic Investments.We regularly review our long-lived
assets and strategic investments for indicators of impairment
and assess the carrying value of the assets against market
values. When an impairment exists, we record an expense to the
extent that the carrying value exceeds fair market value in the
period the assessment is made.

We record impairment losses on long-lived assets
used in operations or expected to be disposed of when events and
circumstances indicate that the undiscounted cash flow estimated
to be generated by these assets is less than the carrying
amounts of those assets. We consider sensitivities to capacity,
utilization and technological developments in making related
assumptions.

The fair value of strategic investments is
dependent on the performance of the companies in which we have
invested, as well as the marketability of these investments. In
assessing potential impairment of these investments, we consider
these factors as well as forecasted financial performance of the
investees. If these forecasts are not met or if market
conditions change, we may assess the value of the strategic
investment to be other than temporarily impaired and accordingly
record an impairment charge.

Intangible Assets.We record intangible assets at fair
value. Intangible assets with finite useful lives are amortized
over their estimated useful life and amortization expense is
classified as part of operating expenses. To date we have only
intangible assets with finite useful lives. We regularly perform
reviews to determine if the carrying values of our intangible
assets are impaired. We look for facts, circumstances, either
internal or external, that indicate we may not recover the
carrying value of the asset. We record impairment losses based
on the amount by which the carrying amounts of such assets
exceed their fair values.

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Recent Accounting Pronouncements

In November 2002, the FASB issued Interpretation
No. 45, Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others (FIN 45). The Interpretation
will significantly change current practice in the accounting
for, and disclosure of, guarantees. The Interpretation requires
certain guarantees to be recorded at fair value, which is
different from current practice, which is generally to record a
liability only when a loss is probable and reasonably estimable,
as those terms are defined in FASB Statement No. 5,
Accounting for Contingencies. The Interpretation
also requires a guarantor to make significant new disclosures,
even when the likelihood of making any payments under the
guarantee is remote, which is another change from current
practice. We adopted the disclosure requirement of FIN 45
in the quarter ended December 31, 2002. See Note 6,
Product Warranty. We adopted FIN 45 prospectively in the
quarter ended March 31, 2003.

Fiscal year ended March 31, 2003 compared
to fiscal year ended March 31, 2002

Net sales.Net sales
for fiscal 2003 were $49.4 million compared to
$57.1 million for fiscal 2002, a decrease of 13%. The
decrease was due primarily to a combination of weak demand in
the wireless infrastructure market, which caused a decrease in
sales volume for this particular market, and the decision by our
largest customer to not purchase our semiconductor products for
use in their next generation of handset products.

Net sales of GaAs semiconductor products for
fiscal 2003 were $29.3 million compared to
$30.4 million in fiscal 2002, a decrease of 4%. The
decrease in sales was the result of a decline in sales of power
amplifier modules for handsets in the last half of fiscal 2003.
This decline was the result of Motorola, our largest customer
for the last three years, not selecting our semiconductor
products for inclusion in the next generation of its handset
platforms. We have designed several new products for this market
and are currently providing samples of these products to
customers. Until we secure design wins on new handset platforms
and these platforms go into production, however, we do not
expect to see any significant increase in semiconductor revenue.
The increase in sales to China in fiscal 2003 of $9.8 million
from zero in fiscal 2002 is the result of Motorola transferring
production of the handset, which our power amplifiers were used
in, from Mexico to China.

In addition to the foregoing, visibility of
customer demand for power amplifier modules continues to be
limited. We do not expect a strong recovery in the handset
market in this fiscal year. In addition, the handset market has
historically had seasonal and consumer trends in demand, which
can cause variation in revenues in sequential quarters.

Net sales of GaAs-based subsystems products for
fiscal 2003 were $20.1 million compared to
$26.7 million in fiscal 2002, a decrease of 25%. The
decline in sales was the result of continued weakness in the
wireless infrastructure market and flat year over year defense
business. We are not currently pursuing business in the wireless
infrastructure markets for our subsystem products and we do not
expect any significant revenue from the wireless infrastructure
market in fiscal 2004.

Gross margin.Gross
margin was 21% in fiscal 2003 and 9% in fiscal 2002. The
improvement in gross margin in fiscal 2003 was primarily the
result of lower material costs due to changes in product mix and
lower overhead expenses due to cost cutting measures undertaken
by us.

Research and development.Research and development expense for
fiscal 2003 was $10.8 million, or 22% of net sales compared
to $9.2 million, or 16% of net sales, in fiscal 2002, an
increase of 17%. The increase was primarily due to increased
levels of new product development, in large part resulting from
our acquisition of Tavanza and the hiring of additional
personnel in our engineering department. The new product
development expense was mainly for the development of new power
amplifier products for the handset market. We expect research
and development expenses to continue at approximately this level
in fiscal 2004.

Selling, general and administrative.Selling, general and administrative
expense, including costs related to shareholder actions, for
fiscal 2003 was $10.0 million, or 20% of net sales compared
to $9.6 million, or 17% of net sales, in fiscal 2002, an
increase of 4%. The increased expense was due to various
expenses related to

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overtures by Anaren, Inc. with respect to a
possible acquisition of our company and the special meeting of
shareholders that was requested by a shareholder group,
partially offset by lower commission expenses based on lower
revenue levels.


In-process research and development.We recorded in-process research and
development expenses of $4.4 million in the third quarter
of fiscal 2003, resulting from our purchase of Tavanza, which we
accounted for as an acquisition of assets (as described in Note
3 Asset Acquisition of the Consolidated Financial Statements).
Of the total purchase price of $6.1 million,
$4.4 million represented purchased in-process research and
development, which at the date of purchase had not yet reached
technical feasibility, had no alternative future use and was
therefore charged to operations. The valuation of in-process
research and development included estimating the stage of
development of each in-process research and development project
at the date of acquisition, estimating cash flows resulting from
the expected revenue generated from such projects, and
discounting the net cash flows back to their present value using
an appropriate discount rate. The discount rate used represents
a premium to our cost of capital. All of the projections used
are based on managements estimates of market size and
growth, expected trends in technology and the expected timing of
new product introductions.

With the acquisition of Tavanza, we acquired the
technology necessary to introduce 3mm × 3mm power
amplifier modules with lower cost packaging. Previous to this
product introduction, most power amplifier modules were
6mm × 6mm. The development was completed in March
2003 and we began to deliver samples of these parts to our
potential customers. Although there can be no assurance that our
customers will adopt these products for use in handsets, we
believe the smaller size and lower cost structure will provide
us with a competitive advantage. Several of our competitors have
introduced similar products in the last quarter.

Special charges.We
recorded special charges of $2.8 million in fiscal 2003 due
to Motorolas decision to transition from the model 120v
handset platform on which we are the sole source for power
amplifier modules, to the next generation of handset platforms,
for which we will not be supplying power amplifier modules. As a
result of this decrease in revenue and operations, we closed our
office in Lincoln, United Kingdom and restructured various
operations in the United States. The special charges of
$2.8 million are comprised of operating lease and fixed
asset impairments and employee termination charges.
Approximately $1.3 million of the $2.8 million total
charge is due to operating lease impairments, which were the
result of equipment covered by United States manufacturing
operating leases no longer used by us. Another $1.1 million
of the $2.8 million total charge is due to the write off of
certain Lincoln fixed assets, mainly equipment, related to the
closing of this design center. The Lincoln building, which is
owned by us, was reclassified current assets as a current asset
for resale. We expect to be able to sell the building in the
next twelve months. The remaining $0.4 million of the
$2.8 million charge is related to employee termination
charges. The total number of employees terminated in all
locations was 44.

As a result of the restructuring activities taken
in the third quarter of fiscal 2003, we expect to experience
cash savings of approximately $4.0 million annually.

The following table summarizes our special
charges activity (in thousands):

|                                 |  |             |      |           |  |             |        |       |  |   |       |   |  |   |        |  
|-------------------------------- |  | ----------- | ---- | --------- |  | ----------- | ------ | ----- |  | - | ----- | - |  | - | ------ | -
|                                 |  | Employee    |      |           |  |             |        |      
|                                 |  | Termination |      | Excess    |  | Lease       |        |      
|                                 |  | Costs       |      | Equipment |  | Impairments |        | Total
|                                 |  |             |      |           |  |             |        |      
|Fiscal 2003 Special Charges      |  | $           | 350  |           |  | $           | 1,160  |       |  | $ | 1,326 |   |  | $ | 2,836  |  
|Cash Paid                        |  |             | (227 | )         |  |             |       |       |  |   | (276  | ) |  |   | (503   | )
|Non-cash activity                |  |             |     |           |  |             | (1,160 | )     |  |   |      |   |  |   | (1,160 | )
|                                 |  |             |      |           |  |             |        |       |  |   |       |   |  |   |        |  
|Accrual balances, March 31, 2003 |  | $           | 123  |           |  | $           |       |       |  | $ | 1,050 |   |  | $ | 1,173  |  
|                                 |  |             |      |           |  |             |        |       |  |   |       |   |  |   |        |  

During the third quarter of fiscal 2002 we
experienced a decline in demand in the wireless infrastructure
and mobile handset markets, which included several semiconductor
customers reducing their previously forecasted demand.

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In response to this decline, we evaluated the
ongoing value of our semiconductor capital assets. As a result
of this analysis, we recorded an impairment charge of
$11.0 million in the third quarter of fiscal 2002 related
to certain assets for which expected future cash flows were
judged to be insufficient to cover their carrying value. Of this
charge, $10.5 million was a result of the write-down of
capital assets related to excess capacity due to un-utilized
wafer fabrication equipment and leasehold improvements
undertaken to increase the wafer fabrication area. The
$10.5 million write-down is comprised of $5.4 million
related to abandoned leasehold improvements originally intended
to expand our wafer fabrication facility and $5.1 million
related to un-utilized wafer fabrication equipment. The fair
value used to calculate the equipment impairment was obtained
from third party sources.

The remaining $0.5 million impairment was
the result of a further impairment with respect to certain
capital assets initially written down in the fourth quarter of
fiscal 2001. The capital assets were initially written down to
an estimated fair market value in the fourth quarter of fiscal
2001 due to delayed and cancelled contracts as a result of the
declining wireless market. We reassessed the fair market value
based on the current resale market for this type of equipment
during the third quarter of fiscal 2002 and adjusted the capital
assets carrying value accordingly. We reviewed these capital
assets as of March 31, 2003 and determined no indicators of
impairment were present that would indicate the current carrying
value of these capital assets was further impaired.

During the second quarter of fiscal 2003, we
received an unsolicited conditional offer from Anaren, Inc. to
purchase all of the outstanding shares of our common stock. Our
Board of Directors voted unanimously to reject the offer as not
in the best interests of our shareholders.

In the fourth quarter of fiscal 2003, a group of
shareholders (the Celeritek Shareholder Protective
Committee) called a special meeting of shareholders to
remove our Board of Directors from office and replace them with
a different slate of candidates. In the first quarter of fiscal
2004, we reached an agreement with the Celeritek Shareholder
Protective Committee. Pursuant to the agreement, the Celeritek
Shareholder Protective Committee withdrew their request for a
special meeting. In addition, we expanded the Board of Directors
from six directors to seven. The new Board is now composed of
three of the Companys directors who were directors prior
to the agreement, three directors nominated by the Celeritek
Shareholder Protective Committee and one member who is not
affiliated with either the Company or the Celeritek Shareholder
Protective Committee. Each of the Board committees also contains
one director nominated by the Celeritek Shareholder Protective
Committee. The Board also created a strategy committee to
explore all strategic alternatives available to us. Under the
terms of the settlement, we have terminated our shareholder
rights plan.

We have incurred expenses for legal and
investment advisors of $1.3 million for the fiscal year
ended March 31, 2003 relating to both the Anaren offer and
the proxy contest, which have been reported in loss from
operations under the caption Costs related to shareholder
actions. Although our Board voted unanimously to reject
the Anaren offer and we have reached an agreement with the
Celeritek Shareholder Protective Committee, we incurred
additional expenses in the first fiscal quarter of 2004 of
approximately $2.0 million related to these actions for
legal and investment advisory services, prior to the agreement.

Amortization of intangibles.Amortization of intangibles was
$0.2 million during fiscal 2003. The intangible assets were
acquired as part of the purchase of Tavanzas assets during
the third quarter of fiscal 2003. Estimated amortization expense
for fiscal 2004 through fiscal 2007 is $0.5 million,
$0.3 million, $0.06 million, and $0.03 million,
respectively. We do not estimate any amortization of intangibles
in fiscal 2008.

Impairment of short-term and strategic
investments.During fiscal 2003 we
recorded an impairment charges of approximately
$0.4 million and during fiscal 2002, we recorded an
impairment charge of approximately $1.7 million against our
strategic investment in the Taiwanese foundry, which was deemed,
in those respective periods, to have an other than temporary
decline in value.

In order to determine the impairment charges we
reviewed updated financial statements and projections from the
foundry. Significant decreases in actual and expected revenues,
net income and cash balances were observed as compared with the
original projections. In addition, the foundry has few current
customers. With

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this backdrop, combined with the downturn in the
semiconductor industry and our excess semiconductor capacity, we
determined that there was a decline in the value of the foundry
investment that was other than temporary. The impairment charge
was determined after analysis of changes in the market values of
public companies in the GaAs market from December 2000 through
March 2003.


Interest income and other, net.Interest income and other, net, for
fiscal 2003 was $1.5 million compared to $3.5 million
in fiscal 2002. The decrease was primarily due to lower interest
income, which was a result of lower interest rates and to a much
lesser extent, lower cash and short-term investment balances.

Provision (benefit) for income taxes.For the fiscal year ended
March 31, 2003, we recorded an income tax provision of
approximately $0.14 million that represented foreign taxes
incurred that do not currently provide a benefit in the United
States. For the fiscal year ended March 31, 2002, we
recorded an income tax benefit of $0.18 million that
consisted of $0.24 million of federal refundable taxes
attributable to the recent law change allowing companies to
carryback net operating losses five years offset by
$0.06 million of foreign taxes incurred that do not
currently provide a benefit in the United States.

Fiscal year ended March 31, 2002 compared
to fiscal year ended March 31, 2001

Net sales.Net sales
for fiscal 2002 were $57.1 million compared to $85.1
million for fiscal 2001, a decrease of 33%. The decrease was due
to weak demand in the wireless infrastructure market, which has
caused a decrease in sales volume for this particular market,
partially offset by increased sales of our GaAs semiconductor
products for the mobile handset market and GaAs-based subsystems
for the defense electronics market.

Net sales of GaAs semiconductor products for
fiscal 2002 were $30.4 million compared to $42.0 million in
fiscal 2001, a decrease of 28%. The decrease in sales was the
result of a decline of 71% from $26.5 million in fiscal
2001 to $7.8 million in fiscal 2002 for wireless
infrastructure products partially offset by an increase of 46%
from $15.5 million in fiscal 2001 to $22.6 million in
fiscal 2002 for our products for the mobile handset market.

Net sales of GaAs-based subsystems products for
fiscal 2002 were $26.7 million compared to $43.1 million in
fiscal 2001, a decrease of 38%. The decrease in sales was the
result of a decline of 79% from $29.3 million in fiscal
2001 to $6.2 million in fiscal 2002 for wireless
infrastructure products, partially offset by an increase of 49%
from $13.8 million in fiscal 2001 to $20.5 million in
fiscal 2002 of our defense electronics products. While demand in
the defense market for our type of product has been fairly
stable, we were able to increase our defense related revenue by
refocusing our manufacturing and marketing capacity on defense
products.

Gross margin.Gross
margin was consistent at 9% in fiscal 2002 and fiscal 2001.
Improvements in gross margin from improved yields and a
favorable shift in product mix were offset by lower factory
utilization. Newly introduced semiconductor products tend to
have lower yields and, consequently, lower gross margin. The mix
of new and more mature products in any quarter can cause
fluctuations in gross margin.

Research and development.Research and development expense for
fiscal 2002 was $9.2 million, or 16% of net sales compared
to $10.2 million, or 12% of net sales, in fiscal 2001, a
decrease of 10%. The dollar decrease was primarily due to a
reduction of engineering headcount and related expenses for
product development efforts for the wireless infrastructure
market partially offset by increased investment in semiconductor
development costs.

Selling, general and administrative.Selling, general and administrative
expense for fiscal 2002 was $9.6 million, or 17% of net
sales compared to $11.8 million, or 14% of net sales, in fiscal
2001, a decrease of 19%. The decrease was primarily due to
salary reductions, reduced headcount and lower selling costs due
to the decline in business activity. In response to market
conditions, including significant order cancellations in the
fourth quarter of 2001 in the wireless infrastructure market, we
increased our allowance for doubtful accounts in response to
heightened collectability concerns.

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Special charges.The
$11.0 million special charge during the third quarter of
fiscal 2002 was a capital asset impairment incurred in response
to a decline in the wireless infrastructure and mobile handset
markets, which included several semiconductor customers reducing
their forecasted demand in the third quarter of fiscal 2002.

In response to the decline, we evaluated the
ongoing value of our semiconductor capital assets. As a result
of this analysis, we recorded an impairment charge of
$11.0 million in the third quarter of fiscal 2002 related
to certain assets for which expected future cash flows are
insufficient to cover their carrying value. Of this charge,
$10.5 million was a result of the write-down of capital
assets related to excess capacity due to un-utilized wafer
fabrication equipment and leasehold improvements undertaken to
increase the wafer fabrication area. The $10.5 million
write-down is comprised of $5.4 million related to abandoned
leasehold improvements originally intended to expand our wafer
fabrication facility and $5.1 million related to
un-utilized wafer fabrication equipment. The fair value used to
calculate the equipment impairment was obtained from third party
sources.

The remaining $0.5 million impairment was
the result of a further impairment with respect to certain
capital assets initially written down in the fourth quarter of
fiscal 2001 because we determined that any recovery on these
assets was not probable given the excess of this type of
equipment in the market place. During the fourth quarter of
fiscal 2001, we recorded an initial impairment charge of
approximately $1.3 million for certain capital assets used
in the subsystem production area due to delayed and cancelled
contracts. Assets for which there was no longer any productive
use were written down to net realizable value.

Impairment of short-term and strategic
investments.During the fourth quarter
of fiscal 2002, we recorded impairment charges of approximately
$1.7 million against our strategic investment in the Taiwanese
foundry, which was deemed to have an other than temporary
decline in value.

During the fourth quarter of fiscal 2002, we
reviewed updated financial statements and projections from the
foundry. Significant decreases in actual and expected revenues,
net income and cash balances were observed as compared with the
original projections. In addition, the foundry has no current
customers. With this backdrop, combined with the downturn in the
semiconductor industry and our excess semiconductor capacity, we
determined that there was a decline in the value of the foundry
that was other than temporary. The impairment charge was
determined after analysis of changes in the market values of
public companies in the GaAs market from December 2000 through
March 2002. An additional write-down was taken on the fact that
the foundry is a private company, which is inherently less
liquid.

During the fourth quarter of fiscal 2001 we
recorded an impairment charge of $0.5 million for PG&E
bonds, held in our short-term investments, which we deemed to
have an other than temporary decline in market value because
PG&E had filed for chapter 11 bankruptcy protection.
The PG&E bonds were subsequently sold in fiscal 2002 at a
loss.

Interest income (expense) and other, net.Interest income (expense) and
other, net, for fiscal 2002 was $3.5 million compared to
$5.7 million in fiscal 2001. The decrease was primarily due
to lower interest income, which was a result of lower interest
rates and to a lesser extent, lower cash and short-term
investment balances.

Provision (benefit) for income taxes.For the year ended March 31, 2002
we recorded an income tax benefit of $0.18 million that
consisted of $0.24 million of federal refundable taxes
attributable to a change in tax law allowing companies to
carryback net operating losses five years offset by
$0.06 million of foreign taxes incurred that do not
currently provide a benefit in the United States. In fiscal
2001, we recorded an income tax provision of $0.13 million
to reflect federal alternative minimum taxes.

Liquidity and Capital Resources

We have funded our operations to date primarily
through cash flows from operations and sales of equity
securities. As of March 31, 2003, we had $28.9 million
in cash and cash equivalents, $66.7 million in short-term
investments and $92.3 million in working capital.

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Net cash provided by operating activities was
$3.8 million in fiscal 2003, which was primarily the result
of decreases in accounts receivable, inventories and prepaid and
other current assets as well as increases in accrued payroll and
accrued liabilities. Net cash used in operating activities was
$3.6 million in fiscal 2002 and $5.9 million in fiscal
2001. Net cash used in operating activities in fiscal 2002 was
primarily due to the decrease in accounts payable, accrued
payroll and accrued liabilities offset by decreases in accounts
receivable and inventories. Net cash used in operating
activities in fiscal 2001 was due to increases in accounts
receivable, inventories and other current assets offset by
increases in accounts payable, accrued payroll and accrued
liabilities.

Net cash provided by investing activities was
$19.5 million in fiscal 2003 and $5.2 million in
fiscal 2002 compared to net cash used in investing activities of
$107.2 million in fiscal 2001. Net cash provided by
investing activities in fiscal 2003 is the result of the sale
and maturities of short-term investments of $156.1 million
offset by the purchase of short-term investments of
$132.1 million, the purchase of property, plant and
equipment of $2.6 million and the purchase of strategic
investments of $2.0 million. Net cash provided by investing
activities in fiscal 2002 is the result of the sale and maturity
of short-term investments of approximately $151.9 million
offset by the purchase of short-term investments of
$139.5 million and the purchase of strategic investments of
approximately $0.5 million and the purchase of property and
equipment of approximately $6.7 million. Net cash used in
investing activities in fiscal 2001 is the result of the
purchase of short-term investments of $177.6 million, the
purchase of property, plant and equipment of $19.0 million
and the purchase of strategic investments of $2.4 million
offset by the sale and maturities of short-term investments of
$91.8 million.

Net cash used by financing activities was
$2.3 million in fiscal 2003, which was the result of
principal payments of long-term debt of $2.3 million and
principal payments on capital leases of $0.7 million offset
by proceeds from the exercise of stock options and employee
stock purchase plan of $0.7 million. Net cash provided by
financing activities was $2.9 million in fiscal 2002 and
$107.9 million in fiscal 2001. Net cash provided by
financing activities during fiscal 2002 was due primarily to
borrowings on long-term debt of approximately $3.7 million
and net proceeds from the exercise of stock options and employee
stock purchase plan of approximately $1.8 million reduced
by payments on long-term debt of $1.8 million and payments
on capital leases of $0.8 million. Net cash provided by
investing activities in fiscal 2001 was the result of raising
approximately $100.3 million in a secondary public offering
of common stock in June of 2001 plus borrowings on long-term
debt of $7.2 million and proceeds from the exercise of
stock options and employee stock purchase plan of
$1.8 million offset by payments on long-term debt of
$1.1 million and payments on capital leases of
$0.3 million.

As of March 31, 2003, we had
$0.5 million in outstanding letters of credit, which are
secured by certificates of deposits.

Given our cash position, we currently do not have
a line of credit. We have various equipment notes outstanding
with other lenders, which are secured by the equipment. Several
of these notes have covenants attached pertaining to liquidity
levels and minimum tangible net worth. As of March 31, 2003
we were in compliance with all covenants.

We believe that our current cash resources and
borrowings available from our equipment financing sources should
be sufficient to meet our liquidity requirements through at
least the next twelve months.

Commitments

We do not have any special purpose entities. We
have no commercial commitments with related parties, except for
employee loans. We have outstanding loans to certain officers
and employees totaling approximately $1.5 million at
March 31, 2003. The notes are relocation loans
collateralized by certain real property assets, bear no interest
and have maturities through 2019. The principal will be repaid
at various dates. If an employee ceases being employed by us,
the principal outstanding will be due and payable within
90 days.

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We have contractual obligations in the form of
operating and capital leases, debt and purchase order
commitments. The following table sets forth our future
contractual obligations as of March 31, 2003 (in thousands):

|                                |  |             |        |      |  |      |       |      |  |      |       |      |  |            |       |  |  |   |    |  |  |   |    |  |  |   |     | 
|------------------------------- |  | ----------- | ------ | ---- |  | ---- | ----- | ---- |  | ---- | ----- | ---- |  | ---------- | ----- |  |  | - | -- |  |  | - | -- |  |  | - | --- | 
|                                |  |            
|                                |  | Fiscal Year
|                                |  |            
|Contractual Obligations         |  | Total       |        | 2004 |  | 2005 |       | 2006 |  | 2007 |       | 2008 |  | Thereafter
|                                |  |             |        |      |  |      |       |      |  |      |       |      |  |           
|Long-term debt obligations      |  | $           | 5,107  |      |  | $    | 2,883 |      |  | $    | 1,922 |      |  | $          | 302   |  |  | $ |   |  |  | $ |   |  |  | $ |    | 
|Capital lease obligations       |  |             | 1,529  |      |  |      | 686   |      |  |      | 565   |      |  |            | 279   |  |  |   |   |  |  |   |   |  |  |   |    | 
|Operating lease obligations     |  |             | 7,871  |      |  |      | 3,880 |      |  |      | 2,572 |      |  |            | 775   |  |  |   | 89 |  |  |   | 56 |  |  |   | 499 | 
|Open purchase order commitments |  |             | 1,448  |      |  |      | 1,448 |      |  |      |      |      |  |            |      |  |  |   |   |  |  |   |   |  |  |   |    | 
|                                |  |             |        |      |  |      |       |      |  |      |       |      |  |            |       |  |  |   |    |  |  |   |    |  |  |   |     | 
|Total                           |  | $           | 15,957 |      |  | $    | 8,898 |      |  | $    | 5,059 |      |  | $          | 1,356 |  |  | $ | 89 |  |  | $ | 56 |  |  | $ | 499 | 
|                                |  |             |        |      |  |      |       |      |  |      |       |      |  |            |       |  |  |   |    |  |  |   |    |  |  |   |     | 

The table records cash obligations, including
future interest repayments, and includes operating lease
obligations for equipment that no longer has economic value for
us, for which a special charge of $1.3 million was recorded
in the third quarter of fiscal 2003 income statement.

In addition, we have contractual commitments as
of March 31, 2003, relating to our engagement of financial
advisory firms pursuant to which we will be required to incur
aggregate minimum future costs of approximately
$1.75 million through November 2004, of which
$0.9 million has been expensed in the first quarter fiscal
2004. However, as is customary for contracts of this type, these
commitments may increase above the minimum depending on the
value of any strategic transaction we may complete, or the value
of our common stock in the event that there is no strategic
transaction.

We have outstanding letters of credit of
approximately $0.5 million as security for capital leases
for equipment.

Related Party Transactions

We have outstanding loans totaling
$1.5 million at March 31, 2003 and $1.6 million
at March 31, 2002 to certain officers and employees. The
notes are relocation loans collateralized by certain real
property assets, bear no interest and have maturities through
2019. The principal will be repaid at various dates. If an
employee ceases being employed by us, the principal outstanding
will be due and payable within 90 days. During fiscal 2001,
loans were granted to officers and employees totaling
approximately $1.8 million. No loans were granted to
officers and employees during fiscal 2002 or 2003. During fiscal
2001, 2002 and 2003 cash in the amount of $0.02 million,
$0.3 million and $0.1 million, respectively, was
received for the outstanding loans to officers and employees.

In November 2002, we entered into change of
control severance agreements with each of Tamer Husseini and
Margaret Smith. Pursuant to these agreements, if either
Mr. Husseini or Ms. Smith is terminated as a result of
an involuntary termination within 24 months after a change
in control or within three months on or before a change in
control, then he or she shall be entitled to certain benefits as
set forth in the agreements, which are listed in the Exhibit
Table hereto. The change in the composition of our Board as a
result of our agreement with the Celeritek Shareholder
Protective Committee, as described above, resulted in a change
of control for the purpose of these agreements.

During the fourth quarter of fiscal 2003, a
portion of the impaired Lincoln, United Kingdom equipment was
sold to a company founded by former Lincoln management for the
fair market value of $0.3 million. Multiple quotes were
received from third parties to determine the sale price of the
equipment. In connection with the sale of equipment, we received
an unsecured note bearing interest at 5.25% per annum for the
entire amount of the proceeds. After assessing the
collectability of the note, which is payable in two lump sums
over 24 months, we decided to record the gain on disposal
as cash is received.

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RISK FACTORS

You should carefully consider the risks
described below. The risks and uncertainties described below are
not the only ones facing us. Additional risks and uncertainties
not presently known to us or that we currently deem immaterial
may also impair our business operations. If any of the following
risks actually occur, our business, results of operations or
cash flows could be adversely affected. In those cases, the
trading price of our common stock could decline, and you may
lose all or part of your investment.

We depend on a small number of original
equipment manufacturers as customers. If we fail to secure
design wins from new OEMs who have not made recent purchases
from us or who have never purchased from us, or if we lose one
or more of our significant customers, or if purchases by any one
of our key customers decrease, our business will be
harmed.

We expect that sales to a limited number of
customers will account for a large percentage of our net sales
in the future and will be a very important component in our
plans for returning to profitability. In particular, we are
currently marketing our products to large OEMs in the wireless
handset market to whom we have not in the past sold our power
amplifier products. If we fail to secure design wins from one or
more of these large OEMs, and if we are unable to secure
significant sales to major new OEM customers, our revenues will
be less than anticipated and we will likely not be profitable.

In addition, if we lose any of our existing major
customers, our operating results and business would be harmed.
In fiscal year 2003, sales to our top ten customers accounted
for approximately 75% of our net sales, with Motorola making up
approximately 41% of those net sales. In fiscal year 2002, sales
to our top ten customers accounted for approximately 76% of our
net sales, with Motorola making up approximately 43% of those
net sales. We have been a sole source supplier of power
amplifier modules to Motorola for its model 120v handset
platform. However, Motorola is currently transitioning to new
platforms, and it selected a sole source supplier other than us
for its new platforms. Although we continue to be the sole
source for power amplifier modules for Motorolas model
120v platform, third and fourth quarter fiscal 2003 sales have
declined significantly as a result of this transition. We expect
that the effect on our revenues will continue into the next
several quarters. Although we intend to compete for
Motorolas business in the future, there can be no
assurance that we will be successful. If we are unable to sell
our products to Motorola, our revenues may decline and our
business will be harmed. Although Motorola is not currently one
of our largest customers, we expect that sales of our products
to a limited number of customers will continue to account for a
high percentage of our sales in the foreseeable future. If we
were to lose another major customer, or if orders by any of our
remaining major customers were to otherwise decrease or be
delayed, our business, operating results and financial condition
would be seriously harmed.

Because many of our expenses are fixed, we
will not achieve profitability until our revenues significantly
increase.

Our business requires us to invest heavily in
manufacturing equipment and related support infrastructure that
we must pay for regardless of our level of sales. To support our
manufacturing capacity we also incur costs for maintenance and
repairs and employ personnel for manufacturing and process
engineering functions. These expenses, along with depreciation
costs, are fixed and do not vary greatly, if at all, when our
net sales decrease. In addition, the lead time for developing
and manufacturing our products often requires us to invest in
manufacturing capacity in anticipation of future demand. We
committed to significant expenditures in capital equipment and
facilities in fiscal 2001 based on customer demand. The recent
decline in market demand has resulted in infrastructure costs in
excess of current needs and has resulted in lower earnings. We
are relying on increased sales to large OEMs in the wireless
handset market in order to realize an increase in revenues. If
these sales do not materialize, and if our revenues do not
significantly increase to a level commensurate with our
installed capacity, we will be unable to achieve profitability.

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We need to keep pace with rapid product and
process development and technological changes to be
competitive.

We compete in markets with rapidly changing
technologies, evolving industry standards and continuous
improvements in products. To be competitive we will need to
continually improve our products and keep abreast of new
technology. For example, our ability to grow will depend
substantially on our ability to continue to apply our GaAs
semiconductor components expertise to existing and emerging
wireless communications markets. New process technologies could
be developed that have characteristics that are superior to our
current processes. If we are unable to develop competitive
processes or design products using new technologies, our
business and operating results will suffer. We cannot assure you
that we will be able to respond to technological advances,
changes in customer requirements or changes in regulatory
requirements or industry standards. Any significant delays in
our development, introduction or shipment of products could
seriously harm our business, operating results and financial
condition.

Our operating results have fluctuated
significantly in the past, and we expect these fluctuations to
continue. If our results are worse than expected, our stock
price could fall.

Our operating results have fluctuated in the
past, and may continue to fluctuate in the future. These
fluctuations may cause our stock price to decline. Some of the
factors that may cause our operating results to fluctuate
include:



| |   |                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------
| |  | the timing, cancellation or delay of customer
    orders or shipments, particularly from our largest customers;
|
| |  | fluctuating demand from our defense customers;                                                                 
|
| |  | the timing of our introduction of new products
    and the introduction of new products by our competitors;    
|
| |  | variations in average selling prices of our
    products;                                                      
|
| |  | the mix of products that we sell;                                                                              
|
| |  | our ability to secure manufacturing capacity and
    effectively utilize the capacity;                         
|
| |  | the availability and cost of components;                                                                       
|
| |  | GaAs semiconductor component and GaAs-based
    subsystem failures and associated support costs;               
|
| |  | variations in our manufacturing yields related to
    our GaAs semiconductor components;                       
|
| |  | market acceptance of our products; and                                                                         
|
| |  | changes in our inventory levels.                                                                               

Any unfavorable changes in the factors listed
above or general industry and global economic conditions could
significantly harm our business, operating results and financial
condition. For example, during the third quarter of fiscal 2003,
Motorola, our largest customer, began transitioning to new
handset platforms for which we were not the selected supplier of
power amplifier modules and our sales were negatively impacted.
We cannot assure you that we will be able to achieve or maintain
quarterly profitability in the future.

Due to fluctuations in our net sales and
operating expenses, we believe that period to period comparisons
of our results of operations are not good indications of our
future performance. It is possible that in some future quarter
or quarters, our operating results will be below the
expectations of securities analysts or investors. In that case,
our stock price could decline.

Any acquisitions we make could disrupt our
business and harm our financial condition.

In October 2002, we acquired the assets of
Tavanza, and we may make additional investments in or acquire
complementary companies, products or technologies. These
acquisitions involve numerous risks, including problems
combining or integrating the purchased operations, technologies
or products; unanticipated

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costs; diversion of managements attention
from our core business; adverse effects on existing business
relationships with suppliers and customers; risks associated
with entering markets in which we have no or limited prior
experience; and potential loss of key employees, particularly
those of the acquired organizations. In addition, in the event
of any such investments or acquisitions, we could issue stock
that would dilute our current shareholders percentage
ownership, incur debt, assume liabilities, incur amortization or
impairment expenses related to goodwill and other intangible
assets, or incur large and immediate write-offs. We cannot
assure you that we will be able to successfully integrate any
businesses, products, technologies or personnel that we might
acquire in the future. For example, with the acquisition of
Tavanza, we acquired the technology necessary to introduce
3mm × 3mm power amplifier modules with lower cost
packaging. Previous to this product introduction, most power
amplifier modules were 6mm × 6mm. Although we
have completed development of the 3mm × 3mm power
amplifier modules and have begun to deliver samples of these
parts to our potential customers, there can be no assurance that
our customers will adopt these products for use in handsets. In
addition, several of our competitors have introduced similar
products in the last quarter. If our customers do not purchase
our new power amplifier modules, our development and integration
efforts will have been unsuccessful, and our business may suffer.


We are exposed to general economic, market
and, additionally, industry conditions.

Our business is subject to the effects of general
economic conditions in the United States and globally, and, in
particular, market conditions in the wireless communications
industry. In recent quarters, our operating results have been
adversely affected as a result of unfavorable economic
conditions and reduced capital spending in the United States,
Europe and Asia. In particular, sales to customers who supply
equipment to service providers of voice and data services have
been adversely affected due to significant decline in demand in
the wireless infrastructure markets. Additionally, industry
forecast of sales of handsets for calendar 2003 continue to show
no to low growth expectations with rising concerns regarding
excess inventory levels. If the economic conditions in the
United States and globally do not improve, if we experience a
worsening in the global economic slowdown or if the wireless
infrastructure markets do not recover, we may continue to
experience material adverse impacts on our business, operating
results and financial condition.

We expect our products to experience rapidly
declining average sales prices, and if we do not decrease costs
or develop new or enhanced products, our margins will
suffer.

In each of the markets where we compete, average
sales prices of established products have been significantly
declining, and we anticipate that prices will continue to
decline and negatively impact our gross profit margins. There is
currently over capacity in the markets we serve, which could
lead to additional pricing pressure as our competitors seek to
improve their asset utilization. Accordingly, to remain
competitive, we believe that we must continue to develop product
enhancements and new technologies that will either slow the
price declines of our products or reduce the cost of producing
and delivering our products. If we fail to do so, our results of
operations would be seriously harmed.

Our sales to international customers expose us
to risks that may harm our business.

During fiscal 2003, sales to international
customers accounted for 67% of our net sales. During fiscal
2002, sales to international customers accounted for 31% of our
net sales. We expect that international sales will continue to
account for a significant portion of our net sales in the
future. In addition, many of our domestic customers sell their
products outside of the United States. These sales expose us to
a number of inherent risks, including:



| |   |                                                                           
| | - | --------------------------------------------------------------------------
| |  | the need for export licenses;                                             
|
| |  | unexpected changes in regulatory requirements;                            
|
| |  | tariffs and other potential trade barriers and
    restrictions;          
|
| |  | reduced protection for intellectual property
    rights in some countries;
|
| |  | fluctuations in foreign currency exchange rates;                          

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| |   |                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------
| |  | the burdens of complying with a variety of
    foreign laws;                                           
|
| |  | the impact of recessionary or inflationary
    environments in economies outside the United States; and
|
| |  | generally longer accounts receivable collection
    periods.                                           

We are also subject to general geopolitical
risks, such as political and economic instability and changes in
diplomatic and trade relationships, in connection with our
international operations. Potential markets for our products
exist in developing countries that may deploy wireless
communications networks. These countries may decline to
construct wireless communications networks, experience delays in
the construction of these networks or use the products of one of
our competitors to construct their networks. As a result, any
demand for our products in these countries will be similarly
limited or delayed. If we experience significant disruptions to
our international sales, our business, operating results and
financial condition could be harmed.

Additionally, all of our circuit assembly and
test vendors are located outside of the United States.
Consequently, our ability to secure products from these vendors
is subject to most of the same risks described in the above
paragraphs, including: unexpected changes in regulatory
requirements; tariffs and other potential trade barriers and
restrictions; reduced protection for intellectual property
rights in some countries; fluctuations in foreign currency
exchange rates; the burdens of complying with a variety of
foreign laws; and general geopolitical risks. In the event that
any of our international vendors is unable to fulfill our
requirements in a timely manner, we may experience an
interruption in production until we locate alternative sources
of supply. If we encounter shortages in component supply, we may
be forced to adjust our product designs and production
schedules. The failure of one or more of our key suppliers or
vendors to fulfill our orders in a timely manner and with
acceptable quality and yields could cause us to not meet our
contractual obligations, could damage our customer relationships
(including relationships with major customers) and could harm
our business.

Our expected sales to customers in South Korea
may be less than anticipated.

Over the past year, we have increased our focus
with respect to sales of our power amplifier modules to
customers in South Korea, and in particular, Samsung. Among
other things, we recently opened a new sales and technical
support office in Seoul, South Korea, and we have invested
approximately $2.5 million in a South Korean handset design
company. During the third quarter of fiscal 2003, we loaned the
South Korean handset design company $0.5 million, which was
repaid during the fourth quarter of fiscal 2003. However, we are
subject to a number of risks and uncertainties with respect to
our desire to increase our sales to South Korea customers, and
there is no assurance that we will be successful in doing so.
These risks include, but are not limited to: the recent
political uncertainty with respect to North Koreas
announcements about its nuclear program; competition from South
Korean companies; unexpected or changing product specifications
by South Korean customers; uncertainties in the development of
the South Korean wireless communications networks; unexpected
changes in regulatory requirements; and tariffs and other
potential trade barriers and restrictions, perhaps as a result
of the political situation between the United States and North
Korea. If our expected sales do not materialize, our revenues
will be less than anticipated, and we may be unable to quickly
reduce the costs attendant to our Korean operations. In such a
case, our results of operations would be seriously harmed.

Uncertainties resulting from the unsolicited
offer from Anaren and the recent proxy contest may adversely
affect our business and may hamper our ability to retain key
personnel.

During the second quarter of fiscal 2003, we
received an unsolicited conditional offer from Anaren to
purchase all of the outstanding shares of our common stock. In
addition, in the fourth quarter of fiscal 2003, a group of
shareholders (the Celeritek Shareholder Protective
Committee) called a special meeting to remove our Board of
Directors from office and replace them with a different slate of
candidates. Although our Board unanimously voted to reject
Anarens offer as not in the best interest of our
shareholders, and we have reached an agreement with the
Celeritek Shareholder Protective Committee as described above,
uncertainties resulting from the proxy contest and future
unsolicited acquisition offers may adversely affect our business
and hamper our ability to retain our executives or key personnel
in our engineering and other departments. If we fail to retain
executives or key engineering personnel, our ability to develop
products, especially new products

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such as the recently introduced
3mm × 3mm power amplifier modules, will be harmed
and our revenues will likely decline. In addition, we anticipate
that we will incur additional expenses of at least
$2.0 million over the next quarter for legal and advisory
services related to the proxy contest. However, expenses could
be greater than anticipated, which would negatively affect our
earnings.


Given our presence in China and other parts of
Asia, the outbreak of SARS may negatively impact our operating
results.

The recent outbreak of severe acute respiratory
syndrome (SARS), a disease of unknown etiology that has caused
numerous deaths in Asia, North America and Europe, could have a
negative impact on our operations. In particular, we have both
customers, sales personnel and third party suppliers located in
the affected areas of Asia, and therefore, our normal operating
processes could be hindered by a number of SARS-related factors,
including, but not limited to:



| |   |                                                                            
| | - | ---------------------------------------------------------------------------
| |  | disruptions to our sales personnel and process in
    affected locations;  
|
| |  | disruptions at our third-party suppliers located
    in affected locations;
|
| |  | disruptions in our customers operations in
    affected locations; and    
|
| |  | reduced travel between ourselves, customers, and
    suppliers.            

If the number of cases continues to rise or
spread to other areas, our sales and operating results could be
harmed.

Our backlog may not result in sales.

Our backlog primarily represents signed purchase
orders for products due to ship within the next year. As of
March 31, 2003, our backlog was approximately
$10.4 million, of which 88% was from defense customers and
12% was from commercial customers. Backlog is not necessarily
indicative of future sales as our customers may cancel or defer
orders without penalty. Nevertheless, we make a number of
management decisions based on our backlog, including purchasing
materials, hiring personnel and other matters that may increase
our production capabilities and costs. Cancellation of pending
purchase orders or termination or reduction of purchase orders
in progress could significantly harm our business. We do not
believe that our backlog as of any particular date is
representative of actual sales for any succeeding period, and we
do not know whether our current order backlog will necessarily
lead to sales in any future period.

Generally, purchase orders in our backlog are
subject to cancellation without penalty at the option of the
customer, and from time to time we have experienced cancellation
of orders in backlog. In fact, in the fourth quarter of fiscal
2001 and in fiscal 2002, a significant portion of our backlog
was cancelled due to changing market conditions. Certain of our
customers in the wireless infrastructure market delayed and
cancelled long-standing contracts in response to declining
market demand.

The variability of our manufacturing yields
may affect our gross margins.

The success of our business depends largely on
our ability to make our products efficiently through a
manufacturing process that results in a large number of usable
products, or yields, from any particular production run. In the
past we have experienced significant delays in our product
shipments due to lower than expected production yields. Due to
the rigid technical requirements for our products and
manufacturing processes, our production yields can be negatively
affected for a variety of reasons, some of which are beyond our
control. For instance, yields may be reduced by:



| |   |                                                                             
| | - | ----------------------------------------------------------------------------
| |  | lack of experience in producing a new product;                              
|
| |  | defects in masks that are used to transfer
    circuit patterns onto wafers;
|
| |  | impurities in materials used;                                               

31



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| |   |                                                        
| | - | -------------------------------------------------------
| |  | contamination of the manufacturing environment;
    and
|
| |  | equipment failures.                                    

Our manufacturing yields also vary significantly
among our products due to product complexity and the depth of
our experience in manufacturing a particular product. For
example, in the fourth quarter of fiscal 2001, we began volume
production of a new product, HBT modules. We experienced
lower than expected yields and start-up quality issues with the
subcontractor who is assembling the modules. These issues
resulted in lower gross margins than expected. In addition, with
the acquisition of Tavanza, we acquired the technology necessary
to introduce 3mm × 3mm power amplifier modules
with lower cost packaging. Although we have completed
development of the 3mm × 3mm power amplifier
modules and have begun to deliver samples of these parts to our
potential customers, we have limited experience with these
modules. Consequently, our production yields may be lower than
expected, and we cannot assure you that we will not experience
problems with our production yields in the future. Decreases in
our yields can result in substantially higher costs for our
products. If we cannot maintain acceptable yields in the future,
our business, operating results and financial condition will
suffer.

Decreases in our customers sales volumes
could result in decreases in our sales volumes.

A significant number of our products are designed
to address the specific needs of individual original equipment
manufacturer customers. Where our products are designed into an
original equipment manufacturers product, our sales
volumes depend upon the commercial success of the original
equipment manufacturers product. Sales of our major
customers products can vary significantly from quarter to
quarter. Accordingly, our sales could be adversely affected by a
reduction in demand for mobile handsets and for wireless
subsystem infrastructure equipment. Our operating results have
been significantly harmed in the past by the failure of
anticipated orders to be realized and by deferrals or
cancellations of orders as a result of changes in demand for our
customers products. For example, in 2001, our operating
results were adversely affected when major customers experienced
a reduction in anticipated demand for wireless communications
networks. Additionally, industry forecasts of sales of handsets
for calendar 2003 continue to show low to moderate growth
expectations.

We depend on single and limited sources for
key components. If we lose one or more of these sources,
delivery of our products could be delayed or prevented and our
business could suffer.

We acquire some of the components for our
existing products from single sources, and some of the other
components for our products are presently available or acquired
only from a limited number of suppliers. Our single-sourced
components include substrates, millimeter wave components and
semiconductor packages. Some of these components are critical to
the products we sell to our major customers. In the event that
any of these suppliers are unable to fulfill our requirements in
a timely manner, we may experience an interruption in production
until we locate alternative sources of supply. If we encounter
shortages in component supply, we may be forced to adjust our
product designs and production schedules. The failure of one or
more of our key suppliers or vendors to fulfill our orders in a
timely manner and with acceptable quality and yields could cause
us to not meet our contractual obligations, could damage our
customer relationships (including relationships with major
customers) and could harm our business. For example, a
single-sourced supplier of substrates ceased operations at the
end of the second quarter of fiscal 2002, but we were able to
find a replacement supplier. If we had not been able to find
another supplier, the delivery of our products to our customers,
including our major customers, would have been delayed and our
relationship with such customers would have been harmed and our
business would have suffered.

Intense competition in our industry could
result in the loss of customers or an inability to attract new
customers.

We compete in an intensely competitive industry
and we expect our competition to increase. A number of companies
produce products that compete with ours or could enter into
competition with us. These competitors, or potential future
competitors, include ANADIGICS, CTT, JCA Technology, Miteq,
REMEC,

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RF Micro Devices, Skyworks Solutions and
TriQuint Semiconductor. In addition, a number of smaller
companies may introduce competing products. Many of our current
and potential competitors have significantly greater financial,
technical, manufacturing and marketing resources than we have
and have achieved market acceptance of their existing
technologies. Our ability to compete successfully depends upon a
number of factors, including:




| |   |                                                                                                   
| | - | --------------------------------------------------------------------------------------------------
| |  | the willingness of our customers to incorporate
    our products into their products;             
|
| |  | product quality, performance and price;                                                           
|
| |  | the effectiveness of our sales and marketing
    personnel;                                       
|
| |  | the ability to rapidly develop new products with
    desirable features;                          
|
| |  | the ability to produce and deliver products that
    meet our customers requested shipment dates;
|
| |  | the capability to evolve as industry standards
    change; and                                    
|
| |  | the number and nature of our competitors.                                                         

We cannot assure you that we will be able to
compete successfully with our existing or new competitors. If we
are unable to compete successfully in the future, our business,
operating results and financial condition will be harmed.

Our business will be harmed if potential
customers do not use gallium arsenide components.

Silicon semiconductor technologies are the
dominant process technologies for integrated circuits and the
performance of silicon integrated circuits continues to improve.
Our prospective customers may be systems designers and
manufacturers who are evaluating these silicon technologies and,
in particular, silicon germanium versus gallium arsenide
integrated circuits for use in their next generation high
performance systems. Customers may be reluctant to adopt our
gallium arsenide products because of:



| |   |                                                                                                                             
| | - | ----------------------------------------------------------------------------------------------------------------------------
| |  | unfamiliarity with designing systems with gallium
    arsenide products;                                                    
|
| |  | concerns related to relatively higher
    manufacturing costs and lower yields; and                                         
|
| |  | uncertainties about the relative cost
    effectiveness of our products compared to high performance
    silicon components.

In addition, potential customers may be reluctant
to rely on a smaller company like us for critical components. We
cannot be certain that prospective customers will design our
products into their systems, that current customers will
continue to integrate our components into their systems or that
gallium arsenide technology will continue to achieve widespread
market acceptance.

Our products may not perform as designed and
may have errors or defects that could result in a decrease in
net sales or liability claims against us.

Our customers establish demanding specifications
for product performance and reliability. Our standard product
warranty period is one year. Problems may occur in the future
with respect to the performance and reliability of our products
in conforming to customer specifications. If these problems do
occur, we could experience increased costs, delays in or
reductions, cancellations or rescheduling of orders and
shipments, product returns and discounts and product redesigns,
any of which would have a negative impact on our business,
operating results and financial condition. In addition, errors
or defects in our products may result in legal claims that could
damage our reputation and our business, increase our expenses
and impair our operating results.

33



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##### Table of Contents



The sales cycle of our products is lengthy and
the life cycle of our products is short, making it difficult to
manage our inventory efficiently.

Most of our products are components in mobile
handsets or wireless subsystem infrastructure equipment. The
sales cycle associated with our products is typically lengthy,
and can be as long as two years, due to the fact that our
customers conduct significant technical evaluations of our
products before making purchase commitments. This qualification
process involves a significant investment of time and resources
from us and our customers to ensure that our product designs are
fully qualified to perform with the customers equipment.
The qualification process may result in the cancellation or
delay of anticipated product shipments, thereby harming our
operating results.

In addition, our inventory can rapidly become out
of date due to the short life cycle of the end products that
incorporate our products. For example, the life cycle of mobile
handsets has been and is expected to continue to be relatively
short with models, features and functionality evolving rapidly.
In fiscal 1999, 2002 and 2003, we wrote off out of date
inventory when one of our customers stopped producing the mobile
handsets that incorporated our power amplifier. Our business,
operating results and financial condition could be harmed by
excess or out of date inventory levels if our customers
products evolve more rapidly than anticipated or if demand for a
product does not materialize.

We are subject to stringent environmental
regulations that could negatively impact our business.

We are subject to a variety of federal, state and
local laws, rules and regulations related to the discharge and
disposal of toxic, volatile and other hazardous chemicals used
in our manufacturing process. Our failure to comply with present
or future regulations could result in fines being imposed on us,
suspension of our production or a cessation of our operations.
The regulations could require us to acquire significant
equipment or to incur substantial other expenses in order to
comply with environmental regulations. Any past or future
failure by us to control the use of or to restrict adequately
the discharge of hazardous substances could subject us to future
liabilities and could cause our business, operating results and
financial condition to suffer. In addition, under some
environmental laws and regulations we could be held financially
responsible for remedial measures if our properties are
contaminated, even if we did not cause the contamination.

If we are unable to effectively protect our
intellectual property, or if it were determined that we
infringed the intellectual property rights of others, our
ability to compete in the market may be impaired.

Our success depends in part on our ability to
obtain patents, trademarks and copyrights, maintain trade secret
protection and operate our business without infringing the
intellectual property rights of other parties. Although there
are no pending lawsuits against us, from time to time we have
been notified in the past and may be notified in the future that
we are infringing another partys intellectual property
rights.

In the event of any adverse determination of
litigation alleging that our products infringe the intellectual
property rights of others, we may be unable to obtain licenses
on commercially reasonable terms, if at all. If we were unable
to obtain necessary licenses, we could incur substantial
liabilities and be forced to suspend manufacture of our
products. Litigation arising out of infringement claims could be
costly and divert the effort of our management and technical
personnel.

In addition to patent and copyright protection,
we also rely on trade secrets, technical know-how and other
unpatented proprietary information relating to our product
development and manufacturing activities. We try to protect this
information with confidentiality agreements with our employees
and other parties. We cannot be sure that these agreements will
not be breached, that we would have adequate remedies for any
breach or that our trade secrets and proprietary know-how will
not otherwise become known or independently discovered by others.

In addition, to retain our intellectual property
rights we may be required to seek legal action against
infringing parties. This legal action may be costly and may
result in a negative outcome. An adverse outcome in litigation
could subject us to significant liability to third parties,
could put our patents at risk of being invalidated or narrowly
interpreted and could put our patent applications at risk of not
issuing. The steps taken

34



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##### Table of Contents



by us may be inadequate to deter misappropriation
or impede third party development of our technology. In
addition, the laws of some foreign countries in which our
products are or may be sold do not protect our intellectual
property rights to the same extent, as do the laws on the United
States. If we are not successful in protecting our intellectual
property our business will suffer.


Our manufacturing capacity and our ability to
maintain sales volume is dependent on the successful retention
of qualified design, assembly and test personnel and our ability
to install critical assembly and test equipment on a timely
basis.

Our ability to satisfy our current backlog and
any additional orders we may receive in the future will depend
on our ability to successfully retain qualified design
engineers, assembly and test personnel. Our design engineers
reside at our headquarters in Santa Clara, California and at our
design center in the United Kingdom. We contract with third
parties located primarily in Asia for many of our assembly and
test requirements. Our need to successfully manage and retain
these personnel will intensify if in the future our production
volumes are required to increase significantly from expected
levels. Demand for people with these skills is intense and we
cannot assure you that we will be successful in retaining
sufficient personnel with these critical skills. Our business
has been harmed in the past by our inability to hire and retain
people with these critical skills, and we cannot assure you that
similar problems will not reoccur. For example, we also lost an
order from a major customer in fiscal 2000 due to a shortage we
experienced in design engineers.

Our ability to maintain manufacturing capacity
also depends on our ability to install additional assembly and
test equipment at our Santa Clara facility and at our Asian
subcontractors facilities on a timely basis. We rely on
third party providers of this equipment to deliver and install
it on a timely basis. If there is a delay in the delivery and
installation of this equipment, our planned increased production
capacity will be reduced or delayed. This could result in
delayed or lost sales to customers, adversely affect our
customer relationships and harm our business.

Past in-house foundry capacity limitations
forced us into relationships with other foundries. We may incur
extra costs as a result of these third party foundry
relationships, which could negatively impact our financial
condition.

We currently operate our own foundry located in
Santa Clara, California to produce GaAs semiconductor components
for sale as well as for use in our GaAs-based subsystems
products. In the past, our in-house capacity was not sufficient
by itself to satisfy the demand and our growth objectives.

In December 2000, we invested approximately
$2.4 million in a GaAs foundry under construction in
Taiwan. We made this investment to secure a portion of the
foundrys capacity for our use. During the fourth quarter
of fiscal 2002 we recorded an impairment charge of approximately
$1.7 million against the foundry investment, which was
deemed to have an other than temporary decline in value. During
the first and fourth quarter of fiscal 2003, we recorded
additional impairments of $0.3 and $0.1 million
respectively. We regularly review our investments for
circumstances of impairment and assess the carrying value of the
assets against market value. When an impairment exists, we
record an expense to the extent that the carrying value exceeds
fair market value in the period the assessment was made. The
fair value of strategic investments, such as the foundry, is
dependent on the performance of the companies invested in, as
well as the marketability for these investments. In assessing
potential impairment of these investments, management considers
these factors as well as forecasted financial performance of the
investees. If these forecasts are not met or if market
conditions change, we may have to record additional impairment
charges.

Reliance on third party foundries means we have
less control over delivery schedules, manufacturing yields and
costs. Our relationship with outside foundries will also require
us to successfully manage and coordinate our production through
third parties over which we have limited or no control. If we
are not successful in effectively managing and coordinating our
in-house manufacturing capabilities with the independent
foundries, our integrated component production could be
disrupted and fail to meet our requirements which could severely
harm our business.

35



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We depend heavily on our key managerial and
technical personnel. If we cannot attract and retain persons for
our critical management and technical functions we may be unable
to compete effectively.

Our success depends in significant part upon the
continued service of our key technical, marketing, sales and
senior management personnel and our continuing ability to
attract and retain highly qualified technical, marketing, sales
and managerial personnel. In particular, we have experienced and
continue to experience difficulty attracting and retaining
qualified engineers, which has harmed our ability to develop a
wider range of handset products in a timely manner. Competition
for these kinds of experienced personnel is intense. In
addition, as discussed above, uncertainties resulting from the
proxy contest and future unsolicited acquisition offers may
hamper our ability to retain our executives or key personnel in
our engineering and other departments. We cannot assure you that
we can retain our key technical and managerial employees or that
we can attract, assimilate or retain other highly qualified
technical and managerial personnel in the future. Our failure to
attract, assimilate or retain key personnel could significantly
harm our business, operating results and financial condition.

Our customers failure to adhere to
governmental regulations could harm our business.

A significant portion of our products are
integrated into the wireless communications subsystems of our
clients. These subsystems are regulated domestically by the
Federal Communications Commission and internationally by other
government agencies. With regard to equipment in which our
products are integrated, it is typically our customers
responsibility, and not ours, to ensure compliance with
governmental regulations. Our net sales will be harmed if our
customers products fail to comply with all applicable
domestic and international regulations.

A disaster could severely damage our
operations.

A disaster could severely damage our ability to
deliver our products to our customers. Our products depend on
our ability to maintain and protect our computer systems, which
are primarily located in or near our principal headquarters in
Santa Clara, California. Santa Clara exists on or near a known
earthquake fault zone. Although the facilities in which we host
our computer systems are designed to be fault tolerant, the
systems are susceptible to damage from fire, floods,
earthquakes, power loss, telecommunications failures, and
similar events. Although we maintain general business insurance
against fires, floods and some general business interruptions,
there can be no assurance that the amount of coverage will be
adequate in any particular case.

Item 7A.     Qualitative
and Quantitative Disclosure About Market Risk

Interest
Rate Risk

Our exposure to market risk is principally
confined to our cash, cash equivalents and investments which
have maturities of less than two years. We maintain a
non-trading investment portfolio of investment grade, liquid,
debt securities that limits the amount of credit exposure to any
one issue, issuer or type of instrument. At March 31, 2003,
our investment portfolio comprised approximately
$27.8 million in money market funds and certificate of
deposits and $66.2 million of money market auction rate
preferred stocks, corporate debt securities and municipal bonds.
The securities in our investment portfolio are not leveraged,
are classified as available for sale and are therefore subject
to interest rate risk. We currently do not hedge interest rate
exposure. If market interest rates were to increase by 100 basis
points, or 1%, from March 31, 2003 levels, the fair value
of our portfolio would decline by approximately $139,000. The
modeling technique used measures the change in fair values
arising from an immediate hypothetical shift in market interest
rates.

Foreign
Currency Exchange Risk

The current foreign exchange exposure in all
international operations is deemed to be immaterial since all of
our net sales and the majority of liabilities are receivable and
payable in U.S. dollars. A 10% change in exchange rates would
not be material to our financial condition and results from
operations. Accordingly, we do not use derivative financial
instruments to hedge against foreign exchange exposure.

36



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##### Table of Contents



Item 8.     Financial
Statements and Supplementary Data

The information required by this item is listed
under Item 7 and Item 15(a)1 of this Form 10-K.



|        |                                                                                         
|------- | ----------------------------------------------------------------------------------------
|Item 9. | Changes in and Disagreements with
    Accountants on Accounting and Financial Disclosure

Not applicable.




PART III

Item 10.     Directors
and Executive Officers of the Board

The information required by this item is
incorporated herein by reference to our definitive Proxy
Statement to be filed in connection with our 2003 Annual Meeting
of Shareholders, which is expected to be filed not later than
120 days after our fiscal year ended March 31, 2003.

Item 11.     Executive
Compensation

The information required by this item is
incorporated herein by reference to our definitive Proxy
Statement to be filed in connection with our 2003 Annual Meeting
of Shareholders, which is expected to be filed not later than
120 days after our fiscal year ended March 31, 2003.



|         |                                                                                                       
|-------- | ------------------------------------------------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial
    Owners and Management and Related Shareholder
    Matters

The information required by this item is
incorporated herein by reference to our definitive Proxy
Statement to be filed in connection with our 2003 Annual Meeting
of Shareholders, which is expected to be filed not later than
120 days after our fiscal year ended March 31, 2003.



|         |                                                         
|-------- | --------------------------------------------------------
|Item 13. | Certain Relationships and Related Party
    Transactions

The information required by this item is
incorporated herein by reference to our definitive Proxy
Statement to be filed in connection with our 2003 Annual Meeting
of Shareholders, which is expected to be filed not later than
120 days after our fiscal year ended March 31, 2003.




PART IV

Item 14.     Controls
and Procedures

Our chief executive officer and our chief
financial officer, after evaluating our disclosure
controls and procedures (as defined in Securities Exchange
Act of 1934 (the Exchange Act) Rules 13a-14(c)
and 15d-14(c)) as of a date within 90 days before the
filing date of this Annual Report on Form 10-K (the
Evaluation Date) have concluded that as of the
Evaluation Date, our disclosure controls and procedures are
effective.

Subsequent to the Evaluation Date, there were no
significant changes in our internal controls or in other factors
that could significantly affect our disclosure controls and
procedures, nor were there any significant deficiencies or
material weaknesses in our internal controls. As a result, no
corrective actions were required or undertaken

37



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

(a) The following documents are filed as
part of this report:



| |    |                                  
| | -- | ---------------------------------
| | 1. | Consolidated Financial Statements

|                                                                                                          |  |      |    | 
|--------------------------------------------------------------------------------------------------------- |  | ---- | -- | 
|                                                                                                          |  | Page
|                                                                                                          |  |     
|Report of Ernst & Young LLP, Independent
    Auditors                                                     |  |      | 40 | 
|Consolidated Balance Sheets as of March 31,
    2003 and 2002                                             |  |      | 41 | 
|Consolidated Statements of Operations for the
    years ended March 31, 2003, 2002 and 2001               |  |      | 42 | 
|Consolidated Statements of Shareholders
    Equity for the years ended March 31, 2003, 2002
    and 2001 |  |      | 43 | 
|Consolidated Statements of Cash Flow for the
    years ended March 31, 2003, 2002 and 2001                |  |      | 44 | 
|Notes to Consolidated Financial Statements                                                                |  |      | 45 | 



| |                                
| | -------------------------------
| | 2. Financial Statement Schedule

|                                                    |  |  |     | 
|--------------------------------------------------- |  |  | --- | 
|Schedule II  Valuation and
    Qualifying Accounts |  |  | S-1 | 

All other schedules and financial statements are
omitted because they are not applicable or the required
information is shown in the consolidated financial statements or
notes thereto.



| |            
| | -----------
| | 3. Exhibits

|        |    |             |  |                                                                                                                                                                    
|------- | -- | ----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|Number  |    | Description
|        |    |            
|        | 3  | .1(1)       |  | Amended and Restated Articles of Incorporation of
    Registrant.                                                                                                  
|        | 3  | .2          |  | Bylaws of Registrant, as amended through
    May 28, 2003.                                                                                                         
|        | 4  | .1(2)       |  | Form of Registrants Stock Certificate.                                                                                                                            
|        | 4  | .2(2)       |  | Third Modification Agreement (including
    Registration Rights Agreement) dated July 30, 1990, between
    the Registrant and certain investors.                  
|        | 4  | .3(6)       |  | Shareholders Rights Agreement dated
    March 25, 1999, by and between the Registrant and
    BankBoston, N.A.                                                     
|        | 4  | .4(14)      |  | Registration Rights Agreement, dated
    February 4, 2000, between the Registrant and the parties
    identified on Exhibit A thereto.                             
|        | 10 | .1(2)       |  | 1985 Stock Incentive Program and forms of
    Incentive Stock Option Agreement and Nonstatutory Stock Option
    Agreement.                                        
|        | 10 | .2(4)       |  | 1994 Stock Option Plan, as amended, and form of
    Stock Option Agreement.                                                                                        
|        | 10 | .3(10)      |  | Employee Qualified Stock Purchase Plan, as
    amended, and form of Subscription Agreement.                                                                        
|        | 10 | .4(2)       |  | Outside Directors Stock Option Plan and
    form of Stock Option Agreement.                                                                                       
|        | 10 | .5(2)       |  | Form of Directors and Officers
    Indemnification Agreement.                                                                                                    
|        | 10 | .6(2)       |  | Lease Agreement dated April 1, 1993 between
    the Registrant and Berg & Berg Developers.                                                                         
|        | 10 | .7(3)       |  | Lease agreement dated April 11, 1997 between
    the Registrant and Spieker Properties, L.P.                                                                       
|        | 10 | .8(7)       |  | First Amendment to Lease dated June 17, 1999
    by and between Registrant and Mission West
    Properties, L.P. II (formerly known as Berg &
    Berg Developers).
|        | 10 | .9(8)       |  | 2000 Nonstatutory Stock Option Plan.                                                                                                                               
|        | 10 | .10(8)      |  | Share Subscription Agreement by and between the
    Registrant and Suntek Compound Semiconductor Co. LTD, dated
    December 5, 2000.                              
|        | 10 | .11(9)      |  | Joint Venture Agreement, dated as of
    December 20, 2001, by and among Celeritek, Inc.,
    UBE Electronics, Ltd. and NewGen Telecom Co., Ltd.                   
|        | 10 | .12(11)     |  | Stock Purchase agreement, dated as of
    March 18, 2002, by and among Celeritek, Inc. and
    NewGen Telecom Co., Ltd.                                            

38



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|        |    |             |  |                                                                                                                                                                                                                        
|------- | -- | ----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|Number  |    | Description
|        |    |            
|        | 10 | .13(12)     |  | Change of Control Severance Agreement by and
    between Celeritek, Inc. and Tamer Husseini, dated
    November 22, 2002.                                                                                              
|        | 10 | .14(12)     |  | Change of Control Severance Agreement by and
    between Celeritek, Inc. and Margaret E. Smith, dated
    November 22, 2002.                                                                                           
|        | 10 | .15(15)     |  | Tavanza, Inc. 2000 Stock Incentive Plan.                                                                                                                                                                               
|        | 21 |             |  | Subsidiaries of Celeritek.                                                                                                                                                                                             
|        | 23 | .1          |  | Consent of Ernst & Young LLP,
    Independent Auditors.                                                                                                                                                                
|        | 24 |             |  | Power of Attorney (see signature page).                                                                                                                                                                                
|        | 99 | .1          |  | Certification of Chief Executive Officer and
    Chief Financial Officer Pursuant to 18 U.S.C. Section 1350,
    as adopted pursuant to Section 906 of the Sarbanes-Oxley
    Act of 2002.                             
|        | 99 | .2(12)      |  | Charter for the Audit Committee of the Board of
    Directors.                                                                                                                                                         
|        | 99 | .3(12)      |  | Charter for the Compensation Committee of the
    Board of Directors.                                                                                                                                                  
|        | 99 | .4(12)      |  | Charter for the Corporate Governance and
    Nominating Committee of the Board of Directors.                                                                                                                           
|        | 99 | .5(12)      |  | Corporate Governance Guidelines.                                                                                                                                                                                       
|        | 99 | .6(13)      |  | Settlement Agreement, dated May 28, 2003,
    between Celeritek, Inc., the Celeritek Shareholder Protective
    Committee and the members and certain affiliates of the
    Celeritek Shareholder Protective Committee.



---



|    |                                                                                                                                                                                                  
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Incorporated by reference to our Form 8-K
    filed on July 29, 2002.                                                                                                                            
|   
|(2) | Incorporated by reference to the identically
    numbered exhibits to our Registration Statement of Form S-1
    (Commission File No. 33-98854), which became effective on
    December 19, 1995.
|   
|(3) | Incorporated by reference to our Form 10-K
    filed for the fiscal year ended March 31, 1997.                                                                                                   
|   
|(4) | Incorporated by reference to our Statement on
    Form S-8 (Commission File No. 333-52037), filed
    May 7, 1998.                                                                               
|   
|(5) | Incorporated by reference to our Form 10-K
    filed for the fiscal year ended March 31, 1999.                                                                                                   
|   
|(6) | Incorporated by reference to our Form 8-A
    filed on April 1, 1999.                                                                                                                            
|   
|(7) | Incorporated by reference to our Form 10-K/A
    filed for the fiscal year ended March 31, 2000.                                                                                                 
|   
|(8) | Incorporated by reference to our Form 10-K
    filed for the fiscal year ended March 31, 2001.                                                                                                   
|   
|(9) | Incorporated by reference to our Form 10-Q
    filed for the quarter ended December 31, 2001.                                                                                                    



|     |                                                                                               
|---- | ----------------------------------------------------------------------------------------------
|(10) | Incorporated by reference to our Form S-8
    filed on August 15, 2001.                       
|    
|(11) | Incorporated by reference to our Form 10-K
    filed for the fiscal year ended March 31, 2002.
|    
|(12) | Incorporated by reference to our Form 8-K
    filed on April 16, 2003.                        
|    
|(13) | Incorporated by reference to our Form 8-K
    filed on May 28, 2003.                          
|    
|(14) | Incorporated by reference to our Form S-3
    filed on February 25, 2000.                     
|    
|(15) | Incorporated by reference to our Form 8-8
    filed on January 16, 2003.                      

(b) Reports on Form 8-K



| |                                                                               
| | ------------------------------------------------------------------------------
| | No reports on Form 8-K were filed during the
    quarter ended March 31, 2003.

(c) Exhibits



| |                                        
| | ---------------------------------------
| | See Item 15(a)3 for a list of exhibits.

(d) Financial Statement Schedules.



| |                                                                 
| | ----------------------------------------------------------------
| | See Item 15(a)2 for a list of financial
    statement schedules.

39



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##### Table of Contents



REPORT OF ERNST & YOUNG LLP, INDEPENDENT
AUDITORS

The Board of Directors and Shareholders

Celeritek, Inc.


We have audited the accompanying consolidated
balance sheets of Celeritek, Inc. as of March 31, 2003
and 2002, and the related consolidated statements of operations,
shareholders equity, and cash flows for each of the three
years in the period ended March 31, 2003. Our audits also
included the financial statement schedule listed in the Index at
Item 15 (a). These financial statements and schedule are
the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audits in accordance with
auditing standards generally accepted in the United States.
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.

In our opinion, the financial statements referred
to above present fairly, in all material respects, the
consolidated financial position of Celeritek, Inc. at
March 31, 2003 and 2002, and the consolidated results of
its operations and its cash flows for each of the three years in
the period ended March 31, 2003, in conformity with
accounting principles generally accepted in the United States.
Also, in our opinion, the related financial statement schedule,
when considered in relation to the basic financial statements
taken as a whole, presents fairly in all material respects the
information set forth therein.



| |                      
| | ---------------------
| | /s/ ERNST & YOUNG LLP

San Jose, California

April 25, 2003


except for Note 20 as to which 
 the date is June 13, 2003


40



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##### Table of Contents






CONSOLIDATED BALANCE SHEETS

(In thousands, except share amounts)


|                                                           |                                                                                                                                 |                                |                                                                                                        |                                            |   |         |         |         |   |         |         | 
|---------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------- | ------------------------------ | ------------------------------------------------------------------------------------------------------ | ------------------------------------------ | - | ------- | ------- | ------- | - | ------- | ------- | 
|                                                           |                                                                                                                                 |                               
|                                                           |                                                                                                                                 | March 31,                     
|                                                           |                                                                                                                                 |                               
|                                                           |                                                                                                                                 | 2003                           |                                                                                                        | 2002                                      
|                                                           |                                                                                                                                 |                                |                                                                                                        |                                           
|ASSETS                                                    
|Current assets:                                            |                                                                                                                                 |                                |                                                                                                        |                                            |   |         |         |        
|                                                           | Cash and cash equivalents                                                                                                       |                                | $                                                                                                      | 28,909                                     |   |         | $       | 8,096   |  
|                                                           | Short-term investments                                                                                                          |                                |                                                                                                        | 66,727                                     |   |         |         | 90,597  |  
|                                                           | Accounts receivable, net of allowance for
    doubtful accounts of $626 and $1,183 at March 31, 2003 and
    2002, respectively |                                |                                                                                                        | 4,483                                      |   |         |         | 10,001  |  
|                                                           | Inventories                                                                                                                     |                                |                                                                                                        | 3,599                                      |   |         |         | 9,372   |  
|                                                           | Prepaid expenses and other current assets                                                                                       |                                |                                                                                                        | 1,813                                      |   |         |         | 3,268   |  
|                                                           | Loans to officers and employees  short
    term portion                                                                        |                                |                                                                                                        | 112                                        |   |         |         | 403     |  
|                                                           |                                                                                                                                 |                                |                                                                                                        |                                            |   |         |         |        
|                                                           |                                                                                                                                 |                                |                                                                                                        | Total current assets                       |   |         | 105,643 |         |   |         | 121,737 | 
|Net property and equipment                                 |                                                                                                                                 |                                | 11,029                                                                                                 |                                            |   |         | 14,839  |        
|Other assets                                               |                                                                                                                                 |                                | 3,501                                                                                                  |                                            |   |         | 1,902   |        
|Loans to officers and employees  long
    term portion    |                                                                                                                                 |                                | 1,356                                                                                                  |                                            |   |         | 1,210   |        
|Purchased intangible assets                                |                                                                                                                                 |                                | 931                                                                                                    |                                            |   |         |        |        
|                                                           |                                                                                                                                 |                                |                                                                                                        |                                            |   |         |         |        
|                                                           |                                                                                                                                 |                                |                                                                                                        | Total assets                               |   | $       | 122,460 |         |   | $       | 139,688 | 
|                                                           |                                                                                                                                 |                                |                                                                                                        |                                            |   |         |         |        
|LIABILITIES AND SHAREHOLDERS
    EQUITY                  
|Current liabilities:                                       |                                                                                                                                 |                                |                                                                                                        |                                            |   |         |         |        
|                                                           | Accounts payable                                                                                                                |                                | $                                                                                                      | 4,355                                      |   |         | $       | 4,583   |  
|                                                           | Accrued payroll                                                                                                                 |                                |                                                                                                        | 1,601                                      |   |         |         | 1,505   |  
|                                                           | Accrued liabilities                                                                                                             |                                |                                                                                                        | 4,201                                      |   |         |         | 3,098   |  
|                                                           | Current portion of long-term debt                                                                                               |                                |                                                                                                        | 2,543                                      |   |         |         | 2,312   |  
|                                                           | Current obligations under capital leases                                                                                        |                                |                                                                                                        | 597                                        |   |         |         | 669     |  
|                                                           |                                                                                                                                 |                                |                                                                                                        |                                            |   |         |         |        
|                                                           |                                                                                                                                 |                                |                                                                                                        | Total current liabilities                  |   |         | 13,297  |         |   |         | 12,167  | 
|Long-term debt, less current portion                       |                                                                                                                                 |                                | 2,126                                                                                                  |                                            |   |         | 4,675   |        
|Noncurrent obligations under capital lease
    commitments |                                                                                                                                 |                                | 793                                                                                                    |                                            |   |         | 1,340   |        
|Commitments and contingencies                              |                                                                                                                                 |                                |                                                                                                        |                                            |   |         |         |        
|Shareholders equity:                                      |                                                                                                                                 |                                |                                                                                                        |                                            |   |         |         |        
|                                                           | Preferred stock, no par value:                                                                                                  |                                |                                                                                                        |                                            |   |         |         |         |  
|                                                           |                                                                                                                                 | Authorized shares  2,000,000  |                                                                                                        |                                            |   |         |         |         |   |        
|                                                           |                                                                                                                                 |                                | Issued and outstanding  none                                                                          |                                            |   |        |         |         |   |        |        
|                                                           | Common stock, no par value:                                                                                                     |                                |                                                                                                        |                                            |   |         |         |         |  
|                                                           |                                                                                                                                 | Authorized shares  50,000,000 |                                                                                                        |                                            |   |         |         |         |   |        
|                                                           |                                                                                                                                 |                                | Issued and outstanding shares  12,342,163
    and 12,228,194 at March 31, 2003 and 2002, respectively |                                            |   | 158,049 |         |         |   | 156,340 |        
|                                                           | Accumulated other comprehensive income (loss)                                                                                   |                                |                                                                                                        | 5                                          |   |         |         | (51     | )
|                                                           | Accumulated deficit                                                                                                             |                                |                                                                                                        | (51,810                                    | ) |         |         | (34,783 | )
|                                                           |                                                                                                                                 |                                |                                                                                                        |                                            |   |         |         |        
|                                                           |                                                                                                                                 |                                |                                                                                                        | Total shareholders equity                 |   |         | 106,244 |         |   |         | 121,506 | 
|                                                           |                                                                                                                                 |                                |                                                                                                        |                                            |   |         |         |        
|                                                           |                                                                                                                                 |                                |                                                                                                        | Total liabilities and shareholders equity |   | $       | 122,460 |         |   | $       | 139,688 | 
|                                                           |                                                                                                                                 |                                |                                                                                                        |                                            |   |         |         |        

See accompanying notes.

41



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##### Table of Contents






CONSOLIDATED STATEMENTS OF
OPERATIONS

(In thousands, except per share
amounts)


|                                              |                                      |                          |         |        |        |      |         |        |        |   |         |        |        | 
|--------------------------------------------- | ------------------------------------ | ------------------------ | ------- | ------ | ------ | ---- | ------- | ------ | ------ | - | ------- | ------ | ------ | 
|                                              |                                      |                         
|                                              |                                      | Years Ended March 31,   
|                                              |                                      |                         
|                                              |                                      | 2003                     |         | 2002   |        | 2001
|                                              |                                      |                          |         |        |        |     
|Net sales                                     |                                      | $                        | 49,423  |        |        | $    | 57,050  |        |        | $ | 85,062  |       
|Cost of goods sold                            |                                      |                          | 39,101  |        |        |      | 51,839  |        |        |   | 77,482  |       
|                                              |                                      |                          |         |        |        |      |         |        |        |   |         |       
|Gross profit                                  |                                      |                          | 10,322  |        |        |      | 5,211   |        |        |   | 7,580   |       
|Operating expenses:                           |                                      |                          |         |        |        |      |         |        |        |   |         |       
|                                              | Research and development             |                          |         | 10,797 |        |      |         | 9,195  |        |   |         | 10,179 |       
|                                              | Selling, general, and administrative |                          |         | 8,729  |        |      |         | 9,648  |        |   |         | 11,846 |       
|                                              | Costs related to shareholder actions |                          |         | 1,306  |        |      |         |       |        |   |         |       |       
|                                              | Special charges                      |                          |         | 2,836  |        |      |         | 10,960 |        |   |         | 1,250  |       
|                                              | In-process research and development  |                          |         | 4,414  |        |      |         |       |        |   |         |       |       
|                                              | Amortization of intangible assets    |                          |         | 215    |        |      |         |       |        |   |         |       |       
|                                              |                                      | Total operating expenses |         |        | 28,297 |      |         |        | 29,803 |   |         |        | 23,275 | 
|                                              |                                      |                          |         |        |        |      |         |        |        |   |         |       
|Loss from operations                          |                                      |                          | (17,975 | )      |        |      | (24,592 | )      |        |   | (15,695 | )     
|Impairment of strategic investments           |                                      |                          | (422    | )      |        |      | (1,702  | )      |        |   |        |       
|Impairment of short-term investments          |                                      |                          |        |        |        |      |        |        |        |   | (524    | )     
|Interest income and other                     |                                      |                          | 2,217   |        |        |      | 4,191   |        |        |   | 6,154   |       
|Interest expense                              |                                      |                          | (711    | )      |        |      | (695    | )      |        |   | (412    | )     
|                                              |                                      |                          |         |        |        |      |         |        |        |   |         |       
|Loss before income taxes                      |                                      |                          | (16,891 | )      |        |      | (22,798 | )      |        |   | (10,477 | )     
|Provision (benefit) for income taxes          |                                      |                          | 136     |        |        |      | (180    | )      |        |   | 125     |       
|                                              |                                      |                          |         |        |        |      |         |        |        |   |         |       
|Net Loss                                      |                                      | $                        | (17,027 | )      |        | $    | (22,618 | )      |        | $ | (10,602 | )     
|                                              |                                      |                          |         |        |        |      |         |        |        |   |         |       
|Basic and diluted net loss per share          |                                      | $                        | (1.39   | )      |        | $    | (1.87   | )      |        | $ | (0.94   | )     
|                                              |                                      |                          |         |        |        |      |         |        |        |   |         |       
|Shares used in net loss per share calculation |                                      |                          |         |        |        |      |         |        |        |   |         |       
|                                              | Basic and diluted                    |                          |         | 12,285 |        |      |         | 12,076 |        |   |         | 11,272 |       

See accompanying notes.

42



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CONSOLIDATED STATEMENTS OF SHAREHOLDERS
EQUITY

(In thousands)


|                                                                                          |                                                                                     |              |        |               |  |              |         |               |  |        |     |      |   |   |         |         |   |   |         |         |  
|----------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------- | ------------ | ------ | ------------- |  | ------------ | ------- | ------------- |  | ------ | --- | ---- | - | - | ------- | ------- | - | - | ------- | ------- | -
|                                                                                          |                                                                                     |              |        | Accumulated   |  | Retained     |         |              
|                                                                                          |                                                                                     | Common Stock |        | Other         |  | Earnings     |         | Total        
|                                                                                          |                                                                                     |              |        | Comprehensive |  | (Accumulated |         | Shareholders
|                                                                                          |                                                                                     | Shares       |        | Amount        |  | Income       |         | Deficit)      |  | Equity
|                                                                                          |                                                                                     |              |        |               |  |              |         |               |  |       
|Balance at March 31, 2000                                                                 |                                                                                     |              | 9,317  |               |  | $            | 52,394  |               |  | $      |    |      |   | $ | (1,563  | )       |   | $ | 50,831  |        
|Issuance of common stock on exercise of options
    under stock option plans              |                                                                                     |              | 194    |               |  |              | 953     |               |  |        |    |      |   |   |        |         |   |   | 953     |        
|Issuance of common stock in connection with
    secondary offering, net of issuance costs |                                                                                     |              | 2,300  |               |  |              | 100,319 |               |  |        |    |      |   |   |        |         |   |   | 100,319 |        
|Issuance of common stock under employee stock
    purchase plan                           |                                                                                     |              | 121    |               |  |              | 828     |               |  |        |    |      |   |   |        |         |   |   | 828     |        
|Comprehensive loss:                                                                       |                                                                                     |              |        |               |  |              |         |               |  |        |     |      |   |   |         |         |   |   |         |        
|                                                                                          | Net loss for the year ended March 31, 2001                                          |              |        |              |  |              |         |              |  |        |     |     |   |   |         | (10,602 | ) |   |         | (10,602 | )
|                                                                                          | Unrealized gain on available-for-sale securities                                    |              |        |              |  |              |         |              |  |        |     | 485  |   |   |         |        |   |   |         | 485     |  
|                                                                                          | Reclassification adjustments for gain on sale of
    available-for-sale investments |              |        |              |  |              |         |              |  |        |     | (5   | ) |   |         |        |   |   |         | (5      | )
|                                                                                          |                                                                                     |              |        |               |  |              |         |               |  |        |     |      |   |   |         |         |   |   |         |        
|                                                                                          | Comprehensive loss                                                                  |              |        |              |  |              |         |              |  |        |     |     |   |   |         |        |   |   |         | (10,122 | )
|                                                                                          |                                                                                     |              |        |               |  |              |         |               |  |        |     |      |   |   |         |         |   |   |         |        
|Balance at March 31, 2001                                                                 |                                                                                     |              | 11,932 |               |  |              | 154,494 |               |  |        | 480 |      |   |   | (12,165 | )       |   |   | 142,809 |        
|Issuance of common stock on exercise of options
    under stock option plans              |                                                                                     |              | 225    |               |  |              | 1,157   |               |  |        |    |      |   |   |        |         |   |   | 1,157   |        
|Issuance of common stock under employee stock
    purchase plan                           |                                                                                     |              | 71     |               |  |              | 689     |               |  |        |    |      |   |   |        |         |   |   | 689     |        
|Comprehensive loss:                                                                       |                                                                                     |              |        |               |  |              |         |               |  |        |     |      |   |   |         |         |   |   |         |        
|                                                                                          | Net loss for the year ended March 31, 2002                                          |              |        |              |  |              |         |              |  |        |     |     |   |   |         | (22,618 | ) |   |         | (22,618 | )
|                                                                                          | Unrealized loss on available-for-sale securities                                    |              |        |              |  |              |         |              |  |        |     | (675 | ) |   |         |        |   |   |         | (676    | )
|                                                                                          | Reclassification adjustments for loss on sale of
    available-for-sale investments |              |        |              |  |              |         |              |  |        |     | 144  |   |   |         |        |   |   |         | 145     |  
|                                                                                          |                                                                                     |              |        |               |  |              |         |               |  |        |     |      |   |   |         |         |   |   |         |        
|                                                                                          | Comprehensive loss                                                                  |              |        |              |  |              |         |              |  |        |     |     |   |   |         |        |   |   |         | (23,149 | )
|                                                                                          |                                                                                     |              |        |               |  |              |         |               |  |        |     |      |   |   |         |         |   |   |         |        
|Balance at March 31, 2002                                                                 |                                                                                     |              | 12,228 |               |  |              | 156,340 |               |  |        | (51 | )    |   |   | (34,783 | )       |   |   | 121,506 |        
|Issuance of common stock on exercise of options
    under stock option plans              |                                                                                     |              | 33     |               |  |              | 187     |               |  |        |    |      |   |   |        |         |   |   | 187     |        
|Issuance of common stock under employee stock
    purchase plan                           |                                                                                     |              | 81     |               |  |              | 522     |               |  |        |    |      |   |   |        |         |   |   | 522     |        
|Stock option consideration for Tavanza asset
    purchase                                 |                                                                                     |              |       |               |  |              | 1,000   |               |  |        |    |      |   |   |        |         |   |   | 1,000   |        
|Comprehensive loss:                                                                       |                                                                                     |              |        |               |  |              |         |               |  |        |     |      |   |   |         |         |   |   |         |        
|                                                                                          | Net loss for the year ended March 31, 2003                                          |              |        |              |  |              |         |              |  |        |     |     |   |   |         | (17,027 | ) |   |         | (17,027 | )
|                                                                                          | Unrealized gain on available-for-sale securities                                    |              |        |              |  |              |         |              |  |        |     | 63   |   |   |         |        |   |   |         | 63      |  
|                                                                                          | Reclassification adjustments for gain on sale of
    available-for-sale investments |              |        |              |  |              |         |              |  |        |     | (7   | ) |   |         |        |   |   |         | (7      | )
|                                                                                          |                                                                                     |              |        |               |  |              |         |               |  |        |     |      |   |   |         |         |   |   |         |        
|                                                                                          | Comprehensive loss                                                                  |              |        |              |  |              |         |              |  |        |     |     |   |   |         |        |   |   |         | (16,971 | )
|                                                                                          |                                                                                     |              |        |               |  |              |         |               |  |        |     |      |   |   |         |         |   |   |         |        
|Balance at March 31, 2003                                                                 |                                                                                     |              | 12,342 |               |  | $            | 158,049 |               |  | $      | 5   |      |   | $ | (51,810 | )       |   | $ | 106,244 |        
|                                                                                          |                                                                                     |              |        |               |  |              |         |               |  |        |     |      |   |   |         |         |   |   |         |        

See accompanying notes.

43



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##### Table of Contents






CONSOLIDATED STATEMENTS OF CASH
FLOWS

(In thousands)


|                                                                                           |                                                               |                                           |                                                         |       |       |        |          |        |        |        |          |       |        |          |  
|------------------------------------------------------------------------------------------ | ------------------------------------------------------------- | ----------------------------------------- | ------------------------------------------------------- | ----- | ----- | ------ | -------- | ------ | ------ | ------ | -------- | ----- | ------ | -------- | -
|                                                                                           |                                                               |                                          
|                                                                                           |                                                               | Years Ended March 31,                    
|                                                                                           |                                                               |                                          
|                                                                                           |                                                               | 2003                                      |                                                         | 2002  |       | 2001  
|                                                                                           |                                                               |                                           |                                                         |       |       |       
|Operating activities                                                                       |                                                               |                                           |                                                         |       |       |        |          |        |        |        |          |      
|Net loss                                                                                   |                                                               | $                                         | (17,027                                                 | )     |       | $      | (22,618  | )      |        | $      | (10,602  | )    
|Adjustments to reconcile net loss to net cash
    provided (used) in operating activities: |                                                               |                                           |                                                         |       |       |        |          |        |        |        |          |      
|                                                                                           | Depreciation                                                  |                                           |                                                         | 5,000 |       |        |          | 5,276  |        |        |          | 3,641 |       
|                                                                                           | Amortization of intangible assets                             |                                           |                                                         | 215   |       |        |          |       |        |        |          |      |       
|                                                                                           | Impairment of strategic and short-term investments            |                                           |                                                         | 422   |       |        |          | 1,702  |        |        |          | 524   |       
|                                                                                           | Loss on impairment and disposal of property and
    equipment |                                           |                                                         | 1,292 |       |        |          | 11,047 |        |        |          | 1,116 |       
|                                                                                           | (Gain) loss on sale of short-term investments                 |                                           |                                                         | (7    | )     |        |          | 145    |        |        |          | (239  | )     
|                                                                                           | Income tax receivable                                         |                                           |                                                         | 244   |       |        |          |       |        |        |          |      |       
|                                                                                           | Purchase of in-process research and development               |                                           |                                                         | 793   |       |        |          |       |        |        |          |      |       
|                                                                                           | Changes in operating assets and liabilities:                  |                                           |                                                         |       |       |        |          |        |        |        |          |       |       
|                                                                                           |                                                               | Accounts receivable                       |                                                         |       | 5,518 |        |          |        | 6,494  |        |          |       | (4,586 | )       
|                                                                                           |                                                               | Inventories                               |                                                         |       | 5,773 |        |          |        | 5,989  |        |          |       | (1,006 | )       
|                                                                                           |                                                               | Prepaid expenses and other current assets |                                                         |       | 1,425 |        |          |        | (304   | )      |          |       | (1,819 | )       
|                                                                                           |                                                               | Other assets                              |                                                         |       | (29   | )      |          |        | (801   | )      |          |       | 75     |         
|                                                                                           |                                                               | Related party receivables                 |                                                         |       | 145   |        |          |        | 282    |        |          |       | (1,778 | )       
|                                                                                           |                                                               | Intangible assets                         |                                                         |       | (939  | )      |          |        |       |        |          |       |       |         
|                                                                                           |                                                               | Accounts payable                          |                                                         |       | (221  | )      |          |        | (8,830 | )      |          |       | 7,192  |         
|                                                                                           |                                                               | Accrued payroll                           |                                                         |       | 99    |        |          |        | (1,174 | )      |          |       | 165    |         
|                                                                                           |                                                               | Accrued liabilities                       |                                                         |       | 1,103 |        |          |        | (814   | )      |          |       | 1,445  |         
|                                                                                           |                                                               |                                           |                                                         |       |       |        |          |        |        |        |          |      
|                                                                                           |                                                               |                                           | Net cash provided by (used in) operating
    activities |       |       | 3,806  |          |        |        | (3,606 | )        |       |        | (5,872   | )
|Investing activities                                                                       |                                                               |                                           |                                                         |       |       |        |          |        |        |        |          |      
|Purchases of property and equipment                                                        |                                                               |                                           | (2,593                                                  | )     |       |        | (6,656   | )      |        |        | (19,019  | )    
|Purchase of strategic investments                                                          |                                                               |                                           | (1,992                                                  | )     |       |        | (512     | )      |        |        | (2,362   | )    
|Purchases of short-term investments                                                        |                                                               |                                           | (132,145                                                | )     |       |        | (139,472 | )      |        |        | (177,614 | )    
|Proceeds from sale of property and equipment                                               |                                                               |                                           | 168                                                     |       |       |        | 20       |        |        |        |         |      
|Proceeds from sales of short-term investments                                              |                                                               |                                           | 34,258                                                  |       |       |        | 59,863   |        |        |        | 43,902   |      
|Proceeds from maturities of short-term investments                                         |                                                               |                                           | 121,820                                                 |       |       |        | 92,003   |        |        |        | 47,918   |      
|                                                                                           |                                                               |                                           |                                                         |       |       |        |          |        |        |        |          |      
|                                                                                           |                                                               |                                           | Net cash provided by (used in) investing
    activities |       |       | 19,516 |          |        |        | 5,246  |          |       |        | (107,175 | )
|Financing activities                                                                       |                                                               |                                           |                                                         |       |       |        |          |        |        |        |          |      
|Principal payments on long-term debt                                                       |                                                               |                                           | (2,318                                                  | )     |       |        | (1,787   | )      |        |        | (1,138   | )    
|Borrowings on long-term debt                                                               |                                                               |                                           |                                                        |       |       |        | 3,708    |        |        |        | 7,207    |      
|Principal payments on obligations under capital
    leases                                 |                                                               |                                           | (693                                                    | )     |       |        | (826     | )      |        |        | (314     | )    
|Proceeds from the issuance of common stock, net
    of issuance costs                      |                                                               |                                           |                                                        |       |       |        |         |        |        |        | 100,319  |      
|Proceeds from the exercise of stock options and
    employee stock purchase plan           |                                                               |                                           | 709                                                     |       |       |        | 1,846    |        |        |        | 1,781    |      
|                                                                                           |                                                               |                                           |                                                         |       |       |        |          |        |        |        |          |      
|                                                                                           |                                                               |                                           | Net cash (used in) provided by financing
    activities |       |       | (2,302 | )        |        |        | 2,941  |          |       |        | 107,855  |  
|Effect of exchange rate changes on
    cash                                                |                                                               |                                           | (207                                                    | )     |       |        |         |        |        |        |         |      
|                                                                                           |                                                               |                                           |                                                         |       |       |        |          |        |        |        |          |      
|Increase (decrease) in cash and cash
    equivalents                                       |                                                               |                                           | 20,813                                                  |       |       |        | 4,581    |        |        |        | (5,192   | )    
|Cash and cash equivalents at beginning of year                                             |                                                               |                                           | 8,096                                                   |       |       |        | 3,515    |        |        |        | 8,707    |      
|                                                                                           |                                                               |                                           |                                                         |       |       |        |          |        |        |        |          |      
|Cash and cash equivalents at end of year                                                   |                                                               | $                                         | 28,909                                                  |       |       | $      | 8,096    |        |        | $      | 3,515    |      
|                                                                                           |                                                               |                                           |                                                         |       |       |        |          |        |        |        |          |      

See accompanying notes.

44



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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS



|        |                                                                
|------- | ---------------------------------------------------------------
|Note 1. | Organization and Summary of Significant
    Accounting Policies

Business Activities.Celeritek, Inc. (the Company) designs
and manufactures gallium arsenide, or GaAs, semiconductor
components and GaAs-based subsystems used in the transmission of
voice, video and data over wireless communication networks and
systems. The Companys products are designed to facilitate
broadband voice and data transmission in mobile handsets and
wireless communication network infrastructures. The
Companys GaAs-based subsystems are used in a variety of
defense applications such as tactical aircraft and ground based
and ship board radar systems, electronic counter measures and
satellite applications.

Basis of Presentation.The consolidated financial statements
include the accounts of the Company and its wholly owned
subsidiaries, Celeritek UK Limited, Celeritek Korea, and
Tavanza, Inc. Intercompany accounts and transactions have been
eliminated. The Companys reporting period generally
consists of a fifty-two week period ending on the Sunday closest
to the calendar month end. Fiscal years 2003, 2002, and 2001
ended March 30, March 31, and April 1,
respectively. For convenience, the accompanying financial
statements have been presented as ending on the last day of the
calendar month.

Use of Estimates.The preparation of the financial
statements in conformity with accounting principles generally
accepted in the United States requires management to make
estimates and assumptions that affect reported amounts of assets
and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reported
period. Actual results could differ from those estimates.
Significant estimates are discussed in the critical accounting
policies section of Item 7. Managements Discussion
and Analysis of Financial Condition and Results of Operations.

Cash and Cash Equivalents and Short-Term
Investments.The Company considers all
highly liquid investments with a remaining maturity of
90 days or less at the time of purchase to be cash
equivalents. Cash equivalents are carried at cost, which
approximates fair value. The Companys short-term
investments primarily consist of readily marketable debt
securities with remaining maturities of more than 90 days
at the time of purchase.

Marketable equity and all debt securities are
classified as held-to-maturity, available-for-sale, or trading.
Management determines the appropriate classification of
marketable equity and debt securities at the time of purchase
and reevaluates such designation as of each balance sheet date.
The Company has classified its entire investment portfolio as
available-for-sale. Available-for-sale securities are classified
as cash equivalents or short-term investments and are stated at
fair value with unrealized gains and losses included in
accumulated other comprehensive loss, which is a component of
stockholders equity. The Company uses the fair market
value to determine fair value. The Company views its
available-for-sale portfolio as available for sale in current
operations. Accordingly, all investments are classified as
short-term even though the stated maturity date may be a year or
more beyond the current balance sheet date. The amortized cost
of debt securities is adjusted for amortization of premiums and
accretion of discounts to maturity. Such amortization and
accretion are included in interest income (expense) and
other. Realized gains and losses are also included in interest
income and other. The cost of securities sold is based on the
specific identification method. Other than United States
investment treasury instruments, the Companys investment
policy limits the amounts invested in any one institution or in
any single type of instrument.

45



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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


The following is a summary of available-for-sale
securities at cost, which approximates fair value:

|                     |                                          |                |   |            |        |            |   |       |    |  |   |      |      |   |   |        |        | 
|-------------------- | ---------------------------------------- | -------------- | - | ---------- | ------ | ---------- | - | ----- | -- |  | - | ---- | ---- | - | - | ------ | ------ | 
|                     |                                          |                |   | Gross      |        | Gross      |   |      
|                     |                                          | Amortized      |   | Unrealized |        | Unrealized |   | Fair 
|                     |                                          | Cost           |   | Gains      |        | Losses     |   | Value
|                     |                                          |                |   |            |        |            |   |      
|                     |                                          |               
|                     |                                          | (In thousands)
|As of March 31, 2003 |                                          |                |   |            |        |            |   |       |    |  |   |      |      |   |   |       
|                     | Money market funds                       |                | $ | 27,297     |        |            | $ |      |    |  | $ |     |      |   | $ | 27,297 |       
|                     | Certificate of deposits                  |                |   | 504        |        |            |   |      |    |  |   |     |      |   |   | 504    |       
|                     | U.S. Government and federal agency bonds |                |   | 8,024      |        |            |   | 6     |    |  |   |     |      |   |   | 8,030  |       
|                     | Corporate debt securities                |                |   | 28,494     |        |            |   | 20    |    |  |   | (21  | )    |   |   | 28,493 |       
|                     | Municipal bonds                          |                |   | 19,400     |        |            |   |      |    |  |   |     |      |   |   | 19,400 |       
|                     | Equities                                 |                |   | 10,300     |        |            |   |      |    |  |   |     |      |   |   | 10,300 |       
|                     |                                          |                |   |            |        |            |   |       |    |  |   |      |      |   |   |       
|                     |                                          | Total          |   | $          | 94,019 |            |   | $     | 26 |  |   | $    | (21  | ) |   | $      | 94,024 | 
|                     |                                          |                |   |            |        |            |   |       |    |  |   |      |      |   |   |       
|As of March 31, 2002 |                                          |                |   |            |        |            |   |       |    |  |   |      |      |   |   |       
|                     | Money market funds                       |                | $ | 7,775      |        |            | $ |      |    |  | $ |     |      |   | $ | 7,775  |       
|                     | Certificate of deposits                  |                |   | 502        |        |            |   |      |    |  |   |     |      |   |   | 502    |       
|                     | U.S. Government and federal agency bonds |                |   | 3,000      |        |            |   |      |    |  |   | (7   | )    |   |   | 2,993  |       
|                     | Corporate debt securities                |                |   | 74,646     |        |            |   | 94    |    |  |   | (138 | )    |   |   | 74,602 |       
|                     | Municipal bonds                          |                |   | 12,500     |        |            |   |      |    |  |   |     |      |   |   | 12,500 |       
|                     |                                          |                |   |            |        |            |   |       |    |  |   |      |      |   |   |       
|                     |                                          | Total          |   | $          | 98,423 |            |   | $     | 94 |  |   | $    | (145 | ) |   | $      | 98,372 | 
|                     |                                          |                |   |            |        |            |   |       |    |  |   |      |      |   |   |       

Available for sale securities at March 31,
2003, by contractual maturity, are shown below:

|                                  |       |                      |        |        |  |   |        |        | 
|--------------------------------- | ----- | -------------------- | ------ | ------ |  | - | ------ | ------ | 
|                                  |       |                     
|                                  |       | Estimated Fair Value
|                                  |       | March 31,           
|                                  |       |                     
|                                  |       | 2003                 |        | 2002  
|                                  |       |                      |        |       
|                                  |       |                     
|                                  |       | (In thousands)      
|Due in one year                   |       | $                    | 88,772 |        |  | $ | 84,211 |       
|Due after 1 years through 2 years |       |                      | 5,252  |        |  |   | 14,161 |       
|                                  |       |                      |        |        |  |   |        |       
|                                  | Total |                      | $      | 94,024 |  |   | $      | 98,372 | 
|                                  |       |                      |        |        |  |   |        |       

Above amounts are included in the following:

|                          |       |                |        |        |  |   |        |        | 
|------------------------- | ----- | -------------- | ------ | ------ |  | - | ------ | ------ | 
|                          |       |               
|                          |       | March 31,     
|                          |       |               
|                          |       | 2003           |        | 2002  
|                          |       |                |        |       
|                          |       |               
|                          |       | (In thousands)
|Cash and cash equivalents |       | $              | 27,297 |        |  | $ | 7,775  |       
|Short-term investments    |       |                | 66,727 |        |  |   | 90,597 |       
|                          |       |                |        |        |  |   |        |       
|                          | Total |                | $      | 94,024 |  |   | $      | 98,372 | 
|                          |       |                |        |        |  |   |        |       

Following is a reconciliation of cash and cash
equivalents:

|                              |       |                |        |        |  |   |       |       | 
|----------------------------- | ----- | -------------- | ------ | ------ |  | - | ----- | ----- | 
|                              |       |               
|                              |       | March 31,     
|                              |       |               
|                              |       | 2003           |        | 2002  
|                              |       |                |        |       
|                              |       |               
|                              |       | (In thousands)
|Available-for-sale securities |       | $              | 27,297 |        |  | $ | 7,775 |      
|Cash and bank accounts        |       |                | 1,612  |        |  |   | 321   |      
|                              |       |                |        |        |  |   |       |      
|                              | Total |                | $      | 28,909 |  |   | $     | 8,096 | 
|                              |       |                |        |        |  |   |       |      

46



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Gross realized gains in fiscal 2003, 2002 and
2001, respectively were $0.007 million, $0.003 million
and $0.005 million and gross realized losses in fiscal 2002
were $0.2 million and were included in earnings as a result
of the sales of available for sale securities. There were no
gross realized losses in fiscal 2003 or 2001.

Concentration of Credit Risk.The Company sells its products
primarily to original equipment manufacturers in the
communications industry and government contractors. Credit is
extended based on an evaluation of a customers financial
condition and, generally, collateral is not required. Actual
credit losses may differ from managements estimates. To
date, credit losses have been within managements
expectations, and the Company believes that an adequate
allowance for doubtful accounts has been provided.

Inventories.Inventories are stated at the lower of
standard cost (which approximates actual cost on a first-in,
first-out method) or market.

Significant components of inventories are:

|                |  |                |       |      |  |   |       | 
|--------------- |  | -------------- | ----- | ---- |  | - | ----- | 
|                |  |               
|                |  | March 31,     
|                |  |               
|                |  | 2003           |       | 2002
|                |  |                |       |     
|                |  |               
|                |  | (In thousands)
|Raw materials   |  | $              | 666   |      |  | $ | 2,346 | 
|Work-in-process |  |                | 2,933 |      |  |   | 7,026 | 
|                |  |                |       |      |  |   |       | 
|                |  | $              | 3,599 |      |  | $ | 9,372 | 
|                |  |                |       |      |  |   |       | 

The Company records inventory write-downs for
estimated obsolescence or unmarketable inventory. The
Companys write-downs for excess and obsolete inventory are
primarily based upon forecasted demand and the Companys
backlog of orders for the product. Any inventory write-downs are
reflected in cost of sales in the period the write-downs are
made.

Property and Equipment.Property and equipment are recorded at
cost and depreciated using the straight-line method over their
respective estimated useful lives (generally five years). Assets
recorded under capital leases are amortized by the straight-line
method over their respective useful lives of three to seven
years or the lease term, whichever is less. Leasehold
improvements are amortized by the straight-line method over
their respective estimated useful lives of seven years or the
lease term, whichever is less.

Significant components of property and equipment
are:

|                                          |  |                |         |      |  |   |         |  
|----------------------------------------- |  | -------------- | ------- | ---- |  | - | ------- | -
|                                          |  |               
|                                          |  | March 31,     
|                                          |  |               
|                                          |  | 2003           |         | 2002
|                                          |  |                |         |     
|                                          |  |               
|                                          |  | (In thousands)
|Equipment                                 |  | $              | 35,122  |      |  | $ | 35,839  |  
|Furniture and fixtures                    |  |                | 516     |      |  |   | 451     |  
|Leasehold improvements                    |  |                | 1,819   |      |  |   | 2,509   |  
|                                          |  |                |         |      |  |   |         |  
|                                          |  |                | 37,457  |      |  |   | 38,799  |  
|Accumulated depreciation and amortization |  |                | (26,428 | )    |  |   | (23,960 | )
|                                          |  |                |         |      |  |   |         |  
|Net property and equipment                |  | $              | 11,029  |      |  | $ | 14,839  |  
|                                          |  |                |         |      |  |   |         |  

Long-lived Assets and Strategic Investments.The Company regularly reviews its
long-lived assets and strategic investments for indicators of
impairment and assesses the carrying value of the assets against
market values. When an impairment exists, the Company records an
expense to the extent that the carrying value exceeds fair
market value in the period the assessment is made.

The Company records impairment losses on
long-lived assets used in operations or expected to be disposed
of when events and circumstances indicate that the undiscounted
cash flow estimated to be generated

47



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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


by these assets is less than the carrying amounts
of those assets. The Company considers sensitivities to
capacity, utilization and technological developments in making
related assumptions.

Stock-Based Compensation.The Company generally grants stock
options to its employees for a fixed number of shares with an
exercise price equal to the fair value of the shares on the date
of grant. The Company records compensation related to employees
stock awards under the intrinsic value method and accordingly,
no compensation expense is recognized in the Companys
financial statements in connection with stock options granted to
employees with exercise prices not less than fair value.

Proforma information regarding net loss and net
loss per share under the fair value method is presented below:

|                                                                                                                                           |             |                                          |         |       |   |      |         |       |   |   |         |       |  
|------------------------------------------------------------------------------------------------------------------------------------------ | ----------- | ---------------------------------------- | ------- | ----- | - | ---- | ------- | ----- | - | - | ------- | ----- | -
|                                                                                                                                           |             |                                         
|                                                                                                                                           |             | Years Ended March 31,                   
|                                                                                                                                           |             |                                         
|                                                                                                                                           |             | 2003                                     |         | 2002  |   | 2001
|                                                                                                                                           |             |                                          |         |       |   |     
|                                                                                                                                           |             |                                         
|                                                                                                                                           |             | (in thousands, except per share amounts)
|Net loss, as reported                                                                                                                      |             | $                                        | (17,027 | )     |   | $    | (22,618 | )     |   | $ | (10,602 | )    
|Add: Total stock-based employee compensation
    expense determined under fair value method for all awards, net
    of related tax effects |             |                                          | (5,012  | )     |   |      | (6,219  | )     |   |   | (4,773  | )    
|                                                                                                                                           |             |                                          |         |       |   |      |         |       |   |   |         |      
|Pro forma net loss                                                                                                                         |             | $                                        | (22,039 | )     |   | $    | (28,837 | )     |   | $ | (15,375 | )    
|                                                                                                                                           |             |                                          |         |       |   |      |         |       |   |   |         |      
|Basic and diluted net loss per share:                                                                                                      |             |                                          |         |       |   |      |         |       |   |   |         |      
|                                                                                                                                           | As reported |                                          | $       | (1.39 | ) |      | $       | (1.87 | ) |   | $       | (0.94 | )
|                                                                                                                                           |             |                                          |         |       |   |      |         |       |   |   |         |      
|                                                                                                                                           | Pro forma   |                                          | $       | (1.79 | ) |      | $       | (2.39 | ) |   | $       | (1.36 | )
|                                                                                                                                           |             |                                          |         |       |   |      |         |       |   |   |         |      

Revenue Recognition.Revenue related to product sales is
recognized when the products are shipped to the customer, title
has transferred and no obligations remain. In circumstances
where the collection of payment is not probable at the time of
shipment, the Company defers recognition of the revenue until
payment is collected. The Company provides for expected returns
based on past experience as well as current customer activities.
Customers do not have rights of return outside of products
returned under warranty and, to date, returns have not been
material. Shipping and handling costs are included in costs of
goods sold for all periods presented.

Product Warranty.The Company warrants its products
against defects in design, materials and workmanship, generally
for one year from the date of shipment for all of its products.
The actual term could vary depending on the specific customers.
An accrual for estimated future costs relating to warranty
expense is recorded, as a percentage of revenue based on prior
experience, when revenue is recorded and is included in cost of
goods sold. Factors that affect the Companys warranty
liability include historical and anticipated rates of warranty
claims and cost per claim. The Company periodically assesses the
adequacy of its recorded warranty liabilities and adjusts the
amounts as necessary.

Research and Development.Research and development expenditures
are charged to operations as incurred.

Advertising.The
Company accounts for advertising costs as expense in the period
in which they are incurred. Advertising expense for all years
presented was immaterial.

Net Loss Per Share.Basic and diluted net loss per share
are computed by dividing the net loss for the period by the
weighted average number of common shares outstanding during the
period. Diluted net loss per share excludes the incremental
shares issuable upon the assumed exercise of stock options if
their effect is antidilutive.

48



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


The following table sets forth the potential
shares of common stock that are not included in the computation
of diluted net loss per share because to do so would be
antidilutive for all periods presented:

|                                 |  |                       |           |      |  |      |           |  |  |   |           | 
|-------------------------------- |  | --------------------- | --------- | ---- |  | ---- | --------- |  |  | - | --------- | 
|                                 |  |                      
|                                 |  | Years Ended March 31,
|                                 |  |                      
|                                 |  | 2003                  |           | 2002 |  | 2001
|                                 |  |                       |           |      |  |     
|Options to purchase common stock |  |                       | 1,983,911 |      |  |      | 1,824,294 |  |  |   | 1,549,592 | 
|Average exercise price           |  | $                     | 14.98     |      |  | $    | 16.39     |  |  | $ | 17.48     | 

Comprehensive Loss.Comprehensive loss comprises net loss
and other comprehensive gain (loss). The Company records
unrealized gains and losses on the mark-to-market of its
available for sale investments as the only component of other
comprehensive gain (loss).

The components of comprehensive loss, net of
related tax, for the years ended March 31, 2003, 2002, and
2001 were as follows:

|                                                                                          |  |                       |         |      |  |      |         |   |  |   |         |  
|----------------------------------------------------------------------------------------- |  | --------------------- | ------- | ---- |  | ---- | ------- | - |  | - | ------- | -
|                                                                                          |  |                      
|                                                                                          |  | Years Ended March 31,
|                                                                                          |  |                      
|                                                                                          |  | 2003                  |         | 2002 |  | 2001
|                                                                                          |  |                       |         |      |  |     
|                                                                                          |  |                      
|                                                                                          |  | (in thousands)       
|Net loss                                                                                  |  | $                     | (17,027 | )    |  | $    | (22,618 | ) |  | $ | (10,602 | )
|Unrealized gain (loss) on available for sale
    securities                               |  |                       | 63      |      |  |      | (675    | ) |  |   | 485     |  
|Reclassification adjustments for (gain) loss
    on sale of available for sale securities |  |                       | (7      | )    |  |      | 144     |   |  |   | (5      | )
|                                                                                          |  |                       |         |      |  |      |         |   |  |   |         |  
|Comprehensive loss                                                                        |  | $                     | (16,971 | )    |  | $    | (23,149 | ) |  | $ | (10,122 | )
|                                                                                          |  |                       |         |      |  |      |         |   |  |   |         |  

The components of accumulated comprehensive loss,
net of related tax, at March 31, 2003, 2002, and 2001 were
as follows:

|                                                            |  |                |         |      |  |      |         |   |  |   |         |  
|----------------------------------------------------------- |  | -------------- | ------- | ---- |  | ---- | ------- | - |  | - | ------- | -
|                                                            |  |               
|                                                            |  | March 31,     
|                                                            |  |               
|                                                            |  | 2003           |         | 2002 |  | 2001
|                                                            |  |                |         |      |  |     
|                                                            |  |               
|                                                            |  | (in thousands)
|Accumulated deficit                                         |  | $              | (51,810 | )    |  | $    | (34,783 | ) |  | $ | (12,165 | )
|Unrealized gain (loss) on available for sale
    securities |  |                | 5       |      |  |      | (51     | ) |  |   | 480     |  
|                                                            |  |                |         |      |  |      |         |   |  |   |         |  
|Accumulated comprehensive loss                              |  | $              | (51,805 | )    |  | $    | (34,834 | ) |  | $ | (11,685 | )
|                                                            |  |                |         |      |  |      |         |   |  |   |         |  

Foreign Currency Translation.The U.S. dollar is the functional
currency for the Companys foreign operations. Gains and
losses on the reameasurement into United States dollars of
amounts denominated in foreign currencies are included in net
loss. The total foreign currency translation included in net
loss was a loss of approximately $0.1 million in fiscal
2003 and was not material in fiscal 2002 and 2001.

Principles of Consolidation.The consolidated financial statements
include the accounts of Celeritek and its subsidiaries. All
significant intercompany balances and transactions are
eliminated on consolidation.

Reclassification.Certain amounts reported in previous
years have been reclassified to conform to the current year
presentation.



|        |                
|------- | ---------------
|Note 2. | Special Charges

The special charges of $2.8 million recorded
during the third quarter of fiscal 2003 were due to
Motorolas transition from the model 120v handset platform
on which the Company was the sole source for power amplifier
modules, to the next generation of handset platforms, for which
the Company is not a supplier of power amplifier modules. As a
result of this decrease in revenue and operations, the Company
closed its office in Lincoln, United Kingdom and restructured
various operations in the United States. The $2.8 million
of special charges is comprised of operating lease and fixed
asset impairments and employee termination charges.

49



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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Approximately $1.3 million of the
$2.8 million total charge is due to an operating lease
impairment, which was the result of equipment covered by
operating leases no longer having economic value to the Company.
Another $1.1 million of the $2.8 million total charge
is due to the write off of certain Lincoln fixed assets, mainly
equipment. The Lincoln building, which is owned by the Company,
was reclassified to prepaid and other current assets as a
current asset for resale. The Company expects to be able to sell
the building in the next twelve months. The remaining
$0.4 million of the $2.8 million charge is related to
employee termination charges. The total number of employees
terminated in the United States and the United Kingdom was 44.

During the fourth quarter of fiscal 2003, a
portion of the impaired Lincoln, United Kingdom equipment was
sold to a company founded by former Lincoln management for the
fair market value of $0.3 million. Multiple quotes were
received from third parties in order to determine the sales
price of the equipment. In return for the sale of equipment, the
Company received an unsecured note bearing interest at 5.25% per
annum for the entire amount of the proceeds. After assessing the
collectability of the note, which is payable in two lump sums
over 24 months, the Company decided to record the gain on
disposal as cash is received. The remaining impaired equipment
is expected to be scrapped.

The following table summarizes the Companys
special charges activity as follows (in thousands):

|                                 |  |             |      |           |  |             |        |       |  |   |       |   |  |   |        |  
|-------------------------------- |  | ----------- | ---- | --------- |  | ----------- | ------ | ----- |  | - | ----- | - |  | - | ------ | -
|                                 |  | Employee    |      |           |  |             |        |      
|                                 |  | Termination |      | Excess    |  | Lease       |        |      
|                                 |  | Costs       |      | Equipment |  | Impairments |        | Total
|                                 |  |             |      |           |  |             |        |      
|Fiscal 2003 Special Charges      |  | $           | 350  |           |  | $           | 1,160  |       |  | $ | 1,326 |   |  | $ | 2,836  |  
|Cash Paid                        |  |             | (227 | )         |  |             |       |       |  |   | (276  | ) |  |   | (503   | )
|Non-cash activity                |  |             |     |           |  |             | (1,160 | )     |  |   |      |   |  |   | (1,160 | )
|                                 |  |             |      |           |  |             |        |       |  |   |       |   |  |   |        |  
|Accrual balances, March 31, 2003 |  | $           | 123  |           |  | $           |       |       |  | $ | 1,050 |   |  | $ | 1,173  |  
|                                 |  |             |      |           |  |             |        |       |  |   |       |   |  |   |        |  

In response to a decline in the wireless
infrastructure and mobile handset markets, which included
several semiconductor customers reducing their forecasted demand
in the third quarter of fiscal 2002, the Company evaluated the
ongoing value of its semiconductor capital assets. As a result
of this analysis, the Company recorded an impairment charge of
$11.0 million in the first nine months of fiscal 2002
related to certain assets for which expected future cash flows
are insufficient to cover their carrying value. Of this charge,
$10.5 million was a result of the write-down of capital
assets related to excess capacity due to un-utilized wafer
fabrication equipment and leasehold improvements undertaken to
increase the wafer fabrication area. The $10.5 million
write-down is comprised of $5.4 million related to
abandoned leasehold improvements originally intended to expand
the Companys wafer fabrication facility and
$5.1 million related to un-utilized wafer fabrication
equipment. The fair value used to calculate the equipment
impairment was obtained from third party sources.

The remaining $0.5 million impairment was
the result of a further impairment with respect to certain
capital assets initially written down in the fourth quarter of
fiscal 2001. The capital assets were initially written down to
an estimated fair market value in the fourth quarter of fiscal
2001 due to delayed and cancelled contracts as a result of the
declining wireless market. The Company reassessed the fair
market value based on the current resale market for this type of
equipment during the third quarter of fiscal 2002 and adjusted
the capital assets carrying value accordingly. The Company
reviewed these capital assets as of December 31, 2002 and
determined no indicators of impairment were present that would
indicate the current carrying value of these capital assets was
impaired.

50



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|        |                  
|------- | -----------------
|Note 3. | Asset Acquisition

On October 29, 2002, the Company acquired
Tavanza, Inc. (Tavanza), a privately held
development stage, fabless designer of power amplifier modules
and components for cellular and wireless LAN products, in a
merger transaction. The total purchase price of
$6.1 million consists of the following (in thousands):

|                                       |  |   |       | 
|-------------------------------------- |  | - | ----- | 
|Cash                                   |  | $ | 3,568 | 
|Liabilities assumed                    |  |   | 1,493 | 
|Fair value of assumed options          |  |   | 1,000 | 
|Acquisition legal and accounting costs |  |   | 79    | 
|                                       |  |   |       | 
|Total purchase price                   |  | $ | 6,140 | 
|                                       |  |   |       | 

At the acquisition date, Tavanza did not meet the
accounting criteria to be considered a business acquisition.
Accordingly, the Company accounted for this transaction as an
acquisition of assets as follows. The Company allocated the
acquisition purchase price to the tangible assets, liabilities,
and intangible assets acquired based on their estimated fair
values. Since the transaction was not accounted for as a
business combination, no goodwill was recognized. Excess
purchase price over the already allocated fair value of assets
acquired was allocated on a pro rata basis to the intangible
assets. The fair value assigned to intangible assets acquired
was determined through established valuation techniques.

These valuation techniques included estimating
the stage of development of each in-process research and
development project at the date of acquisition, estimating cash
flows resulting from the expected revenue generated from such
projects, and discounting the net cash flows back to their
present value using an appropriate discount rate. The discount
rate used represents a premium to the Companys cost of
capital. All of the projections used are based on
managements estimates of market size and growth, expected
trends in technology and the expected timing of new product
introductions.

The following is a summary of the purchase price
allocation (in thousands):

|                                         |  |   |       | 
|---------------------------------------- |  | - | ----- | 
|Tangible assets less liabilities assumed |  | $ | 580   | 
|Patent applications                      |  |   | 233   | 
|Assembled workforce                      |  |   | 913   | 
|In-process research and development      |  |   | 4,414 | 
|                                         |  |   |       | 
|Total purchase price                     |  | $ | 6,140 | 
|                                         |  |   |       | 

Purchased intangible assets with definite useful
lives are being amortized over that useful life beginning in the
third quarter of fiscal 2003. The Company has no intangible
assets with indefinite useful lives. In-process research and
development of $4.4 million, at the date of purchase had
not yet reached technical feasibility, had no alternative future
use and was therefore expensed.



|        |                  
|------- | -----------------
|Note 4. | Intangible Assets

Intangible assets consist of the following (in
thousands):

|                    |  |              |         |                |  |              |       |          |  |   |      |   |  |   |     | 
|------------------- |  | ------------ | ------- | -------------- |  | ------------ | ----- | -------- |  | - | ---- | - |  | - | --- | 
|                    |  |              |         |               
|                    |  |              |         | March 31, 2003
|                    |  |              |         |               
|                    |  |              |         | Gross          |  |              |       | Net     
|                    |  | Amortization |         | Carrying       |  | Accumulated  |       | Carrying
|                    |  | Period       |         | Amount         |  | Amortization |       | Amount  
|                    |  |              |         |                |  |              |       |         
|Patent application  |  |              | 4 years |                |  | $            | 233   |          |  | $ | (25  | ) |  | $ | 208 | 
|Assembled workforce |  |              | 2 years |                |  |              | 913   |          |  |   | (190 | ) |  |   | 723 | 
|                    |  |              |         |                |  |              |       |          |  |   |      |   |  |   |     | 
|                    |  |              |         |                |  | $            | 1,146 |          |  | $ | (215 | ) |  | $ | 931 | 
|                    |  |              |         |                |  |              |       |          |  |   |      |   |  |   |     | 

51



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|        |                                     
|------- | ------------------------------------
|Note 5. | Costs Related to Shareholder Actions

During the second quarter of fiscal 2003, the
Company received an unsolicited conditional offer from Anaren
Inc. for all of the outstanding shares of the Companys
common stock. The Board of Directors voted unanimously to reject
the offer as not in the best interests of the Companys
shareholders. In the fourth quarter of fiscal 2003, a group of
shareholders (the Celeritek Shareholder Protective
Committee) called a special meeting to remove the
Companys Board of Directors from office and replace them
with a different slate of candidates. Expenses for legal and
investment advisors of $1.3 million for fiscal 2003 have
been incurred relating to both of these actions and have been
reported in loss from operations under the caption Costs
related to shareholder actions. In March 2003, the Company
changed its investment advisors. See note 17 for
commitments arising from contracts for such services.



|        |                 
|------- | ----------------
|Note 6. | Product Warranty

The Company warrants its products against defects
in design, materials, and workmanship, generally for one year
from the date of shipment for all of its products. The actual
term could vary depending on the specific customers. An accrual
for estimated future costs relating to warranty expense is
recorded, as a percentage of revenue based on prior experience,
when revenue is recorded and is included in cost of goods sold.
Factors that affect the Companys warranty liability
include historical and anticipated rates of warranty claims and
cost per claim. The Company periodically assesses the adequacy
of its recorded warranty liabilities and adjusts the amounts as
necessary.

Changes in the Companys product liability
during the three months and twelve months ended March 31,
2003 were as follows (in thousands):

|                                          |  |                 |      |                 |  |      |     |      |  |   |      |   |  |   |      |  
|----------------------------------------- |  | --------------- | ---- | --------------- |  | ---- | --- | ---- |  | - | ---- | - |  | - | ---- | -
|                                          |  |                 |      |                
|                                          |  | Three months    |      | Twelve months  
|                                          |  | ended March 31, |      | ended March 31,
|                                          |  |                 |      |                
|                                          |  | 2003            |      | 2002            |  | 2003 |     | 2002
|                                          |  |                 |      |                 |  |      |     |     
|Beginning accrual balance                 |  | $               | 500  |                 |  | $    | 501 |      |  | $ | 500  |   |  | $ | 502  |  
|Warranties issued                         |  |                 | 80   |                 |  |      | 77  |      |  |   | 243  |   |  |   | 378  |  
|Adjustment related to change in estimates |  |                 | (100 | )               |  |      |    |      |  |   | (100 | ) |  |   |     |  
|Charges incurred                          |  |                 | (80  | )               |  |      | (78 | )    |  |   | (243 | ) |  |   | (380 | )
|                                          |  |                 |      |                 |  |      |     |      |  |   |      |   |  |   |      |  
|Ending accrual balance                    |  | $               | 400  |                 |  | $    | 500 |      |  | $ | 400  |   |  | $ | 500  |  
|                                          |  |                 |      |                 |  |      |     |      |  |   |      |   |  |   |      |  



|        |                      
|------- | ---------------------
|Note 7. | Strategic Investments

Handset
Design Company

In December 2001, the Company invested
$0.5 million in a Korean handset design company. On
April 1, 2002, the Company invested an additional
$2.0 million in the handset design company. The Company
does not have significant influence over the management of the
handset design company and accordingly has accounted for the
investment on a cost basis in all reported periods. The Company
reviewed the investment as of March 31, 2003 and determined
no indicators of impairment were present that would indicate the
current carrying value of the investment was impaired.

GaAs
Foundry

In December 2000, the Company invested
approximately $2.4 million in a GaAs foundry under
construction in Taiwan in exchange for a strategic interest. The
Company has accounted for this investment using the cost basis
in all reported periods.

During fiscal 2002 and fiscal 2003, the Company
recorded impairment charges of approximately $1.7 million
and $0.4 million respectively, against its strategic
investment in the Taiwanese foundry, which was deemed, in those
respective periods, to have an other than temporary decline in
value.

52



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|        |                           
|------- | --------------------------
|Note 8. | Related Party Transactions

The Company has outstanding loans totaling
$1.5 million at March 31, 2003 and $1.6 million
at March 31, 2002 to certain officers and employees. The
notes are relocation loans collateralized by certain real
property assets, bear no interest and have maturities through
2019. The principal will be repaid at various dates. If an
employee ceases being employed by the Company, the principal
outstanding will be due and payable within 90 days. During
fiscal 2001, loans were granted to officers and employees
totaling approximately $1.8 million. No loans were granted
to officers and employees during fiscal 2002 or 2003. During
fiscal 2001, 2002 and 2003 cash in the amount of
$0.02 million, $0.3 million and $0.1 million,
respectively, was received for the outstanding loans to officers
and employees.



|        |                    
|------- | -------------------
|Note 9. | Accrued Liabilities

Significant components of accrued liabilities are:

|                    |  |                |       |      |  |   |       | 
|------------------- |  | -------------- | ----- | ---- |  | - | ----- | 
|                    |  |               
|                    |  | March 31,     
|                    |  |               
|                    |  | 2003           |       | 2002
|                    |  |                |       |     
|                    |  |               
|                    |  | (In thousands)
|Accrued expenses    |  | $              | 1,597 |      |  | $ | 636   | 
|Accrued commissions |  |                | 657   |      |  |   | 775   | 
|Warranty accrual    |  |                | 400   |      |  |   | 500   | 
|Other               |  |                | 1,547 |      |  |   | 1,187 | 
|                    |  |                |       |      |  |   |       | 
|                    |  | $              | 4,201 |      |  | $ | 3,098 | 
|                    |  |                |       |      |  |   |       | 



|         |       
|-------- | ------
|Note 10. | Leases

The Company leases equipment under capital and
non-cancelable operating leases. The Company also leases certain
facilities used in operations under non-cancelable operating
leases that expire at various times through the year 2007.
Property and equipment include the following amounts under
leases that have been capitalized:

|                              |  |                |        |      |  |   |        |  
|----------------------------- |  | -------------- | ------ | ---- |  | - | ------ | -
|                              |  |               
|                              |  | March 31,     
|                              |  |               
|                              |  | 2003           |        | 2002
|                              |  |                |        |     
|                              |  |               
|                              |  | (In thousands)
|Equipment                     |  | $              | 8,413  |      |  | $ | 8,994  |  
|Less accumulated amortization |  |                | (4,069 | )    |  |   | (2,652 | )
|                              |  |                |        |      |  |   |        |  
|                              |  | $              | 4,344  |      |  | $ | 6,342  |  
|                              |  |                |        |      |  |   |        |  

Amortization of leased assets is included in
depreciation and amortization expense. Certain of the leased
assets require the Company to maintain adequate liability
insurance coverage. The leases are secured by the related assets.

53



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Future minimum payments under capital and
non-cancelable operating leases with initial terms of one year
or more consisted of the following at March 31, 2003:

|                                            |                              |                |       |           |  |   |       |       | 
|------------------------------------------- | ---------------------------- | -------------- | ----- | --------- |  | - | ----- | ----- | 
|                                            |                              | Capital        |       | Operating
|                                            |                              | Leases         |       | Leases   
|                                            |                              |                |       |          
|                                            |                              |               
|                                            |                              | (In thousands)
|2004                                        |                              | $              | 686   |           |  | $ | 3,880 |      
|2005                                        |                              |                | 565   |           |  |   | 2,572 |      
|2006                                        |                              |                | 279   |           |  |   | 775   |      
|2007                                        |                              |                |      |           |  |   | 89    |      
|2008                                        |                              |                |      |           |  |   | 56    |      
|Thereafter                                  |                              |                |      |           |  |   | 499   |      
|                                            |                              |                |       |           |  |   |       |      
|                                            | Total minimum lease payments |                |       | 1,530     |  |   | $     | 7,871 | 
|                                            |                              |                |       |           |  |   |       |      
|Less amounts representing interest          |                              |                | (140  | )         |  |   |       |      
|                                            |                              |                |       |           |  |   |       |      
|Present value of net minimum lease payments |                              |                | 1,390 |           |  |   |       |      
|Less current portion                        |                              |                | (597  | )         |  |   |       |      
|                                            |                              |                |       |           |  |   |       |      
|                                            |                              | $              | 793   |           |  |   |       |      
|                                            |                              |                |       |           |  |   |       |      

Rent expense was approximately $5.5 million,
$7.2 million, and $5.9 million for the years ended
March 31, 2003, 2002, and 2001, respectively.



|         |               
|-------- | --------------
|Note 11. | Long-Term Debt

The Company has various equipment notes
outstanding with lenders, which are secured by the related
equipment and carry interest rates ranging from 8.87% to 10.97%.
Several of these notes have covenants attached pertaining to
liquidity levels and minimum tangible net worth. As of
March 31, 2003 the Company was in compliance with all
covenants.

Future minimum principle payments on debt
consisted of the following at March 31, 2003:

|                     |                                  |                |        |       | 
|-------------------- | -------------------------------- | -------------- | ------ | ----- | 
|                     |                                  | Debt          
|                     |                                  |               
|                     |                                  | (In thousands)
|2004                 |                                  | $              | 2,550  |      
|2005                 |                                  |                | 1,829  |      
|2006                 |                                  |                | 290    |      
|                     |                                  |                |        |      
|                     | Total minimum principle payments |                |        | 4,669 | 
|Less current portion |                                  |                | (2,543 | )    
|                     |                                  |                |        |      
|Non-current portion  |                                  | $              | 2,126  |      
|                     |                                  |                |        |      

54



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Note 12.     Income
Taxes

Significant components of the provision
(benefit) for income taxes are as follows:

|                                     |         |                       |     |      |     |      |      |      |      |   |     |     |     | 
|------------------------------------ | ------- | --------------------- | --- | ---- | --- | ---- | ---- | ---- | ---- | - | --- | --- | --- | 
|                                     |         |                      
|                                     |         | Years Ended March 31,
|                                     |         |                      
|                                     |         | 2003                  |     | 2002 |     | 2001
|                                     |         |                       |     |      |     |     
|                                     |         |                      
|                                     |         | (In thousands)       
|Current:                             |         |                       |     |      |     |      |      |      |      |   |     |    
|                                     | Federal |                       | $   |     |     |      | $    | (244 | )    |   | $   | 125 |    
|                                     | State   |                       |     |     |     |      |      |     |      |   |     |    |    
|                                     | Foreign |                       |     | 136  |     |      |      | 64   |      |   |     |    |    
|                                     |         |                       |     |      |     |      |      |      |      |   |     |    
|                                     |         | Total current         |     |      | 136 |      |      |      | (180 | ) |     |     | 125 | 
|Deferred:                            |         |                       |     |      |     |      |      |      |      |   |     |    
|                                     | Federal |                       |     |     |     |      |      |     |      |   |     |    |    
|                                     | State   |                       |     |     |     |      |      |     |      |   |     |    |    
|                                     |         |                       |     |      |     |      |      |      |      |   |     |    
|                                     |         | Total deferred        |     |      |    |      |      |      |     |   |     |     |    | 
|                                     |         |                       |     |      |     |      |      |      |      |   |     |    
|Provision (benefit) for income taxes |         | $                     | 136 |      |     | $    | (180 | )    |      | $ | 125 |    
|                                     |         |                       |     |      |     |      |      |      |      |   |     |    

Income (loss) before provision for income
taxes consisted of the following:

|         |                                                 |                       |         |         |   |      |         |         |   |   |         |         |  
|-------- | ----------------------------------------------- | --------------------- | ------- | ------- | - | ---- | ------- | ------- | - | - | ------- | ------- | -
|         |                                                 |                      
|         |                                                 | Years Ended March 31,
|         |                                                 |                      
|         |                                                 | 2003                  |         | 2002    |   | 2001
|         |                                                 |                       |         |         |   |     
|         |                                                 |                      
|         |                                                 | (In thousands)       
|Domestic |                                                 | $                     | (17,338 | )       |   | $    | (23,076 | )       |   | $ | (10,707 | )      
|         | Foreign                                         |                       |         | 447     |   |      |         | 278     |   |   |         | 230     |  
|         |                                                 |                       |         |         |   |      |         |         |   |   |         |        
|         | Income (loss) before provision for income taxes |                       | $       | (16,891 | ) |      | $       | (22,798 | ) |   | $       | (10,477 | )
|         |                                                 |                       |         |         |   |      |         |         |   |   |         |        

The reconciliation of the provision
(benefit) for income taxes computed at the United States
federal statutory tax rate to the effective tax rate is as
follows:

|                                     |  |                                    |        |         |  |        |       |         |  |        |        |         |  |  |       |    |  |   |        |   |  |  |       |   
|------------------------------------ |  | ---------------------------------- | ------ | ------- |  | ------ | ----- | ------- |  | ------ | ------ | ------- |  |  | ----- | -- |  | - | ------ | - |  |  | ----- | --
|                                     |  |                                   
|                                     |  | Years Ended March 31,             
|                                     |  |                                   
|                                     |  |                                    |        |         |  |       
|                                     |  | 2003                               |        | 2002    |  | 2001  
|                                     |  |                                    |        |         |  |       
|                                     |  | Amount                             |        | Percent |  | Amount |       | Percent |  | Amount |        | Percent
|                                     |  |                                    |        |         |  |        |       |         |  |        |        |        
|                                     |  |                                   
|                                     |  | (In thousands, except percentages)
|At U.S. statutory rate               |  | $                                  | (5,743 | )       |  |        | (34.0 | )%      |  | $      | (7,751 | )       |  |  | (34.0 | )% |  | $ | (3,545 | ) |  |  | (34.0 | )%
|Change in valuation allowance        |  |                                    | 4,219  |         |  |        | 25.0  |         |  |        | 7,751  |         |  |  | 34.0  |    |  |   | 3,545  |   |  |  | 34.0  |   
|In-process research and development  |  |                                    | 1,501  |         |  |        | 8.9   |         |  |        |       |         |  |  |      |    |  |   |       |   |  |  |      |   
|Foreign taxes                        |  |                                    | 136    |         |  |        | 0.8   |         |  |        | 64     |         |  |  | 0.3   |    |  |   |       |   |  |  |      |   
|Benefit due to change in tax law     |  |                                    |       |         |  |        |      |         |  |        | (244   | )       |  |  | (1.1  | )  |  |   |       |   |  |  |      |   
|Federal alternative minimum tax      |  |                                    |       |         |  |        |      |         |  |        |       |         |  |  |      |    |  |   | 125    |   |  |  | 1.2   |   
|Other                                |  |                                    | 23     |         |  |        | 0.1   |         |  |        |       |         |  |  |      |    |  |   |       |   |  |  |      |   
|                                     |  |                                    |        |         |  |        |       |         |  |        |        |         |  |  |       |    |  |   |        |   |  |  |       |   
|Provision (benefit) for income taxes |  | $                                  | 136    |         |  |        | 0.8   | %       |  | $      | (180   | )       |  |  | (0.8  | )% |  | $ | 125    |   |  |  | 1.2   | % 
|                                     |  |                                    |        |         |  |        |       |         |  |        |        |         |  |  |       |    |  |   |        |   |  |  |       |   

55



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Deferred income taxes reflect the net tax effect
of temporary differences between the carrying amounts of assets
and liabilities for financial reporting purposes and the amounts
used for income tax purposes. The significant components of the
Companys deferred tax assets and liabilities are as
follows:

|                                                          |  |                |         |      |  |   |         |  
|--------------------------------------------------------- |  | -------------- | ------- | ---- |  | - | ------- | -
|                                                          |  |               
|                                                          |  | March 31,     
|                                                          |  |               
|                                                          |  | 2003           |         | 2002
|                                                          |  |                |         |     
|                                                          |  |               
|                                                          |  | (In thousands)
|Deferred tax assets:                                      |  |                |         |      |  |   |         |  
|Inventory valuation                                       |  | $              | 5,650   |      |  | $ | 4,637   |  
|Accruals and reserves not deductible for tax
    purposes |  |                | 2,005   |      |  |   | 6,394   |  
|Net operating loss carryforwards                          |  |                | 12,829  |      |  |   | 7,158   |  
|Tax credit carryforwards                                  |  |                | 2,197   |      |  |   | 1,925   |  
|Other                                                     |  |                | 896     |      |  |   | 484     |  
|                                                          |  |                |         |      |  |   |         |  
|Deferred tax assets                                       |  |                | 23,577  |      |  |   | 20,598  |  
|Valuation allowance                                       |  |                | (22,972 | )    |  |   | (20,598 | )
|                                                          |  |                |         |      |  |   |         |  
|                                                          |  | $              | 605     |      |  | $ |        |  
|                                                          |  |                |         |      |  |   |         |  
|Deferred tax liabilities:                                 |  |                |         |      |  |   |         |  
|Acquisition-related item                                  |  | $              | (605    | )    |  | $ |        |  
|                                                          |  |                |         |      |  |   |         |  
|Net deferred tax assets                                   |  | $              |        |      |  | $ |        |  
|                                                          |  |                |         |      |  |   |         |  

As of March 31, 2003 the Company had net
deferred tax assets of approximately $23.0 million.
Realization of the deferred tax assets is dependent upon future
earnings, the timing and amount of which are uncertain.
Accordingly, a valuation allowance, in an amount equal to the
net deferred tax assets as of March 31, 2003 was recorded.

The valuation allowance for deferred tax assets
increased by approximately $2.4 million, $9.7 million
and $3.6 million during the years ended March 31,
2003, March 31, 2002 and March 31, 2001, respectively.
Approximately $1.0 million of the valuation allowance was
attributable to acquisition-related items that if and when
realized in future periods, will first reduce the carrying value
of long-lived intangible assets of the acquired subsidiary and
then income tax expense.

As of March 31, 2003, the Company had
federal net operating loss and tax credit carryforwards of
approximately $35.3 million and $0.9 million,
respectively. The federal net operating loss and tax credit
carryforwards will expire beginning in 2021 and 2012, if not
utilized.

The Company also had state net operating loss and
tax credit carryforwards of approximately $14.0 million and
$2.0 million, respectively. The state net operating loss
and California Manufacturers Investment credit
carryforwards will expire beginning in 2007 and 2010, if not
utilized. The state research and development tax credits will
carry forward indefinitely.

Utilization of the net operating loss
carryforwards and tax credit carryforwards may be subject to
substantial annual limitation due to ownership change
limitations provided by the Internal Revenue Code of 1986, as
amended, and similar state provisions. The annual limitation may
result in the expiration of net operating loss carryforwards and
tax credit carryforwards before utilization.

Note 13.     Salary
Deferral Plan

The Company maintains a Salary Deferral Plan (the
Plan) which is qualified under Section 401(k) of the
Internal Revenue Code and allows all eligible employees to defer
a percentage of their earnings on a pretax basis through
contributions to the Plan. The Plan provides for employer
contributions at the discretion of the

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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Board of Directors. Company contributions to the
Plan were approximately $185,000 in fiscal 2003, $253,000 in
fiscal 2002, and $159,000 in fiscal 2001. Administrative
expenses relating to the Plan are insignificant.

Note
14.     Shareholders
Equity

Preferred Stock

The Board of Directors has the authority, without
further action by the shareholders, to issue up to 2,000,000
shares of preferred stock in one or more series and to fix the
designations, powers, preferences, privileges, and relative
participation, optional, or special rights and the
qualifications, limitations or restrictions thereof, including
dividend rights, conversion rights, voting rights, terms of
redemption and liquidation preferences, any or all of which may
be greater than the rights of the common stock.

Employee Stock Purchase Plan

Under the Companys Employee Qualified Stock
Purchase Plan (the ESPP), 500,000 shares of common stock were
originally reserved for issuance to employees of the Company. On
July 27, 2001 the Companys shareholders approved an
amendment to the ESPP to increase the number of shares of common
stock reserved for issuance thereunder from 500,000 to
1,000,000. During the fiscal year ended March 31, 2003,
2002, and 2001, 80,645, 71,087, and 121,045 shares of common
stock, respectively, were purchased under the ESPP. The Company
has 381,206 shares remaining reserved for future issuance under
this Plan.

Stock Option Plans

1994 Stock
Option Plan

Under the 1994 Stock Option Plan (the 1994 Plan),
which was approved in April 1994 and expires ten years from
adoption, the Company may grant either incentive stock options
or nonstatutory stock options to certain employees and
consultants as designated by the Board of Directors. The 1994
Plan provides that (i) the exercise of an incentive stock
option will be no less than the fair market value of the
Companys common stock at the date of grant, (ii) the
exercise price of a nonstatutory stock option will be no less
than 85% of the fair market value, and (iii) the exercise
price to an optionee who possesses more than 10% of the total
combined voting power of all classes of stock will be no less
than 110% of the fair market value. The plan administrator has
the authority to set exercise dates (no longer than ten years
from the date of grant or five years for an optionee who meets
the 10% criteria), payment terms, and other provisions for each
grant. Unexercised options are canceled upon termination of
employment and become available under the 1994 Plan. The number
of shares reserved for issuance under the 1994 Plan shall be
increased by an amount equal to the lesser of (i) 250,000
shares, (ii) 3% of the outstanding shares of the
Companys common stock on such a date or (iii) a
lesser amount determined by the Board of Directors of the
Company. The Company has reserved 1,874,947 shares for future
issuance under the 1994 Plan.

2000
Nonstatutory Stock Option Plan

On March 23, 2000, the Board of Directors
approved the 2000 Nonstatutory Stock Option Plan (the 2000 Plan)
under which 200,000 shares of common stock have been reserved
for issuance to employees and consultants. The Company has
200,000 shares remaining reserved for future issuance under the
2000 plan.

Tavanza, Inc.
Statutory Stock Option Plan

On October 29, 2002, the Company assumed all
the outstanding options to purchase Tavanza common stock
included in the Tavanza, Inc. Statutory Stock Option Plan, (the
Tavanza Plan). The Company has reserved 190,000 shares for
future issuance under the Tavanza Plan upon exercise of the
assumed options.

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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Activity under the 1994 Plan, the 2000 Plan and
the Tavanza Stock Option Plan is set forth below:

|                          |                                                   |           |         |                     |   |           |           |          |   |   |      |       |  |   |   |  |        |       |  |   |       |       | 
|------------------------- | ------------------------------------------------- | --------- | ------- | ------------------- | - | --------- | --------- | -------- | - | - | ---- | ----- |  | - | - |  | ------ | ----- |  | - | ----- | ----- | 
|                          |                                                   | Shares    |         |                     |   |           |           |          |   |   |      |      
|                          |                                                   | Available |         | Number of           |   |           |           |          |   |   |      |      
|                          |                                                   | for Grant |         | Shares              |   |           |           |          |   |   |      |      
|                          |                                                   |           |         |                     |   |           |           |          |   |   |      |      
|                          |                                                   |           |         |                     |   | Weighted 
|                          |                                                   |           |         | Options Outstanding |   | Average  
|                          |                                                   |           |         |                     |   | Exercise 
|                          |                                                   |           |         |                     |   |           |           | Price   
|                          |                                                   |           |         |                     |   | Price     |           |         
|                          |                                                   |           |         |                     |   | Per Share |           |         
|                          |                                                   |           |         |                     |   |           |           |         
|Balance at March 31, 2000 |                                                   |           | 250,086 |                     |   |           | 1,078,320 |          |   | $ | 3.00 |       |  |  |   |  | $52.63 |       |  | $ | 6.31  |      
|                          | Additional shares authorized for 1994 Plan        |           |         | 750,000             |   |           |           |          |   |   |      |       |  |   |   |  |        |       |  |   |       |       | 
|                          | Shares authorized for 2000 Plan                   |           |         | 200,000             |   |           |           |          |   |   |      |       |  |   |   |  |        |       |  |   |       |       | 
|                          | Options granted                                   |           |         | (722,500            | ) |           |           | 722,500  |   |   |      | 12.63 |  |   |  |  |        | 53.75 |  |   |       | 31.43 | 
|                          | Options exercised                                 |           |         |                    |   |           |           | (194,422 | ) |   |      | 3.00  |  |   |  |  |        | 7.63  |  |   |       | 4.90  | 
|                          | Options canceled and expired                      |           |         | 56,806              |   |           |           | (56,806  | ) |   |      | 4.00  |  |   |  |  |        | 53.75 |  |   |       | 23.83 | 
|                          |                                                   |           |         |                     |   |           |           |          |   |   |      |       |  |  
|Balance at March 31, 2001 |                                                   |           | 534,392 |                     |   |           | 1,549,592 |          |   | $ | 3.00 |       |  |  |   |  | $53.75 |       |  | $ | 17.48 |      
|                          | Additional shares authorized for 1994 Plan        |           |         | 250,000             |   |           |           |          |   |   |      |       |  |   |   |  |        |       |  |   |       |       | 
|                          | Options granted                                   |           |         | (709,000            | ) |           |           | 709,000  |   |   |      | 10.00 |  |   |  |  |        | 14.53 |  |   |       | 11.02 | 
|                          | Options exercised                                 |           |         |                    |   |           |           | (224,713 | ) |   |      | 3.00  |  |   |  |  |        | 13.13 |  |   |       | 5.15  | 
|                          | Options canceled and expired                      |           |         | 209,585             |   |           |           | (209,585 | ) |   |      | 4.00  |  |   |  |  |        | 53.75 |  |   |       | 18.34 | 
|                          |                                                   |           |         |                     |   |           |           |          |   |   |      |       |  |   |   |  |        |       |  |   |       |      
|Balance at March 31, 2002 |                                                   |           | 284,977 |                     |   |           | 1,824,294 |          |   | $ | 3.00 |       |  |  |   |  | $53.75 |       |  | $ | 16.39 |      
|                          | Assumed Tavanza, Inc. Statutory stock option plan |           |         | 200,000             |   |           |           |          |   |   |      |       |  |   |   |  |        |       |  |   |       |       | 
|                          | Options granted                                   |           |         | (375,000            | ) |           |           | 375,000  |   |   |      | 6.74  |  |   |  |  |        | 9.44  |  |   |       | 7.65  | 
|                          | Options exercised                                 |           |         |                    |   |           |           | (33,324  | ) |   |      | 4.00  |  |   |  |  |        | 6.94  |  |   |       | 5.61  | 
|                          | Options canceled and expired                      |           |         | 171,059             |   |           |           | (182,059 | ) |   |      | 3.00  |  |   |  |  |        | 53.75 |  |   |       | 15.09 | 
|                          |                                                   |           |         |                     |   |           |           |          |   |   |      |       |  |   |   |  |        |       |  |   |       |      
|Balance at March 31, 2003 |                                                   |           | 281,036 |                     |   |           | 1,983,911 |          |   | $ | 3.00 |       |  |  |   |  | $53.75 |       |  | $ | 14.98 |      
|                          |                                                   |           |         |                     |   |           |           |          |   |   |      |       |  |   |   |  |        |       |  |   |       |      

At March 31, 2002 and 2001, outstanding
options covering 1,074,169 and 585,031 shares were exercisable.

The following table summarizes information about
stock options outstanding and exercisable at March 31, 2003:

|                |  |                     |           |                     |  |          |            |             |  |          |       |  |  |  |           |  |  |   |       | 
|--------------- |  | ------------------- | --------- | ------------------- |  | -------- | ---------- | ----------- |  | -------- | ----- |  |  |  | --------- |  |  | - | ----- | 
|                |  |                     |           |                    
|                |  | Options Outstanding |           | Options Exercisable
|                |  |                     |           |                    
|                |  |                     |           | Weighted            |  | Weighted |            |             |  | Weighted
|                |  |                     |           | Average             |  | Average  |            |             |  | Average 
|Range of        |  | Number              |           | Remaining           |  | Exercise |            | Number      |  | Exercise
|Exercise Prices |  | Outstanding         |           | Contractual Life    |  | Price    |            | Exercisable |  | Price   
|                |  |                     |           |                     |  |          |            |             |  |         
|$3.00 $7.05    |  |                     | 702,203   |                     |  |          | 6.47 years |             |  | $        | 5.78  |  |  |  | 460,301   |  |  | $ | 5.17  | 
|$7.92$12.13    |  |                     | 768,500   |                     |  |          | 8.71 years |             |  | $        | 10.47 |  |  |  | 241,137   |  |  | $ | 10.88 | 
|$13.13$53.75   |  |                     | 513,208   |                     |  |          | 7.39 years |             |  | $        | 34.31 |  |  |  | 372,731   |  |  | $ | 33.40 | 
|                |  |                     |           |                     |  |          |            |             |  |          |       |  |  |  |           |  |  |   |       | 
|                |  |                     | 1,983,911 |                     |  |          | 7.57 years |             |  | $        | 14.98 |  |  |  | 1,074,169 |  |  | $ | 16.23 | 
|                |  |                     |           |                     |  |          |            |             |  |          |       |  |  |  |           |  |  |   |       | 

The Company utilized the intrinsic value method
in accounting for its stock options since, as discussed below,
the alternative fair market value accounting requires the use of
option valuation models that were not developed for use in
valuing stock options. Under the intrinsic value method, if the
exercise price of the Companys stock options is equal to
the market price of the underlying stock on the date of grant,
no expense is recognized.

Pro forma information regarding net loss and net
loss per share, as disclosed in note 1, is required by
Statement of Financial Accounting Standards No. 123,
Accounting for Stock-based Compensation (SFAS 123), as amended
by SFAS 148, and has been determined as if the Company had
accounted for its stock options granted subsequent to
December 31, 1994 under the fair value method of SFAS 123.
The fair market

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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


value for options granted prior to December 1995,
the date of the initial public offering of the Companys
common stock, was estimated at the date of grant using the
Minimum Value Method. The fair market value for options granted
subsequent to December 1995 was estimated at the date of grant
using the Black-Scholes option-pricing model. The Company valued
its employee stock options using the following weighted-average
assumptions:

|                         |  |                       |         |      |  |      |         |  |  |  |         | 
|------------------------ |  | --------------------- | ------- | ---- |  | ---- | ------- |  |  |  | ------- | 
|                         |  |                      
|                         |  | Years Ended March 31,
|                         |  |                      
|                         |  | 2003                  |         | 2002 |  | 2001
|                         |  |                       |         |      |  |     
|Risk-free interest rate  |  |                       | 4.1%    |      |  |      | 5.0%    |  |  |  | 5.7%    | 
|Dividend yield           |  |                       | 0.0%    |      |  |      | 0.0%    |  |  |  | 0.0%    | 
|Volatility               |  |                       | 88.7%   |      |  |      | 90.5%   |  |  |  | 92.1%   | 
|Expected life of options |  |                       | 5 years |      |  |      | 5 years |  |  |  | 5 years | 

The Company used the following weighted average
assumptions for its ESPP:

|                         |  |                       |           |      |  |      |           |  |  |  |           | 
|------------------------ |  | --------------------- | --------- | ---- |  | ---- | --------- |  |  |  | --------- | 
|                         |  |                      
|                         |  | Years Ended March 31,
|                         |  |                      
|                         |  | 2003                  |           | 2002 |  | 2001
|                         |  |                       |           |      |  |     
|Risk-free interest rate  |  |                       | 1.7%      |      |  |      | 4.1%      |  |  |  | 5.7%      | 
|Dividend yield           |  |                       | 0.0%      |      |  |      | 0.0%      |  |  |  | 0.0%      | 
|Volatility               |  |                       | 88.7%     |      |  |      | 90.5%     |  |  |  | 92.1%     | 
|Expected life of options |  |                       | 0.5 years |      |  |      | 0.5 years |  |  |  | 0.5 years | 

The Black-Scholes option valuation model was
developed for use in estimating the fair market value of traded
options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected
stock price volatility. Because the Companys stock options
have characteristics significantly different from those of
traded options, and because changes in the subjective input
assumptions can materially affect the fair market value
estimate, in managements opinion, the existing models do
not necessarily provide a reliable measure of the fair market
value of its options.

The weighted average grant date fair value of
options granted during the fiscal years ended March 31,
2003, 2002, and 2001 was $5.92, $7.99, and $23.18, respectively.
The weighted average grant date fair value of ESPP shares
granted during the fiscal years ended March 31, 2003, 2002,
and 2001 was $3.01, $6.35, and $4.11, respectively.

Outside Directors Stock Option
Plan

Under the Outside Directors Stock Option
Plan (the Directors Plan), options are granted
automatically at periodic intervals to nonemployee members of
the Board of Directors at an exercise price equal to 100% of the
fair market value of the common stock on the date of grant. Such
options have a maximum term of 10 years. New directors are
automatically granted options to purchase 6,000 shares of common
stock at their date of election or appointment to the Board. On
the fourth anniversary of serving on the Board and on each
anniversary thereof, each director is automatically granted an
additional 1,500 options to purchase shares of common stock.
During the fiscal year ended March 31, 2003, 12,000 options to
purchase shares of common stock were granted. At March 31,
2003, options to purchase 45,000 shares of common stock were
outstanding of which 33,000 options were exercisable at weighted
average exercise prices of $9.01 and $9.72, respectively. The
Company had 72,000 shares reserved for future issuance under the
Directors Plan as of the end of fiscal 2003. See
Note 20 for option grants subsequent to March 31, 2003.

Purchase Rights

The Board of Directors declared a dividend of one
right for each share of common stock (the Right) to be paid on
April 8, 1999, to shareholders of record at such date. Each
Right represents the right to purchase

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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


one one-thousandth of a share of preferred stock
at an exercise price of $45.00 per Right. All common stock
issued after April 9, 1999 contains the Right. See
Note 20 for subsequent changes to the rights plan.

Note 15.     Business
Segment Data and Related Information

The Company operates in one business segment, the
sale of GaAs-based products for the wireless communications
market to semiconductor and subsystems customers.

The chief operating decision-maker has been
identified as the Chief Executive Officer (CEO). Revenue from
semiconductor components was $29.3 million in fiscal 2003,
$30.4 million in fiscal 2002 and $42.0 million in
fiscal 2001. Revenue from GaAs-based subsystems was
$20.1 million in fiscal 2003, $26.7 million in fiscal
2002 and $43.1 million in fiscal 2001.

Significant
customers representing 10% or more of total revenues

During the fiscal year ended March 31, 2003,
Motorola accounted for approximately 41% of net sales. During
the fiscal year ended March 31, 2002, Motorola accounted
for approximately 43% of net sales. During the fiscal year ended
March 31, 2001, Motorola accounted for approximately 21% of
net sales, and DMC Stratex Networks accounted for approximately
10% of net sales.

The following is a summary of operations by
geographic region:

|                            |                |                       |        |        |  |      |        |        |  |   |        |        | 
|--------------------------- | -------------- | --------------------- | ------ | ------ |  | ---- | ------ | ------ |  | - | ------ | ------ | 
|                            |                |                      
|                            |                | Years Ended March 31,
|                            |                |                      
|                            |                | 2003                  |        | 2002   |  | 2001
|                            |                |                       |        |        |  |     
|                            |                |                      
|                            |                | (In thousands)       
|Net sales to customers:     |                |                       |        |        |  |      |        |        |  |   |        |       
|                            | United States  |                       | $      | 16,366 |  |      | $      | 39,541 |  |   | $      | 49,780 | 
|                            | China          |                       |        | 9,771  |  |      |        |       |  |   |        |       | 
|                            | Mexico         |                       |        | 8,912  |  |      |        | 5,521  |  |   |        | 6,974  | 
|                            | Japan          |                       |        | 4,149  |  |      |        | 4,530  |  |   |        | 4,586  | 
|                            | Europe         |                       |        | 3,630  |  |      |        | 3,064  |  |   |        | 8,283  | 
|                            | Korea          |                       |        | 3,277  |  |      |        | 280    |  |   |        | 4,187  | 
|                            | Brazil         |                       |        | 2,357  |  |      |        | 2,336  |  |   |        | 4,054  | 
|                            | Canada         |                       |        | 710    |  |      |        |       |  |   |        |       | 
|                            | Israel         |                       |        | 32     |  |      |        | 262    |  |   |        | 5,726  | 
|                            | Other          |                       |        | 219    |  |      |        | 1,516  |  |   |        | 1,472  | 
|                            |                |                       |        |        |  |      |        |        |  |   |        |       
|                            |                | $                     | 49,423 |        |  | $    | 57,050 |        |  | $ | 85,062 |       
|                            |                |                       |        |        |  |      |        |        |  |   |        |       
|Net property and equipment: |                |                       |        |        |  |      |        |        |  |   |        |       
|                            | United States  |                       | $      | 9,997  |  |      | $      | 11,984 |  |   | $      | 20,761 | 
|                            | United Kingdom |                       |        | 848    |  |      |        | 2,558  |  |   |        | 2,870  | 
|                            | Philippines    |                       |        | 139    |  |      |        | 297    |  |   |        | 367    | 
|                            | South Korea    |                       |        | 45     |  |      |        |       |  |   |        |       | 
|                            |                |                       |        |        |  |      |        |        |  |   |        |       
|                            |                | $                     | 11,029 |        |  | $    | 14,839 |        |  | $ | 23,998 |       
|                            |                |                       |        |        |  |      |        |        |  |   |        |       

Net sales to customers are based on the
customers billing location. Long-lived assets are those
assets used in each geographical area.

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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Note 16.     Contingencies

The Company operates in the semiconductor
industry and may from time to time become party to litigation.
Management is currently not aware of any potential or pending
litigation that could reasonably be expected to have a material
adverse effect on the Companys financial condition or
result of operations.

Note 17.     Commitments

The Company has contractual commitments as of
March 31, 2003, relating to its engagement of financial
advisory firms pursuant to which the Company will be required to
incur aggregate minimum future costs of approximately $1.75
million through November 2004, of which $0.9 million has
been expensed in the first quarter of fiscal 2004. However, as
is customary for contracts of this type, these commitments may
increase above the minimum depending on the value of any
strategic transaction the Company may complete, or the value of
its common stock in the event that there is no strategic
transaction.

Note 18.     Supplemental
Cash Flow Information

|                                                                                   |  |                       |       |      |  |      |     |  |  |   |     | 
|---------------------------------------------------------------------------------- |  | --------------------- | ----- | ---- |  | ---- | --- |  |  | - | --- | 
|                                                                                   |  |                      
|                                                                                   |  | Years Ended March 31,
|                                                                                   |  |                      
|                                                                                   |  | 2003                  |       | 2002 |  | 2001
|                                                                                   |  |                       |       |      |  |     
|                                                                                   |  |                      
|                                                                                   |  | (In thousands)       
|Cash paid for interest                                                             |  | $                     | 711   |      |  | $    | 695 |  |  | $ | 412 | 
|Cash paid for income taxes                                                         |  |                       | 74    |      |  |      | 77  |  |  |   | 1   | 
|Capital lease obligations incurred to acquire
    equipment                        |  |                       | 100   |      |  |      | 189 |  |  |   | 335 | 
|Assumption of options as consideration for
    acquisition of Tavanza, Inc. assets |  |                       | 1,000 |      |  |      |    |  |  |   |    | 

Note 19.     Quarterly
Results of Operations (Unaudited)

The following table presents unaudited quarterly
data for the eight quarters ended March 31, 2003. This
information has been presented on the same basis as the audited
consolidated financial statements. All necessary adjustments
have been included in the amounts stated below to present fairly
the unaudited quarterly results. Results of operations for any
quarter are not necessarily indicative of the results to be

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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


expected for the entire fiscal year or for any
future period. Certain amounts have been reclassified to conform
to annual disclosures.

|                                                   |                   |                                       |        |           |  |          |        |          |  |          |         |           |  |          |        |          |  |   |        |        |  |   |        |        |  |   |         |        |  |   |        |        | 
|-------------------------------------------------- | ----------------- | ------------------------------------- | ------ | --------- |  | -------- | ------ | -------- |  | -------- | ------- | --------- |  | -------- | ------ | -------- |  | - | ------ | ------ |  | - | ------ | ------ |  | - | ------- | ------ |  | - | ------ | ------ | 
|                                                   |                   |                                      
|                                                   |                   | Three Months Ended                   
|                                                   |                   |                                      
|                                                   |                   | June 30,                              |        | Sept. 30, |  | Dec. 31, |        | Mar. 31, |  | June 30, |         | Sept. 30, |  | Dec. 31, |        | Mar. 31,
|                                                   |                   | 2001                                  |        | 2001      |  | 2001(1)  |        | 2002(2)  |  | 2002     |         | 2002      |  | 2002(3)  |        | 2003    
|                                                   |                   |                                       |        |           |  |          |        |          |  |          |         |           |  |          |        |         
|                                                   |                   |                                      
|                                                   |                   | (In thousands, except per share data)
|Consolidated Statement of
    Operations Data:     |                   |                                       |        |           |  |          |        |          |  |          |         |           |  |          |        |          |  |   |        |        |  |   |        |        |  |   |         |        |  |   |        |       
|Net sales                                          |                   | $                                     | 14,012 |           |  | $        | 15,131 |          |  | $        | 14,680  |           |  | $        | 13,227 |          |  | $ | 15,341 |        |  | $ | 15,484 |        |  | $ | 10,523  |        |  | $ | 8,075  |       
|Gross profit (loss)                                |                   |                                       | (1,214 | )         |  |          | 862    |          |  |          | 2,869   |           |  |          | 2,694  |          |  |   | 3,955  |        |  |   | 3,880  |        |  |   | 1,922   |        |  |   | 565    |       
|Loss from operations                               |                   |                                       | (6,441 | )         |  |          | (3,677 | )        |  |          | (12,582 | )         |  |          | (1,871 | )        |  |   | (1,404 | )      |  |   | (1,621 | )      |  |   | (10,299 | )      |  |   | (4,651 | )     
|                                                   |                   |                                       |        |           |  |          |        |          |  |          |         |           |  |          |        |          |  |   |        |        |  |   |        |        |  |   |         |        |  |   |        |       
|Net loss                                           |                   | $                                     | (5,119 | )         |  | $        | (2,732 | )        |  | $        | (11,919 | )         |  | $        | (2,848 | )        |  | $ | (1,267 | )      |  | $ | (1,168 | )      |  | $ | (10,050 | )      |  | $ | (4,542 | )     
|                                                   |                   |                                       |        |           |  |          |        |          |  |          |         |           |  |          |        |          |  |   |        |        |  |   |        |        |  |   |         |        |  |   |        |       
|Basic and diluted net loss per share               |                   | $                                     | (0.43  | )         |  | $        | (0.23  | )        |  | $        | (0.99   | )         |  | $        | (0.23  | )        |  | $ | (0.10  | )      |  | $ | (0.10  | )      |  | $ | (0.82   | )      |  | $ | (0.37  | )     
|                                                   |                   |                                       |        |           |  |          |        |          |  |          |         |           |  |          |        |          |  |   |        |        |  |   |        |        |  |   |         |        |  |   |        |       
|Shares used in net loss per share
    calculation: |                   |                                       |        |           |  |          |        |          |  |          |         |           |  |          |        |          |  |   |        |        |  |   |        |        |  |   |         |        |  |   |        |       
|                                                   | Basic and diluted |                                       |        | 11,960    |  |          |        | 12,071   |  |          |         | 12,097    |  |          |        | 12,174   |  |   |        | 12,231 |  |   |        | 12,280 |  |   |         | 12,301 |  |   |        | 12,328 | 



---



|    |                                                                                                                                                                                                 
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The quarter ended December 31, 2001 includes
    a fixed asset impairment charge of approximately
    $11.0 million.                                                                            
|   
|(2) | The quarter ended March 31, 2002 includes a
    $1.7 million strategic investment write-down.                                                                                                   
|   
|(3) | The quarter ended December 31, 2002 included
    a $4.4 million charge for in-process research and
    development and a $2.8 million dollar special charge due to
    restructuring activities.

Note
20.     Subsequent Events

In May 2003 the Companys Board of Directors
entered into an agreement with the Celeritek Shareholder
Protective Committee (the Committee). (See
Note 5 Costs Related to Shareholder Actions for details
during fiscal 2003). Under the terms of the settlement, the
Company has expanded its Board of Directors from six directors
to seven. The new Board is now composed of three of the
Companys directors who were directors prior to the
settlement, three directors nominated by the Committee and one
member who is not affiliated with either the Company or the
Committee.

The four new directors were each automatically
granted options to purchase 6,000 shares of common stock.
Consequently, the Company currently has 3,000 options available
for grant under the Directors Plan.

On June 6, 2003 the Company amended the
Rights Plan to accelerate the final expiration date of the
Preferred Share Purchase Rights issued thereunder from
April 8, 2009 to June 13, 2003. The Company terminated
the Rights Plan upon expiration of the purchase rights on
June 13, 2003.

62



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


SIGNATURES

Pursuant to the requirements of Section 13
or 15(d) of the Securities Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the
undersigned, thereupon duly authorized.

|                    |  |                                                                                    
|------------------- |  | -----------------------------------------------------------------------------------
|                    |  | CELERITEK, INC.                                                                    
|                   
|Date: June 27, 2003 |  | By: /s/ TAMER HUSSEINITamer HusseiniChairman, President and Chief Executive Officer




POWER OF ATTORNEY

Each person whose signature below constitutes and
appoints Tamer Husseini and Margaret E. Smith, jointly and
severally, his or her attorneys-in-fact, each with the power of
substitution, for him or her in any and all capacities, to sign
any amendments to this Report on Form 10-K, and to file the
same, with exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that each of said attorney-in-fact,
or his or her substitute or substitutes, may do or cause to be
done by virtue hereof.

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

|                                           |  |                                                                                                          |  |               |  | 
|------------------------------------------ |  | -------------------------------------------------------------------------------------------------------- |  | ------------- |  | 
|                                           |  |                                                                                                          |  |              
|Signature                                  |  | Title                                                                                                    |  | Date         
|                                           |  |                                                                                                          |  |              
|/s/ TAMER HUSSEINITamer Husseini           |  | Chairman, President and
    Chief Executive Officer
    (Principal Executive Officer)                    |  | June 27, 2003
|                                          
|/s/ MARGARET E. SMITHMargaret E. Smith     |  | Vice President, Finance and
    Chief Financial Officer (Principal Financial and Accounting
    Officer) |  | June 27, 2003
|                                          
|/s/ ROBERT J. GALLAGHERRobert J. Gallagher |  | Director                                                                                                 |  | June 27, 2003
|                                          
|/s/ J. MICHAEL GULLARDJ. Michael Gullard   |  | Director                                                                                                 |  | June 27, 2003
|                                          
|/s/ LLOYD I . MILLERLloyd I. Miller        |  | Director                                                                                                 |  | June 27, 2003
|                                          
|/s/ BRYANT R. RILEYBryant R. Riley         |  | Director                                                                                                 |  | June 27, 2003
|                                          
|/s/ MICHAEL B. TARGOFFMichael B. Targoff   |  | Director                                                                                                 |  | June 27, 2003
|                                          
|/s/ CHARLES P. WAITECharles P. Waite       |  | Director                                                                                                 |  | June 27, 2003

63



---



##### Table of Contents



CERTIFICATIONS

I, Tamer Husseini, certify that:



| |    |                                                                                                                                                                                                                                                                                                                                             
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. | I have reviewed this annual report on
    Form 10-K of Celeritek, Inc.;                                                                                                                                                                                                                                                                     
|
| | 2. | Based on my knowledge, this annual report does
    not contain any untrue statement of a material fact or omit to
    state a material fact necessary to make the statements made, in
    light of the circumstances under which such statements were
    made, not misleading with respect to the period covered by this
    annual report;
|
| | 3. | Based on my knowledge, the financial statements,
    and other financial information included in this annual report,
    fairly present in all material respects the financial condition,
    results of operations and cash flows of the registrant as of,
    and for, the periods presented in this annual report;                       
|
| | 4. | The registrants other certifying officers
    and I are responsible for establishing and maintaining
    disclosure controls and procedures (as defined in Exchange Act
    Rules 13a-14 and 15d-14) for the registrant and we have:                                                                                                       



| |    |                                                                                                                                                                                                                                                                                                             
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) | designed such disclosure controls and procedures
    to ensure that material information relating to the registrant,
    including its consolidated subsidiaries, is made known to us by
    others within those entities, particularly during the period in
    which this annual report is being prepared;
|
| | b) | evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this annual
    report (the Evaluation Date); and                                                                                                      
|
| | c) | presented in this annual report our conclusions
    about the effectiveness of the disclosure controls and
    procedures based on our evaluation as of the Evaluation Date;                                                                                                                                



| |    |                                                                                                                                                                                                                                                                
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 5. | The registrants other certifying officers
    and I have disclosed, based on our most recent evaluation, to
    the registrants auditors and the audit committee of
    registrants board of directors (or persons performing the
    equivalent functions):



| |    |                                                                                                                                                                                                                                                                                                                   
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) | all significant deficiencies in the design or
    operation of internal controls which could adversely affect the
    registrants ability to record, process, summarize and
    report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and
|
| | b) | any fraud, whether or not material, that involves
    management or other employees who have a significant role in the
    registrants internal controls; and                                                                                                                                                    



| |    |                                                                                                                                                                                                                                                                                                                                                                                                               
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 6. | The registrants other certifying officers
    and I have indicated in this annual report whether or not there
    were significant changes in internal controls or in other
    factors that could significantly affect internal controls
    subsequent to the date of our most recent evaluation, including
    any corrective actions with regard to significant deficiencies
    and material weaknesses.

Date: June 27, 2003



| |     |                   
| | --- | ------------------
| | By: | /s/ TAMER HUSSEINI

| |       |               
| | ----- | --------------
| | Name: | Tamer Husseini

| | 
| | 
| | 

| |        |                        
| | ------ | -----------------------
| | Title: | Chief Executive Officer

64



---



##### Table of Contents



I, Margaret E. Smith, certify that:



| |    |                                                                                                                                                                                                                                                                                                                                             
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. | I have reviewed this annual report on
    Form 10-K of Celeritek, Inc.;                                                                                                                                                                                                                                                                     
|
| | 2. | Based on my knowledge, this annual report does
    not contain any untrue statement of a material fact or omit to
    state a material fact necessary to make the statements made, in
    light of the circumstances under which such statements were
    made, not misleading with respect to the period covered by this
    annual report;
|
| | 3. | Based on my knowledge, the financial statements,
    and other financial information included in this annual report,
    fairly present in all material respects the financial condition,
    results of operations and cash flows of the registrant as of,
    and for, the periods presented in this annual report;                       
|
| | 4. | The registrants other certifying officers
    and I are responsible for establishing and maintaining
    disclosure controls and procedures (as defined in Exchange Act
    Rules 13a-14 and 15d-14) for the registrant and we have:                                                                                                       



| |    |                                                                                                                                                                                                                                                                                                             
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) | designed such disclosure controls and procedures
    to ensure that material information relating to the registrant,
    including its consolidated subsidiaries, is made known to us by
    others within those entities, particularly during the period in
    which this annual report is being prepared;
|
| | b) | evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this annual
    report (the Evaluation Date); and                                                                                                      
|
| | c) | presented in this annual report our conclusions
    about the effectiveness of the disclosure controls and
    procedures based on our evaluation as of the Evaluation Date;                                                                                                                                



| |    |                                                                                                                                                                                                                                                                
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 5. | The registrants other certifying officers
    and I have disclosed, based on our most recent evaluation, to
    the registrants auditors and the audit committee of
    registrants board of directors (or persons performing the
    equivalent functions):



| |    |                                                                                                                                                                                                                                                                                                                   
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) | all significant deficiencies in the design or
    operation of internal controls which could adversely affect the
    registrants ability to record, process, summarize and
    report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and
|
| | b) | any fraud, whether or not material, that involves
    management or other employees who have a significant role in the
    registrants internal controls; and                                                                                                                                                    



| |    |                                                                                                                                                                                                                                                                                                                                                                                                               
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 6. | The registrants other certifying officers
    and I have indicated in this annual report whether or not there
    were significant changes in internal controls or in other
    factors that could significantly affect internal controls
    subsequent to the date of our most recent evaluation, including
    any corrective actions with regard to significant deficiencies
    and material weaknesses.

Date: June 27, 2003



| |     |                      
| | --- | ---------------------
| | By: | /s/ MARGARET E. SMITH

| | 
| | 
| | 

| |       |                  
| | ----- | -----------------
| | Name: | Margaret E. Smith

| |                               
| | ------------------------------
| |                               
| | Title: Chief Financial Officer

65



---



##### Table of Contents



SCHEDULE II  VALUATION AND
QUALIFYING ACCOUNTS

Allowance for Doubtful Accounts


(in thousands)


|                   |  |            |       |            |  |               |       |           |  |   |       |  |  |   |       | 
|------------------ |  | ---------- | ----- | ---------- |  | ------------- | ----- | --------- |  | - | ----- |  |  | - | ----- | 
|                   |  |            |       | Additions  |  |               |       |          
|                   |  | Balance at |       | Charged to |  |               |       | Balance  
|                   |  | Beginning  |       | Costs and  |  |               |       | at End   
|Period             |  | of Period  |       | Expenses   |  | Deductions(1) |       | of Period
|                   |  |            |       |            |  |               |       |          
|Year Ended 3/31/03 |  | $          | 1,183 |            |  | $             | 277   |           |  | $ | 834   |  |  | $ | 626   | 
|Year Ended 3/31/02 |  | $          | 1,977 |            |  | $             | 557   |           |  | $ | 1,351 |  |  | $ | 1,183 | 
|Year Ended 3/31/01 |  |            | 349   |            |  |               | 1,645 |           |  |   | 17    |  |  |   | 1,977 | 



---



|    |                                                                          
|--- | -------------------------------------------------------------------------
|(1) | Deductions represent write-offs of uncollectable
    accounts receivable.

S-1



---



##### Table of Contents






INDEX OF EXHIBITS

|        |    |             |  |                                                                                                                                                                                                                        
|------- | -- | ----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|Number  |    | Description
|        |    |            
|        | 3  | .1(1)       |  | Amended and Restated Articles of Incorporation of
    Registrant.                                                                                                                                                      
|        | 3  | .2          |  | Bylaws of Registrant, as amended through
    May 28, 2003.                                                                                                                                                             
|        | 4  | .1(2)       |  | Form of Registrants Stock Certificate.                                                                                                                                                                                
|        | 4  | .2(2)       |  | Third Modification Agreement (including
    Registration Rights Agreement) dated July 30, 1990, between
    the Registrant and certain investors.                                                                      
|        | 4  | .3(6)       |  | Shareholders Rights Agreement dated
    March 25, 1999, by and between the Registrant and
    BankBoston, N.A.                                                                                                         
|        | 4  | .4(14)      |  | Registration Rights Agreement, dated
    February 4, 2000, between the Registrant and the parties
    identified on Exhibit A thereto.                                                                                 
|        | 10 | .1(2)       |  | 1985 Stock Incentive Program and forms of
    Incentive Stock Option Agreement and Nonstatutory Stock Option
    Agreement.                                                                                            
|        | 10 | .2(4)       |  | 1994 Stock Option Plan, as amended, and form of
    Stock Option Agreement.                                                                                                                                            
|        | 10 | .3(10)      |  | Employee Qualified Stock Purchase Plan, as
    amended, and form of Subscription Agreement.                                                                                                                            
|        | 10 | .4(2)       |  | Outside Directors Stock Option Plan and
    form of Stock Option Agreement.                                                                                                                                           
|        | 10 | .5(2)       |  | Form of Directors and Officers
    Indemnification Agreement.                                                                                                                                                        
|        | 10 | .6(2)       |  | Lease Agreement dated April 1, 1993 between
    the Registrant and Berg & Berg Developers.                                                                                                                             
|        | 10 | .7(3)       |  | Lease agreement dated April 11, 1997 between
    the Registrant and Spieker Properties, L.P.                                                                                                                           
|        | 10 | .8(7)       |  | First Amendment to Lease dated June 17, 1999
    by and between Registrant and Mission West Properties, L.P.
    II (formerly known as Berg & Berg Developers).                                                        
|        | 10 | .9(8)       |  | 2000 Nonstatutory Stock Option Plan.                                                                                                                                                                                   
|        | 10 | .10(8)      |  | Share Subscription Agreement by and between the
    Registrant and Suntek Compound Semiconductor Co. LTD, dated
    December 5, 2000.                                                                                  
|        | 10 | .11(9)      |  | Joint Venture Agreement, dated as of
    December 20, 2001, by and among Celeritek, Inc.,
    UBE Electronics, Ltd. and NewGen Telecom Co., Ltd.                                                                       
|        | 10 | .12(11)     |  | Stock Purchase agreement, dated as of
    March 18, 2002, by and among Celeritek, Inc. and NewGen
    Telecom Co., Ltd.                                                                                                
|        | 10 | .13(12)     |  | Change of Control Severance Agreement by and
    between Celeritek, Inc. and Tamer Husseini, dated
    November 22, 2002.                                                                                              
|        | 10 | .14(12)     |  | Change of Control Severance Agreement by and
    between Celeritek, Inc. and Margaret E. Smith, dated
    November 22, 2002.                                                                                           
|        | 10 | .15(15)     |  | Tavanza, Inc. 2000 Stock Incentive Plan.                                                                                                                                                                               
|        | 21 |             |  | Subsidiaries of Celeritek.                                                                                                                                                                                             
|        | 23 | .1          |  | Consent of Ernst & Young LLP,
    Independent Auditors.                                                                                                                                                                
|        | 24 |             |  | Power of Attorney (see signature page).                                                                                                                                                                                
|        | 99 | .1          |  | Certification of Chief Executive Officer and
    Chief Financial Officer Pursuant to 18 U.S.C.
    Section 1350, as adopted pursuant to Section 906 of
    the Sarbanes-Oxley Act of 2002.                             
|        | 99 | .2(12)      |  | Charter for the Audit Committee of the Board of
    Directors.                                                                                                                                                         
|        | 99 | .3(12)      |  | Charter for the Compensation Committee of the
    Board of Directors.                                                                                                                                                  
|        | 99 | .4(12)      |  | Charter for the Corporate Governance and
    Nominating Committee of the Board of Directors.                                                                                                                           
|        | 99 | .5(12)      |  | Corporate Governance Guidelines.                                                                                                                                                                                       
|        | 99 | .6(13)      |  | Settlement Agreement, dated May 28, 2003,
    between Celeritek, Inc., the Celeritek Shareholder Protective
    Committee and the members and certain affiliates of the
    Celeritek Shareholder Protective Committee.

(Footnotes are on following page)



---



##### Table of Contents





---



|    |                                                                                                                                                                                                  
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Incorporated by reference to our Form 8-K
    filed on July 29, 2002.                                                                                                                            
|   
|(2) | Incorporated by reference to the identically
    numbered exhibits to our Registration Statement of Form S-1
    (Commission File No. 33-98854), which became effective on
    December 19, 1995.
|   
|(3) | Incorporated by reference to our Form 10-K
    filed for the fiscal year ended March 31, 1997.                                                                                                   
|   
|(4) | Incorporated by reference to our Statement on
    Form S-8 (Commission File No. 333-52037), filed
    May 7, 1998.                                                                               
|   
|(5) | Incorporated by reference to our Form 10-K
    filed for the fiscal year ended March 31, 1999.                                                                                                   
|   
|(6) | Incorporated by reference to our Form 8-A
    filed on April 1, 1999.                                                                                                                            
|   
|(7) | Incorporated by reference to our Form 10-K/A
    filed for the fiscal year ended March 31, 2000.                                                                                                 
|   
|(8) | Incorporated by reference to our Form 10-K
    filed for the fiscal year ended March 31, 2001.                                                                                                   
|   
|(9) | Incorporated by reference to our Form 10-Q
    filed for the quarter ended December 31, 2001.                                                                                                    



|     |                                                                                               
|---- | ----------------------------------------------------------------------------------------------
|(10) | Incorporated by reference to our Form S-8
    filed on August 15, 2001.                       
|    
|(11) | Incorporated by reference to our Form 10-K
    filed for the fiscal year ended March 31, 2002.
|    
|(12) | Incorporated by reference to our Form 8-K
    filed on April 16, 2003.                        
|    
|(13) | Incorporated by reference to our Form 8-K
    filed on May 28, 2003.                          
|    
|(14) | Incorporated by reference to our Form S-3
    filed on February 25, 2000.                     
|    
|(15) | Incorporated by reference to our Form 8-8
    filed on January 16, 2003.