##### Table of Contents









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,
    2004                                                
|          
|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, 2003 (the last business day of the
registrants most recently completed second fiscal quarter)
was approximately $56,338,000. 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, 2004, approximately
12,855,962 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, 2004, are incorporated by reference in
Part III of this Form 10-K.



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TABLE OF CONTENTS



|                                                        |                                                                                                                      |              |  |  |  |  |  | 
|------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------- | ------------ |  |  |  |  |  | 
|PART I                                                 
|                                                        | Item 1. Business                                                                                                    
|                                                        | Item 2. Properties                                                                                                  
|                                                        | Item 3. Legal Proceedings                                                                                           
|                                                        | Item 4. Submission of Matters to a Vote of Security Holders                                                         
|                                                        |                                                                                                                      | PART II     
|                                                        | Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
|                                                        | Item 6. Selected Financial Data                                                                                     
|                                                        | Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operation                        
|                                                        |                                                                                                                      | RISK FACTORS
|                                                        | Item 7A. Quantitative and Qualitative Disclosures About Market Risk                                                 
|                                                        | Item 8. Financial Statements and Supplementary Data                                                                 
|                                                        | Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                        
|                                                        | Item 9A. Controls and Procedures                                                                                    
|                                                        |                                                                                                                      | PART III    
|                                                        | Item 10. Directors and Executive Officers of the Registrant                                                         
|                                                        | Item 11. Executive Compensation                                                                                     
|                                                        | Item 12. Security Ownership of Certain Beneficial Owners and Management                                             
|                                                        | Item 13. Certain Relationships and Related Transactions                                                             
|                                                        | Item 14. Principal Accounting Fees and Services                                                                     
|                                                        |                                                                                                                      | PART IV     
|                                                        | Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K                                            
|REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
|REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
|                                                        | Note 2. Special Charges                                                                                             
|                                                        | Note 3. Asset Acquisition                                                                                           
|                                                        | Note 4. Intangible Assets                                                                                           
|                                                        | Note 5. Costs Related to Shareholder and Strategic Actions                                                          
|                                                        | Note 6. Product Warranty                                                                                            
|                                                        | Note 7. Strategic Investments                                                                                       
|                                                        | Note 8. Related Party Transactions                                                                                  
|                                                        | Note 9. Accrued Liabilities                                                                                         
|                                                        | Note 10. Leases                                                                                                     
|                                                        | Note 11. Long-Term Debt                                                                                             
|                                                        | Note 12. Income Taxes                                                                                               
|                                                        | Note 13. Salary Deferral Plan                                                                                       
|                                                        | Note 14. Shareholders Equity                                                                                       
|                                                        | Note 15. Business Segment Data and Related Information                                                              
|                                                        | Note 16. Contingencies                                                                                              
|                                                        | Note 17. Commitments                                                                                                
|                                                        | Note 18. Supplemental Cash Flow Information                                                                         
|                                                        | Note 19. Quarterly Results of Operations (Unaudited)                                                                
|SIGNATURES                                             
|EXHIBIT 21                                             
|EXHIBIT 23.1                                           
|EXHIBIT 23.2                                           
|EXHIBIT 31.1                                           
|EXHIBIT 31.2                                           
|EXHIBIT 32.1                                           



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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: our ability to return to profitability with
the re-focusing of our resources and reduction of expenses
following our exit from the wireless power amplifier market; our
technical advantage in product development based on our
extensive experience and expertise; our ability to design
products to address our customers needs; our ability to
address emerging trends in wireless communication markets; our
ability to expand our customer base; the implementation of
3G technologies; our strategy of vertical integration of
design and manufacturing processes; the market opportunity for
our new HBV technology; a significant potion of our revenues
coming from international sales; future semiconductor revenues;
and the recovery of the wireless infrastructure market. 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 satellite handsets,
wireless communications network infrastructure, and defense
applications. The focus of our GaAs semiconductor components has
been mainly on power amplifier modules for wireless 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.

In late September 2003, we exited the wireless
handset power amplifier market. This decision was the result of
severe pricing pressure and other adverse market conditions in
the wireless handset industry that we believe would have
prevented our handset related business from achieving acceptable
gross margins. We believe our exit from the wireless handset
power amplifier market will allow us to focus our resources on
market areas where our core competencies will provide us the
greatest opportunity of success in our goal of returning to
profitability. As a result of this action, we face increased
reliance on the sales of our semiconductor products for the
wireless infrastructure, satellite and defense markets, which
may have lower growth potential than the wireless handset market.

In October 2003, we sold all the intangible and
certain tangible assets related to the wireless handset power
amplifier market for $1.0 million to Anadigics, Inc. We
also terminated 42 employees in early October 2003. In December
2003, we consolidated our Santa Clara operations into one
building and closed our Korean office. As a result of these
activities, we incurred special charges of approximately
$1.9 million in the third quarter of fiscal 2004 related to
employee termination expenses, a building lease impairment
charge and facilities consolidation costs, offset by
$0.2 million in proceeds from the sale of equipment
impaired in fiscal 2002.

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.

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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.

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, which is
30 times faster then a typical 56 kilobits per second
modem, applications such as broadband wireless access to the
Internet and mobile video conferencing are expected to become
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 defer capital
expenditures in 2003, upgrading rather than replacing equipment,
because of the continued depressed state of the
telecommunications industry.

A new standard, World Interoperability for
Microwave Access, or WiMAX, is poised to be a significant player
in metropolitan area networking and as a wireless alternative
for cable, DSL and T1, the last mile broadband access
technologies, as well as providing backhaul for wireless
fidelity, or WiFi hotspots. Like many other technologies in
their early stages, broadband wireless has stalled due to the
lack of a universal standard. WiMAX will meet that need. WiMAX
is designed to achieve standards conformance, interoperability,
quality of service assurances, independent testability, and
compliance, which in turn will ensure open interoperability and
technological efficiency. It is optimized for fixed applications
and, over the longer term, mobile, in the wide area network.
WiMAX creates a competitive broadband wireless access market by
specifying minimum air-interface performance between and among
vendors products and certifying products that meet the
performance benchmarks. The original 802.16 standard for 10 to
66 gigahertz, or GHz operation was ratified in January
2001, and the 802.16a amendment to the standard to support
lower frequency operation in the 2 to 11 GHz range was
approved in January 2003 by the IEEE.

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| |                         
| | ------------------------
| | Satellite Communications

In the past several years a number of
communications companies have developed satellite-based
commercial communication systems that provide voice and data
services across large geographic areas. While services such as
Inmarsat have provided global communications for many years, the
required equipment has traditionally been bulky and very
expensive, limiting their applications to high-priority use. A
new breed of satellite systems promise to bring satellite
receiver equipment, services and costs into the same realm as
ground-based service.

Satellite based systems such as Iridium also
bring a new dimension to aviation, military, maritime, disaster
relief, homeland security, construction, mining and other
diverse industries. Through a network of 66 Low Earth
Orbiting satellites operated by Boeing, Iridium delivers
essential communications services to and from remote areas where
terrestrial communications are not available.

Another example of satellite service is very
small aperture terminal, or VSAT, solutions that provide
customers with DSL comparable transmission speeds. For
homeowners and small-to-medium enterprises, VSAT provides fast,
always-on uplinks and downloads. For large enterprises and
government, VSAT provides a high-speed end-to-end broadband
satellite platform, supports the distribution of files to
multiple sites simultaneously and handles two-way credit and
debit card transactions. VSAT can also support two-way distance
learning, telemedicine, virtual private networks, and various
other business applications.

For the military, only satellite services allow
its forces to send and receive voice, paging, data and tracking
information regardless of location or movement.



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

Manufacturers of 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.



| |                           
| | --------------------------
| | Defense Electronics Market

Military forces worldwide are dependent 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 and low phase noise 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 satellite
and 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.

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| |                                             
| | --------------------------------------------
| | Extensive Expertise in GaAs
    Technologies

We believe our 19 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. 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 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 new high voltage InGaP HBT technology offers a
viable alternative to laterally diffused metal oxide
semiconductors, or LDMOS, in the infrastructure power amplifier
market.



| |                                        
| | ---------------------------------------
| | 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 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

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our products. For example, our design expertise
enabled us to develop our semiconductor InGaP HBT power modules
for mobile satellite handsets. This represents a major step
forward in our first product offering using our new high voltage
InGaP HBT process technology. Mobile satellite handsets required
much higher power levels than cellular handsets and as a result
of our development efforts, we are able to supply products to
these demanding specifications.


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. 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 satellite, defense and wireless
infrastructure markets. 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.



| |                                                                                            
| | -------------------------------------------------------------------------------------------
| | 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.



| |                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------
| | Expand Relationships with Leading Worldwide
    Manufacturers of Satellites, Wireless Local Area Network and
    Network Infrastructure Equipment

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.

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Products



| |                              
| | -----------------------------
| | GaAs Semiconductor Components

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

|                                        |  |                                                                                                                                                         |  |                                                                                                                            |  |                                                                                                                   
|--------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------
|                                       
|                                       
|Market                                  |  | Semiconductor Components                                                                                                                                |  | Applications                                                                                                               |  | Product Benefits                                                                                                  
|                                       
|                                       
|Satellite Handsets                      |  |  Low noise amplifiers                                                                                                                                  |  | Transmit and receive portion of handsets for
    voice and data                                                            |  |  Lengthens talk time
     Increase data capacity
     Decreases size of handset
     Decreases battery voltage
|                                       
|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(1) |  |  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                                                                    
|                                       
|Satellite                               |  |  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                                                              
|                                       



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

Revenue from semiconductor components was
$10.2 million in fiscal 2004, $29.3 million in fiscal
2003 and $30.4 million in fiscal 2002. $23.0 million
of our revenue from semiconductor products in fiscal 2003 was
derived from products we supplied to the wireless handset
market. In fiscal 2004, the majority of our semiconductor
revenue came from wireless infrastructure, defense and satellite
applications. Although the wireless infrastructure market is not
currently as robust as it has been historically, we have seen
some level of recovery in this market. We believe the other
markets in the table provide opportunities for us to expand our
customer base as we are developing new products.

6



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| |                      
| | ---------------------
| | GaAs-based Subsystems

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

|        |  |                                                                                                                                                                                                                                                                           |  |                                                                  |  |                                                   |  |  |  | 
|------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------------------------------------------- |  | ------------------------------------------------- |  |  |  | 
|       
|       
|Market  |  | Subsystem Product                                                                                                                                                                                                                                                         |  | Applications                                                     |  | Product Benefits                                 
|       
|       
|Defense |  |  Amplifier Low noise Low phase noise 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 |  | Electronic countermeasures, warning systems and
    radar decoys |  |  Increases integration Lower costs Ease of use
|       

Revenue from GaAs-based subsystems was
$19.7 million in fiscal 2004, $20.1 million in fiscal
2003 and $26.7 million in fiscal 2002.

Customers

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

A relatively limited number of customers have
historically accounted for a substantial portion of our sales.
During the fiscal year ended March 31, 2004, Raytheon
accounted for approximately 16% of net sales and BAE Systems
accounted for approximately 10% of net 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. Sales to our top ten customers accounted for
approximately 62% of our net sales in fiscal 2004, 75% of our
net sales in fiscal 2003 and 76% of our net sales in fiscal
2002. 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. Please see the section of
this Report entitled Risk Factors for a description
of risks related to our backlog and customer concentration.

In fiscal 2004, sales to international customers
were $10.5 million, which accounted for 35% of net sales.
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
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. 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.

7



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| |                 
| | ----------------
| | 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 extensively in low noise
amplifiers for infrastructure applications, satellite
ground-based applications at microwave and millimeter-wave
frequencies and defense products.

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 to 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. The larger metal strip
dimensions, typically 2um, and extensive use of etch stop layers
make the manufacturing yields of HBT devices significantly
higher than the small gate width, typically 0.35um, MESFET and
pHEMT devices. 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 our new
family of gain block amplifiers for base station infrastructure
and high voltage breakdown power amplifiers for L-band satellite
applications.



| |                                           
| | ------------------------------------------
| | High Breakdown Voltage (HBV) InGaP
    HBT

Power amplifiers are the critical link in the
transmission and reception of all high power wireless signals
and they are found in every cell phone and every cellular base
station. An essential element for any transistor technology used
in the design of these power amplifiers is the ability to
operate at 28 volts. The dominant transistor technology used is
silicon LDMOS. Developed over the last year, our new HBV InGaP
HBT technology offers a competitive advantage in integration and
performance over new technologies for these W-CDMA power
amplifiers with enhanced manufacturing capabilities and
performance advantages. We believe there is a distinct window of
opportunity for our new HBV technology and are already employing
it in integrated 16 watt satellite power amplifier modules.

8



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| |                      
| | ---------------------
| | 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 power handling and 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. We are also addressing lead free
requirements in our latest generation of infrastructure and
satellite products.



| |                        
| | -----------------------
| | 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 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, 2004, we had contracts with 12
manufacturers representatives in the United States and

9



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##### Table of Contents



10 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.


Additionally, for standard products, we
supplement our sales organization with Richardson Electronics
Ltd. who distributes our products worldwide. We believe the
agreement with Richardson allows 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, 2004 was
approximately $15.6 million, of which 82% was for subsystem
products and 18% was for semiconductor products. The backlog at
March 31, 2003 was $10.4 million, of which 88% was for
subsystem products and 12% was for semiconductor products.
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.

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,
2004, we employed 37 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 integrated into
higher level systems. We believe our ability to leverage this
library of modules reduces product time to market and
development costs.

As a result of our decision to exit the wireless
handset market, we terminated the design staff dedicated to
those products and reduced our research and development expenses
in the second half of fiscal 2004.

Our total expenses for research and development
were $9.3 million for the fiscal year ended March 31,
2004, $10.8 million for the fiscal year ended
March 31, 2003 and $9.2 million for the fiscal year
ended March 31, 2002.

Manufacturing

We manufacture our GaAs semiconductor components
and GaAs-based subsystems, and in addition, supplement our
manufacturing capacity by selectively outsourcing 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;

10



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##### Table of Contents





| |   |                                                                                                                                 
| | - | --------------------------------------------------------------------------------------------------------------------------------
| |  | 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.

As a result of decreased customer demand, we
currently have excess fabrication capacity that has resulted in
infrastructure costs in excess of current needs and has resulted
in lower earnings. Additionally, the GaAs semiconductor industry
as a whole is experiencing a worldwide overcapacity situation.

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 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 who
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 Filtronics, Fujitsu, NEC, RF Micro Devices,
Sirenza Microdevices, TriQuint Semiconductor and WJ
Communications. 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.

11



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##### Table of Contents



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. 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, 2004, we had a total of 181
employees including 6 in marketing, sales and related customer
support services, 37 in research and development, 125 in
manufacturing and 13 in administration and finance. None of our
employees are represented by a labor union. We consider our
relations with our employees to be good.

12



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##### Table of Contents



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.

Executive Officers of the Registrant

Our executive officers as of March 31, 2004
are as follows:

|                  |  |     |    |          |  |                                                            
|----------------- |  | --- | -- | -------- |  | -----------------------------------------------------------
|Name              |  | Age |    | Position
|                  |  |     |    |         
|Tamer Husseini    |  |     | 61 |          |  | Chairman, President and Chief Executive Officer            
|Margaret E. Smith |  |     | 56 |          |  | Vice President, Finance and Chief Financial
    Officer    
|Gary J. Policky   |  |     | 62 |          |  | Vice President, Engineering and Chief Technical
    Officer
|Richard G. Finney |  |     | 54 |          |  | Vice President, Subsystem Division                         
|Damian M. McCann  |  |     | 42 |          |  | 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

13



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##### Table of Contents



Operations. Before joining Loral, Western
Operations, Mr. Finney was employed by Avantek from 1974 to
1984, most recently as a manufacturing manager.


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.
from 1984 to 1991 as a principal design engineer.






|        |           
|------- | ----------
|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. Our United Kingdom design center is
located in a leased facility in Belfast, Northern Ireland.
During fiscal 2004, we closed our second facility of
approximately 26,000 square foot in Santa Clara,
California and our leased sales office in Seoul, South Korea. 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,
2004.




PART II






|        |                                                                                                                     
|------- | --------------------------------------------------------------------------------------------------------------------
|Item 5. | Market for Registrants Common Equity,
    Related Stockholder Matters and Issuer Purchases of Equity
    Securities

Market Information

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 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 | 
|Fiscal 2004    |  |      |       |     |  |   |      | 
|First Quarter  |  | $    | 8.21  |     |  | $ | 7.30 | 
|Second Quarter |  |      | 8.60  |     |  |   | 6.67 | 
|Third Quarter  |  |      | 8.34  |     |  |   | 6.95 | 
|Fourth Quarter |  |      | 8.75  |     |  |   | 3.17 | 

At May 23, 2004 there were approximately
169 shareholders of record.

14



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##### Table of Contents



Dividends

On January 14, 2004, our Board of Directors
announced the declaration of an extraordinary cash dividend of
$4.50 per share to shareholders of record on
February 5, 2004. The dividend was paid on March 11,
2004, totaled $57.8 million, and has been recorded as a
return of capital. Pursuant to the Nasdaq Marketplace Rules, the
ex-dividend date with respect to the cash dividend was set as
March 12, 2004. Accordingly, prior to the commencement of
trading on March 12, 2004, the Companys opening bid
price was reduced by $4.50 to reflect the payment of the cash
dividend. Under the intrinsic value method of accounting for
stock options, we were required to adjust our stock option
exercise price by the dividend amount or $4.50 per share
because the dividend was a return of capital. Since our stock
option plan does not allow us to reprice options, we were
required to change to the variable method of accounting for our
outstanding stock options. Under variable accounting,
compensation expense is recognized over the life of the option
(until exercised, forfeited, or cancelled) generally to the
extent that there are any increases in the per share market
price of the Companys common stock. It is difficult to
estimate the impact that expensing stock options will have on
our statement of operations as this expense is dependent upon
future events that are difficult to predict, such as the number
of options to be granted during a period, the price of our
common stock at the time of grant, the stock price volatility,
the risk free interest rate during the period and the expected
average life of the option. A slight change in any one of these
variables can materially affect the amount of compensation
expense to be recorded. This change to the variable method of
accounting on March 12, 2004 had no financial impact on the
fiscal 2004 financial statements.






|        |                        
|------- | -----------------------
|Item 6. | Selected Financial Data

The following selected financial data for the
five-year period ended March 31, 2004, 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,         
|                                                  |                   |                                      
|                                                  |                   | 2000                                  |        | 2001  |  | 2002 |         | 2003   |  | 2004
|                                                  |                   |                                       |        |       |  |      |         |        |  |     
|                                                  |                   |                                      
|                                                  |                   | (In thousands, except per share data)
|Net sales                                         |                   | $                                     | 48,211 |       |  | $    | 85,062  |        |  | $    | 57,050  |        |  | $ | 49,423  |        |  | $ | 29,928  |       
|Gross profit                                      |                   |                                       | 8,373  |       |  |      | 7,580   |        |  |      | 5,211   |        |  |   | 10,322  |        |  |   | 7,753   |       
|Loss from operations                              |                   |                                       | (7,154 | )     |  |      | (15,695 | )      |  |      | (24,592 | )      |  |   | (17,975 | )      |  |   | (17,691 | )     
|Net loss                                          |                   | $                                     | (6,824 | )     |  | $    | (10,602 | )      |  | $    | (22,618 | )      |  | $ | (17,027 | )      |  | $ | (15,980 | )     
|                                                  |                   |                                       |        |       |  |      |         |        |  |      |         |        |  |   |         |        |  |   |         |       
|Basic and diluted net loss per share              |                   | $                                     | (0.88  | )     |  | $    | (0.94   | )      |  | $    | (1.87   | )      |  | $ | (1.39   | )      |  | $ | (1.28   | )     
|                                                  |                   |                                       |        |       |  |      |         |        |  |      |         |        |  |   |         |        |  |   |         |       
|Shares used in net loss per share calculation(1): |                   |                                       |        |       |  |      |         |        |  |      |         |        |  |   |         |        |  |   |         |       
|                                                  | Basic and diluted |                                       |        | 7,736 |  |      |         | 11,272 |  |      |         | 12,076 |  |   |         | 12,285 |  |   |         | 12,460 | 



---



|    |                                                                                                                                                      
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------
|(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 2004 results of operations include a
    $4.5 million special charge for equipment impairments, a
    building lease impairment and severance costs that resulted from
    our decision to exit the wireless handset power amplifier
    market, partially offset by $0.2 million in proceeds
    received in fiscal 2004 from the sale of equipment impaired in
    fiscal 2002.
|
| | 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.                                                                                                                                                                                                 

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| |                                                                                                                                                                                               
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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,  
|                                |  |               
|                                |  | 2000           |        | 2001 |  | 2002 |         | 2003 |  | 2004
|                                |  |                |        |      |  |      |         |      |  |     
|                                |  |               
|                                |  | (In thousands)
|Consolidated Balance Sheet Data |  |                |        |      |  |      |         |      |  |      |         |  |  |   |         |  |  |   |        | 
|Total assets                    |  | $              | 63,655 |      |  | $    | 170,525 |      |  | $    | 139,688 |  |  | $ | 122,460 |  |  | $ | 46,766 | 
|Long-term obligations           |  |                | 636    |      |  |      | 5,578   |      |  |      | 6,015   |  |  |   | 2,919   |  |  |   |       | 






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

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 semiconductor products
are designed to facilitate broadband voice and data transmission
in satellite handsets, wireless communications network
infrastructure and defense applications. The focus of our GaAs
semiconductor components has been mainly on power amplifiers for
wireless 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. We also
supply 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.

During fiscal 2004, we incurred $4.5 million
in special charges due to our exit from the wireless handset
power amplifier market, partially offset by $0.2 million in
proceeds received in fiscal 2004 from the sale of equipment
impaired in fiscal 2002, for a net expense of $4.3 million
for fiscal 2004.

At the end of the second quarter of fiscal 2004,
(calendar September 2003), we exited the wireless handset power
amplifier market. This decision was the result of severe pricing
pressure and other adverse market conditions in the wireless
handset industry that we believe would have prevented our
handset related business from achieving acceptable gross
margins. We believe our exit from the wireless handset power
amplifier market will allow us to focus our resources on market
areas where our core competencies will provide us the greatest
opportunity of success in our goal of returning to
profitability. As a result of this action, we face increased
reliance on the sales of our semiconductor products for the
wireless infrastructure and satellite markets, which markets may
have lower growth potential than the wireless handset market.

As a further consequence of this action, we
incurred $2.6 million in special charges in the second
quarter of fiscal 2004 for fixed and intangible asset impairment
charges. The special charges of $2.6 million are comprised
of approximately $0.2 million of impairment charges related
to the reassessment of carrying values for certain tangible and
intangible assets to be sold, $1.8 million of equipment
impairment charges related to exiting the wireless handset power
amplifier market, and $0.6 million of equipment impairment
charges related to restructuring at the Belfast facility.

During our third quarter of fiscal 2004,
(calendar October 2003), we sold all the intangible and certain
tangible assets related to the wireless handset power amplifier
market for $1.0 million to Anadigics, Inc. We also
terminated 42 employees in early October 2003. In December
2003, we consolidated our Santa Clara operations into one
building and closed our Korean office. As a result of these
activities, we incurred special

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charges of approximately $1.9 million in the
third quarter of fiscal 2004 related to employee termination
expenses, a building lease impairment charge and facilities
consolidation costs, offset by $0.2 million in proceeds
from the sale of equipment impaired in fiscal 2002.


A limited number of customers have historically
accounted for a substantial portion of our sales. Sales to our
top ten customers accounted for approximately 62% of net sales
in fiscal 2004, 75% of net sales in fiscal 2003 and 76% of net
sales in fiscal 2002. In fiscal 2004, Motorola accounted for
approximately 3% of net sales, in fiscal 2003, Motorola
accounted for approximately 41% of net sales and in fiscal 2002,
Motorola accounted for 43% 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 power amplifiers. 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. Our business requires us to
maintain manufacturing equipment and related support
infrastructure that we must pay for regardless of our business
level. The recent decline in market demand has resulted in
infrastructure costs in excess of current needs and has resulted
in lower gross margins. 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.

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

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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. Commission payments to
sales representatives are based on a percentage of gross sales
and are included in selling, general, and administrative costs
at the time of shipment.


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 recorded intangible assets at fair value. Intangible assets
with finite useful lives were amortized over their estimated
useful life and amortization expense was classified as part of
operating expenses. To date, we have only had intangible assets
with finite useful lives. We regularly performed reviews to
determine if the carrying values of our intangible assets were
impaired. We looked for facts, circumstances, either internal or
external, that may have indicated we may not have recovered the
carrying value of the assets. We recorded impairment losses
based on the amount by which the carrying amounts of such assets
exceeded their fair values. In the third quarter of fiscal 2004,
we sold all the assets related to the wireless handset power
amplifier market, which included all of our intangible assets.

Recent Accounting Pronouncements

In January 2003, the FASB issued Interpretation
No. 46 (FIN 46), Consolidation of
Variable Interest Entities. In general, a variable
interest entity is a corporation, partnership, trust, or any
other legal structure used for business purposes that either
(a) does not have equity investors with voting rights or
(b) has equity investors that do not provide sufficient
financial resources for the entity to support its activities.
FIN 46 requires a variable interest entity to be
consolidated by a company if that company is subject to a
majority of the risk of loss from the variable interest
entitys activities or entitled to receive a majority of
the entitys residual returns or both. The consolidation
requirements of FIN 46 apply immediately to variable
interest entities created after January 31, 2003. The
consolidation requirements apply to older entities in the first
fiscal year or interim period ending after December 15,
2003. Certain of the disclosure requirements apply in all
financial statements issued after January 31, 2003,
regardless of when the variable interest entity was established.
We adopted FIN 46 in the third quarter of fiscal 2004 and
its adoption did not have a material impact on our financial
position or results of operations.

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In May 2003, the FASB issued Statement Number
150, Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity
(SFAS 150). SFAS 150 establishes standards
for classifying and measuring as liabilities certain financial
instruments that embody obligations of the issuer and have
characteristics of both liabilities and equity. SFAS 150
generally requires liability classification for two broad
classes of financial instruments: (1) instruments that
represent, or are indexed to, an obligation to buy back the
issuers shares, and (2) obligations that can be
settled in shares, but are subject to certain conditions.
SFAS 150 applies to all financial instruments created or
modified after May 31, 2003, and to other instruments at
the beginning of the first interim period beginning after
July 1, 2003. As we have not created or modified any
financial instruments since the effective date of SFAS 150,
it did not have a material impact on our financial statements.

In November 2002, the Emerging Issues Task Force
(the EITF) reached a consensus on Issue
No. 00-21 Accounting for Revenue Arrangements with
Multiple Deliverables. The EITF concluded that revenue
arrangements with multiple elements should be divided into
separate units of accounting if the deliverables in the
arrangement have value to the customer on a standalone basis, if
there is objective and reliable evidence of the fair value of
the undelivered elements, and as long as there are no rights of
return or additional performance guarantees by our company. The
provisions of EITF Issue No. 00-21 are applicable to
agreements entered into in fiscal periods beginning after
June 15, 2003. Management adopted the consensus in the
second quarter of fiscal 2004, and it did not have a material
effect on our results of operations or financial condition.

In November 2003, the EITF issued EITF
No. 03-6 Participating Securities and the
Two-Class Method under FASB Statement No. 128,
which provides for a two-class method of calculating earnings
per share computations that relate to certain securities that
would be considered to be participating in conjunction with
certain common stock rights. This guidance would be applicable
to us starting with the second quarter beginning July 1,
2004. We are currently evaluating the potential impact of this
pronouncement on our financial statements.

Fiscal Year Ended March 31, 2004 Compared
to Fiscal Year Ended March 31, 2003

Net Sales.Net sales
for fiscal 2004 were $29.9 million compared to
$49.4 million for fiscal 2003, a decrease of 39%. The
decrease was due to a decline in sales of power amplifier
modules for handsets. 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.

Net sales of GaAs semiconductor products for
fiscal 2004 were $10.2 million compared to
$29.3 million in fiscal 2003, a decrease of 65%. The
decrease in sales was the result of a decline in sales of power
amplifier modules for handsets. 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.

Net sales of GaAs-based subsystems products for
fiscal 2004 were $19.7 million compared to
$20.1 million in fiscal 2003, a decrease of 2%. While
defense sales levels were consistent year-to-year, there was a
slight decline in sales for the wireless infrastructure market.

Gross Margin.Gross
margin was 26% in fiscal 2004 and 21% in fiscal 2003. The
improvement in gross margin was mainly attributable to
approximately $0.8 million in sales in fiscal 2004 for
products that were written off in fiscal 2003 and
$1.0 million in sales in fiscal 2004 for a development
contract with the corresponding costs in research and
development. Therefore, there was no cost of sales associated
with these revenues in fiscal 2004. Although we implemented cost
cutting measures that reduced absolute overhead expenses, we
were unable to reduce expenses enough to offset the decline in
revenue. Direct material costs were reduced as a percent of
sales due to reduced revenue from power amplifier modules for
handsets which had a higher than average material content.

Research and
Development.Research and development
expense for fiscal 2004 was $9.3 million, or 31% of net
sales compared to $10.8 million, or 22% of net sales, in
fiscal 2003, a decrease of 14%. The decrease was primarily due
to our decision to close our office in Lincoln, United Kingdom
and to exit the power amplifier

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handset market resulting in a reduction in our
design staff. This decrease was slightly offset by increased
staffing for defense product development.


Selling, General and
Administrative.Selling, general and
administrative expense for fiscal 2004 was $8.2 million, or
27% of net sales compared to $8.7 million, or 18% of net
sales, in fiscal 2003, a decrease of 6%. The decreased expense
was due to lower commission expenses based on lower revenue
levels.

Costs Related to Shareholder
Actions.The $3.4 million in
costs related to shareholder and strategic actions in fiscal
2004 consisted of approximately $1.4 million in expense
related to the special meeting of shareholders that was
requested by the Celeritek Shareholder Protective Committee
(described below) and $2.0 million in investment banking
fees related to strategic actions. The $1.3 million in
costs related to shareholder actions in fiscal 2003 was for
legal and investment advisors in response to an overture by
Anaren Microwave, Inc. with respect to a possible acquisition of
our company.

Special Charges.During fiscal 2004, we incurred $4.5 million in special
charges due to our exit of the wireless handset power amplifier
market, offset by $0.2 million in proceeds from the sale of
equipment impaired in fiscal 2002, for a net expense of
$4.3 million for fiscal 2004. The special charges of
$4.5 million in fiscal 2004 are comprised of approximately
$0.2 million of impairment charges related to the
reassessment of carrying values for certain tangible and
intangible assets to be sold, $1.8 million of equipment
impairment charges related to exiting the wireless handset power
amplifier market, $0.6 million of equipment impairment
charges related to restructuring at the Belfast facility,
$0.7 million in employee termination charges,
$0.9 million for building lease termination costs,
$0.2 million of facilities consolidation costs, and
$0.1 million to close our Korean sales office.

In fiscal 2003, we recorded special charges of
$2.8 million due to Motorolas decision to transition
from the model 120v handset platform on which we were the sole
source for power amplifier modules, to the next generation of
handset platforms, for which we would 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 we owned, was reclassified to
current asset for resale under prepaid and other current assets.
We subsequently sold the building in July 2003 for approximately
$0.3 million, which resulted in a gain of approximately
$0.05 million. 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.

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

|                                 |  |             |      |           |  |               |        |             |  |       |      |   |  |   |       |   |  |   |        |  
|-------------------------------- |  | ----------- | ---- | --------- |  | ------------- | ------ | ----------- |  | ----- | ---- | - |  | - | ----- | - |  | - | ------ | -
|                                 |  |             |      |           |  |               |        | Lease       |  |      
|                                 |  |             |      |           |  |               |        | Termination |  |      
|                                 |  | Employee    |      |           |  | Impairment    |        | and         |  |      
|                                 |  | Termination |      | Excess    |  | of Assets     |        | Relocation  |  |      
|                                 |  | Costs       |      | Equipment |  | Held for Sale |        | Costs       |  | 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  |  
|                                 |  |             |      |           |  |               |        |             |  |       |      |   |  |   |       |   |  |   |        |  
|Fiscal 2004 special charges      |  |             | 734  |           |  |               | 2,618  |             |  |       | 183  |   |  |   | 1,005 |   |  |   | 4,540  |  
|Cash paid                        |  |             | (680 | )         |  |               |       |             |  |       |     |   |  |   | (932  | ) |  |   | (1,612 | )
|Non-cash activity                |  |             | (100 | )         |  |               | (2,618 | )           |  |       | (183 | ) |  |   |      |   |  |   | (2,901 | )
|                                 |  |             |      |           |  |               |        |             |  |       |      |   |  |   |       |   |  |   |        |  
|Accrual balances, March 31, 2004 |  | $           | 77   |           |  | $             |       |             |  | $     |     |   |  | $ | 1,123 |   |  | $ | 1,200  |  
|                                 |  |             |      |           |  |               |        |             |  |       |      |   |  |   |       |   |  |   |        |  

Amortization of
Intangibles.Amortization of
intangibles was $0.3 million during fiscal 2004 compared to
$0.2 million during fiscal 2003. The intangible assets were
acquired as part of the purchase of Tavanzas assets (as
described in Note 3. Asset Acquisition of the Consolidated
Financial Statements) during the third quarter of fiscal 2003
and subsequently sold as part of the Tavanza asset sale during
the third quarter of fiscal 2004.

Impairment of Short-term and Strategic
Investments.During fiscal 2003 we
recorded an impairment charge of approximately $0.4 million
against our strategic investment in a Taiwanese foundry, which
was deemed to have an other than temporary decline in value. We
reviewed the investments during fiscal 2004 and determined no
further impairment was required at March 31, 2004. In order
to determine the impairment charges, we reviewed updated
financial statements and projections from the foundry and
analyzed its actual and expected revenues, net income and cash
balances.

Interest Income and Other,
Net.Interest income and other, net,
for fiscal 2004 was $1.7 million compared to
$1.5 million in fiscal 2003. The increase was primarily due
to the collection of a customers order cancellation charge
of $0.8 million, lower interest expense from the repayment
of capital leases and debt and gains on the disposal of assets,
offset by decreased interest income due to lower interest rates
on lower cash and short-term investment balances.

Provision (Benefit) for Income
Taxes.For the fiscal year ended
March 31, 2004, we recorded no income tax provision. For
the fiscal year ended March 31, 2003, we recorded an income
tax provision of approximately $0.1 million that
represented foreign taxes incurred that do not currently provide
a benefit in the United States.

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 weak demand in the wireless
infrastructure market, which caused a decrease in sales volume
for this particular market, and to a lesser extent a decrease in
demand for our power amplifier modules for the handset market.

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. The increase in sales to China in fiscal 2003 of
$9.8 million from zero in fiscal 2002 is

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the result of Motorola transferring production of
the handset, which our power amplifiers were used in, from
Mexico to China.


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.

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 we have
implemented.

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.

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 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 were based on managements estimates
of market size and growth, expected trends in technology and the
expected timing of new product introductions.

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 we
owned, was reclassified to current asset for resale under
prepaid and other current assets. We subsequently sold the
building in July 2003 for approximately $0.3 million, which
resulted in a gain of approximately $0.05 million. 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.

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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.

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, 2004 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 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
and strategic 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.

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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.

Impairment of Short-term and Strategic
Investments.During fiscal 2003 we
recorded an impairment charge 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 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.

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, 2004, we had $3.1 million
in cash and cash equivalents, $24.1 million in short-term
investments and $25.7 million in working capital.

Net cash used in operating activities was
$8.6 million in fiscal 2004, which was primarily due to
operating losses, increases in accounts receivable and decreases
in accounts payable, offset by decreases in inventories, related
party receivables and prepaid expenses and increases in accrued
liabilities. 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 and increases in accrued payroll and
accrued liabilities. Net cash used in operating activities was
$3.6 million in fiscal 2002, which was primarily due to the
decrease in accounts payable, accrued payroll and accrued
liabilities offset by decreases in accounts receivable and
inventories.

Net cash provided by investing activities was
$42.5 million in fiscal 2004, which was the result of the
sale and maturities of short-term investments of
$167.2 million and proceeds from the sale of property and
equipment of $0.8 million, offset by the purchases of
short-term investments of $124.5 million and property and
equipment of $0.9 million. Net cash provided by investing
activities was $19.5 million in fiscal 2003, which was the
result of the sale and maturities of short-term investments of
$156.1 million, offset by the purchases of short-term
investments of $132.1 million, property and equipment of
$2.6 million and strategic investments of
$2.0 million. Net cash provided by investing activities was
$5.2 million in fiscal 2002, which was the result of the
sale and maturity of short-term investments of
$151.9 million, offset by the purchases of short-term
investments of $139.5 million, strategic investments of
$0.5 million and property and equipment of
$6.7 million.

Net cash used by financing activities was
$59.5 million in fiscal 2004, which was the result of the
extraordinary dividend payment of $57.8 million, principal
payments of long-term debt of $2.8 million and capital
leases of $1.5 million, offset by proceeds from the
exercise of stock options and employee stock

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purchase plan of $2.7 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 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, which was the result of borrowings on long-term debt of
$3.7 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 $1.8 million and
capital leases of $0.8 million.


As of March 31, 2004, we had
$0.9 million in outstanding letters of credit, which are
secured by certificates of deposits.

We declared an extraordinary cash dividend of
$4.50 per share payable to shareholders of record as of
February 5, 2004, payable on March 11, 2004. The total
dividend paid was $57.8 million. Under the intrinsic value
method of accounting for stock options, we were required to
adjust our stock option exercise price by the dividend amount or
$4.50 per share because the dividend was a return of
capital. Since our stock option plan does not allow us to
reprice options, we were required to change to the variable
method of accounting for our outstanding stock options. Under
variable accounting, compensation expense is recognized over the
life of the option (until exercised, forfeited, or cancelled)
generally to the extent that there are any increases in the per
share market price of the companys common stock. It is
difficult to estimate the impact that expensing stock options
will have on our statement of operations as this expense is
dependent upon future events that are difficult to predict, such
as the number of options to be granted during a period, the
price of our Common Stock at the time of grant, the stock price
volatility, the risk free interest rate during the period and
the expected average life of the option. A slight change in any
one of these variables can materially affect the amount of
compensation expense to be recorded. This change to the variable
method of accounting on March 12, 2004 had no financial
impact on the fiscal 2004 financial statements.

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 a result of the extraordinary cash dividend,
we violated certain lending covenants in March 2004, based on
current agreements in place, on approximately $0.9 million
in debt. Therefore, we have classified the total amount of
$0.9 million under current liabilities. We are in the
process of renegotiating our debt covenants. There can be no
assurance that we will successfully renegotiate the covenants,
in which case the $0.9 million in debt may become due.

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 former
officers and employees totaling approximately $0.6 million
at March 31, 2004. 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 voluntarily 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, 2004 (in thousands):

|                                |  |             |       |      |  |      |       |      |  |      |       |  |  |   |     |  |  |   |    | 
|------------------------------- |  | ----------- | ----- | ---- |  | ---- | ----- | ---- |  | ---- | ----- |  |  | - | --- |  |  | - | -- | 
|                                |  |            
|                                |  | Fiscal Year
|                                |  |            
|Contractual Obligations         |  | Total       |       | 2005 |  | 2006 |       | 2007 |  | 2008
|                                |  |             |       |      |  |      |       |      |  |     
|Long-term debt obligations      |  | $           | 1,866 |      |  | $    | 1,576 |      |  | $    | 290   |  |  | $ |    |  |  | $ |   | 
|Capital lease obligations       |  |             | 336   |      |  |      | 336   |      |  |      |      |  |  |   |    |  |  |   |   | 
|Operating lease obligations     |  |             | 5,029 |      |  |      | 3,470 |      |  |      | 1,253 |  |  |   | 276 |  |  |   | 30 | 
|Open purchase order commitments |  |             | 1,070 |      |  |      | 1,070 |      |  |      |      |  |  |   |    |  |  |   |   | 
|                                |  |             |       |      |  |      |       |      |  |      |       |  |  |   |     |  |  |   |    | 
|Total                           |  | $           | 8,398 |      |  | $    | 6,537 |      |  | $    | 1,555 |  |  | $ | 276 |  |  | $ | 30 | 
|                                |  |             |       |      |  |      |       |      |  |      |       |  |  |   |     |  |  |   |    | 

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.

We have outstanding letters of credit of
approximately $0.9 million as security for capital leases
for equipment and pending supplier cancellation charges.

Related Party Transactions

We have outstanding loans totaling
$0.6 million at March 31, 2004 and $1.5 million
at March 31, 2003 to certain former 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 voluntarily 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, 2003, or 2004.
During fiscal 2002, 2003 and 2004, the outstanding loans to
officers and employees were reduced by the amounts of
$0.3 million, $0.1 million and $0.9 million,
respectively.

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. In
the event of an involuntary termination, severance cost would be
approximately $1.5 million for both Mr. Husseini and
Ms. Smith. In addition, all options granted prior to the
change of control will become fully vested and be exercisable as
of the date of termination. As of March 31, 2004, there are
stock options outstanding for 318,000 shares subject to the
change of control agreement with a weighted average exercise
price of $20.15.

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.

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

Our business requires us to maintain
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. The
recent decline in market demand has resulted in infrastructure
costs in excess of current needs and has resulted in lower
earnings. Although we recently exited the wireless handset power
amplifier market  which we believe will result in
reduced expenses  we are nevertheless still relying
on increased sales to manufacturers of commercial communications
equipment and defense contractors in order to realize a
significant 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.

As a result of our recent exit from the
wireless handset power amplifier business, we face risks
relating to our increased reliance on sales of our semiconductor
products for wireless infrastructure, satellite communications
and defense applications.

In late September 2003, we exited the wireless
handset power amplifier business in order to focus our resources
on market areas where we believe our core competencies will
allow us the greatest opportunity of success in our goal of
returning to profitability. There is, however, no guarantee that
our exit from the wireless handset power amplifier business will
enable us to reach profitability on a more expedited basis, or
at all. In particular, we now face increased reliance on the
sales of our semiconductor products for wireless infrastructure,
satellite communications and defense applications, which markets
may have lower growth potential than the wireless handset
market. In addition, we may fail to manage successfully our exit
from the wireless handset power amplifier business. If we do not
properly manage our exit from the handset business, or if our
projections with respect to the sales of our semiconductors
products for wireless infrastructure, satellite communications
and defense applications are incorrect, we may fail to achieve
profitability and our business may suffer. As our Board of
Directors continues to explore all strategic alternatives to
enhance shareholder value, there could be further business
realignments with outcomes that may not materialize as
anticipated.

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;                                                      

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| |   |                                                                                                 
| | - | ------------------------------------------------------------------------------------------------
| |  | 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.
In addition, in late September 2003, we exited the wireless
handset power amplifier market entirely. 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.

Variable accounting related to past stock
option grants may impact our future earnings.

We declared an extraordinary cash dividend of
$4.50 per share payable to shareholders of record as of
February 5, 2004, payable on March 11, 2004. The total
dividend paid was $57.8 million. Pursuant to the Nasdaq
Marketplace Rules, the ex-dividend date with respect to the cash
dividend was set as March 12, 2004. Accordingly, prior to
the commencement of trading on March 12, 2004, the
Companys opening bid price was reduced by $4.50 per
share to reflect the payment of the cash dividend. Under the
intrinsic value method of accounting for stock options, we were
required to adjust our stock option exercise price by the
dividend amount or $4.50 per share because the dividend was
a return of capital. Since our stock option plan does not allow
us to reprice options, we were required to change to the
variable method of accounting for our outstanding stock options.
Under variable accounting, compensation expense is recognized
over the life of the option (until exercised, forfeited, or
cancelled) generally to the extent that there are any increases
in the per share market price of the companys common
stock. It is difficult to estimate the impact that expensing
stock options will have on our statement of operations as this
expense is dependent upon future events that are difficult to
predict, such as the number of options to be granted during a
period, the price of our common stock at the time of grant, the
stock price volatility, the risk free interest rate during the
period and the expected average life of the option. A slight
change in any one of these variables can materially affect the
amount of compensation expense to be recorded.

We depend on a small number of original
equipment manufacturers as customers. If we lose one or more of
our significant customers, or if purchases by any one of our key
customers decrease, our net sales will decline and 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. If we lose any of our
existing major customers, our operating results and business
would be harmed. In fiscal year 2004, sales to our top ten
customers accounted for approximately 62% of our net sales, with
Raytheon making up approximately 16% and BAE Systems making up
approximately 10% of those net sales. 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 had been a
sole source supplier of power amplifier modules to Motorola for
its model 120v handset platform. However, Motorola transitioned
to new platforms, and it selected a sole source supplier other
than us for its

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new platforms. As discussed above, we have exited
the wireless handset power amplifier market entirely. If we were
to lose a major customer, or if orders by any of our major
customers were to otherwise decrease or be delayed, our
business, operating results and financial condition would be
seriously harmed.


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 and 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 and maintain
competitive processes or design products using new technologies,
and if we are unable to secure production orders for these
products, we will not achieve the significant increase in
revenues necessary to achieve profitability, and 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.

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 and
defense industries. 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. 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.

Sales to international customers accounted for
35% of our net sales in fiscal 2004, 67% of our net sales in
fiscal 2003 and 31% of our net sales in 2002. The decline in the
percentage of sales to international customers in fiscal 2004,
as compared to fiscal 2003, is the result of the decline in
sales of power amplifiers to Motorola. Almost all of our
wireless handset power amplifier products were sold to
Motorolas foreign subsidiaries and contractors. 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;

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| |   |                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------
| |  | 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;                                           
|
| |  | 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 backlog may not result in sales.

Our backlog primarily represents signed purchase
orders for products due to ship within 18 months. As of
March 31, 2004, our backlog was approximately
$15.6 million, of which 82% was from subsystem customers
and 18% was from semiconductor 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 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

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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;                                               
|
| |  | 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. 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.

Our current semiconductor product strategy is to
design standard products that can be used by different customers
for a variety of applications. Any significant increase in our
sales volume is dependent on our achieving a considerable number
of design wins. Additionally, where our products are designed
into an original equipment manufacturers product, our
sales volumes will be dependent 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 wireless and defense
communications systems. 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.

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.

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 CTT, M/ A-COM, Miteq, and REMEC. 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

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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.

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 commercial
or defense communications systems. 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

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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
outdated due to the short life cycle of the end products that
incorporate our products. In fiscal 2003, we wrote off outdated
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 outdated 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 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.

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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.

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
potential business restructurings 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. | Quantitative and Qualitative Disclosures
    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, 2004,
our investment portfolio comprised approximately
$2.5 million in money market funds

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and certificate of deposits and
$23.6 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, 2004 levels,
the fair value of our portfolio would decline by approximately
$0.1 million. 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.






|        |                                                
|------- | -----------------------------------------------
|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

Selection of BDO Seidman, LLP

The Audit Committee of the Board of Directors of
Celeritek, Inc. periodically considers and recommends to the
Board the selection of independent public accountants. On
February 18, 2004, after an evaluation process of
independent audit firms, the Audit Committee appointed BDO
Seidman, LLP (BDO) as Celeriteks independent
auditors for the 2004 fiscal year, replacing Ernst &
Young LLP (Ernst & Young).

This action effectively dismissed
Ernst & Young as the Companys independent auditor
for the fiscal year that commenced on April 1, 2003. The
report of Ernst & Young on the Companys
consolidated financial statements for the fiscal years ended
March 31, 2003 and 2002 did not contain an adverse opinion
or a disclaimer of opinion and was not qualified or modified as
to uncertainty and audit scope or accounting principles. There
have been no disagreements with Ernst & Young on any
matter of accounting principles or practices, financial
statement disclosure or auditing scope or procedure, which
disagreements if not resolved to Ernst & Youngs
satisfaction would have caused them to make reference to the
subject matter of the disagreement in connection with their
reports. There were no reportable events as that
term is described in Item 304(a)(1)(v) of
Regulation S-K.

During the fiscal years ended March 31, 2003
and 2002 and through February 18, 2004 (the date BDO was
appointed), the Company did not consult BDO with respect to the
application of accounting principles to a specified transaction,
either completed or proposed, or the type of audit opinion that
might be rendered on the Companys Consolidated Financial
Statements or any other matters or reportable events as defined
in Item 304(a)(2)(i) and (ii) of Regulation S-K.






|         |                        
|-------- | -----------------------
|Item 9A. | Controls and Procedures

Our management evaluated, with the participation
of our chief executive officer and our chief financial officer,
the effectiveness of our disclosure controls and procedures
pursuant to Rule 13a-15 promulgated under the Securities
Exchange Act as of March 31, 2004. Based on this
evaluation, our chief executive officer and our chief financial
officer have concluded that our disclosure controls and
procedures are effective to ensure that information we are
required to disclose in reports that we file or submit under the
Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in
Securities and Exchange Commission rules and forms.

There was no change in our internal control over
financial reporting that occurred during the period covered by
this Report that has materially affected, or is reasonably
likely to materially affect, our internal control over financial
reporting. We are aware that any system of control, however
well-designed and operated, can only provide reasonable, and not
absolute, assurance that the objectives of this system are met,
and that maintenance of disclosure controls and procedures is an
ongoing process that may change over time.

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PART III






|         |                                                       
|-------- | ------------------------------------------------------
|Item 10. | Directors and Executive Officers of the
    Registrant

The information regarding our executive officer
required by this item is incorporated by reference from the
section entitled Executive Officers of the
Registrant in Part 1 of this Report. All other
information required by this item is incorporated herein by
reference to our definitive Proxy Statement to be filed in
connection with our 2004 Annual Meeting of Shareholders, which
is expected to be filed not later than 120 days after our
fiscal year ended March 31, 2004.






|         |                       
|-------- | ----------------------
|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 2004 Annual Meeting
of Shareholders, which is expected to be filed not later than
120 days after our fiscal year ended March 31, 2004.






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

The information required by this item is
incorporated herein by reference to our definitive Proxy
Statement to be filed in connection with our 2004 Annual Meeting
of Shareholders, which is expected to be filed not later than
120 days after our fiscal year ended March 31, 2004.






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

The information required by this item is
incorporated herein by reference to our definitive Proxy
Statement to be filed in connection with our 2004 Annual Meeting
of Shareholders, which is expected to be filed not later than
120 days after our fiscal year ended March 31, 2004.






|         |                                           
|-------- | ------------------------------------------
|Item 14. | Principal Accounting Fees and
    Services

The information required by this item is
incorporated herein by reference to our definitive Proxy
Statement to be filed in connection with our 2004 Annual Meeting
of Shareholders, which is expected to be filed not later than
120 days after our fiscal year ended March 31, 2004.




PART IV






|         |                                                                    
|-------- | -------------------------------------------------------------------
|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 Independent Registered Public
    Accounting Firm  BDO Seidman, LLP                        |  |      | 39  | 
|Report of Independent Registered Public
    Accounting Firm  Ernst & Young, LLP                      |  |      | 40  | 
|Consolidated Balance Sheets as of March 31,
    2004 and 2003                                         |  |      | 41  | 
|Consolidated Statements of Operations for the
    years ended March 31, 2004, 2003 and 2002           |  |      | 42  | 
|Consolidated Statements of Shareholders
    Equity for the years ended March 31, 2004, 2003 and 2002 |  |      | 43  | 
|Consolidated Statements of Cash Flows for the
    years ended March 31, 2004, 2003 and 2002           |  |      | 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.

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3.     Exhibits

|        |    |             |  |                                                                                                                                                                                                                        
|------- | -- | ----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|Number  |    | Description
|        |    |            
|        | 3  | .1(1)       |  | Amended and Restated Articles of Incorporation of
    Registrant.                                                                                                                                                      
|        | 3  | .2(16)      |  | 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.                                                                                                                                                                               
|        | 16 | .1(17)      |  | Letter dated February 23, 2004 from
    Ernst & Young LLP to the Securities and Exchange
    Commission.                                                                                                               
|        | 21 |             |  | Subsidiaries of Celeritek.                                                                                                                                                                                             
|        | 23 | .1          |  | Consent of BDO Seidman, LLP, Independent
    Registered Public Accounting Firm.                                                                                                                                        
|        | 23 | .2          |  | Consent of Ernst & Young LLP,
    Independent Registered Public Accounting Firm.                                                                                                                                       
|        | 24 |             |  | Power of Attorney (see signature page).                                                                                                                                                                                
|        | 31 | .1          |  | Certification of the Chief Executive Officer
    pursuant to Securities and Exchange Act Rules 13a-15(e) and
    15d-1(e), as adopted pursuant to Section 302 of the
    Sarbanes-Oxley Act of 2002.                   
|        | 31 | .2          |  | Certification of the Chief Financial Officer
    pursuant to Securities and Exchange Act Rules 13a-15(e) and
    15d-1(e), as adopted pursuant to Section 302 of the
    Sarbanes-Oxley Act of 2002.                   
|        | 32 | .1          |  | Certifications 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 | .1(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.

37



---



##### 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
    (Commission File No. 333-67624) 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
    (Commission File No. 333-31160) filed on February 25, 2000.
|    
|(15) | Incorporated by reference to our Form S-8
    (Commission File No. 333-102538) filed on January 16, 2003.
|    
|(16) | Incorporated by reference to our Form 10-K
    filed for the fiscal year ended March 31, 2003.           
|    
|(17) | Incorporated by reference to our Form 8-K
    filed on February 23, 2004.                                

(b) Reports on Form 8-K

We filed 4 reports on Form 8-K with the
Securities and Exchange Commission during the fourth quarter
ended March 31, 2004, as follows:



| |                                                                                                                                                                                      
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. Report on Form 8-K filed on
    January 15, 2004 under Item 2 (Acquisition or
    Disposition of Assets), regarding our extraordinary cash
    dividend.                          
|
| | 2. Report on Form 8-K filed on
    January 27, 2004 under Item 12 (Results of Operations
    and Financial Condition), regarding our third quarter fiscal
    2004 financial results.
|
| | 3. Report on Form 8-K filed on
    February 23, 2004 under Item 4 (Changes in
    Registrants Certifying Accountant), regarding the changes
    in our certifying accountants.      
|
| | 4. Report on Form 8-K/ A filed on
    February 26, 2004 under Item 4 (Changes in
    Registrants Certifying Accountant), regarding the changes
    in our certifying accountants.   

(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.

38



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REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM

The Board of Directors and Shareholders

Celeritek, Inc.


We have audited the accompanying consolidated
balance sheet of Celeritek, Inc. as of March 31, 2004, and
the related consolidated statements of operations,
shareholders equity, and cash flows for the year then
ended. We have also audited 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 and schedule based on our
audit.

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

In our opinion, the consolidated financial
statements referred to above present fairly, in all material
respects, the financial position of Celeritek, Inc. at
March 31, 2004, and the results of its operations and its
cash flows for the year then ended, in conformity with
accounting principles generally accepted in the United States.

Also, in our opinion, the 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/ BDO SEIDMAN, LLP

San Jose, California

April 30, 2004


39



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##### Table of Contents






REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM

The Board of Directors and Shareholders

Celeritek, Inc.


We have audited the accompanying consolidated
balance sheet of Celeritek, Inc. as of March 31, 2003, and
the related consolidated statements of operations,
shareholders equity, and cash flows for each of the two
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 the
standards of the Public Company Accounting Oversight Board
(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 the consolidated results of its
operations and its cash flows for each of the two years in the
period ended March 31, 2003, in conformity with
U.S. generally accepted accounting principles. 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



CELERITEK, INC.

CONSOLIDATED BALANCE SHEETS

|                                                           |                                                                                                                               |                                |                                                                                                            |                                            |   |         |        |         |   |         |         | 
|---------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------- | ------------------------------ | ---------------------------------------------------------------------------------------------------------- | ------------------------------------------ | - | ------- | ------ | ------- | - | ------- | ------- | 
|                                                           |                                                                                                                               |                               
|                                                           |                                                                                                                               | March 31,                     
|                                                           |                                                                                                                               |                               
|                                                           |                                                                                                                               | 2004                           |                                                                                                            | 2003                                      
|                                                           |                                                                                                                               |                                |                                                                                                            |                                           
|                                                           |                                                                                                                               |                               
|                                                           |                                                                                                                               | (In thousands, except         
|                                                           |                                                                                                                               | share amounts)                
|ASSETS                                                    
|Current assets:                                            |                                                                                                                               |                                |                                                                                                            |                                            |   |         |        |        
|                                                           | Cash and cash equivalents                                                                                                     |                                | $                                                                                                          | 3,121                                      |   |         | $      | 28,909  |  
|                                                           | Short-term investments                                                                                                        |                                |                                                                                                            | 24,110                                     |   |         |        | 66,727  |  
|                                                           | Accounts receivable, net of allowance for
    doubtful accounts of $547 and $626 at March 31, 2004 and
    2003, respectively |                                |                                                                                                            | 6,048                                      |   |         |        | 4,483   |  
|                                                           | Inventories                                                                                                                   |                                |                                                                                                            | 2,739                                      |   |         |        | 3,599   |  
|                                                           | Prepaid expenses and other current assets                                                                                     |                                |                                                                                                            | 1,275                                      |   |         |        | 1,813   |  
|                                                           | Loans to officers and employees  short
    term portion                                                                      |                                |                                                                                                            | 40                                         |   |         |        | 112     |  
|                                                           |                                                                                                                               |                                |                                                                                                            |                                            |   |         |        |        
|                                                           |                                                                                                                               |                                |                                                                                                            | Total current assets                       |   |         | 37,333 |         |   |         | 105,643 | 
|Net property and equipment                                 |                                                                                                                               |                                | 5,430                                                                                                      |                                            |   |         | 11,029 |        
|Strategic investments                                      |                                                                                                                               |                                | 2,741                                                                                                      |                                            |   |         | 2,741  |        
|Other assets                                               |                                                                                                                               |                                | 731                                                                                                        |                                            |   |         | 760    |        
|Loans to officers and employees  long
    term portion    |                                                                                                                               |                                | 531                                                                                                        |                                            |   |         | 1,356  |        
|Purchased intangible assets                                |                                                                                                                               |                                |                                                                                                           |                                            |   |         | 931    |        
|                                                           |                                                                                                                               |                                |                                                                                                            |                                            |   |         |        |        
|                                                           |                                                                                                                               |                                |                                                                                                            | Total assets                               |   | $       | 46,766 |         |   | $       | 122,460 | 
|                                                           |                                                                                                                               |                                |                                                                                                            |                                            |   |         |        |        
|                                                          
|LIABILITIES AND SHAREHOLDERS
    EQUITY                  
|Current liabilities:                                       |                                                                                                                               |                                |                                                                                                            |                                            |   |         |        |        
|                                                           | Accounts payable                                                                                                              |                                | $                                                                                                          | 3,171                                      |   |         | $      | 4,355   |  
|                                                           | Accrued payroll                                                                                                               |                                |                                                                                                            | 1,459                                      |   |         |        | 1,601   |  
|                                                           | Accrued liabilities                                                                                                           |                                |                                                                                                            | 4,826                                      |   |         |        | 4,201   |  
|                                                           | Current portion of long-term debt                                                                                             |                                |                                                                                                            | 1,866                                      |   |         |        | 2,543   |  
|                                                           | Current obligations under capital leases                                                                                      |                                |                                                                                                            | 328                                        |   |         |        | 597     |  
|                                                           |                                                                                                                               |                                |                                                                                                            |                                            |   |         |        |        
|                                                           |                                                                                                                               |                                |                                                                                                            | Total current liabilities                  |   |         | 11,650 |         |   |         | 13,297  | 
|Long-term debt, less current portion                       |                                                                                                                               |                                |                                                                                                           |                                            |   |         | 2,126  |        
|Noncurrent obligations under capital lease
    commitments |                                                                                                                               |                                |                                                                                                           |                                            |   |         | 793    |        
|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 
    12,855,962 and 12,342,163 at March 31, 2004 and 2003,
    respectively |                                            |   | 102,891 |        |         |   | 158,049 |        
|                                                           | Accumulated other comprehensive income                                                                                        |                                |                                                                                                            | 15                                         |   |         |        | 5       |  
|                                                           | Accumulated deficit                                                                                                           |                                |                                                                                                            | (67,790                                    | ) |         |        | (51,810 | )
|                                                           |                                                                                                                               |                                |                                                                                                            |                                            |   |         |        |        
|                                                           |                                                                                                                               |                                |                                                                                                            | Total shareholders equity                 |   |         | 35,116 |         |   |         | 106,244 | 
|                                                           |                                                                                                                               |                                |                                                                                                            |                                            |   |         |        |        
|                                                           |                                                                                                                               |                                |                                                                                                            | Total liabilities and shareholders equity |   | $       | 46,766 |         |   | $       | 122,460 | 
|                                                           |                                                                                                                               |                                |                                                                                                            |                                            |   |         |        |        

See accompanying notes.

41



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##### Table of Contents



CELERITEK, INC.

CONSOLIDATED STATEMENTS OF
OPERATIONS

|                                              |                                                    |                          |         |        |        |      |         |        |        |   |         |        |        | 
|--------------------------------------------- | -------------------------------------------------- | ------------------------ | ------- | ------ | ------ | ---- | ------- | ------ | ------ | - | ------- | ------ | ------ | 
|                                              |                                                    |                         
|                                              |                                                    | Years Ended March 31,   
|                                              |                                                    |                         
|                                              |                                                    | 2004                     |         | 2003   |        | 2002
|                                              |                                                    |                          |         |        |        |     
|                                              |                                                    |                         
|                                              |                                                    | (In thousands, except   
|                                              |                                                    | per share amounts)      
|Net sales                                     |                                                    | $                        | 29,928  |        |        | $    | 49,423  |        |        | $ | 57,050  |       
|Cost of goods sold                            |                                                    |                          | 22,175  |        |        |      | 39,101  |        |        |   | 51,839  |       
|                                              |                                                    |                          |         |        |        |      |         |        |        |   |         |       
|Gross profit                                  |                                                    |                          | 7,753   |        |        |      | 10,322  |        |        |   | 5,211   |       
|Operating expenses:                           |                                                    |                          |         |        |        |      |         |        |        |   |         |       
|                                              | Research and development                           |                          |         | 9,288  |        |      |         | 10,797 |        |   |         | 9,195  |       
|                                              | Selling, general, and administrative               |                          |         | 8,182  |        |      |         | 8,729  |        |   |         | 9,648  |       
|                                              | Costs related to shareholder and strategic actions |                          |         | 3,412  |        |      |         | 1,306  |        |   |         |       |       
|                                              | Special charges                                    |                          |         | 4,305  |        |      |         | 2,836  |        |   |         | 10,960 |       
|                                              | In-process research and development                |                          |         |       |        |      |         | 4,414  |        |   |         |       |       
|                                              | Amortization of intangible assets                  |                          |         | 257    |        |      |         | 215    |        |   |         |       |       
|                                              |                                                    | Total operating expenses |         |        | 25,444 |      |         |        | 28,297 |   |         |        | 29,803 | 
|                                              |                                                    |                          |         |        |        |      |         |        |        |   |         |       
|Loss from operations                          |                                                    |                          | (17,691 | )      |        |      | (17,975 | )      |        |   | (24,592 | )     
|Impairment of strategic investments           |                                                    |                          |        |        |        |      | (422    | )      |        |   | (1,702  | )     
|Interest income and other                     |                                                    |                          | 2,125   |        |        |      | 2,217   |        |        |   | 4,191   |       
|Interest expense                              |                                                    |                          | (414    | )      |        |      | (711    | )      |        |   | (695    | )     
|                                              |                                                    |                          |         |        |        |      |         |        |        |   |         |       
|Loss before income taxes                      |                                                    |                          | (15,980 | )      |        |      | (16,891 | )      |        |   | (22,798 | )     
|Provision (benefit) for income taxes          |                                                    |                          |        |        |        |      | 136     |        |        |   | (180    | )     
|                                              |                                                    |                          |         |        |        |      |         |        |        |   |         |       
|Net loss                                      |                                                    | $                        | (15,980 | )      |        | $    | (17,027 | )      |        | $ | (22,618 | )     
|                                              |                                                    |                          |         |        |        |      |         |        |        |   |         |       
|Basic and diluted net loss per share          |                                                    | $                        | (1.28   | )      |        | $    | (1.39   | )      |        | $ | (1.87   | )     
|                                              |                                                    |                          |         |        |        |      |         |        |        |   |         |       
|Shares used in net loss per share calculation |                                                    |                          |         |        |        |      |         |        |        |   |         |       
|                                              | Basic and diluted                                  |                          |         | 12,460 |        |      |         | 12,285 |        |   |         | 12,076 |       

See accompanying notes.

42



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##### Table of Contents



CELERITEK, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS
EQUITY

|                                                                             |                                                                                     |                |        |               |  |              |         |             |  |        |     |      |   |   |         |         |   |   |         |         |  
|---------------------------------------------------------------------------- | ----------------------------------------------------------------------------------- | -------------- | ------ | ------------- |  | ------------ | ------- | ----------- |  | ------ | --- | ---- | - | - | ------- | ------- | - | - | ------- | ------- | -
|                                                                             |                                                                                     |                |        | Accumulated   |  | Retained     |         |            
|                                                                             |                                                                                     | Common Stock   |        | Other         |  | Earnings     |         | Total      
|                                                                             |                                                                                     |                |        | Comprehensive |  | (Accumulated |         | Shareholder
|                                                                             |                                                                                     | Shares         |        | Amount        |  | Income       |         | Deficit)    |  | Equity
|                                                                             |                                                                                     |                |        |               |  |              |         |             |  |       
|                                                                             |                                                                                     |               
|                                                                             |                                                                                     | (In thousands)
|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 | ) |   |         |        |   |   |         | (675    | )
|                                                                             | Reclassification adjustments for loss on sale of
    available-for-sale investments |                |        |              |  |              |         |            |  |        |     | 144  |   |   |         |        |   |   |         | 144     |  
|                                                                             |                                                                                     |                |        |               |  |              |         |             |  |        |     |      |   |   |         |         |   |   |         |        
|                                                                             | 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 |        
|Issuance of common stock on exercise of options
    under stock option plans |                                                                                     |                | 436    |               |  |              | 2,245   |             |  |        |    |      |   |   |        |         |   |   | 2,245   |        
|Issuance of common stock under employee stock
    purchase plan              |                                                                                     |                | 78     |               |  |              | 441     |             |  |        |    |      |   |   |        |         |   |   | 441     |        
|Extraordinary dividend                                                       |                                                                                     |                |       |               |  |              | (57,844 | )           |  |        |    |      |   |   |        |         |   |   | (57,844 | )      
|Comprehensive loss:                                                          |                                                                                     |                |        |               |  |              |         |             |  |        |     |      |   |   |         |         |   |   |         |        
|                                                                             | Net loss for the year ended March 31, 2004                                          |                |        |              |  |              |         |            |  |        |     |     |   |   |         | (15,980 | ) |   |         | (15,980 | )
|                                                                             | Unrealized gain on available-for-sale securities                                    |                |        |              |  |              |         |            |  |        |     | 24   |   |   |         |        |   |   |         | 24      |  
|                                                                             | Reclassification adjustments for gain on sale of
    available-for-sale investments |                |        |              |  |              |         |            |  |        |     | (14  | ) |   |         |        |   |   |         | (14     | )
|                                                                             |                                                                                     |                |        |               |  |              |         |             |  |        |     |      |   |   |         |         |   |   |         |        
|                                                                             | Comprehensive loss                                                                  |                |        |              |  |              |         |            |  |        |     |     |   |   |         |        |   |   |         | (15,970 | )
|                                                                             |                                                                                     |                |        |               |  |              |         |             |  |        |     |      |   |   |         |         |   |   |         |        
|Balance at March 31, 2004                                                    |                                                                                     |                | 12,856 |               |  | $            | 102,891 |             |  | $      | 15  |      |   | $ | (67,790 | )       |   | $ | 35,116  |        
|                                                                             |                                                                                     |                |        |               |  |              |         |             |  |        |     |      |   |   |         |         |   |   |         |        

See accompanying notes.

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CELERITEK, INC.

CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                                                                           |                                                               |                                           |                                                         |       |        |         |          |       |       |        |          |        |        |        |  
|------------------------------------------------------------------------------------------ | ------------------------------------------------------------- | ----------------------------------------- | ------------------------------------------------------- | ----- | ------ | ------- | -------- | ----- | ----- | ------ | -------- | ------ | ------ | ------ | -
|                                                                                           |                                                               |                                          
|                                                                                           |                                                               | Years Ended March 31,                    
|                                                                                           |                                                               |                                          
|                                                                                           |                                                               | 2004                                      |                                                         | 2003  |        | 2002   
|                                                                                           |                                                               |                                           |                                                         |       |        |        
|                                                                                           |                                                               |                                          
|                                                                                           |                                                               | (In thousands)                           
|Operating activities                                                                       |                                                               |                                           |                                                         |       |        |         |          |       |       |        |          |       
|Net loss                                                                                   |                                                               | $                                         | (15,980                                                 | )     |        | $       | (17,027  | )     |       | $      | (22,618  | )     
|Adjustments to reconcile net loss to net cash
    provided (used) in operating activities: |                                                               |                                           |                                                         |       |        |         |          |       |       |        |          |       
|                                                                                           | Depreciation                                                  |                                           |                                                         | 3,602 |        |         |          | 5,000 |       |        |          | 5,276  |       
|                                                                                           | Amortization of intangible assets                             |                                           |                                                         | 257   |        |         |          | 215   |       |        |          |       |       
|                                                                                           | Impairment of strategic and short-term investments            |                                           |                                                         |      |        |         |          | 422   |       |        |          | 1,702  |       
|                                                                                           | Loss on impairment and disposal of property and
    equipment |                                           |                                                         | 2,755 |        |         |          | 1,292 |       |        |          | 11,047 |       
|                                                                                           | (Gain) loss on sale of short-term investments                 |                                           |                                                         | (14   | )      |         |          | (7    | )     |        |          | 145    |       
|                                                                                           | Income tax receivable and other                               |                                           |                                                         | 101   |        |         |          | 244   |       |        |          |       |       
|                                                                                           | Purchase of in-process research and development               |                                           |                                                         |      |        |         |          | 793   |       |        |          |       |       
|                                                                                           | Changes in operating assets and liabilities:                  |                                           |                                                         |       |        |         |          |       |       |        |          |        |       
|                                                                                           |                                                               | Accounts receivable                       |                                                         |       | (1,565 | )       |          |       | 5,518 |        |          |        | 6,494  |       
|                                                                                           |                                                               | Inventories                               |                                                         |       | 860    |         |          |       | 5,773 |        |          |        | 5,989  |       
|                                                                                           |                                                               | Prepaid expenses and other current assets |                                                         |       | 538    |         |          |       | 1,425 |        |          |        | (304   | )     
|                                                                                           |                                                               | Other assets                              |                                                         |       | 29     |         |          |       | (29   | )      |          |        | (801   | )     
|                                                                                           |                                                               | Related party receivables                 |                                                         |       | 897    |         |          |       | 145   |        |          |        | 282    |       
|                                                                                           |                                                               | Intangible assets                         |                                                         |       | 674    |         |          |       | (939  | )      |          |        |       |       
|                                                                                           |                                                               | Accounts payable                          |                                                         |       | (1,167 | )       |          |       | (221  | )      |          |        | (8,830 | )     
|                                                                                           |                                                               | Accrued payroll                           |                                                         |       | (137   | )       |          |       | 99    |        |          |        | (1,174 | )     
|                                                                                           |                                                               | Accrued liabilities                       |                                                         |       | 537    |         |          |       | 1,103 |        |          |        | (814   | )     
|                                                                                           |                                                               |                                           |                                                         |       |        |         |          |       |       |        |          |       
|                                                                                           |                                                               |                                           | Net cash (used in) provided by operating
    activities |       |        | (8,613  | )        |       |       | 3,806  |          |        |        | (3,606 | )
|                                                                                           |                                                               |                                           |                                                         |       |        |         |          |       |       |        |          |       
|Investing activities                                                                       |                                                               |                                           |                                                         |       |        |         |          |       |       |        |          |       
|Purchases of property and equipment                                                        |                                                               |                                           | (875                                                    | )     |        |         | (2,593   | )     |       |        | (6,656   | )     
|Purchase of strategic investments                                                          |                                                               |                                           |                                                        |       |        |         | (1,992   | )     |       |        | (512     | )     
|Purchases of short-term investments                                                        |                                                               |                                           | (124,525                                                | )     |        |         | (132,145 | )     |       |        | (139,472 | )     
|Proceeds from sale of property and equipment                                               |                                                               |                                           | 775                                                     |       |        |         | 168      |       |       |        | 20       |       
|Proceeds from sales of short-term investments                                              |                                                               |                                           | 82,676                                                  |       |        |         | 34,258   |       |       |        | 59,863   |       
|Proceeds from maturities of short-term investments                                         |                                                               |                                           | 84,490                                                  |       |        |         | 121,820  |       |       |        | 92,003   |       
|                                                                                           |                                                               |                                           |                                                         |       |        |         |          |       |       |        |          |       
|                                                                                           |                                                               |                                           | Net cash provided by investing activities               |       |        | 42,541  |          |       |       | 19,516 |          |        |        | 5,246  |  
|                                                                                           |                                                               |                                           |                                                         |       |        |         |          |       |       |        |          |       
|Financing activities                                                                       |                                                               |                                           |                                                         |       |        |         |          |       |       |        |          |       
|Principal payments on long-term debt                                                       |                                                               |                                           | (2,803                                                  | )     |        |         | (2,318   | )     |       |        | (1,787   | )     
|Borrowings on long-term debt                                                               |                                                               |                                           |                                                        |       |        |         |         |       |       |        | 3,708    |       
|Principal payments on obligations under capital
    leases                                 |                                                               |                                           | (1,535                                                  | )     |        |         | (693     | )     |       |        | (826     | )     
|Extraordinary dividend payment                                                             |                                                               |                                           | (57,844                                                 | )     |        |         |         |       |       |        |         |       
|Proceeds from the exercise of stock options and
    employee stock purchase plan           |                                                               |                                           | 2,686                                                   |       |        |         | 709      |       |       |        | 1,846    |       
|                                                                                           |                                                               |                                           |                                                         |       |        |         |          |       |       |        |          |       
|                                                                                           |                                                               |                                           | Net cash (used in) provided by financing
    activities |       |        | (59,496 | )        |       |       | (2,302 | )        |        |        | 2,941  |  
|                                                                                           |                                                               |                                           |                                                         |       |        |         |          |       |       |        |          |       
|Effect of exchange rate changes on
    cash                                                |                                                               |                                           | (220                                                    | )     |        |         | (207     | )     |       |        |         |       
|                                                                                           |                                                               |                                           |                                                         |       |        |         |          |       |       |        |          |       
|Increase (decrease) in cash and cash equivalents                                           |                                                               |                                           | (25,788                                                 | )     |        |         | 20,813   |       |       |        | 4,581    |       
|Cash and cash equivalents at beginning of year                                             |                                                               |                                           | 28,909                                                  |       |        |         | 8,096    |       |       |        | 3,515    |       
|                                                                                           |                                                               |                                           |                                                         |       |        |         |          |       |       |        |          |       
|Cash and cash equivalents at end of year                                                   |                                                               | $                                         | 3,121                                                   |       |        | $       | 28,909   |       |       | $      | 8,096    |       
|                                                                                           |                                                               |                                           |                                                         |       |        |         |          |       |       |        |          |       

See accompanying notes.

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CELERITEK, INC.

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 semiconductor products are designed to facilitate
broadband voice and data transmission in satellite handsets,
wireless communication network infrastructures and defense
applications. 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
countermeasures and satellite communications systems.

Basis of
Presentation.The consolidated
financial statements include the accounts of the Company and its
wholly owned subsidiaries, Celeritek UK Limited and Celeritek
Korea. 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 2004, 2003, and 2002
ended March 28, March 30, and March 31,
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.

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CELERITEK, INC.


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, 2004 |                                          |                |   |            |        |            |   |       |    |  |   |     |     |   |   |       
|                     | Money market funds                       |                | $ | 2,028      |        |            | $ |      |    |  | $ |    |     |   | $ | 2,028  |       
|                     | Certificate of deposits                  |                |   | 504        |        |            |   |      |    |  |   |    |     |   |   | 504    |       
|                     | U.S. Government and federal agency bonds |                |   | 4,500      |        |            |   |      |    |  |   |    |     |   |   | 4,500  |       
|                     | Corporate debt securities                |                |   | 18,091     |        |            |   | 15    |    |  |   |    |     |   |   | 18,106 |       
|                     | Municipal bonds                          |                |   | 1,000      |        |            |   |      |    |  |   |    |     |   |   | 1,000  |       
|                     |                                          |                |   |            |        |            |   |       |    |  |   |     |     |   |   |       
|                     |                                          | Total          |   | $          | 26,123 |            |   | $     | 15 |  |   | $   |    |   |   | $      | 26,138 | 
|                     |                                          |                |   |            |        |            |   |       |    |  |   |     |     |   |   |       
|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 | 
|                     |                                          |                |   |            |        |            |   |       |    |  |   |     |     |   |   |       

Available for sale securities at March 31,
2004, by contractual maturity, are shown below:

|                                  |       |                      |        |        |  |   |        |        | 
|--------------------------------- | ----- | -------------------- | ------ | ------ |  | - | ------ | ------ | 
|                                  |       |                     
|                                  |       | Estimated Fair Value
|                                  |       |                     
|                                  |       |                     
|                                  |       | March 31,           
|                                  |       |                     
|                                  |       | 2004                 |        | 2003  
|                                  |       |                      |        |       
|                                  |       |                     
|                                  |       | (In thousands)      
|Due in one year                   |       | $                    | 25,138 |        |  | $ | 88,772 |       
|Due after 1 years through 2 years |       |                      | 1,000  |        |  |   | 5,252  |       
|                                  |       |                      |        |        |  |   |        |       
|                                  | Total |                      | $      | 26,138 |  |   | $      | 94,024 | 
|                                  |       |                      |        |        |  |   |        |       

Above amounts are included in the following:

|                          |       |                |        |        |  |   |        |        | 
|------------------------- | ----- | -------------- | ------ | ------ |  | - | ------ | ------ | 
|                          |       |               
|                          |       | March 31,     
|                          |       |               
|                          |       | 2004           |        | 2003  
|                          |       |                |        |       
|                          |       |               
|                          |       | (In thousands)
|Cash and cash equivalents |       | $              | 2,028  |        |  | $ | 27,297 |       
|Short-term investments    |       |                | 24,110 |        |  |   | 66,727 |       
|                          |       |                |        |        |  |   |        |       
|                          | Total |                | $      | 26,138 |  |   | $      | 94,024 | 
|                          |       |                |        |        |  |   |        |       

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CELERITEK, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Following is a reconciliation of cash and cash
equivalents:

|                              |       |                |       |       |  |   |        |        | 
|----------------------------- | ----- | -------------- | ----- | ----- |  | - | ------ | ------ | 
|                              |       |               
|                              |       | March 31,     
|                              |       |               
|                              |       | 2004           |       | 2003 
|                              |       |                |       |      
|                              |       |               
|                              |       | (In thousands)
|Available-for-sale securities |       | $              | 2,028 |       |  | $ | 27,297 |       
|Cash and bank accounts        |       |                | 1,093 |       |  |   | 1,612  |       
|                              |       |                |       |       |  |   |        |       
|                              | Total |                | $     | 3,121 |  |   | $      | 28,909 | 
|                              |       |                |       |       |  |   |        |       

Gross realized gains in fiscal 2004, 2003 and
2002, respectively were $0.014 million, $0.007 million
and $0.003 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 2004 or 2003.

Fair Values of Financial
Instruments.The Company considers the
carrying amounts of cash and cash equivalents, accounts
receivable, and accounts payable to approximate fair value due
to the short period of time to maturity for these financial
instruments. Short-term investments are carried at fair value
based on quoted market prices. Long-term strategic investments
are carried at amounts which management believes approximates
fair value after taking into account managements
impairment analyses performed and the impairments recorded as of
the respective balance sheet dates. Long-term debt, including
current portion, is carried at amounts which management believes
approximates value fair as the contractual interest rates are
believed to approximate rates that the Company could obtain for
comparable arrangements.

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,     
|                |  |               
|                |  | 2004           |       | 2003
|                |  |                |       |     
|                |  |               
|                |  | (In thousands)
|Raw materials   |  | $              | 763   |      |  | $ | 666   | 
|Work-in-process |  |                | 1,976 |      |  |   | 2,933 | 
|                |  |                |       |      |  |   |       | 
|                |  | $              | 2,739 |      |  | $ | 3,599 | 
|                |  |                |       |      |  |   |       | 

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.

47



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CELERITEK, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Significant components of property and equipment
are:

|                                          |  |                |         |      |  |   |         |  
|----------------------------------------- |  | -------------- | ------- | ---- |  | - | ------- | -
|                                          |  |               
|                                          |  | March 31,     
|                                          |  |               
|                                          |  | 2004           |         | 2003
|                                          |  |                |         |     
|                                          |  |               
|                                          |  | (In thousands)
|Equipment                                 |  | $              | 24,102  |      |  | $ | 35,122  |  
|Furniture and fixtures                    |  |                | 232     |      |  |   | 516     |  
|Leasehold improvements                    |  |                | 1,314   |      |  |   | 1,819   |  
|                                          |  |                |         |      |  |   |         |  
|                                          |  |                | 25,648  |      |  |   | 37,457  |  
|Accumulated depreciation and amortization |  |                | (20,218 | )    |  |   | (26,428 | )
|                                          |  |                |         |      |  |   |         |  
|Net property and equipment                |  | $              | 5,430   |      |  | $ | 11,029  |  
|                                          |  |                |         |      |  |   |         |  

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 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,          
|                                                                                                                                           |             |                                
|                                                                                                                                           |             | 2004                            |         | 2003  |   | 2002
|                                                                                                                                           |             |                                 |         |       |   |     
|                                                                                                                                           |             |                                
|                                                                                                                                           |             | (In thousands, except per share
|                                                                                                                                           |             | amounts)                       
|Net loss, as reported                                                                                                                      |             | $                               | (15,980 | )     |   | $    | (17,027 | )     |   | $ | (22,618 | )    
|Add: Total stock-based employee compensation
    expense determined under fair value method for all awards, net
    of related tax effects |             |                                 | (4,484  | )     |   |      | (5,012  | )     |   |   | (6,219  | )    
|                                                                                                                                           |             |                                 |         |       |   |      |         |       |   |   |         |      
|Pro forma net loss                                                                                                                         |             |                                 | (20,464 | )     |   |      | (22,039 | )     |   |   | (28,837 | )    
|Basic and diluted net loss per share:                                                                                                      |             |                                 |         |       |   |      |         |       |   |   |         |      
|                                                                                                                                           | As reported |                                 | $       | (1.28 | ) |      | $       | (1.39 | ) |   | $       | (1.87 | )
|                                                                                                                                           |             |                                 |         |       |   |      |         |       |   |   |         |      
|                                                                                                                                           | Pro forma   |                                 | $       | (1.64 | ) |      | $       | (1.79 | ) |   | $       | (2.39 | )
|                                                                                                                                           |             |                                 |         |       |   |      |         |       |   |   |         |      

On January 14, 2004, the Companys
Board of Directors announced the declaration of an extraordinary
cash dividend of $4.50 per share to shareholders of record
on February 5, 2004. The dividend was paid on
March 11, 2004, totaled $57.8 million, and has been
recorded as a return of capital. Pursuant to the Nasdaq
Marketplace Rules, the ex-dividend date with respect to the cash
dividend was set as March 12, 2004. Under the intrinsic
value method of accounting for stock options, the Company is
required to adjust its stock option exercise price by the
dividend amount or $4.50 per share because the dividend was
a return of capital. Since

48



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##### Table of Contents



CELERITEK, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

the Companys stock option plan does not
allow it to reprice options, the Company was required to change
to the variable method of accounting for its outstanding stock
options. Under variable accounting, compensation expense is
recognized over the life of the option (until exercised,
forfeited, or cancelled) generally to the extent that there are
any increases in the per share market price of the
Companys common stock. It is difficult to estimate the
impact that expensing stock options will have on the
Companys statement of operations as this expense is
dependent upon future events that are difficult to predict, such
as the number of options to be granted during a period, the
price of the Companys common stock at the time of grant,
the stock price volatility, the risk free interest rate during
the period and the expected average life of the option. A slight
change in any one of these variables can materially affect the
amount of compensation expense to be recorded. The change to the
variable method of accounting on March 12, 2004 had no
financial impact on the fiscal 2004 financial statements.

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.

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,
|                                 |  |                      
|                                 |  | 2004                  |           | 2003 |  | 2002
|                                 |  |                       |           |      |  |     
|Options to purchase common stock |  |                       | 1,186,796 |      |  |      | 1,983,911 |  |  |  | 1,824,294 | 
|Average exercise price           |  |                       | $19.78    |      |  |      | $14.98    |  |  |  | $16.39    | 

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).

49



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##### Table of Contents



CELERITEK, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The components of comprehensive loss, net of
related tax, for the years ended March 31, 2004, 2003, and
2002 were as follows:

|                                                                                          |  |                       |         |      |  |      |         |   |  |   |         |  
|----------------------------------------------------------------------------------------- |  | --------------------- | ------- | ---- |  | ---- | ------- | - |  | - | ------- | -
|                                                                                          |  |                      
|                                                                                          |  | Years Ended March 31,
|                                                                                          |  |                      
|                                                                                          |  | 2004                  |         | 2003 |  | 2002
|                                                                                          |  |                       |         |      |  |     
|                                                                                          |  |                      
|                                                                                          |  | (In thousands)       
|Net loss                                                                                  |  | $                     | (15,980 | )    |  | $    | (17,027 | ) |  | $ | (22,618 | )
|Unrealized gain (loss) on available for sale
    securities                               |  |                       | 24      |      |  |      | 63      |   |  |   | (675    | )
|Reclassification adjustments for (gain) loss
    on sale of available for sale securities |  |                       | (14     | )    |  |      | (7      | ) |  |   | 144     |  
|                                                                                          |  |                       |         |      |  |      |         |   |  |   |         |  
|Comprehensive loss                                                                        |  | $                     | (15,970 | )    |  | $    | (16,971 | ) |  | $ | (23,149 | )
|                                                                                          |  |                       |         |      |  |      |         |   |  |   |         |  

The components of accumulated comprehensive loss,
net of related tax, at March 31, 2004, 2003, and 2002 were
as follows:

|                                                            |  |                       |         |      |  |      |         |   |  |   |         |  
|----------------------------------------------------------- |  | --------------------- | ------- | ---- |  | ---- | ------- | - |  | - | ------- | -
|                                                            |  |                      
|                                                            |  | Years Ended March 31,
|                                                            |  |                      
|                                                            |  | 2004                  |         | 2003 |  | 2002
|                                                            |  |                       |         |      |  |     
|                                                            |  |                      
|                                                            |  | (In thousands)       
|Accumulated deficit                                         |  | $                     | (67,790 | )    |  | $    | (51,810 | ) |  | $ | (34,783 | )
|Unrealized gain (loss) on available for sale
    securities |  |                       | 15      |      |  |      | 5       |   |  |   | (51     | )
|                                                            |  |                       |         |      |  |      |         |   |  |   |         |  
|Accumulated comprehensive loss                              |  | $                     | (67,775 | )    |  | $    | (51,805 | ) |  | $ | (34,834 | )
|                                                            |  |                       |         |      |  |      |         |   |  |   |         |  

Foreign Currency
Translation.The U.S. dollar is
the functional currency for the Companys foreign
operations. Gains and losses on the remeasurement 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 2004.

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.

Recent Accounting
Pronouncements.In January 2003, the
FASB issued Interpretation No. 46
(FIN 46), Consolidation of Variable
Interest Entities.In general, a variable interest
entity is a corporation, partnership, trust, or any other legal
structure used for business purposes that either (a) does
not have equity investors with voting rights or (b) has
equity investors that do not provide sufficient financial
resources for the entity to support its activities. FIN 46
requires a variable interest entity to be consolidated by a
company if that company is subject to a majority of the risk of
loss from the variable interest entitys activities or
entitled to receive a majority of the entitys residual
returns or both. The consolidation requirements of FIN 46
apply immediately to variable interest entities created after
January 31, 2003. The consolidation requirements apply to
older entities in the first fiscal year or interim period ending
after December 15, 2003. Certain of the disclosure
requirements apply in all financial statements issued after
January 31, 2003, regardless of when the variable interest
entity was established. The Company adopted FIN 46 in the
third quarter of fiscal 2004 and its adoption did not have a
material impact on the Companys financial position or
results of operations.

In May 2003, the FASB issued Statement Number
150, Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity
(SFAS 150). SFAS 150 establishes standards
for classifying and measuring as liabilities certain financial
instruments that embody obligations of the issuer and have
characteristics of both liabilities and equity. SFAS 150
generally requires liability classification for two broad
classes of financial instruments: (1) instruments that
represent, or are indexed to, an obligation to buy

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CELERITEK, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

back the issuers shares, and
(2) obligations that can be settled in shares, but are
subject to certain conditions. SFAS 150 applies to all
financial instruments created or modified after May 31,
2003, and to other instruments at the beginning of the first
interim period beginning after July 1, 2003. As the Company
has not created or modified any financial instruments since the
effective date of SFAS 150, it did not have a material
impact on the Companys financial statements.

In November 2002, the Emerging Issues Task Force
(the EITF) reached a consensus on Issue
No. 00-21 Accounting for Revenue Arrangements with
Multiple Deliverables. The EITF concluded that revenue
arrangements with multiple elements should be divided into
separate units of accounting if the deliverables in the
arrangement have value to the customer on a standalone basis, if
there is objective and reliable evidence of the fair value of
the undelivered elements, and as long as there are no rights of
return or additional performance guarantees by the Company. The
provisions of EITF Issue No. 00-21 are applicable to
agreements entered into in fiscal periods beginning after
June 15, 2003. Management adopted the consensus in the
second quarter of fiscal 2004, and it did not have a material
effect on the Companys results of operations or financial
condition.

In November 2003, the EITF issued EITF
No. 03-6 Participating Securities and the
Two-Class Method under FASB Statement No. 128,
which provides for a two-class method of calculating earnings
per share computations that relate to certain securities that
would be considered to be participating in conjunction with
certain common stock rights. This guidance would be applicable
to the Company starting with the second quarter beginning
July 1, 2004. The Company is currently evaluating the
potential impact of this pronouncement on its financial
statements.






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

During fiscal 2004, the Company incurred
$4.5 million in special charges due to its exit from the
wireless handset power amplifier market, partially offset by
$0.2 million in proceeds received in fiscal 2004 from the
sale of equipment impaired in fiscal 2002, for a net expense of
$4.3 million for fiscal 2004. These matters are discussed
further below.

The special charges of $2.6 million recorded
during the second quarter of fiscal 2004 were due to the
Companys restructuring activities at its Belfast facility
in July 2003, and the Companys decision to exit the
wireless handset power amplifier market in late September 2003.
This decision was the result of severe pricing pressure and
other adverse market conditions in the wireless handset industry
that the Company believes would have prevented its handset
related business from achieving acceptable gross margins. The
special charges of $2.6 million are comprised of
approximately $0.2 million of impairment charges related to
the write down of carrying values for certain tangible and
intangible assets to be sold, $1.8 million of equipment
impairment charges related to exiting the wireless handset power
amplifier market, and $0.6 million of equipment impairment
charges related to restructuring at the Belfast facility.

The special charges of $1.9 million recorded
during the third quarter of fiscal 2004 were due to the
Companys decision to exit the wireless handset power
amplifier market and included $0.7 million in employee
termination expenses, $1.1 million in building
consolidation costs, and $0.1 million to close the
Companys Korean subsidiary, offset by $0.2 million in
proceeds from the sale of equipment impaired in fiscal 2002.

51



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##### Table of Contents



CELERITEK, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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

|                                 |  |             |      |           |  |               |        |             |  |       |      |   |  |   |       |   |  |   |        |  
|-------------------------------- |  | ----------- | ---- | --------- |  | ------------- | ------ | ----------- |  | ----- | ---- | - |  | - | ----- | - |  | - | ------ | -
|                                 |  |             |      |           |  |               |        | Lease       |  |      
|                                 |  |             |      |           |  |               |        | Termination |  |      
|                                 |  | Employee    |      |           |  | Impairment    |        | and         |  |      
|                                 |  | Termination |      | Excess    |  | of Assets     |        | Relocation  |  |      
|                                 |  | Costs       |      | Equipment |  | Held for Sale |        | Costs       |  | 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  |  
|                                 |  |             |      |           |  |               |        |             |  |       |      |   |  |   |       |   |  |   |        |  
|Fiscal 2004 special charges      |  |             | 734  |           |  |               | 2,618  |             |  |       | 183  |   |  |   | 1,005 |   |  |   | 4,540  |  
|Cash paid                        |  |             | (680 | )         |  |               |       |             |  |       |     |   |  |   | (932  | ) |  |   | (1,612 | )
|Non-cash activity                |  |             | (100 | )         |  |               | (2,618 | )           |  |       | (183 | ) |  |   |      |   |  |   | (2,901 | )
|                                 |  |             |      |           |  |               |        |             |  |       |      |   |  |   |       |   |  |   |        |  
|Accrual balances, March 31, 2004 |  | $           | 77   |           |  | $             |       |             |  | $     |     |   |  | $ | 1,123 |   |  | $ | 1,200  |  
|                                 |  |             |      |           |  |               |        |             |  |       |      |   |  |   |       |   |  |   |        |  

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.
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 was owned by the Company, was reclassified to
prepaid and other current assets as a current asset for resale.
The Company subsequently sold the building in July 2003 for
approximately $0.3 million, which resulted in a gain of
approximately $0.05 million. 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.

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.

52



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CELERITEK, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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.






|        |                  
|------- | -----------------
|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 were 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 had been 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.

In October 2003, the Company sold all the
intangible and certain tangible assets related to the wireless
handset power amplifier market for $1.0 million to
Anadigics, Inc.

53



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##### Table of Contents



CELERITEK, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)








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

Intangible assets consist of the following (in
thousands):

|                                                               |  |                     |      |                     |  |          |     |          |  |              |      |          |  |   |      |   |  |   |      |   |  |   |      |  
|-------------------------------------------------------------- |  | ------------------- | ---- | ------------------- |  | -------- | --- | -------- |  | ------------ | ---- | -------- |  | - | ---- | - |  | - | ---- | - |  | - | ---- | -
|                                                               |  |                     |      |                    
|                                                               |  | Patent Application  |      | Assembled Workforce
|                                                               |  |                     |      |                    
|                                                               |  |                     |      |                    
|                                                               |  | Amortization Period |      | Amortization Period
|                                                               |  |                     |      |                    
|                                                               |  |                     |      |                    
|                                                               |  | 4 Years             |      | 2 Years            
|                                                               |  |                     |      |                    
|                                                               |  | Gross               |      |                     |  | Net      |     | Gross    |  |              |      | Net     
|                                                               |  | Carrying            |      | Accumulated         |  | Carrying |     | Carrying |  | Accumulated  |      | Carrying
|                                                               |  | Amount              |      | Amortization        |  | Amount   |     | Amount   |  | Amortization |      | Amount  
|                                                               |  |                     |      |                     |  |          |     |          |  |              |      |         
|At March 31, 2003                                              |  | $                   | 233  |                     |  | $        | (25 | )        |  | $            | 208  |          |  | $ | 913  |   |  | $ | (190 | ) |  | $ | 723  |  
|Amortization  nine months ended
    December 31, 2003         |  |                     |     |                     |  |          | (28 | )        |  |              | (28  | )        |  |   |     |   |  |   | (229 | ) |  |   | (229 | )
|Reclassification to assets held for sale in
    September 2003 |  |                     | (233 | )                   |  |          | 53  |          |  |              | (180 | )        |  |   | (913 | ) |  |   | 419  |   |  |   | (494 | )
|                                                               |  |                     |      |                     |  |          |     |          |  |              |      |          |  |   |      |   |  |   |      |   |  |   |      |  
|At March 31, 2004                                              |  | $                   |     |                     |  | $        |    |          |  | $            |     |          |  | $ |     |   |  | $ |     |   |  | $ |     |  
|                                                               |  |                     |      |                     |  |          |     |          |  |              |      |          |  |   |      |   |  |   |      |   |  |   |      |  

In October 2003, the Company sold all the
intangible and certain tangible assets related to the wireless
handset power amplifier market for $1.0 million to
Anadigics, Inc.






|        |                                                       
|------- | ------------------------------------------------------
|Note 5. | Costs Related to Shareholder and Strategic
    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. In the first quarter of
fiscal 2004 the Companys Board of Directors entered into
an agreement with the Shareholder Committee and cancelled the
special meeting. Under the terms of the agreement, 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 agreement, three
directors nominated by the Shareholder Committee and one member
who is not affiliated with either the Company or the Shareholder
Committee. Expenses for legal and investment advisors of
$1.3 million for fiscal 2003 and $3.4 million for
fiscal 2004 have been incurred relating to both of these actions
and have been reported in loss from operations under the caption
Costs related to shareholder and strategic actions.
In February 2004, 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.

54



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##### Table of Contents



CELERITEK, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Changes in the Companys product liability
during the three months and twelve months ended March 31,
2004 were as follows (in thousands):

|                                          |  |              |      |               |  |      |      |      |  |   |      |   |  |   |      |  
|----------------------------------------- |  | ------------ | ---- | ------------- |  | ---- | ---- | ---- |  | - | ---- | - |  | - | ---- | -
|                                          |  |              |      |              
|                                          |  | Three Months |      | Twelve Months
|                                          |  | Ended        |      | Ended        
|                                          |  | March 31,    |      | March 31,    
|                                          |  |              |      |              
|                                          |  | 2004         |      | 2003          |  | 2004 |      | 2003
|                                          |  |              |      |               |  |      |      |     
|Beginning accrual balance                 |  | $            | 400  |               |  | $    | 500  |      |  | $ | 400  |   |  | $ | 500  |  
|Warranties issued                         |  |              | 35   |               |  |      | 80   |      |  |   | 188  |   |  |   | 243  |  
|Adjustment related to change in estimates |  |              | (100 | )             |  |      | (100 | )    |  |   | (100 | ) |  |   | (100 | )
|Charges incurred                          |  |              | (34  | )             |  |      | (80  | )    |  |   | (187 | ) |  |   | (243 | )
|                                          |  |              |      |               |  |      |      |      |  |   |      |   |  |   |      |  
|Ending accrual balance                    |  | $            | 301  |               |  | $    | 400  |      |  | $ | 301  |   |  | $ | 400  |  
|                                          |  |              |      |               |  |      |      |      |  |   |      |   |  |   |      |  






|        |                      
|------- | ---------------------
|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, 2004 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.






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

The Company has outstanding loans totaling
$0.6 million at March 31, 2004 and $1.5 million
at March 31, 2003 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 voluntarily 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, 2003,
or 2004. During fiscal 2002, 2003 and 2004, the outstanding
loans to officers and employees were reduced by the amounts of
$0.3 million, $0.1 million and $0.9 million,
respectively.

55



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##### Table of Contents



CELERITEK, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)








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

Significant components of accrued liabilities are:

|                    |  |                |       |      |  |   |       | 
|------------------- |  | -------------- | ----- | ---- |  | - | ----- | 
|                    |  |               
|                    |  | March 31,     
|                    |  |               
|                    |  | 2004           |       | 2003
|                    |  |                |       |     
|                    |  |               
|                    |  | (In thousands)
|Accrued expenses    |  | $              | 2,613 |      |  | $ | 1,597 | 
|Accrued commissions |  |                | 589   |      |  |   | 657   | 
|Warranty accrual    |  |                | 301   |      |  |   | 400   | 
|Other               |  |                | 1,323 |      |  |   | 1,547 | 
|                    |  |                |       |      |  |   |       | 
|                    |  | $              | 4,826 |      |  | $ | 4,201 | 
|                    |  |                |       |      |  |   |       | 






|         |       
|-------- | ------
|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,     
|                              |  |               
|                              |  | 2004           |        | 2003
|                              |  |                |        |     
|                              |  |               
|                              |  | (In thousands)
|Equipment                     |  | $              | 5,202  |      |  | $ | 8,413  |  
|Less accumulated amortization |  |                | (3,488 | )    |  |   | (4,069 | )
|                              |  |                |        |      |  |   |        |  
|                              |  | $              | 1,741  |      |  | $ | 4,344  |  
|                              |  |                |        |      |  |   |        |  

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.

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, 2004:

|                                            |                              |                |      |           |  |   |       |       | 
|------------------------------------------- | ---------------------------- | -------------- | ---- | --------- |  | - | ----- | ----- | 
|                                            |                              | Capital        |      | Operating
|                                            |                              | Leases         |      | Leases   
|                                            |                              |                |      |          
|                                            |                              |               
|                                            |                              | (In thousands)
|2005                                        |                              | $              | 336  |           |  | $ | 3,470 |      
|2006                                        |                              |                |     |           |  |   | 1,253 |      
|2007                                        |                              |                |     |           |  |   | 276   |      
|2008                                        |                              |                |     |           |  |   | 30    |      
|                                            |                              |                |      |           |  |   |       |      
|                                            | Total minimum lease payments |                |      | 336       |  |   | $     | 5,029 | 
|                                            |                              |                |      |           |  |   |       |      
|Less amounts representing interest          |                              |                | (8   | )         |  |   |       |      
|                                            |                              |                |      |           |  |   |       |      
|Present value of net minimum lease payments |                              |                | 328  |           |  |   |       |      
|Less current portion                        |                              |                | (328 | )         |  |   |       |      
|                                            |                              |                |      |           |  |   |       |      
|                                            |                              | $              |     |           |  |   |       |      
|                                            |                              |                |      |           |  |   |       |      

Rent expense was approximately $4.0 million,
$5.5 million, and $7.2 million for the years ended
March 31, 2004, 2003, and 2002, respectively.

56



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##### Table of Contents



CELERITEK, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)








|         |               
|-------- | --------------
|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, 2004 the Company was not in compliance with all
covenants. Consequently, all debt balances have been
reclassified as current, pending discussions with the lenders.

Future minimum principle payments on debt
consisted of the following at March 31, 2004:

|                     |                                  |                |        |       | 
|-------------------- | -------------------------------- | -------------- | ------ | ----- | 
|                     |                                  | Debt          
|                     |                                  |               
|                     |                                  | (In thousands)
|2005                 |                                  | $              | 1,576  |      
|2006                 |                                  |                | 290    |      
|                     |                                  |                |        |      
|                     | Total minimum principle payments |                |        | 1,866 | 
|Less current portion |                                  |                | (1,866 | )    
|                     |                                  |                |        |      
|Non-current portion  |                                  | $              |       |      
|                     |                                  |                |        |      






|         |             
|-------- | ------------
|Note 12. | Income Taxes

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

|                                     |         |                       |   |      |   |      |     |     |     |   |      |      |      |  
|------------------------------------ | ------- | --------------------- | - | ---- | - | ---- | --- | --- | --- | - | ---- | ---- | ---- | -
|                                     |         |                      
|                                     |         | Years Ended March 31,
|                                     |         |                      
|                                     |         | 2004                  |   | 2003 |   | 2002
|                                     |         |                       |   |      |   |     
|                                     |         |                      
|                                     |         | (In thousands)       
|Current:                             |         |                       |   |      |   |      |     |     |     |   |      |     
|                                     | Federal |                       | $ |     |   |      | $   |    |     |   | $    | (244 | )   
|                                     | State   |                       |   |     |   |      |     |    |     |   |      |     |     
|                                     | Foreign |                       |   |     |   |      |     | 136 |     |   |      | 64   |     
|                                     |         |                       |   |      |   |      |     |     |     |   |      |     
|                                     |         | Total current         |   |      |  |      |     |     | 136 |   |      |      | (180 | )
|Deferred:                            |         |                       |   |      |   |      |     |     |     |   |      |     
|                                     | Federal |                       |   |     |   |      |     |    |     |   |      |     |     
|                                     | State   |                       |   |     |   |      |     |    |     |   |      |     |     
|                                     |         | Total deferred        |   |      |  |      |     |     |    |   |      |      |     |  
|                                     |         |                       |   |      |   |      |     |     |     |   |      |     
|Provision (benefit) for income taxes |         | $                     |  |      |   | $    | 136 |     |     | $ | (180 | )   
|                                     |         |                       |   |      |   |      |     |     |     |   |      |     

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

|                                                |  |                       |         |      |  |      |         |   |  |   |         |  
|----------------------------------------------- |  | --------------------- | ------- | ---- |  | ---- | ------- | - |  | - | ------- | -
|                                                |  |                      
|                                                |  | Years Ended March 31,
|                                                |  |                      
|                                                |  | 2004                  |         | 2003 |  | 2002
|                                                |  |                       |         |      |  |     
|                                                |  |                      
|                                                |  | (In thousands)       
|Domestic                                        |  | $                     | (15,644 | )    |  | $    | (17,338 | ) |  | $ | (23,076 | )
|Foreign                                         |  |                       | (336    | )    |  |      | 447     |   |  |   | 278     |  
|                                                |  |                       |         |      |  |      |         |   |  |   |         |  
|Income (loss) before provision for income taxes |  | $                     | (15,980 | )    |  | $    | (16,891 | ) |  | $ | (22,798 | )
|                                                |  |                       |         |      |  |      |         |   |  |   |         |  

57



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##### Table of Contents



CELERITEK, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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,             
|                                     |  |                                   
|                                     |  |                                    |        |         |  |       
|                                     |  | 2004                               |        | 2003    |  | 2002  
|                                     |  |                                    |        |         |  |       
|                                     |  | Amount                             |        | Percent |  | Amount |       | Percent |  | Amount |        | Percent
|                                     |  |                                    |        |         |  |        |       |         |  |        |        |        
|                                     |  |                                   
|                                     |  | (In thousands, except percentages)
|At U.S. statutory rate               |  | $                                  | (5,434 | )       |  |        | (34.0 | )%      |  | $      | (5,743 | )       |  |  | (34.0 | )% |  | $ | (7,751 | ) |  |  | (34.0 | )%
|Change in valuation allowance        |  |                                    | 5,763  |         |  |        | 36.1  |         |  |        | 4,219  |         |  |  | 25.0  |    |  |   | 7,751  |   |  |  | 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      |  |                                    |       |         |  |        |      |         |  |        |       |         |  |  |      |    |  |   |       |   |  |  |      |   
|Other                                |  |                                    | (329   | )       |  |        | (2.1  | )       |  |        | 23     |         |  |  | 0.1   |    |  |   |       |   |  |  |      |   
|                                     |  |                                    |        |         |  |        |       |         |  |        |        |         |  |  |       |    |  |   |        |   |  |  |       |   
|Provision (benefit) for income taxes |  | $                                  |       |         |  |        | 0     | %       |  | $      | 136    |         |  |  | 0.8   | %  |  | $ | (180   | ) |  |  | (0.8  | )%
|                                     |  |                                    |        |         |  |        |       |         |  |        |        |         |  |  |       |    |  |   |        |   |  |  |       |   

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,     
|                          |                                                           |               
|                          |                                                           | 2004           |   | 2003   
|                          |                                                           |                |   |        
|                          |                                                           |               
|                          |                                                           | (In thousands)
|Deferred tax assets:      |                                                           |                |   |         |   |   |     |        
|                          | Inventory valuation                                       |                | $ | 3,378   |   |   | $   | 5,650   |  
|                          | Accruals and reserves not deductible for tax
    purposes |                |   | 1,378   |   |   |     | 2,005   |  
|                          | Net operating loss carryforwards                          |                |   | 21,131  |   |   |     | 12,829  |  
|                          | Tax credit carryforwards                                  |                |   | 2,515   |   |   |     | 2,197   |  
|                          | Other                                                     |                |   | 1,266   |   |   |     | 896     |  
|                          |                                                           |                |   |         |   |   |     |        
|                          | Deferred tax assets                                       |                |   | 29,668  |   |   |     | 23,577  |  
|                          | Valuation allowance                                       |                |   | (29,668 | ) |   |     | (22,972 | )
|                          |                                                           |                |   |         |   |   |     |        
|                          |                                                           | $              |  |         |   | $ | 605 |        
|                          |                                                           |                |   |         |   |   |     |        
|Deferred tax liabilities: |                                                           |                |   |         |   |   |     |        
|                          | Acquisition-related item                                  |                | $ |        |   |   | $   | (605    | )
|                          |                                                           |                |   |         |   |   |     |        
|                          | Net deferred tax assets                                   |                | $ |        |   |   | $   |        |  
|                          |                                                           |                |   |         |   |   |     |        

As of March 31, 2004 the Company had net
deferred tax assets of approximately $29.6 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, 2004 was recorded.

The valuation allowance for deferred tax assets
increased by approximately $6.7 million, $2.4 million
and $9.7 million during the years ended March 31,
2004, March 31, 2003 and March 31, 2002, respectively.

As of March 31, 2004, the Company had
federal net operating loss and tax credit carryforwards of
approximately $57.8 million and $1.1 million,
respectively. The federal net operating loss and tax credit
carryforwards will expire beginning in 2021 and 2012, if not
utilized.

58



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##### Table of Contents



CELERITEK, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The Company also had state net operating loss and
tax credit carryforwards of approximately $23.7 million and
$2.1 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 Board of Directors.
Company contributions to the Plan were approximately $167,000 in
fiscal 2004, $185,000 in fiscal 2003, and $253,000 in fiscal
2002. 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, 2004, 2003, and 2002, 77,914, 80,645, and
71,087 shares of common stock, respectively, were purchased
under the ESPP. The Company has 303,292 shares remaining
reserved for future issuance under this Plan.



| |                   
| | ------------------
| | Stock Option Plans



| |                       
| | ----------------------
| | 1994 Stock Option Plan

The 1994 Stock Option Plan (the 1994 Plan), which
was approved in April 1994 and amended in August 2003, expires
June 2013. 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 Company
has reserved 1,696,873 shares for future issuance under the
1994 Plan.

59



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##### Table of Contents



CELERITEK, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                                    
| | -----------------------------------
| | 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 193,751 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 3,438 shares for
future issuance under the Tavanza Plan upon exercise of the
assumed options.

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

|                           |                                                   |           |         |                     |   |           |           |          |   |   |               |               |  |   |       |       | 
|-------------------------- | ------------------------------------------------- | --------- | ------- | ------------------- | - | --------- | --------- | -------- | - | - | ------------- | ------------- |  | - | ----- | ----- | 
|                           |                                                   |           |         |                     |   |          
|                           |                                                   |           |         | Options Outstanding |   | Weighted 
|                           |                                                   | Shares    |         |                     |   | Average  
|                           |                                                   | Available |         | Number of           |   | Price Per |           | Exercise
|                           |                                                   | for Grant |         | Shares              |   | Share     |           | Price   
|                           |                                                   |           |         |                     |   |           |           |         
|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 |      
|                           | Additional shares authorized for 1994 Plan        |           |         | 250,000             |   |           |           |          |   |   |               |               |  |   |       |       | 
|                           | Options granted                                   |           |         | (7,500              | ) |           |           | 7,500    |   |   |               | 7.33 - 7.33   |  |   |       | 7.33  | 
|                           | Options exercised                                 |           |         |                    |   |           |           | (435,885 | ) |   |               | 3.00 - 7.05   |  |   |       | 5.12  | 
|                           | Options canceled and expired                      |           |         | 183,730             |   |           |           | (368,730 | ) |   |               | 6.63 - 53.75  |  |   |       | 11.03 | 
|                           |                                                   |           |         |                     |   |           |           |          |   |   |               |               |  |   |       |      
|Balance at March 31, 2004  |                                                   |           | 707,266 |                     |   |           | 1,186,796 |          |   | $ | 3.00 - $53.75 |               |  | $ | 19.78 |      

The following table summarizes information about
stock options outstanding and exercisable at March 31, 2004:

|                         |  |                     |           |                     |  |          |            |             |  |          |       |  |  |  |         |  |  |   |       | 
|------------------------ |  | ------------------- | --------- | ------------------- |  | -------- | ---------- | ----------- |  | -------- | ----- |  |  |  | ------- |  |  | - | ----- | 
|                         |  |                     |           |                     |  |         
|                         |  | Options Outstanding |           |                    
|                         |  |                     |           | Options Exercisable
|                         |  |                     |           | Weighted            |  |          |            |            
|                         |  |                     |           | Average             |  | Weighted |            |             |  | Weighted
|                         |  |                     |           | Remaining           |  | Average  |            |             |  | Average 
|                         |  | Number              |           | Contractual         |  | Exercise |            | Number      |  | Exercise
|Range of Exercise Prices |  | Outstanding         |           | Life                |  | Price    |            | Exercisable |  | Price   
|                         |  |                     |           |                     |  |          |            |             |  |         
|$4.00 - $10.00           |  |                     | 495,796   |                     |  |          | 7.76 years |             |  | $        | 9.31  |  |  |  | 264,171 |  |  | $ | 9.07  | 
|$11.96 - $31.44          |  |                     | 531,000   |                     |  |          | 6.78 years |             |  | $        | 19.31 |  |  |  | 438,194 |  |  | $ | 19.83 | 
|$53.75 - $53.75          |  |                     | 160,000   |                     |  |          | 6.02 years |             |  | $        | 53.75 |  |  |  | 156,656 |  |  | $ | 53.75 | 
|                         |  |                     |           |                     |  |          |            |             |  |          |       |  |  |  |         |  |  |   |       | 
|                         |  |                     | 1,186,796 |                     |  |          | 7.09 years |             |  | $        | 19.78 |  |  |  | 859,021 |  |  | $ | 22.72 | 

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CELERITEK, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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 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,
|                         |  |                      
|                         |  | 2004                  |          | 2003 |  | 2002
|                         |  |                       |          |      |  |     
|Risk-free interest rate  |  |                       | 3.5%     |      |  |      | 4.1%     |  |  |  | 5.0%     | 
|Dividend yield           |  |                       | 0.0%     |      |  |      | 0.0%     |  |  |  | 0.0%     | 
|Volatility               |  |                       | 87.2%    |      |  |      | 88.7%    |  |  |  | 90.5%    | 
|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,
|                         |  |                      
|                         |  | 2004                  |            | 2003 |  | 2002
|                         |  |                       |            |      |  |     
|Risk-free interest rate  |  |                       | 1.1%       |      |  |      | 1.7%       |  |  |  | 4.1%       | 
|Dividend yield           |  |                       | 0.0%       |      |  |      | 0.0%       |  |  |  | 0.0%       | 
|Volatility               |  |                       | 87.2%      |      |  |      | 88.7%      |  |  |  | 90.5%      | 
|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,
2004, 2003, and 2002 was $5.12, $5.92, and $7.99, respectively.
The weighted average grant date fair value of ESPP shares
granted during the fiscal years ended March 31, 2004, 2003,
and 2002 was $2.90, $3.01, and $6.35, 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 10,000 shares of common stock at their date
of election or appointment to the Board. In addition, each
director will be automatically granted

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CELERITEK, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

10,000 shares on the date of the annual
meeting of shareholders each year. Options shall vest 100% on
the first anniversary of the grant date. During the fiscal year
ended March 31, 2004, 84,000 options to purchase shares of
common stock were granted. At March 31, 2004, options to
purchase 103,500 shares of common stock were
outstanding of which 19,500 options were exercisable at weighted
average exercise prices of $7.72 and $8.70, respectively. The
Company had 118,500 shares reserved for future issuance
under the Directors Plan as of the end of fiscal 2004.



| |                
| | ---------------
| | 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 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
contained the Right. 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.






|         |                                                  
|-------- | -------------------------------------------------
|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 $10.2 million in fiscal 2004,
$29.3 million in fiscal 2003, and $30.4 million in
fiscal 2002. Revenue from GaAs-based subsystems was
$19.7 million in fiscal 2004, $20.1 million in fiscal
2003, and $26.7 million in fiscal 2002.



| |                                                                     
| | --------------------------------------------------------------------
| | Significant Customers Representing 10% or
    More of Total Revenues

During the fiscal year ended March 31, 2004,
Raytheon accounted for approximately 16% of net sales and BAE
Systems accounted for approximately 10% of net 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.

62



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CELERITEK, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The following is a summary of operations by
geographic region:

|                            |                |                       |        |        |  |      |        |        |  |   |        |        | 
|--------------------------- | -------------- | --------------------- | ------ | ------ |  | ---- | ------ | ------ |  | - | ------ | ------ | 
|                            |                |                      
|                            |                | Years Ended March 31,
|                            |                |                      
|                            |                | 2004                  |        | 2003   |  | 2002
|                            |                |                       |        |        |  |     
|                            |                |                      
|                            |                | (In thousands)       
|Net sales to customers:     |                |                       |        |        |  |      |        |        |  |   |        |       
|                            | United States  |                       | $      | 19,397 |  |      | $      | 16,366 |  |   | $      | 39,541 | 
|                            | Europe         |                       |        | 4,905  |  |      |        | 3,630  |  |   |        | 3,064  | 
|                            | China          |                       |        | 2,034  |  |      |        | 9,771  |  |   |        |       | 
|                            | Japan          |                       |        | 1,781  |  |      |        | 4,149  |  |   |        | 4,530  | 
|                            | Canada         |                       |        | 750    |  |      |        | 710    |  |   |        |       | 
|                            | Korea          |                       |        | 610    |  |      |        | 3,277  |  |   |        | 280    | 
|                            | India          |                       |        | 245    |  |      |        | 216    |  |   |        |       | 
|                            | Brazil         |                       |        | 88     |  |      |        | 2,357  |  |   |        | 2,336  | 
|                            | Mexico         |                       |        |       |  |      |        | 8,912  |  |   |        | 5,521  | 
|                            | Israel         |                       |        |       |  |      |        | 32     |  |   |        | 262    | 
|                            | Other          |                       |        | 118    |  |      |        | 3      |  |   |        | 1,516  | 
|                            |                |                       |        |        |  |      |        |        |  |   |        |       
|                            |                | $                     | 29,928 |        |  | $    | 49,423 |        |  | $ | 57,050 |       
|                            |                |                       |        |        |  |      |        |        |  |   |        |       
|Net property and equipment: |                |                       |        |        |  |      |        |        |  |   |        |       
|                            | United States  |                       |        | 5,238  |  |      |        | 9,997  |  |   |        | 11,984 | 
|                            | United Kingdom |                       |        | 165    |  |      |        | 848    |  |   |        | 2,558  | 
|                            | Philippines    |                       |        | 27     |  |      |        | 139    |  |   |        | 297    | 
|                            | South Korea    |                       |        |       |  |      |        | 45     |  |   |        |       | 
|                            |                |                       |        |        |  |      |        |        |  |   |        |       
|                            |                | $                     | 5,430  |        |  | $    | 11,029 |        |  | $ | 14,839 |       
|                            |                |                       |        |        |  |      |        |        |  |   |        |       

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






|         |              
|-------- | -------------
|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 affect on the Companys financial condition or
result of operations.






|         |            
|-------- | -----------
|Note 17. | Commitments

The Company has contractual commitments as of
March 31, 2004, relating to its engagement of financial
advisory firms pursuant to which the Company was required to
remit an advisory fee of $0.05 million, which has been
expensed in the fourth quarter of fiscal 2004. A minimum
transaction fee of $0.3 million will be due upon completion
of a transaction. 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.

In November 2002, the Company entered into change
of control severance agreements with each of Tamer Husseini (the
Companys CEO) and Margaret Smith (the Companys CFO).
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. The change in the composition of the Companys
Board as a result of its agreement with the Celeritek
Shareholder Protective Committee, as

63



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CELERITEK, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

described in Note 5, resulted in a change of
control for the purpose of these agreements. In the event of an
involuntary termination, severance cost would be approximately
$1.5 million for both Mr. Husseini and Ms. Smith.
In addition, all options granted prior to the change of control
will become fully vested and be exercisable as of the date of
termination. As of March 31, 2004, there are stock options
outstanding for 318,000 shares subject to the change of
control agreement with a weighted average exercise price of
$20.15.






|         |                                   
|-------- | ----------------------------------
|Note 18. | Supplemental Cash Flow Information

|                                                                                   |  |                       |     |      |  |      |       |  |  |   |     | 
|---------------------------------------------------------------------------------- |  | --------------------- | --- | ---- |  | ---- | ----- |  |  | - | --- | 
|                                                                                   |  |                      
|                                                                                   |  | Years Ended March 31,
|                                                                                   |  |                      
|                                                                                   |  | 2004                  |     | 2003 |  | 2002
|                                                                                   |  |                       |     |      |  |     
|                                                                                   |  |                      
|                                                                                   |  | (In thousands)       
|Cash paid for interest                                                             |  | $                     | 414 |      |  | $    | 711   |  |  | $ | 695 | 
|Cash paid for income taxes                                                         |  |                       |    |      |  |      | 74    |  |  |   | 77  | 
|Capital lease obligations incurred to acquire
    equipment                        |  |                       | 480 |      |  |      | 100   |  |  |   | 189 | 
|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, 2004. 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
expected for the entire fiscal year or for any future period.
Certain amounts have been reclassed to conform to annual
disclosures.

|                                               |                   |                                       |        |           |  |          |        |          |  |          |         |           |  |          |        |          |  |   |        |        |  |   |        |        |  |   |        |        |  |   |       |        | 
|---------------------------------------------- | ----------------- | ------------------------------------- | ------ | --------- |  | -------- | ------ | -------- |  | -------- | ------- | --------- |  | -------- | ------ | -------- |  | - | ------ | ------ |  | - | ------ | ------ |  | - | ------ | ------ |  | - | ----- | ------ | 
|                                               |                   |                                      
|                                               |                   | Three Months Ended                   
|                                               |                   |                                      
|                                               |                   | June 30,                              |        | Sept. 30, |  | Dec. 31, |        | Mar. 31, |  | June 30, |         | Sept. 30, |  | Dec. 31, |        | Mar. 31,
|                                               |                   | 2002                                  |        | 2002      |  | 2002(1)  |        | 2003     |  | 2003     |         | 2003(2)   |  | 2003(3)  |        | 2004    
|                                               |                   |                                       |        |           |  |          |        |          |  |          |         |           |  |          |        |         
|                                               |                   |                                      
|                                               |                   | (In thousands, except per share data)
|Consolidated Statement of Operations
    Data: |                   |                                       |        |           |  |          |        |          |  |          |         |           |  |          |        |          |  |   |        |        |  |   |        |        |  |   |        |        |  |   |       |       
|Net sales                                      |                   | $                                     | 15,341 |           |  | $        | 15,484 |          |  | $        | 10,523  |           |  | $        | 8,075  |          |  | $ | 6,572  |        |  | $ | 7,083  |        |  | $ | 7,714  |        |  | $ | 8,559 |       
|Gross profit                                   |                   |                                       | 3,955  |           |  |          | 3,880  |          |  |          | 1,922   |           |  |          | 565    |          |  |   | 555    |        |  |   | 1,379  |        |  |   | 2,630  |        |  |   | 3,189 |       
|Loss from operations                           |                   |                                       | (1,404 | )         |  |          | (1,621 | )        |  |          | (10,379 | )         |  |          | (4,571 | )        |  |   | (7,139 | )      |  |   | (6,721 | )      |  |   | (3,406 | )      |  |   | (425  | )     
|Net loss                                       |                   | $                                     | (1,267 | )         |  | $        | (1,168 | )        |  | $        | (10,050 | )         |  | $        | (4,542 | )        |  | $ | (6,898 | )      |  | $ | (5,730 | )      |  | $ | (3,148 | )      |  | $ | (204  | )     
|                                               |                   |                                       |        |           |  |          |        |          |  |          |         |           |  |          |        |          |  |   |        |        |  |   |        |        |  |   |        |        |  |   |       |       
|Basic and diluted net loss per share           |                   | $                                     | (0.10  | )         |  | $        | (0.10  | )        |  | $        | (0.82   | )         |  | $        | (0.37  | )        |  | $ | (0.56  | )      |  | $ | (0.46  | )      |  | $ | (0.25  | )      |  | $ | (0.02 | )     
|                                               |                   |                                       |        |           |  |          |        |          |  |          |         |           |  |          |        |          |  |   |        |        |  |   |        |        |  |   |        |        |  |   |       |       
|Shares used in net loss per share calculation: |                   |                                       |        |           |  |          |        |          |  |          |         |           |  |          |        |          |  |   |        |        |  |   |        |        |  |   |        |        |  |   |       |       
|                                               | Basic and diluted |                                       |        | 12,231    |  |          |        | 12,280   |  |          |         | 12,301    |  |          |        | 12,328   |  |   |        | 12,343 |  |   |        | 12,374 |  |   |        | 12,408 |  |   |       | 12,715 | 



---



|    |                                                                                                                                                                                                                                                                                       
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The quarter ended December 31, 2002 included
    a $4.4 million charge for in-process research and
    development and a $2.8 million special charge due to
    restructuring activities.                                                                                             
|   
|(2) | The quarter ended September 30, 2003
    included a $2.6 million special charge due to the
    Companys restructuring activities at its Belfast facility
    in July 2003, and the Companys decision to exit the
    wireless handset power amplifier market in late September 2003.
|   
|(3) | The quarter ended December 31, 2003 included
    a $1.9 million special charge due to the Companys
    decision to exit the wireless handset power amplifier market in
    late September 2003.                                                                                      

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##### Table of Contents






SIGNATURES

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



| |                
| | ---------------
| | CELERITEK, INC.



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

| |                        
| | -----------------------
| |                        
| | Tamer Husseini         
| | Chairman, President and
| | Chief Executive Officer

Date: June 25, 2004

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 25, 2004
|                                          
|/s/ MARGARET E. SMITHMargaret E. Smith     |  | Vice President, Finance and
    Chief Financial Officer
    (Principal Financial and
    Accounting Officer) |  | June 25, 2004
|                                          
|/s/ ROBERT J. GALLAGHERRobert J. Gallagher |  | Director                                                                                                     |  | June 25, 2004
|                                          
|/s/ J. MICHAEL GULLARDJ. Michael Gullard   |  | Director                                                                                                     |  | June 25, 2004
|                                          
|/s/ LLOYD I. MILLERLloyd I. Miller         |  | Director                                                                                                     |  | June 25, 2004
|                                          
|/s/ BRYANT R. RILEYBryant R. Riley         |  | Director                                                                                                     |  | June 25, 2004

65



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##### Table of Contents



|                                         |  |          |  |               |  | 
|---------------------------------------- |  | -------- |  | ------------- |  | 
|                                         |  |          |  |              
|Signature                                |  | Title    |  | Date         
|                                         |  |          |  |              
|                                        
|/s/ MICHAEL B. TARGOFFMichael B. Targoff |  | Director |  | June 25, 2004
|                                        
|/s/ CHARLES P. WAITECharles P. Waite     |  | Director |  | June 25, 2004

66



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##### Table of Contents



SCHEDULE II  VALUATION
AND QUALIFYING ACCOUNTS

ALLOWANCE FOR DOUBTFUL ACCOUNTS

|                   |  |                |       |            |  |               |     |            |  |   |       |  |  |   |       | 
|------------------ |  | -------------- | ----- | ---------- |  | ------------- | --- | ---------- |  | - | ----- |  |  | - | ----- | 
|                   |  |                |       | Additions  |  |               |     |           
|                   |  | Balance at     |       | Charged to |  |               |     | Balance at
|                   |  | Beginning      |       | Costs and  |  |               |     | End       
|Period             |  | of Period      |       | Expenses   |  | Deductions(1) |     | of Period 
|                   |  |                |       |            |  |               |     |           
|                   |  |               
|                   |  | (In thousands)
|Year Ended 3/31/04 |  | $              | 626   |            |  | $             |    |            |  | $ | 79    |  |  | $ | 547   | 
|Year Ended 3/31/03 |  | $              | 1,183 |            |  | $             | 277 |            |  | $ | 834   |  |  | $ | 626   | 
|Year Ended 3/31/02 |  | $              | 1,977 |            |  | $             | 557 |            |  | $ | 1,351 |  |  | $ | 1,183 | 



---



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

S-1



---



##### Table of Contents



INDEX TO EXHIBITS

|        |    |             |  |                                                                                                                                                                                                                        
|------- | -- | ----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|Number  |    | Description
|        |    |            
|        | 3  | .1(1)       |  | Amended and Restated Articles of Incorporation of
    Registrant.                                                                                                                                                      
|        | 3  | .2(16)      |  | 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.                                                                                                                                                                               
|        | 16 | .1(17)      |  | Letter dated February 23, 2004 from
    Ernst & Young LLP to the Securities and Exchange
    Commission.                                                                                                               
|        | 21 |             |  | Subsidiaries of Celeritek.                                                                                                                                                                                             
|        | 23 | .1          |  | Consent of BDO Seidman, LLP, Independent
    Registered Public Accounting Firm.                                                                                                                                        
|        | 23 | .2          |  | Consent of Ernst & Young LLP,
    Independent Registered Public Accounting Firm.                                                                                                                                       
|        | 24 |             |  | Power of Attorney (see signature page).                                                                                                                                                                                
|        | 31 | .1          |  | Certification of the Chief Executive Officer
    pursuant to Securities and Exchange Act Rules 13a-15(e) and
    15d-1(e), as adopted pursuant to Section 302 of the
    Sarbanes-Oxley Act of 2002.                   
|        | 31 | .2          |  | Certification of the Chief Financial Officer
    pursuant to Securities and Exchange Act Rules 13a-15(e) and
    15d-1(e), as adopted pursuant to Section 302 of the
    Sarbanes-Oxley Act of 2002.                   
|        | 32 | .1          |  | Certifications 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 | .1(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.



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##### Table of Contents





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| |     |                                                                                                                                                                                                  
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (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
    (Commission File No. 333-67624) 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
    (Commission File No. 333-31160) filed on February 25, 2000.
|    
|(15) | Incorporated by reference to our Form S-8
    (Commission File No. 333-102538) filed on January 16, 2003.
|    
|(16) | Incorporated by reference to our Form 10-K
    filed for the fiscal year ended March 31, 2003.           
|    
|(17) | Incorporated by reference to our Form 8-K
    filed on February 23, 2004.