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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549




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FORM 10-Q

(Mark One)

|  |  |                                                                                       
|- |  | --------------------------------------------------------------------------------------
|x |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934
| 
|  |  | For the quarterly period ended June 30, 2002                                          

or

|  |  |                                                                                        
|- |  | ---------------------------------------------------------------------------------------
|o |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES 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(State or other jurisdiction of
incorporation or organization) |  | 77-0057484(I.R.S. Employer
Identification Number)

|                                                                         |  |                
|------------------------------------------------------------------------ |  | ---------------
|3236 Scott Blvd.
Santa Clara, CA(Address of principal executive offices) |  | 95054(Zip Code)

(408) 986-5060

(Registrants telephone number, including area code)


NOT APPLICABLE

(Former name, former address and former fiscal year, if changed since last report)


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

Yes x   No o

Applicable only to corporate issuers:

Indicate the number of shares outstanding of each of the issuers classes of stock, as of the latest
practicable date.

Common Stock, No Par Value: 12,249,017 shares as of July 26, 2002



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TABLE OF CONTENTS



|                             |                                                                                               |                                                      |  |  |  |  |  | 
|---------------------------- | --------------------------------------------------------------------------------------------- | ---------------------------------------------------- |  |  |  |  |  | 
|PART I FINANCIAL INFORMATION
|                             | Item 1. FINANCIAL STATEMENTS                                                                 
|                             |                                                                                               | CONDENSED CONSOLIDATED BALANCE SHEETS               
|                             |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS     
|                             |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS     
|                             |                                                                                               | Notes to Condensed Consolidated Financial Statements
|                             | Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|                             | Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                           
|PART II OTHER INFORMATION   
|                             | Item 6. EXHIBITS AND REPORTS ON FORM 8-K                                                     
|SIGNATURES                  
|Exhibit Index               
|EXHIBIT 99.1                



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CELERITEK, INC.

Table of Contents

|                              |  |         |    |                                                                                            |  |          |    | 
|----------------------------- |  | ------- | -- | ------------------------------------------------------------------------------------------ |  | -------- | -- | 
|                              |  |         |    |                                                                                            |  | Page No.
|                              |  |         |    |                                                                                            |  |         
|PART I: FINANCIAL INFORMATION |  |         | 1  |                                                                                           
|                             
|                              |  | Item 1. |    | Financial Statements (Unaudited)                                                           |  |          | 1  | 
|                             
|                              |  |         |    | Condensed Consolidated Balance Sheets: June 30, 2002 and March 31, 2002                    |  |          | 1  | 
|                             
|                              |  |         |    | Condensed Consolidated Statements of Operations: Three months ended June 30, 2002 and 2001 |  |          | 2  | 
|                             
|                              |  |         |    | Consolidated Statements of Cash Flows: Three months ended June 30, 2002 and 2001           |  |          | 3  | 
|                             
|                              |  |         |    | Notes to Condensed Consolidated Financial Statements                                       |  |          | 4  | 
|                             
|                              |  | Item 2. |    | Managements Discussion and Analysis of Financial Condition and Results of Operations      |  |          | 7  | 
|                             
|                              |  | Item 3. |    | Quantitative and Qualitative Disclosures About Market Risk                                 |  |          | 20 | 
|                             
|PART II: OTHER INFORMATION    |  |         | 22 |                                                                                           
|                             
|                              |  | Item 6. |    | Exhibits and Reports on Form 8-K                                                           |  |          | 22 | 
|                             
|SIGNATURES:                   |  |         |    | 23                                                                                         | 

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PART I FINANCIAL INFORMATION




Item 1. FINANCIAL STATEMENTS




CELERITEK, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)

|                                             |                                           |                           |         |             |         |           |         |        |         | 
|-------------------------------------------- | ----------------------------------------- | ------------------------- | ------- | ----------- | ------- | --------- | ------- | ------ | ------- | 
|                                             |                                           |                           |         | June 30,    |         | March 31,
|                                             |                                           |                           |         | 2002        |         | 2002     
|                                             |                                           |                           |         |             |         |          
|                                             |                                           |                           |         | (Unaudited) |         | (Note)   
|ASSETS                                       |                                           |                           |         |             |         |           |         |       
|Current assets:                              |                                           |                           |         |             |         |           |         |       
|                                             | Cash and cash equivalents                 |                           | $       | 12,726      |         |           | $       | 8,096  |        
|                                             | Short-term investments                    |                           |         | 87,894      |         |           |         | 90,597 |        
|                                             | Accounts receivable, net                  |                           |         | 9,322       |         |           |         | 10,001 |        
|                                             | Inventories                               |                           |         | 7,481       |         |           |         | 9,372  |        
|                                             | Prepaid expenses and other current assets |                           |         | 2,794       |         |           |         | 3,671  |        
|                                             |                                           |                           |         |             |         |           |         |       
|                                             |                                           | Total current assets      |         |             | 120,217 |           |         |        | 121,737 | 
|Property and equipment, net                  |                                           |                           | 14,272  |             |         |           | 14,839  |       
|Other assets                                 |                                           |                           | 5,020   |             |         |           | 3,112   |       
|                                             |                                           |                           |         |             |         |           |         |       
|Total assets                                 |                                           | $                         | 139,509 |             |         | $         | 139,688 |       
|                                             |                                           |                           |         |             |         |           |         |       
|LIABILITIES & SHAREHOLDERS EQUITY           |                                           |                           |         |             |         |           |         |       
|Current liabilities:                         |                                           |                           |         |             |         |           |         |       
|                                             | Accounts payable                          |                           | $       | 5,601       |         |           | $       | 4,583  |        
|                                             | Accrued payroll                           |                           |         | 1,465       |         |           |         | 1,505  |        
|                                             | Accrued liabilities                       |                           |         | 3,807       |         |           |         | 3,098  |        
|                                             | Current portion of long-term debt         |                           |         | 2,368       |         |           |         | 2,312  |        
|                                             | Current obligations under capital leases  |                           |         | 607         |         |           |         | 669    |        
|                                             |                                           |                           |         |             |         |           |         |       
|                                             |                                           | Total current liabilities |         |             | 13,848  |           |         |        | 12,167  | 
|Long-term debt, less current portion         |                                           |                           | 4,061   |             |         |           | 4,675   |       
|Non-current obligations under capital leases |                                           |                           | 1,230   |             |         |           | 1,340   |       
|Shareholders equity                         |                                           |                           | 120,370 |             |         |           | 121,506 |       
|                                             |                                           |                           |         |             |         |           |         |       
|Total liabilities and shareholders equity   |                                           | $                         | 139,509 |             |         | $         | 139,688 |       
|                                             |                                           |                           |         |             |         |           |         |       



|Note: |  | The balance sheet at March 31, 2002 has been derived from the audited
financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements.
|----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

See accompanying notes.

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CELERITEK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)

|                                                              |                                     |   |                    |       |          |   |        |       | 
|------------------------------------------------------------- | ----------------------------------- | - | ------------------ | ----- | -------- | - | ------ | ----- | 
|                                                              |                                     |   | Three Months Ended
|                                                              |                                     |   |                   
|                                                              |                                     |   | June 30,           |       | June 30,
|                                                              |                                     |   | 2002               |       | 2001    
|                                                              |                                     |   |                    |       |         
|Net sales                                                     |                                     | $ | 15,341             |       |          | $ | 14,012 |      
|Cost of goods sold                                            |                                     |   | 11,386             |       |          |   | 15,226 |      
|                                                              |                                     |   |                    |       |          |   |        |      
|Gross profit (loss)                                           |                                     |   | 3,955              |       |          |   | (1,214 | )    
|Operating expenses:                                           |                                     |   |                    |       |          |   |        |      
|                                                              | Research and development            |   |                    | 2,606 |          |   |        | 2,414 | 
|                                                              | Selling, general and administrative |   |                    | 2,654 |          |   |        | 2,744 | 
|                                                              | Fixed asset impairment charge       |   |                    |      |          |   |        | 69    | 
|                                                              |                                     |   |                    |       |          |   |        |      
|Total operating expenses                                      |                                     |   | 5,260              |       |          |   | 5,227  |      
|Loss from operations                                          |                                     |   | (1,305             | )     |          |   | (6,441 | )    
|Impairment of strategic investment                            |                                     |   | (330               | )     |          |   |       |      
|Interest income (expense) and other, net                      |                                     |   | 368                |       |          |   | 1,322  |      
|                                                              |                                     |   |                    |       |          |   |        |      
|Net loss                                                      |                                     | $ | (1,267             | )     |          | $ | (5,119 | )    
|                                                              |                                     |   |                    |       |          |   |        |      
|Basic loss per share                                          |                                     | $ | (0.10              | )     |          | $ | (0.43  | )    
|                                                              |                                     |   |                    |       |          |   |        |      
|Diluted loss per share                                        |                                     | $ | (0.10              | )     |          | $ | (0.43  | )    
|                                                              |                                     |   |                    |       |          |   |        |      
|Weighted average common shares outstanding                    |                                     |   | 12,231             |       |          |   | 11,960 |      
|Weighted average common shares outstanding, assuming dilution |                                     |   | 12,231             |       |          |   | 11,960 |      

See accompanying notes.

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CELERITEK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

|                                                                                                       |                                                         |   |              |       |                    |     |          |        |   |     | 
|------------------------------------------------------------------------------------------------------ | ------------------------------------------------------- | - | ------------ | ----- | ------------------ | --- | -------- | ------ | - | --- | 
|                                                                                                       |                                                         |   |              |       | Three Months Ended
|                                                                                                       |                                                         |   |              |       |                   
|                                                                                                       |                                                         |   |              |       | June 30,           |     | June 30,
|                                                                                                       |                                                         |   |              |       | 2002               |     | 2001    
|                                                                                                       |                                                         |   |              |       |                    |     |         
|Operating activities                                                                                   |                                                         |   |              |       |                    |     |          |       
|Net Loss                                                                                               |                                                         | $ | (1,267       | )     |                    | $   | (5,119   | )     
|Adjustment to reconcile net loss to net cash provided
(used) by operating activities:                  |                                                         |   |              |       |                    |     |          |       
|                                                                                                       | Depreciation, amortization, impairment charge and other |   |              | 1,561 |                    |     |          | 1,457  |  
|                                                                                                       | Changes in operating assets and liabilities             |   |              | 4,888 |                    |     |          | (1,468 | )
|                                                                                                       |                                                         |   |              |       |                    |     |          |       
|Net cash provided (used) by operating activities                                                       |                                                         |   | 5,182        |       |                    |     | (5,130   | )     
|Investing activities                                                                                   |                                                         |   |              |       |                    |     |          |       
|Purchase of property and equipment                                                                     |                                                         |   | (665         | )     |                    |     | (1,685   | )     
|Purchase of strategic investments                                                                      |                                                         |   | (1,992       | )     |                    |     |         |       
|Purchases of short-term investments                                                                    |                                                         |   | (16,325      | )     |                    |     | (37,498  | )     
|Sale of property and equipment                                                                         |                                                         |   |             |       |                    |     | 4        |       
|Maturities and sale of short-term investments                                                          |                                                         |   | 19,124       |       |                    |     | 48,457   |       
|                                                                                                       |                                                         |   |              |       |                    |     |          |       
|Net cash provided by investing activities                                                              |                                                         |   | 142          |       |                    |     | 9,278    |       
|Financing activities                                                                                   |                                                         |   |              |       |                    |     |          |       
|Payments on long-term debt                                                                             |                                                         |   | (558         | )     |                    |     | (362     | )     
|Payments on obligations under capital leases                                                           |                                                         |   | (172         | )     |                    |     | (230     | )     
|Net proceeds from issuance of common stock, exercise of
stock options and employee stock purchase plan |                                                         |   | 36           |       |                    |     | 568      |       
|                                                                                                       |                                                         |   |              |       |                    |     |          |       
|Net cash used by financing activities                                                                  |                                                         |   | (694         | )     |                    |     | (24      | )     
|Increase in cash and cash equivalents                                                                  |                                                         |   | 4,630        |       |                    |     | 4,124    |       
|Cash and cash equivalents at beginning of period                                                       |                                                         |   | 8,096        |       |                    |     | 3,515    |       
|                                                                                                       |                                                         |   |              |       |                    |     |          |       
|Cash and cash equivalents at end of period                                                             |                                                         | $ | 12,726       |       |                    | $   | 7,369    |       
|                                                                                                       |                                                         |   |              |       |                    |     |          |       
|Supplemental disclosures of cash flow information:                                                     |                                                         |   |              |       |                    |     |          |       
|                                                                                                       | Cash paid during the period for:                        |   |              |       |                    |     |          |        |  
|                                                                                                       |                                                         |   | Income taxes |       | $                  | 1   |          |        |   |    | 
|                                                                                                       |                                                         |   | Interest     |       |                    | 205 |          |        | $ | 144 | 
|                                                                                                       | Capital lease obligations incurred to acquire equipment |   |              |      |                    |     |          |       |  

See accompanying notes.

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Celeritek, Inc.

Notes to Condensed Consolidated Financial Statements
(Unaudited)

June 30, 2002



|1. |  | Basis of Presentation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to
Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
|  
|   |  | The Companys reporting period consisted of a thirteen-week period ending
on the Sunday closest to the calendar month end. The first quarters of
fiscal 2003 and fiscal 2002 ended June 30, 2002 and July 1, 2001,
respectively. For convenience, the accompanying financial statements have
been shown as ending on the last day of the calendar month.                                                                                                                                                                                                                               
|  
|   |  | Operating results for the three months ended June 30, 2002 are not
necessarily indicative of the results that may be expected for the fiscal
year ending March 31, 2003. This financial information should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Companys annual report on Form 10-K for the year ended
March 31, 2002.                                                                                                                                                                                                 
|  
|   |  | Certain amounts reported in previous years have been reclassified to
conform to the current year presentation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|  
|2. |  | Inventories                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|  
|   |  | The components of inventory consist of the following:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

|                |  |                |       |           |  |   |       | 
|--------------- |  | -------------- | ----- | --------- |  | - | ----- | 
|                |  | June 30,       |       | March 31,
|                |  | 2002           |       | 2002     
|                |  |                |       |          
|                |  | (In thousands)
|Raw materials   |  | $              | 1,019 |           |  | $ | 2,346 | 
|Work-in-process |  |                | 6,462 |           |  |   | 7,026 | 
|                |  |                |       |           |  |   |       | 
|                |  | $              | 7,481 |           |  | $ | 9,372 | 
|                |  |                |       |           |  |   |       | 

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|3. |  | Loss per share                                                                                                                                                                                                                                      
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | Basic loss per common share is computed using the weighted average common
shares outstanding during the period. Diluted loss per common share
incorporates the incremental shares issuable upon the assumed exercise of
stock options when dilutive.
|  
|   |  | The following table sets forth the computation of basic and diluted loss
per share (in thousands, except per share data):                                                                                                                           

|                                                      |  |                    |        |      |  |   |        |  
|----------------------------------------------------- |  | ------------------ | ------ | ---- |  | - | ------ | -
|                                                      |  | Three months ended
|                                                      |  | June 30,          
|                                                      |  |                   
|                                                      |  | 2002               |        | 2001
|                                                      |  |                    |        |     
|Basic                                                 |  |                    |        |      |  |   |        |  
|Net loss                                              |  | $                  | (1,267 | )    |  | $ | (5,119 | )
|                                                      |  |                    |        |      |  |   |        |  
|Weighted common shares outstanding                    |  |                    | 12,231 |      |  |   | 11,960 |  
|                                                      |  |                    |        |      |  |   |        |  
|Basic loss per common share                           |  | $                  | (0.10  | )    |  | $ | (0.43  | )
|                                                      |  |                    |        |      |  |   |        |  
|Diluted                                               |  |                    |        |      |  |   |        |  
|Net loss                                              |  | $                  | (1,267 | )    |  | $ | (5,119 | )
|                                                      |  |                    |        |      |  |   |        |  
|Weighted common shares outstanding                    |  |                    | 12,231 |      |  |   | 11,960 |  
|Dilutive effect of stock options                      |  |                    |       |      |  |   |       |  
|                                                      |  |                    |        |      |  |   |        |  
|Weighted common shares outstanding, assuming
dilution |  |                    | 12,231 |      |  |   | 11,960 |  
|                                                      |  |                    |        |      |  |   |        |  
|Diluted loss per common share                         |  | $                  | (0.10  | )    |  | $ | (0.43  | )
|                                                      |  |                    |        |      |  |   |        |  

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|4. |  | Comprehensive loss                                                                                                          
|-- |  | ----------------------------------------------------------------------------------------------------------------------------
|  
|   |  | The components of comprehensive loss for the three-month periods ended
June 30, 2002 and 2001 are as follows (in thousands):

|                                 |                                                     |   |                    |    |      |   |        |      |  
|-------------------------------- | --------------------------------------------------- | - | ------------------ | -- | ---- | - | ------ | ---- | -
|                                 |                                                     |   | Three months ended
|                                 |                                                     |   | June 30,          
|                                 |                                                     |   |                   
|                                 |                                                     |   | 2002               |    | 2001
|                                 |                                                     |   |                    |    |     
|Net loss                         |                                                     | $ | (1,267             | )  |      | $ | (5,119 | )   
|Other comprehensive gain (loss): |                                                     |   |                    |    |      |   |        |     
|                                 | Unrealized gains (losses) on
short-term investments |   |                    | 96 |      |   |        | (275 | )
|                                 |                                                     |   |                    |    |      |   |        |     
|Other comprehensive gain (loss)  |                                                     |   | 96                 |    |      |   | (275   | )   
|                                 |                                                     |   |                    |    |      |   |        |     
|Comprehensive loss               |                                                     | $ | (1,171             | )  |      | $ | (5,394 | )   
|                                 |                                                     |   |                    |    |      |   |        |     



|5. |  | Handset Design Company                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | In December 2001, the Company invested $512,000 in a Korean handset design
company. The Company believes this investment will increase its market
opportunities in Korea and China. 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.                                                                                                                                                 
|  
|6. |  | GaAs Foundry                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|  
|   |  | In December 2000, the Company invested approximately $2.4 million in a
GaAs foundry under construction in Taiwan in exchange for a 3% strategic
interest. This foundry is scheduled to be in production at the end of
calendar 2002. The Company has accounted for this investment using the
cost basis.                                                                                                                                                                                                                                                                                                                        
|  
|   |  | During the fourth quarter of fiscal 2002 the Company recorded an
impairment charge of approximately $1.7 million for its strategic
investment in the Taiwanese foundry, which was deemed to have an other
than temporary decline in value. During the first quarter of fiscal 2003
the Company recorded an additional impairment charge of approximately
$330,000 related to this strategic investment. The additional impairment
charge included in the first quarter of fiscal 2003 results was determined
after analysis of changes in the market values of public companies in the
GaAs market from March 2002 to June 2002.
|  
|   |  | The Company regularly reviews its investments for circumstances of
impairment and assesses the carrying value of the assets against market
value. 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 was made. The fair value of strategic investments, such as the
foundry, is dependant on the                                                                                                                                                                                                                            

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| |  | performance of the companies invested in, as well as the marketability of
these investments. In assessing potential impairment of these
investments, management considers these factors as well as forecasted
financial performance of the investees. If these forecasts are not met or
if market conditions change, the Company may have to record additional
impairment charges.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS

This report contains forward-looking statements which are identified by
words such as anticipate, believe, plan, estimate, expect, intend
and other similar expressions and includes our statement regarding the
sufficiency of our cash to satisfy our liquidity requirements for the next
twelve months. These forward-looking statements are subject to business and
economic risks and uncertainties, and our actual results of operations may
differ materially from those contained in the forward-looking statements. For
example, we may be required to expend cash in currently unexpected ways that
may impact our ability to fund our operations causing our business to suffer.
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. However, readers should carefully review the risk
factors set forth in this Form 10-Q and other reports or documents we file from
time to time with the Securities and Exchange Commission.

Critical Accounting Policies

The preparation of financial statements in conformity with generally
accepted accounting principles requires management 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, evaluate some of
the uncertainties inherent in accounting estimates and evaluate some of the
ways that our estimates may impact our financial condition.

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

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

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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.

Fixed Assets and Strategic Investments.We regularly review our long-lived
assets and 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. Management considers 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, management
considers these factors as well as forecasted financial performance of the
investees. If these forecasts are not met or if market conditions change, we
may assess the value of the strategic investment to be other than temporarily
impaired and accordingly record an impairment charge.

Results of Operations -First Quarter of Fiscal 2003 Compared to First Quarter of Fiscal 2002:

Total net sales were $15.3 million for the first quarter of fiscal 2003
compared to $14.0 million for the first quarter of fiscal 2002, an increase of
9%. Semiconductor sales were $9.3 million in the first quarter of fiscal 2003
compared to $8.1 million in the first quarter of fiscal 2002, an increase of
15%. Semiconductor sales increased due to increased demand from our customers
for power amplifier modules used in handsets. We do not expect a strong
recovery in the handset market in this calendar year. The handset market has
historically had seasonal trends in demand, which can cause variation in
revenues in sequential quarters.

Subsystem sales in the first quarter of fiscal 2003 were $6.0 million
compared to $5.9 million in the first quarter of fiscal 2002, an increase of
2%. Sales of subsystems products to defense customers increased 41% to $5.4
million in the first quarter of fiscal 2003 from $3.8 million in the first
quarter of fiscal 2002 and sales of subsystem products to commercial customers
decreased 73% to $553,000 in the first quarter of fiscal 2003 compared to $2.1
million in the first quarter of fiscal 2002. While demand in the defense market
for our type of product has been fairly stable, we were able to increase our
defense related revenue by refocusing our manufacturing and marketing capacity
on defense products. The decrease in commercial subsystem sales is due to
continued weakness in the communications infrastructure market. We do not
expect any significant sales this fiscal year for infrastructure products.

Gross margin was 26% of net sales in the first quarter of fiscal 2003
compared to a negative 9% of net sales in the first quarter of fiscal 2002. The
increase in gross margin was primarily due to improved yields in the
semiconductor products and increased utilization of our manufacturing facility.
To a lesser extent, the shift in subsystems from commercial products to defense
products also improved margin. We do not expect further significant
improvement in gross margin until sales volumes increase because of fixed costs
related to our fabrication facility.

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Research and development expenses were $2.6 million, or 17% of net sales,
in the first quarter of fiscal 2003 compared to $2.4 million, or 17% of net
sales, in the first quarter of fiscal 2002, an increase of 8% in absolute
dollars. Research and development expenses have increased due to increased
headcount related to new product development.

Selling, general and administrative expenses were $2.7 million, or 17% of
net sales, in the first quarter of fiscal 2003 compared to $2.7 million, or 20%
of net sales, in the first quarter of fiscal 2002. We expect an increase in
our selling expenses as we seek to increase our product offering and expand our
customer base. We also expect our selling, general and administrative expenses
to increase somewhat in the near future due to legal expenses and advisor fees
that we have incurred or may incur in the future related to our evaluation of
Anaren Microwaves intention to influence control of the Company as stated in a
Schedule 13D filed by Anaren with the U.S. Securities and
Exchange Commission.

The $69,000 fixed asset impairment charge included in the first quarter of
fiscal 2002 was the result of further impairment with respect to certain
capital assets used in the subsystem production area, which were initially
written down in the fourth quarter of fiscal 2001 due to delayed and cancelled
contracts as a result of the declining wireless infrastructure market. We
reassessed and lowered our estimates of the fair market value of these assets
during the first quarter of fiscal 2002 based on the current resale market for
this type of equipment.

The $330,000 impairment of strategic investment included in the first
quarter of fiscal 2003 was the result of a further impairment of our investment
in a Taiwanese foundry. During the fourth quarter of fiscal 2002 we recorded
an impairment charge of approximately $1.7 million related to our cost basis
strategic investment in the Taiwanese foundry. During the fourth quarter of
fiscal 2002, we reviewed updated financial statements and projections from the
foundry. Significant decreases in actual and expected revenues, net income and
cash balances were observed as compared with the original projections. In
addition, the foundry had no current customers. With this backdrop, combined
with the downturn in the semiconductor industry and our excess semiconductor
capacity, we determined there was a decline in the value of the foundry that
was other than temporary. The additional impairment charge included in the
first quarter of fiscal 2003 results was determined after analysis of changes
in the market values of public companies in the GaAs market from March 2002 to
June 2002.

Interest income (expense) and other, net was $368,000 in the first quarter
of fiscal 2003 compared to $1.3 million in the first quarter of fiscal 2002.
The decrease in interest income (expense) and other, net, was primarily due to
a decrease in the short-term investment balance and lower interest rates.

Liquidity and Capital Resources

We have funded our operations to date primarily through cash flows from
operations and sales of equity securities. As of June 30, 2002, we had $12.7
million of cash and cash equivalents, $87.9 million of short-term investments
and $106.4 million of working capital.

Net cash provided by operating activities was $5.2 million in the first
quarter of fiscal 2003 and was due mainly to an increase in accounts payable
and a decrease in inventory, accounts receivable and other current assets. Net
cash used by operating activities was $5.1 million in the first quarter of
fiscal 2002 and was due mainly to a decrease in accounts payable.

Net cash provided by investing activities was $142,000 in the first
quarter of fiscal 2003 and $9.3 million in the first quarter of fiscal 2002.
Net cash provided by investing activities in the first quarter of fiscal 2003
was a result of maturities and sales of short-term investments of approximately
$19.1 million less purchases

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of short-term investments, strategic investments and property and
equipment, of approximately $19.0 million. Net cash provided by investing
activities during the first quarter of fiscal 2002 was the result of maturities
and sales of short-term investments of approximately $48.5 million less
purchases of short-term investments and property and equipment of approximately
$39.2 million.

Net cash used by financing activities was $694,000 in the first quarter of
fiscal 2003 and $24,000 in the first quarter of fiscal 2002. Net cash used by
financing activities in the first quarter of fiscal 2003 was the result of
payments on debt and capital leases of $730,000 less cash proceeds from the
exercise of stock options and employee stock purchase plan of $36,000. Net cash
used by financing activities in the first quarter of fiscal 2002 was the result
of payments on debt and capital leases of $592,000 less proceeds from the
exercise of stock options and employee stock purchase plan of $568,000.

As of June 30, 2002, we had approximately $500,000 in outstanding letters
of credit, which are secured by certificates of deposits.

Given our cash position, we currently do not have a line of credit. As of
June 30, 2002, we had no borrowings outstanding against our former term loans.
We have various equipment notes outstanding with other lenders, which are
secured by the equipment. Several of these notes have covenants attached
pertaining to liquidity levels and minimum tangible net worth. As of June 30,
2002 we were in compliance with all covenants.

In December 2001, we invested $512,000 in a Korean handset design company.
We believe this investment will increase our market opportunities in Korea and
China. On April 1, 2002 we invested an additional $2.0 million in the company.
We do not have significant influence over the management of the handset design
company and accordingly have accounted for the investment on a cost basis in
all reported periods.

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

Commitments

We do not have any special purpose entities. We have no commercial
commitments with related parties, except for employee loans. We have
outstanding loans to certain officers and employees totaling approximately $1.6
million at June 30, 2002. 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 leaves
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 (in thousands):

|                                |  |                            |        |      |  |      |        |      |  |      |       |      |  |   |       |  |  |   |       |  |  |   |    | 
|------------------------------- |  | -------------------------- | ------ | ---- |  | ---- | ------ | ---- |  | ---- | ----- | ---- |  | - | ----- |  |  | - | ----- |  |  | - | -- | 
|                                |  | Fiscal Year Ended June 30,
|                                |  |                           
|                                |  | Total                      |        | 2003 |  | 2004 |        | 2005 |  | 2006 |       | 2007
|                                |  |                            |        |      |  |      |        |      |  |      |       |     
|Contractual Obligations         |  |                            |        |      |  |      |        |      |  |      |       |      |  |   |       |  |  |   |       |  |  |   |    | 
|Long-term debt
obligations      |  | $                          | 7,269  |      |  | $    | 2,162  |      |  | $    | 2,883 |      |  | $ | 1,922 |  |  | $ | 302   |  |  |   |   | 
|Capital lease obligations       |  |                            | 2,087  |      |  |      | 601    |      |  |      | 639   |      |  |   | 568   |  |  |   | 279   |  |  |   |   | 
|Operating lease
obligations     |  |                            | 11,005 |      |  |      | 3,921  |      |  |      | 3,815 |      |  |   | 2,516 |  |  |   | 719   |  |  |   | 34 | 
|Open purchase order
commitments |  |                            | 3,800  |      |  |      | 3,800  |      |  |      |      |      |  |   |      |  |  |   |      |  |  |   |   | 
|                                |  |                            |        |      |  |      |        |      |  |      |       |      |  |   |       |  |  |   |       |  |  |   |    | 
|Total                           |  | $                          | 24,161 |      |  | $    | 10,484 |      |  | $    | 7,337 |      |  | $ | 5,006 |  |  | $ | 1,299 |  |  | $ | 34 | 
|                                |  |                            |        |      |  |      |        |      |  |      |       |      |  |   |       |  |  |   |       |  |  |   |    | 

RISKS, TRENDS AND UNCERTAINTIES

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;                                     
| | - |  | -------------------------------------------------------------------------------------------------------
|
| |  |  | 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;                   
|
| |  |  | the timing of our introduction of new products and the
introduction of new products by our competitors;
|
| |  |  | market acceptance of our products;                                                                     
|
| |  |  | variations in average selling prices of our products; and                                              
|
| |  |  | changes in our inventory levels.                                                                       

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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 2002, a number of our semiconductor customers delayed shipment of their
orders and our sales were negatively impacted. We cannot assure you that we
will be able to achieve or maintain quarterly profitability in the future.

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

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.

A substantial portion of our sales is derived from sales to a small number
of original equipment manufacturers. For example, in the 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. For the first three
months of fiscal 2003, sales to our top ten customers accounted for
approximately 82% of our net sales, with Motorola making up approximately 53%
of those net sales. We expect that sales to a limited number of customers will
continue to account for a large percentage of our net sales in the future.
Motorola accounted for approximately 58% of our backlog at June 30, 2002. If we
lose a major customer or if anticipated sales to a major customer do not
materialize, our operating results and business would be harmed. For example,
in the third quarter of fiscal 2002, our net sales were adversely affected when
Motorola delayed shipment of semiconductor products.

Because many of our expenses are fixed in the near term, our earnings will
decline if we do not meet our projected sales.

Our business requires us to invest heavily in manufacturing equipment and
related support infrastructure that we must pay for regardless of our level of
sales. To support our manufacturing capacity we also incur costs for
maintenance and repairs and employ personnel for manufacturing and process
engineering functions. These expenses, along with depreciation costs, do not
vary greatly, if at all, as our net sales decrease. In addition, the lead time
for developing and manufacturing our products often requires us to invest in
manufacturing capacity in anticipation of future demand. We committed to
significant expenditures in capital equipment and facilities in fiscal 2001
based on customer demand. The recent decline in market demand has resulted in
infrastructure costs in excess of current needs and has resulted in lower
earnings. In the third quarter of fiscal 2002, we wrote down fixed assets in
response to the decline in the wireless infrastructure and mobile handset
markets. If future demand does not increase or if our net sales decline
further, our results will continue to suffer. If our net sales projections are
inaccurate or we experience declines in demand for our products, we may not be
able to reduce many of our costs rapidly, if at all, and our business,
operating results and financial condition may be harmed.

We are exposed to general economic and market conditions.

Our business is subject to the effects of general economic conditions in
the United States and globally, and, in particular, market conditions in the
wireless communications industry. In recent quarters, our operating results
have been adversely affected as a result of unfavorable economic conditions and
reduced capital spending in the United States, Europe and Asia. In particular,
sales to customers who supply equipment to service providers of voice and data
services have been adversely affected due to significant

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decline in demand in the wireless infrastructure markets. Additionally,
industry forecast of sales of handsets for calendar 2002 have been reduced a
number of times over the last several months. 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.

Our backlog may not result in sales.

Our backlog primarily represents signed purchase orders for products due
to ship within the next year. As of June 30, 2002, our backlog was
approximately $29 million. 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.

In the fourth quarter of fiscal 2001, some of our customers in the
wireless infrastructure market delayed and cancelled long-standing contracts in
response to declining market demand. The build out of wireless infrastructure
is capital intensive. As the capital markets rapidly softened in late 2000, a
number of the providers of voice and data services were unable to secure
necessary capital and in some cases, filed for Chapter 11 bankruptcy
protection. Our customers, the equipment suppliers to these service providers,
responded by first delaying and then canceling orders associated with this
market. This trend continued to a lesser extent in fiscal 2002.

Of our current backlog, approximately 58% is attributable to orders
received from Motorola. If we lose this customer or any other major customer,
or if orders by a major customer were to otherwise decrease or be delayed,
including reductions due to market or competitive conditions in the wireless
communications markets or further decreases in government defense spending, our
business, operating results and financial condition would be harmed.

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

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



| |  |  | lack of experience in producing a new product;                          
| | - |  | ------------------------------------------------------------------------
|
| |  |  | defects in masks that are used to transfer circuit patterns onto wafers;
|
| |  |  | impurities in materials used;                                           
|
| |  |  | contamination of the manufacturing environment; and                     
|
| |  |  | equipment failures.                                                     

Our manufacturing yields also vary significantly among our products due to
product complexity and the depth of our experience in manufacturing a
particular product. For example, in the fourth quarter of fiscal

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2001, we began volume production of a new product, HBT modules. We
experienced lower than expected yields and start-up quality issues with the
subcontractor who is assembling the modules. These issues resulted in lower
gross margins than expected. 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.

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

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

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

A significant number of our products are designed to address the specific
needs of individual original equipment manufacturer customers. Where our
products are designed into an original equipment manufacturers product, our
sales volumes depend upon the commercial success of the original equipment
manufacturers product. Sales of our major customers products can vary
significantly from quarter to quarter. Accordingly, our sales could be
adversely affected by a reduction in demand for mobile handsets and for
wireless subsystem infrastructure equipment. Our operating results have been
significantly harmed in the past by the failure of anticipated orders to be
realized and by deferrals or cancellations of orders as a result of changes in
demand for our customers products. For example, in 2001, our operating results
were adversely affected when major customers experienced a reduction in
anticipated demand for wireless communications networks. Additionally,
industry forecasts of sales of handsets for calendar 2002 have been reduced a
number of times over the last several months and we do not expect strong
recovery in the handset market in calendar 2002.

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 an over capacity situation 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.

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

We compete in an intensely competitive industry and we expect our
competition to increase. A number of companies produce products that compete
with ours or could enter into competition with us. These competitors, or
potential future competitors, include ANADIGICS, CTT, JCA Technology, Miteq,
Narda Microwave, REMEC, RF Micro Devices, Skyworks Solutions and TriQuint
Semiconductor. In addition, a number of smaller companies may introduce
competing products. Many of our current and potential competitors have
significantly greater financial, technical, manufacturing and marketing
resources than we have and have achieved market acceptance of their existing
technologies. Our ability to compete successfully depends upon a number of
factors, including:



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

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

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

During the first three months of fiscal 2003, sales to international
customers accounted for 66% of our net sales. During fiscal 2002, sales to
international customers accounted for 31% of our net sales. We expect that
international sales will continue to account for a significant portion of our
net sales in the future. In addition, many of our domestic customers sell their
products outside of the United States. These sales expose us to a number of
inherent risks, including:



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

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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.

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.

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

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

Our 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.

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

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

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

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

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

We rely on a continuous power supply to conduct our operations, and an energy
crisis could disrupt our operations and increase our expenses.

In early 2001, California experienced an energy crisis that caused power
outages throughout the State of California, disrupted the operations of
numerous businesses in California and resulted in significantly increased
prices for power. In the event of an acute power shortage, that is, when power
reserves for the State of California fall below 1.5%, California has on some
occasions implemented, and may in the future continue to implement, rolling
blackouts throughout California. We currently do not have backup generators or
alternate sources of power in the event of a blackout, and our current
insurance does not provide coverage for any damages our customers or we may
suffer as a result of any interruption in our power supply. If blackouts
interrupt our power supply, we would be temporarily unable to continue
operations at our facilities. Any such interruption in our ability to continue
operations at our facilities could damage our reputation, harm our ability to
retain existing customers and to obtain new customers, and could result in lost
revenue, any of which could substantially harm our business and results of
operations.

Furthermore, the deregulation of the energy industry instituted in 1996 by
the California government caused power prices to increase in early 2001. Under
deregulation, utilities were encouraged to sell their plants, which
traditionally had produced most of Californias power, to independent energy
companies that were expected to compete aggressively on price. Instead, due in
part to a shortage of supply, on occasion

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wholesale prices have skyrocketed. If wholesale prices continue to
increase, our operating expenses will likely increase, because all of our
facilities are located in California.

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.

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

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

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

We currently operate our own foundry located in Santa Clara, California to
produce GaAs semiconductor components for sale as well as for use in our
GaAs-based subsystems products. In the past, our in-house capacity was not
sufficient by itself to satisfy the demand and our growth objectives.
Accordingly, in order to meet increasing customer demand, we entered into an
arrangement in February 2000 with a third party foundry located in Los Angeles,
California. Our agreement with this foundry required us to commit to a certain
volume of production based on a rolling forecast. Our requirements have fallen
below this level, however, we were still contractually obligated to pay for the
forecast level of service. We have met all our obligations in regards to this
agreement.

In addition, in December 2000, we invested approximately $2.4 million in a
GaAs foundry under construction in Taiwan. This foundry is scheduled to be in
production at the end of calendar 2002. We made this investment to secure a
portion of the foundrys capacity for our use. During the fourth quarter of
fiscal 2002 we recorded an impairment charge of approximately $1.7 million
against the foundry investment, which was deemed to have an other than
temporary decline in value. During the first quarter of fiscal 2003, we
recorded an additional impairment of $330,000. We regularly review our
investments for circumstances of impairment and assess the carrying value of
the assets against market value. When an impairment exists, we record an
expense to the extent that the carrying value exceeds fair market value in the
period the assessment was made. The fair value of strategic investments, such
as the foundry, is dependent on the performance of the companies invested in,
as well as the marketability for these investments. In assessing potential
impairment of these investments, management considers these factors as well as
forecasted financial performance of the investees. If these forecasts are not
met or if market conditions change, we may have to record additional impairment charges.

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

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, and 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 is 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.

Antitakeover provisions could affect the price of our common stock.

The ability of our board of directors to issue preferred stock at any time
with rights preferential to those of our common stock and the presence of our
shareholder rights plan may deter or prevent a takeover attempt, including a
takeover attempt in which the potential purchaser offers to pay a per share
price greater than the current market price for our common stock. The practical
effect of these provisions is to require a party seeking control of us to
negotiate with our board, which could delay or prevent a change in control.
These provisions could limit the price that investors might be willing to pay
in the future for our common stock.




Item 3. 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 June 30, 2002, our investment portfolio comprised
approximately $12.4 million in money market funds and certificate of deposits
and $87.4 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 June 30, 2002 levels, the

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fair value of our portfolio would decline
by approximately $248,000. The modeling technique used measures the change in
fair values arising from an immediate hypothetical shift in market interest
rates.

Foreign Currency Exchange Risk

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

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PART II OTHER INFORMATION




Item 6. EXHIBITS AND REPORTS ON FORM 8-K



| | (a) |  | Exhibits
| | --- |  | --------

| |                                                                               
| | ------------------------------------------------------------------------------
| | 3.1(1)   Amended and Restated Articles of Incorporation of Registrant         
|
| | 3.2(1)   Bylaws of Registrant                                                 
|
| | 99.1      Certification of Chief Executive Officer and Chief Financial Officer



| | (b) |  | Reports on Form 8-K                                                           
| | --- |  | ------------------------------------------------------------------------------
|
| |     |  | No reports on Form 8-K were filed during the three months ended June 30, 2002.



---

|(1) |  | Incorporated by reference to our Form 8-K filed with the U.S.
Securities and Exchange Commission on July 29, 2002.
|--- |  | ------------------------------------------------------------------------------------------------------------------

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SIGNATURES

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

CELERITEK, INC.

|                      |  |                                                                                   
|--------------------- |  | ----------------------------------------------------------------------------------
|Date: August 13, 2002 |  | /s/ MARGARET E. SMITH                                                             
|                      |  |                                                                                   
|                      |  | Margaret E. Smith, Vice President,
Chief Financial Officer and
Assistant Secretary

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Exhibit Index

|        |  |                                                                     
|------- |  | --------------------------------------------------------------------
|Exhibit |  |                                                                     
|Number  |  | Description                                                         
|        |  |                                                                     
|3.1(1)  |  | Amended and Restated Articles of Incorporation of Registrant        
|       
|3.2(1)  |  | Bylaws of the Registrant                                            
|       
|99.1    |  | Certification of Chief Executive Officer and Chief Financial Officer



---

|(1) |  | Incorporated by reference to our Form 8-K filed with the U.S.
Securities and Exchange Commission on July 29, 2002.
|--- |  | ------------------------------------------------------------------------------------------------------------------