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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549




FORM 10-Q

(Mark One)

|   |  |                                                                                         
|-- |  | ----------------------------------------------------------------------------------------
|x  |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
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|   |  | For the quarterly period ended September 30, 2002                                       
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|or
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|o  |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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|   |  |                                                                                         
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|   |  | 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)
|                                                                         
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|                                                                         
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|                                                                         
|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: 12,301,259 shares as of October 25, 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                           
|                             | Item 4. CONTROLS AND PROCEDURES                                                              
|PART II OTHER INFORMATION   
|                             | Item 5. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                  
|                             | Item 6. EXHIBITS AND REPORTS ON FORM 8-K                                                     
|SIGNATURES                  
|Exhibit Index               
|EXHIBIT 99.1                



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##### Table of Contents



CELERITEK, INC.

Table of Contents

|                              |                                                                                               |                                                                                                         |    |          |   | 
|----------------------------- | --------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------- | -- | -------- | - | 
|                              |                                                                                               |                                                                                                         |    | Page No.
|                              |                                                                                               |                                                                                                         |    |         
|PART I: FINANCIAL INFORMATION |                                                                                               |                                                                                                         | 1  |         
|                             
|                             
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|                             
|                              | Item 1. Financial Statements (Unaudited)                                                      |                                                                                                         |    | 1        |  
|                             
|                             
|                             
|                             
|                              |                                                                                               | Condensed Consolidated Balance Sheets: September 30, 2002 and March 31, 2002                            |    |          | 1 | 
|                             
|                             
|                             
|                             
|                              |                                                                                               | Condensed Consolidated Statements of Operations: Three and
six months ended September 30, 2002 and 2001 |    |          | 2 | 
|                             
|                             
|                             
|                             
|                              |                                                                                               | Condensed Consolidated Statements of Cash Flows: Six months
ended September 30, 2002 and 2001           |    |          | 3 | 
|                             
|                             
|                             
|                             
|                              |                                                                                               | Notes to Condensed Consolidated Financial Statements                                                    |    |          | 4 | 
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|                              | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations |                                                                                                         |    | 7        |  
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|                              | Item 3. Quantitative and Qualitative Disclosures About Market Risk                            |                                                                                                         |    | 22       |  
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|                              | Item 4. Controls and Procedures                                                               |                                                                                                         |    | 23       |  
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|PART II: OTHER INFORMATION    |                                                                                               |                                                                                                         | 23 |         
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|                              | Item 5. Submission of Matters to a Vote of Security Holders                                   |                                                                                                         |    | 23       |  
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|                              | Item 6. Exhibits and Reports on Form 8-K                                                      |                                                                                                         |    | 24       |  
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|SIGNATURES                    |                                                                                               |                                                                                                         | 25 |         





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##### Table of Contents






PART I FINANCIAL INFORMATION




Item 1. FINANCIAL STATEMENTS




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

|                                             |                                           |                           |         |               |         |           |         |        |         | 
|-------------------------------------------- | ----------------------------------------- | ------------------------- | ------- | ------------- | ------- | --------- | ------- | ------ | ------- | 
|                                             |                                           |                           |         | September 30, |         | March 31,
|                                             |                                           |                           |         | 2002          |         | 2002     
|                                             |                                           |                           |         |               |         |          
|                                             |                                           |                           |         | (Unaudited)   |         | (Note)   
|                                             |                                           |                           |         |               |         |           |         |        |         | 
|ASSETS                                       |                                           |                           |         |               |         |           |         |       
|                                            
|                                            
|                                            
|                                            
|Current assets:                              |                                           |                           |         |               |         |           |         |       
|                                            
|                                            
|                                            
|                                            
|                                             | Cash and cash equivalents                 |                           | $       | 10,116        |         |           | $       | 8,096  |        
|                                            
|                                            
|                                            
|                                            
|                                             | Short-term investments                    |                           |         | 93,044        |         |           |         | 90,597 |        
|                                            
|                                            
|                                            
|                                            
|                                             | Accounts receivable, net                  |                           |         | 7,754         |         |           |         | 10,001 |        
|                                            
|                                            
|                                            
|                                            
|                                             | Inventories                               |                           |         | 7,205         |         |           |         | 9,372  |        
|                                            
|                                            
|                                            
|                                            
|                                             | Prepaid expenses and other current assets |                           |         | 3,339         |         |           |         | 3,671  |        
|                                             |                                           |                           |         |               |         |           |         |       
|                                             |                                           | Total current assets      |         |               | 121,458 |           |         |        | 121,737 | 
|                                            
|                                            
|                                            
|                                            
|Property and equipment, net                  |                                           |                           | 13,544  |               |         |           | 14,839  |       
|                                            
|                                            
|                                            
|                                            
|Other assets                                 |                                           |                           | 5,037   |               |         |           | 3,112   |       
|                                             |                                           |                           |         |               |         |           |         |       
|Total assets                                 |                                           | $                         | 140,039 |               |         | $         | 139,688 |       
|                                             |                                           |                           |         |               |         |           |         |       
|LIABILITIES & SHAREHOLDERS EQUITY           |                                           |                           |         |               |         |           |         |       
|                                            
|                                            
|                                            
|                                            
|Current liabilities:                         |                                           |                           |         |               |         |           |         |       
|                                            
|                                            
|                                            
|                                            
|                                             | Accounts payable                          |                           | $       | 7,684         |         |           | $       | 4,583  |        
|                                            
|                                            
|                                            
|                                            
|                                             | Accrued payroll                           |                           |         | 1,853         |         |           |         | 1,505  |        
|                                            
|                                            
|                                            
|                                            
|                                             | Accrued liabilities                       |                           |         | 3,362         |         |           |         | 3,098  |        
|                                            
|                                            
|                                            
|                                            
|                                             | Current portion of long-term debt         |                           |         | 2,425         |         |           |         | 2,312  |        
|                                            
|                                            
|                                            
|                                            
|                                             | Current obligations under capital leases  |                           |         | 596           |         |           |         | 669    |        
|                                             |                                           |                           |         |               |         |           |         |       
|                                             |                                           | Total current liabilities |         |               | 15,920  |           |         |        | 12,167  | 
|                                            
|                                            
|                                            
|                                            
|Long-term debt, less current portion         |                                           |                           | 3,431   |               |         |           | 4,675   |       
|                                            
|                                            
|                                            
|                                            
|Non-current obligations under capital leases |                                           |                           | 1,108   |               |         |           | 1,340   |       
|                                            
|                                            
|                                            
|                                            
|Shareholders equity                         |                                           |                           | 119,580 |               |         |           | 121,506 |       
|                                             |                                           |                           |         |               |         |           |         |       
|Total liabilities and shareholders equity   |                                           | $                         | 140,039 |               |         | $         | 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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##### Table of Contents






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

|                                                              |                                            |   |                    |       |                  |   |        |       |      |   |        |       |  |   |         |       | 
|------------------------------------------------------------- | ------------------------------------------ | - | ------------------ | ----- | ---------------- | - | ------ | ----- | ---- | - | ------ | ----- |  | - | ------- | ----- | 
|                                                              |                                            |   | Three Months Ended |       | Six Months Ended
|                                                              |                                            |   | September 30,      |       | September 30,   
|                                                              |                                            |   |                    |       |                 
|                                                              |                                            |   | 2002               |       | 2001             |   | 2002   |       | 2001
|                                                              |                                            |   |                    |       |                  |   |        |       |     
|Net sales                                                     |                                            | $ | 15,484             |       |                  | $ | 15,131 |       |      | $ | 30,825 |       |  | $ | 29,143  |      
|                                                             
|                                                             
|                                                             
|                                                             
|Cost of goods sold                                            |                                            |   | 11,604             |       |                  |   | 14,269 |       |      |   | 22,990 |       |  |   | 29,495  |      
|                                                              |                                            |   |                    |       |                  |   |        |       |      |   |        |       |  |   |         |      
|Gross profit (loss)                                           |                                            |   | 3,880              |       |                  |   | 862    |       |      |   | 7,835  |       |  |   | (352    | )    
|                                                             
|                                                             
|                                                             
|                                                             
|Operating expenses:                                           |                                            |   |                    |       |                  |   |        |       |      |   |        |       |  |   |         |      
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              | Research and development                   |   |                    | 2,738 |                  |   |        | 2,160 |      |   |        | 5,443 |  |   |         | 4,574 | 
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              | Selling, general and administrative        |   |                    | 2,263 |                  |   |        | 2,400 |      |   |        | 4,917 |  |   |         | 5,144 | 
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              | Costs related to hostile takeover
proposal |   |                    | 500   |                  |   |        |      |      |   |        | 500   |  |   |         |      | 
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              | Fixed asset impairment charge              |   |                    |      |                  |   |        |      |      |   |        |      |  |   |         | 69    | 
|                                                              |                                            |   |                    |       |                  |   |        |       |      |   |        |       |  |   |         |      
|Total operating expenses                                      |                                            |   | 5,501              |       |                  |   | 4,560  |       |      |   | 10,860 |       |  |   | 9,787   |      
|                                                             
|                                                             
|                                                             
|                                                             
|Loss from operations                                          |                                            |   | (1,621             | )     |                  |   | (3,698 | )     |      |   | (3,025 | )     |  |   | (10,139 | )    
|                                                             
|                                                             
|                                                             
|                                                             
|Impairment of strategic investment                            |                                            |   |                   |       |                  |   |       |       |      |   | (330   | )     |  |   |        |      
|                                                             
|                                                             
|                                                             
|                                                             
|Interest income and other, net                                |                                            |   | 453                |       |                  |   | 966    |       |      |   | 920    |       |  |   | 2,288   |      
|                                                              |                                            |   |                    |       |                  |   |        |       |      |   |        |       |  |   |         |      
|Net loss                                                      |                                            | $ | (1,168             | )     |                  | $ | (2,732 | )     |      | $ | (2,435 | )     |  | $ | (7,851  | )    
|                                                              |                                            |   |                    |       |                  |   |        |       |      |   |        |       |  |   |         |      
|Basic and diluted loss per share                              |                                            | $ | (0.10              | )     |                  | $ | (0.23  | )     |      | $ | (0.20  | )     |  | $ | (0.65   | )    
|                                                              |                                            |   |                    |       |                  |   |        |       |      |   |        |       |  |   |         |      
|Weighted average common shares
outstanding                    |                                            |   | 12,280             |       |                  |   | 12,071 |       |      |   | 12,256 |       |  |   | 12,016  |      
|                                                             
|                                                             
|                                                             
|                                                             
|Weighted average common shares
outstanding, assuming dilution |                                            |   | 12,280             |       |                  |   | 12,071 |       |      |   | 12,256 |       |  |   | 12,016  |      

See accompanying notes.

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

|                                                                                      |                                             |                                                         |              |       |                  |     |               |       |    |     | 
|------------------------------------------------------------------------------------- | ------------------------------------------- | ------------------------------------------------------- | ------------ | ----- | ---------------- | --- | ------------- | ----- | -- | --- | 
|                                                                                      |                                             |                                                         |              |       | Six Months Ended
|                                                                                      |                                             |                                                         |              |       |                 
|                                                                                      |                                             |                                                         |              |       | September 30,    |     | September 30,
|                                                                                      |                                             |                                                         |              |       | 2002             |     | 2001         
|                                                                                      |                                             |                                                         |              |       |                  |     |              
|Operating activities                                                                  |                                             |                                                         |              |       |                  |     |               |      
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|Net loss                                                                              |                                             | $                                                       | (2,435       | )     |                  | $   | (7,851        | )    
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|Adjustment to reconcile net loss to net cash provided
(used) in operating activities: |                                             |                                                         |              |       |                  |     |               |      
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                      | Depreciation, amortization and other        |                                                         |              | 2,836 |                  |     |               | 2,756 |   
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                      | Changes in operating assets and liabilities |                                                         |              | 8,197 |                  |     |               | 49    |   
|                                                                                      |                                             |                                                         |              |       |                  |     |               |      
|Net cash provided (used) in operating activities                                      |                                             |                                                         | 8,598        |       |                  |     | (5,046        | )    
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|Investing activities                                                                  |                                             |                                                         |              |       |                  |     |               |      
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|Purchase of property and equipment                                                    |                                             |                                                         | (1,218       | )     |                  |     | (3,347        | )    
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|Sale of property and equipment                                                        |                                             |                                                         |             |       |                  |     | 4             |      
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|Purchases of short-term investments                                                   |                                             |                                                         | (58,045      | )     |                  |     | (86,022       | )    
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|Purchase of strategic investments                                                     |                                             |                                                         | (1,992       | )     |                  |     |              |      
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|Maturities and sale of short-term investments                                         |                                             |                                                         | 55,642       |       |                  |     | 118,564       |      
|                                                                                      |                                             |                                                         |              |       |                  |     |               |      
|Net cash (used) provided by investing activities                                      |                                             |                                                         | (5,613       | )     |                  |     | 29,199        |      
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|Financing activities                                                                  |                                             |                                                         |              |       |                  |     |               |      
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|Payments on long-term debt                                                            |                                             |                                                         | (1,131       | )     |                  |     | (732          | )    
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|Borrowings on long-term debt                                                          |                                             |                                                         |             |       |                  |     | 3,708         |      
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|Payments on obligations under capital leases                                          |                                             |                                                         | (305         | )     |                  |     | (360          | )    
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|Proceeds from issuance of common stock                                                |                                             |                                                         | 471          |       |                  |     | 1,032         |      
|                                                                                      |                                             |                                                         |              |       |                  |     |               |      
|Net cash (used) provided by financing activities                                      |                                             |                                                         | (965         | )     |                  |     | 3,648         |      
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|Increase in cash and cash equivalents                                                 |                                             |                                                         | 2,020        |       |                  |     | 27,801        |      
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|Cash and cash equivalents at beginning of period                                      |                                             |                                                         | 8,096        |       |                  |     | 3,515         |      
|                                                                                      |                                             |                                                         |              |       |                  |     |               |      
|Cash and cash equivalents at end of period                                            |                                             | $                                                       | 10,116       |       |                  | $   | 31,316        |      
|                                                                                      |                                             |                                                         |              |       |                  |     |               |      
|Supplemental disclosures of cash flow information:                                    |                                             |                                                         |              |       |                  |     |               |      
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                      | Cash paid during the period for:            |                                                         |              |       |                  |     |               |       |   
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                      |                                             |                                                         | Income taxes |       | $                | 3   |               |       |    |    | 
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                      |                                             |                                                         | Interest     |       |                  | 388 |               |       | $  | 312 | 
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                      |                                             | Capital lease obligations incurred to acquire equipment |              |       |                 |     |               |       | 72 |    

See accompanying notes.

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##### Table of Contents






Celeritek, Inc.

Notes to Condensed Consolidated Financial Statements
(Unaudited)

September 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
adjustments) 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 second quarters of
fiscal 2003 and fiscal 2002 ended September 29, 2002 and September 30,
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 and six months ended September 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 as filed with the Securities and Exchange Commission.                                                                                                                                  
|  
|   |  | 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:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

|                |  |                |       |           |  |   |       | 
|--------------- |  | -------------- | ----- | --------- |  | - | ----- | 
|                |  | September 30,  |       | March 31,
|                |  | 2002           |       | 2002     
|                |  |                |       |          
|                |  | (In thousands)
|Raw materials   |  | $              | 880   |           |  | $ | 2,346 | 
|               
|               
|               
|               
|Work-in-process |  |                | 6,325 |           |  |   | 7,026 | 
|                |  |                |       |           |  |   |       | 
|                |  | $              | 7,205 |           |  | $ | 9,372 | 
|                |  |                |       |           |  |   |       | 



|3. |  | Loss per share                                                                                                                                                                                                                                                   
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | Basic loss per common share is computed using the weighted average common
shares outstanding during the period. The effect of outstanding stock
options is excluded from the calculation of diluted net loss per share, as
their inclusion would be antidilutive.

4



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##### Table of Contents





| |  | The following table sets forth the computation of basic and diluted loss
per share (in thousands, except per share data):
| |  | -------------------------------------------------------------------------------------------------------------------------

|                                                      |  |                    |        |                  |  |      |        |      |  |   |        |   |  |   |        |  
|----------------------------------------------------- |  | ------------------ | ------ | ---------------- |  | ---- | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                                      |  | Three months ended |        | Six months ended
|                                                      |  | September 30,      |        | September 30,   
|                                                      |  |                    |        |                 
|                                                      |  | 2002               |        | 2001             |  | 2002 |        | 2001
|                                                      |  |                    |        |                  |  |      |        |     
|Basic                                                 |  |                    |        |                  |  |      |        |      |  |   |        |   |  |   |        |  
|                                                     
|                                                     
|                                                     
|                                                     
|Net loss                                              |  | $                  | (1,168 | )                |  | $    | (2,732 | )    |  | $ | (2,435 | ) |  | $ | (7,851 | )
|                                                      |  |                    |        |                  |  |      |        |      |  |   |        |   |  |   |        |  
|Weighted common shares
outstanding                    |  |                    | 12,280 |                  |  |      | 12,071 |      |  |   | 12,256 |   |  |   | 12,016 |  
|                                                      |  |                    |        |                  |  |      |        |      |  |   |        |   |  |   |        |  
|Basic loss per common share                           |  | $                  | (0.10  | )                |  | $    | (0.23  | )    |  | $ | (0.20  | ) |  | $ | (0.65  | )
|                                                      |  |                    |        |                  |  |      |        |      |  |   |        |   |  |   |        |  
|Diluted                                               |  |                    |        |                  |  |      |        |      |  |   |        |   |  |   |        |  
|                                                     
|                                                     
|                                                     
|                                                     
|Net loss                                              |  | $                  | (1,168 | )                |  | $    | (2,732 | )    |  | $ | (2,435 | ) |  | $ | (7,851 | )
|                                                      |  |                    |        |                  |  |      |        |      |  |   |        |   |  |   |        |  
|Weighted common shares
outstanding                    |  |                    | 12,280 |                  |  |      | 12,071 |      |  |   | 12,256 |   |  |   | 12,016 |  
|                                                     
|                                                     
|                                                     
|                                                     
|Dilutive effect of stock options                      |  |                    |       |                  |  |      |       |      |  |   |       |   |  |   |       |  
|                                                      |  |                    |        |                  |  |      |        |      |  |   |        |   |  |   |        |  
|Weighted common shares
outstanding, assuming dilution |  |                    | 12,280 |                  |  |      | 12,071 |      |  |   | 12,256 |   |  |   | 12,016 |  
|                                                      |  |                    |        |                  |  |      |        |      |  |   |        |   |  |   |        |  
|Diluted loss per common share                         |  | $                  | (0.10  | )                |  | $    | (0.23  | )    |  | $ | (0.20  | ) |  | $ | (0.65  | )
|                                                      |  |                    |        |                  |  |      |        |      |  |   |        |   |  |   |        |  



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

|                                   |                                                    |   |                    |     |                  |   |        |    |      |   |        |    |  |   |        |      |  
|---------------------------------- | -------------------------------------------------- | - | ------------------ | --- | ---------------- | - | ------ | -- | ---- | - | ------ | -- |  | - | ------ | ---- | -
|                                   |                                                    |   | Three months ended |     | Six months ended
|                                   |                                                    |   | September 30,      |     | September 30,   
|                                   |                                                    |   |                    |     |                 
|                                   |                                                    |   | 2002               |     | 2001             |   | 2002   |    | 2001
|                                   |                                                    |   |                    |     |                  |   |        |    |     
|Net loss                           |                                                    | $ | (1,168             | )   |                  | $ | (2,732 | )  |      | $ | (2,435 | )  |  | $ | (7,851 | )   
|                                  
|                                  
|                                  
|                                  
|Other comprehensive income (loss): |                                                    |   |                    |     |                  |   |        |    |      |   |        |    |  |   |        |     
|                                  
|                                  
|                                  
|                                  
|                                   | Unrealized gains (losses) on
marketable securities |   |                    | (57 | )                |   |        | 20 |      |   |        | 39 |  |   |        | (256 | )
|                                   |                                                    |   |                    |     |                  |   |        |    |      |   |        |    |  |   |        |     
|Other comprehensive income (loss)  |                                                    |   | (57                | )   |                  |   | 20     |    |      |   | 39     |    |  |   | (256   | )   
|                                   |                                                    |   |                    |     |                  |   |        |    |      |   |        |    |  |   |        |     
|Comprehensive loss                 |                                                    | $ | (1,225             | )   |                  | $ | (2,712 | )  |      | $ | (2,396 | )  |  | $ | (8,107 | )   
|                                   |                                                    |   |                    |     |                  |   |        |    |      |   |        |    |  |   |        |     

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|5. |  | Strategic investments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | 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 is dependant
on the 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.                                                                                                
|  
|   |  | Handset Design Company                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|  
|   |  | In December 2001, the Company invested $512,000 in a Korean handset design
company. On April 1, 2002, the Company invested an additional $2.0 million
in the handset design company. The Company does not have significant
influence over the management of the handset design company and
accordingly has accounted for the investment on a cost basis in all
reported periods. The Company reviewed the investment as of September 30,
2002 and determined no indicators of impairment were present that would
indicate the current carrying value of the investment was impaired.                                                                                                                                                                                                                                                                             
|  
|   |  | GaAs Foundry                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|  
|   |  | In December 2000, the Company invested approximately $2.4 million in a
GaAs foundry under construction in Taiwan in exchange for a 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 and the first quarter of fiscal
2003 the Company recorded impairment charges of approximately $2.0 million
for its strategic investment in the Taiwanese foundry, which was deemed to
have an other than temporary decline in value. The Company reviewed the
investment as of September 30, 2002 and determined no indicators of
impairment were present that would indicate the current carrying value of
the investment was impaired.                                                                                                                                                                                                                                                                                                                                                                                
|  
|6. |  | Costs related to hostile takeover proposal                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|  
|   |  | During the second quarter of fiscal 2003, the Company received an
unsolicited offer from Anaren Microwave Inc. for all of the outstanding
shares of the Companys common stock. The Board of Directors voted
unanimously to reject the offer as not in the best interests of the
Companys shareholders. Expenses for legal and investment advisors of
$500,000 have been incurred to defend against the Anaren proposal and have
been reported in operating income under the caption Costs related to
hostile takeover proposal. The Company anticipates that it will incur
additional expenses of at least $560,000 over the next three quarters
related to the Anaren proposal for legal and investment advisors. However,
expenses related to the Anaren proposal could be significantly greater
than expected, which could negatively impact our business.
|  
|7. |  | Subsequent Events                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|  
|   |  | On October 29, 2002, the Company acquired Tavanza, Inc. (Tavanza) for
$3.3 million in cash plus assumed liabilities and related acquisition
costs. Tavanza is a privately held, fabless designer of                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

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| |  | power amplifier modules and components for cellular and wireless LAN
products. An analysis of purchase price allocation will be completed in
the third quarter of fiscal 2003.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




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. In addition, forward looking statements in this
report include, but are not limited to, those regarding: being the sole source
supplier to Motorola for the 120v platform; the effects of Motorolas decision
on our revenues in the third and fourth quarters of fiscal 2003 and beyond;
expected revenues in the third quarter of fiscal 2003; cost savings as a result
of our headcount reduction; research and development and selling, general and
administrative expenses; expenses related to Anaren Microwave; and our belief
that our cash and borrowings from equipment financing should be sufficient to
meet our liquidity needs through at least 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 in the United States requires us to make
estimates and assumptions that affect the reported amounts. Some of the
estimation processes affect current assets and liabilities and are therefore
critical in assessing our financial and operating status. These estimates
involve certain assumptions that if incorrect could create a material adverse
impact on our operations and financial position.

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

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

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

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financial position and order level to determine if an allowance should be established. Any change in
the allowance from our assessment of the likelihood of receiving payment is
reflected in the selling, general, and administrative costs in the period the
change in assessment is made.

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

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. We consider sensitivities to capacity,
utilization and technological developments in making related assumptions.

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

Result of Operations Second Quarter of Fiscal 2003 Compared to Second Quarter of Fiscal 2002:

Total net sales were $15.5 million for the second quarter of fiscal 2003
compared to $15.1 million for the second quarter of fiscal 2002, an increase of
2%. Semiconductor sales were $11.4 million in the second quarter of fiscal
2003, compared to $9.0 million in the second quarter of fiscal 2002, an
increase of 26%. Semiconductor sales increased due to increased volume
shipments of power amplifier modules.

Motorola, which is our largest customer, is in the process of
transitioning from the 120v handset platform on which we are the sole source
for power amplifier modules, to new handset platforms, for which Motorola had
intended to have dual sources of supply. Recently, Motorola decided to
discontinue its strategy of dual sourcing power amplifier modules, and has
selected a sole source supplier other than us for one of its new platforms.
Although we will continue to be the sole source for power amplifier modules for
Motorolas 120v platform, we expect such sales to decline as Motorola
transitions to its new platforms later this calendar year. We expect that the
effects of Motorolas decision will begin to be felt in the third quarter of
fiscal 2003, resulting in lower revenues for that
quarter. We currently expect that the effect on our revenues will be more
significant beginning in the fourth quarter of fiscal 2003.

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

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Subsystem sales in the second quarter of fiscal 2003 were $4.1 million
compared to $6.1 million in the second quarter of fiscal 2002, a decrease of
33%. Sales of subsystems products to defense customers decreased 22% to $3.9
million in the second quarter of fiscal 2003 from $5.0 million in the second
quarter of fiscal 2002, and sales of subsystem products to commercial customers
decreased 84% to $181,000 in the second quarter of fiscal 2003 compared to $1.1
million in the second quarter of fiscal 2002. The decrease in sales of
subsystems products to defense customers is primarily the result of many
defense customers making purchases for specific programs, and therefore product
demand fluctuates from quarter to quarter. 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 25% of net sales in the second quarter of fiscal 2003
compared to 6% of net sales in the second quarter of fiscal 2002. The increase
in gross margin was primarily due to greater inventory write-downs in the
second quarter of the last fiscal year when compared to the second quarter of
fiscal 2003 and increased utilization of our manufacturing facility. Cost of
sales in the second quarter of fiscal 2003 included approximately $100,000 in
termination costs due to a reduction in headcount in order to adjust our
expenses to the current business conditions. The annual savings from the
reduction in headcount is expected to be approximately $2.3 million and will
begin in the third quarter of fiscal 2003. We do not expect further
significant improvement in gross margin until sales volumes increase because of
fixed costs related to our fabrication facility. In fact, 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.

Research and development expenses were $2.7 million, or 18% of net sales,
in the second quarter of fiscal 2003 compared to $2.2 million, or 14% of net
sales, in the second quarter of fiscal 2002, an increase of 27%. Research and
development expenses increased due to headcount increases over the last year
related to new product development. The expenses for the second quarter of
fiscal 2003 included approximately $140,000 of termination costs related to our
effort to more closely align our technical skills with our current product
focus. The annual savings from the reduction in headcount is expected to be
approximately $400,000 and will begin in the third quarter of fiscal 2003. We
expect research and development expenses to increase by approximately $700,000
in future quarters as a result of our acquisition of Tavanza.

Selling, general and administrative expenses were $2.3 million, or 15% of
net sales, in the second quarter of fiscal 2003 compared to $2.4 million, or
15% of net sales, in the second quarter of fiscal 2002. We expect an increase
in our selling expenses for the new office in Korea that we established to
expand our customer base.

During the second quarter of fiscal 2003, we received an unsolicited offer
from Anaren Microwave, Inc. for all of the outstanding shares of our common
stock. Our Board of Directors voted unanimously to reject the offer as not in
the best interests of our shareholders. Expenses for legal and investment
advisors of $500,000 have been incurred to defend against the Anaren proposal
and have been reported in operating income under the caption Costs related to
hostile takeover proposal. We anticipate that we will incur additional
expenses of at least $560,000 over the next three quarters related to the
Anaren proposal for legal and investment advisors. However, expenses related
to the Anaren proposal could be significantly greater than expected, which
could negatively impact our business.

Interest income and other, net was $453,000 in the second quarter of
fiscal 2003 compared to approximately $966,000 in the second quarter of fiscal
2002. The decrease in interest income and other, net, was primarily due to
lower interest rates.

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Result of Operations First Six Months of Fiscal 2003 Compared to First Six Months of Fiscal 2002:

Total net sales were $30.8 million for the first six months of fiscal 2003
compared to $29.1 million for the first six months of fiscal 2002, an increase
of 6%. Semiconductor sales were $20.8 million in the first six months of
fiscal 2003 compared to $17.2 million in the first six months of fiscal 2002,
an increase of 21%. Semiconductor sales increased due to increased volume
shipments of power amplifier modules.

Motorola, which is our largest customer, is in the process of
transitioning from the 120v handset platform on which we are the sole source
for power amplifier modules, to new handset platforms, for which Motorola had
intended to have dual sources of supply. Recently, Motorola decided to
discontinue its strategy of dual sourcing power amplifier modules, and has
selected a sole source supplier other than us for one of its new platforms.
Although we will continue to be the sole source for power amplifier modules for
Motorolas 120v platform, we expect such sales to decline as Motorola
transitions to its new platforms later this calendar year. We expect that the
effects of Motorolas decision will begin to be felt in the third quarter of
fiscal 2003, resulting in lower revenues for that
quarter. We currently expect that the effect on our revenues will be more
significant beginning in the fourth quarter of fiscal 2003.

In addition, visibility of customer demand for power amplifier modules
continues to be limited. We do not expect a strong recovery in the handset
market in this fiscal year. In addition, the handset market has historically
had seasonal and consumer trends in demand, which can cause variation in
revenues in sequential quarters. The increase in semiconductor sales this
quarter is not necessarily indicative of future revenue levels.

Subsystem sales in the first six months of fiscal 2003 were $10 million
compared to $11.9 million in the first six months of fiscal 2002, a decrease of
15%. Sales of subsystem products to defense customers increased 6% to $9.3
million in the first six months of fiscal 2003 from $8.8 million in the first
six months of fiscal 2002, and sales of subsystem products to commercial
customers decreased 76% to $734,000 in the first six months of fiscal 2003
compared to $3.1 million in the first six months 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. However, defense customers often
make purchases for specific programs, and therefore product demand fluctuates
from quarter to quarter. 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 25% of net sales in the first six months of fiscal 2003
compared to a negative 1% of net sales in the first six months 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 improvement was due to greater inventory write-downs in
the second quarter of last fiscal year when compared to the second quarter of
fiscal 2003 and the shift in subsystems from commercial products to defense
products. Cost of sales in the second quarter of fiscal 2003 included
approximately $100,000 in termination costs due to a reduction in headcount in
order to adjust our expenses to the current business conditions. The annual
savings from the reduction in headcount is expected to be approximately $2.3
million and will begin in the third quarter of fiscal 2003. We do not expect
further significant improvement in gross margin over the current run rate of
approximately 25% until sales volumes increase because of fixed costs related
to our fabrication facility. In fact, 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.

Research and development expenses were $5.4 million, or 18% of net sales,
in the first six months of fiscal 2003 compared to $4.6 million, or 16% of net
sales, in the first six months of fiscal 2002, an increase of 17%. Research
and development expenses increased due to headcount increases over the last
year related to

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new product development. The expenses for the second quarter of fiscal
2003 included approximately $140,000 of termination costs related to our effort
to more closely align our technical skills with our current product focus. The
annual savings from the reduction in headcount is expected to be approximately
$400,000 and will begin in the third quarter of fiscal 2003. We expect research
and development expenses to increase by approximately $700,000 in future
quarters as a result of our acquisition of Tavanza.

Selling, general and administrative expenses were $4.9 million, or 16% of
net sales, in the first six months of fiscal 2003 compared to $5.1 million, or
18% of net sales, in the first six months of fiscal 2002. We expect an
increase in our selling expenses for the new office in Korea that we
established to expand our customer base.

During the second quarter of fiscal 2003, we received an unsolicited offer
from Anaren Microwave, Inc. for all of the outstanding shares of our common
stock. Our Board of Directors voted unanimously to reject the offer as not in
the best interests of our shareholders. Expenses for legal and investment
advisors of $500,000 have been incurred to defend against the Anaren proposal
and have been reported in operating income under the caption Costs related to
hostile takeover proposal. We anticipate that we will incur additional
expenses of at least $560,000 over the next three quarters related to the
Anaren proposal for legal and investment advisors. However, expenses related
to the Anaren proposal could be significantly greater than expected, which
could negatively impact our business.

The $69,000 fixed asset impairment charge was included in the first
quarter of fiscal 2002 and was the result of further impairment with respect to
certain capital assets used in the commercial 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 and other, net was $920,000 in the first six months of
fiscal 2003 compared to $2.3 million in the first six months of fiscal 2002.
The decrease in interest income and other, net, was primarily due to lower
interest rates.

Acquisition of Tavanza, Inc.

On October 29, 2002, we acquired Tavanza, Inc. (Tavanza) for $3.3
million in cash plus assumed liabilities and related acquisition costs.
Tavanza was a privately held, fabless designer of power amplifier modules and
components for cellular and wireless LAN products. We believe Tavanzas
innovative technology will enable us to respond more quickly to the growing
demand for high performance, power

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efficient, small volume, cost effective power amplifiers for handsets and
WLAN products by getting products to market faster. An analysis of purchase
price allocation will be completed in the third quarter of fiscal 2003. We
expect research and development expenses to increase by approximately $700,000
in future quarters as a result of our acquisition of Tavanza.

Liquidity and Capital Resources

We have funded our operations to date primarily through cash flows from
operations and sales of equity securities. As of September 30, 2002, we had
$10.1 million in cash and cash equivalents, $93.0 million in short-term
investments and $105.5 million in working capital.

Net cash provided by operating activities was $8.6 million in the first
six months of fiscal 2003 and was due mainly to a decrease in accounts
receivable and inventory and an increase in accounts payable and other current
liabilities. Net cash used by operating activities was $5.0 million in the
first six months of fiscal 2002 and was due mainly to decreases in accounts
payable and other current liabilities.

Net cash used by investing activities was $5.6 million in the first six
months of fiscal 2003 and was the result of the purchase of short-term
investments of approximately $58.0 million offset with proceeds from the sale
and maturities of short-term investments of approximately $55.6 million, the
investment in a handset design company of approximately $2.0 million and the
purchase of property and equipment of approximately $1.2 million. Net cash
provided by investing activities was $29.2 million in the first six months of
fiscal 2002 and was the result of the purchase of short-term investments of
approximately $86.0 million offset with proceeds from the sale and maturities
of short-term investments of approximately $118.5 million and the purchase of
property and equipment of approximately $3.3 million.

Net cash used by financing activities was $965,000 in the first six months
of fiscal 2003 and was due to principal payments on long-term debt of
approximately $1.1 million and payments on capital leases of approximately
$305,000 offset by proceeds from the exercise of employee stock options and
employee stock purchase plan of approximately $471,000. Net cash provided by
financing activities was approximately $3.6 million in the first six months of
fiscal 2002 and was the result of borrowings on long-term debt of approximately
$3.7 million and proceeds from the exercise of employee stock options and
employee stock purchase plan of approximately $1.0 million offset by principal
payments on long-term debt of approximately $732,000 and payments on capital
leases of approximately $360,000.

As of September 30, 2002, we had $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
September 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 September
30, 2002 we were in compliance with all covenants.

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

Commitments

We do not have any special purpose entities. We have no commercial
commitments with related parties, except for employee loans. We have
outstanding loans to certain officers and employees totaling

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approximately $1.6 million at September 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.

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 September 30,
|                                |  |                                
|                                |  | Total                           |        | 2003 |  | 2004 |       | 2005 |  | 2006 |       | 2007
|                                |  |                                 |        |      |  |      |       |      |  |      |       |     
|Contractual Obligations         |  |                                 |        |      |  |      |       |      |  |      |       |      |  |   |       |  |  |   |       |  |  |   |    | 
|Long-term debt
obligations      |  | $                               | 6,549  |      |  | $    | 1,442 |      |  | $    | 2,883 |      |  | $ | 1,922 |  |  | $ | 302   |  |  |   |   | 
|                               
|                               
|                               
|                               
|Capital lease obligations       |  |                                 | 1,896  |      |  |      | 338   |      |  |      | 720   |      |  |   | 559   |  |  |   | 279   |  |  |   |   | 
|                               
|                               
|                               
|                               
|Operating lease
obligations     |  |                                 | 9,664  |      |  |      | 2,580 |      |  |      | 3,815 |      |  |   | 2,516 |  |  |   | 719   |  |  |   | 34 | 
|                               
|                               
|                               
|                               
|Open purchase order
commitments |  |                                 | 2,918  |      |  |      | 2,918 |      |  |      |      |      |  |   |      |  |  |   |      |  |  |   |   | 
|                                |  |                                 |        |      |  |      |       |      |  |      |       |      |  |   |       |  |  |   |       |  |  |   |    | 
|Total                           |  | $                               | 21,027 |      |  | $    | 7,278 |      |  | $    | 7,418 |      |  | $ | 4,997 |  |  | $ | 1,300 |  |  | $ | 34 | 
|                                |  |                                 |        |      |  |      |       |      |  |      |       |      |  |   |       |  |  |   |       |  |  |   |    | 

RISKS, TRENDS AND UNCERTAINTIES

We depend on a small number of original equipment manufacturers as customers.
If we lose one or more of our significant customers, or if purchases by any one
of our key customers decrease, our net sales will decline and our business will
be harmed.

We expect that sales to a limited number of customers will account for a
large percentage of our net sales in the future. 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 the first six months of fiscal 2003,
sales to our top ten customers accounted for approximately 83% of our net
sales, with Motorola making up approximately 56% of those net sales. In fiscal
year 2002, sales to our top ten customers accounted for approximately 76% of
our net sales, with Motorola making up approximately 43% of those net sales.
Motorola accounted for approximately 41% of our backlog at September 30, 2002.

We have been a sole source supplier of power amplifier modules to Motorola
for its 120v handset platform. However, Motorola is currently transitioning to
new platforms, and it recently selected a sole source supplier other than us
for one of its new platforms. Although we will continue to be the sole source
for power amplifier modules for Motorolas 120v platform, we expect such sales
to decline as Motorola transitions to its new platforms later this calendar
year. We expect that the effects of Motorolas decision will begin to be felt
in the third quarter of fiscal 2003, and expect that the effect on our revenues
will be more significant beginning in the fourth quarter of fiscal 2003.
Although we intend to compete for Motorolas

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business in the future, there can be no assurance that we will be
successful. If we are unable to sell our products to Motorola, our revenues
may decline and our business will be harmed.

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

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



| |  |  | the timing, cancellation or delay of customer orders or
shipments, particularly from our largest customer;
| | - |  | ----------------------------------------------------------------------------------------------------------
| |  |  | 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;   
| |  |  | fluctuating demand from our defense customers;                                                            
| |  |  | market acceptance of our products;                                                                        
| |  |  | variations in average selling prices of our products; and                                                 
| |  |  | changes in our inventory levels.                                                                          

Any unfavorable changes in the factors listed above or general industry
and global economic conditions could significantly harm our business, operating
results and financial condition. For example, during the third quarter of
fiscal 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.

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

In October 2002, we acquired Tavanza, Inc., and we may make investments in
or acquire complementary companies, products or technologies. These
acquisitions involve numerous risks, including problems combining or
integrating the purchased operations, technologies or products; unanticipated
costs; diversion of managements attention from our core business; adverse
effects on existing business relationships with suppliers and customers; risks
associated with entering markets in which we have no or limited prior
experience; and potential loss of key employees, particularly those of the
acquired organizations. In addition, in the event of any such investments or
acquisitions, we could issue stock that would dilute our current shareholders
percentage ownership, incur debt, assume liabilities, incur amortization
expenses related to goodwill and other intangible assets, or incur large and
immediate write-offs. We cannot assure you that we will be able to
successfully integrate any businesses, products, technologies or personnel that
we might acquire in the future.

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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, when our net sales decrease. In addition, the lead
time for developing and manufacturing our products often requires us to invest
in manufacturing capacity in anticipation of future demand. We committed to
significant expenditures in capital equipment and facilities in fiscal 2001
based on customer demand. The recent decline in market demand has resulted in
infrastructure costs in excess of current needs and has resulted in lower
earnings. 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 decline in demand in
the wireless infrastructure markets. Additionally, industry forecast of sales
of handsets for calendar 2002 have been further 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.

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

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

Our backlog may not result in sales.

Our backlog primarily represents signed purchase orders for products due
to ship within the next year. As of September 30, 2002, our backlog was
approximately $22 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

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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.

For example, 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. 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 has continued to a lesser extent in
fiscal 2002.

Of our current backlog, approximately 41% 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 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.

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

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

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

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

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

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

During the first six months of fiscal 2003, sales to international
customers accounted for 71% 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 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.

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

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

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

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

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

Most of our products are components in 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

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production or a cessation of our operations. The regulations could require
us to acquire significant equipment or to incur substantial other expenses in
order to comply with environmental regulations. Any past or future failure by
us to control the use of or to restrict adequately the discharge of hazardous
substances could subject us to future liabilities and could cause our business,
operating results and financial condition to suffer. In addition, under some
environmental laws and regulations we could be held financially responsible for
remedial measures if our properties are contaminated, even if we did not cause
the contamination.

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

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

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

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

In addition, to retain our intellectual property rights we may be required
to seek legal action against infringing parties. This legal action may be
costly and may result in a negative outcome. An adverse outcome in litigation
could subject us to significant liability to third parties, could put our
patents at risk of being invalidated or narrowly interpreted and could put our
patent applications at risk of not issuing. The steps taken by us may be
inadequate to deter misappropriation or impede third party development of our
technology. In addition, the laws of some foreign countries in which our
products are or may be sold do not protect our intellectual property rights to
the same extent, as do the laws on the United States. If we are not successful
in protecting our intellectual property our business will suffer.

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

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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.

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

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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.

A disaster could severely damage our operations.

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




Item 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 September 30, 2002, our investment portfolio
comprised approximately $8.4 million in money market funds and certificate of
deposits and $92.5 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 September 30, 2002
levels, the fair value of our portfolio would decline by approximately
$218,000. The modeling technique used measures the change in fair values
arising from an immediate hypothetical shift in market interest rates.

22



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Foreign Currency Exchange Risk

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




Item 4. CONTROLS AND PROCEDURES



| | (a) |  | Evaluation of disclosure controls and procedures.
| | --- |  | -------------------------------------------------

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



| | (b) |  | Changes in internal controls.
| | --- |  | -----------------------------

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




PART II OTHER INFORMATION




Item 5. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

The Companys Annual Meeting of Shareholders was held on August 2, 2002.
The results of the voting were as follows:

|            |  |                                                   
|----------- |  | --------------------------------------------------
|Proposal 1: |  | Election of the Board of Directors of the Company.

|                    |  |           |           |                |  |  |           | 
|------------------- |  | --------- | --------- | -------------- |  |  | --------- | 
|Nominee             |  | Votes For |           | Votes Withheld
|                    |  |           |           |                |  |  |           | 
|Tamer Husseini      |  |           | 8,057,899 |                |  |  | 2,800,787 | 
|                   
|                   
|                   
|                   
|Robert J. Gallagher |  |           | 9,509,535 |                |  |  | 1,349,151 | 
|                   
|                   
|                   
|                   
|Thomas W. Hubbs     |  |           | 9,509,335 |                |  |  | 1,349,351 | 
|                   
|                   
|                   
|                   
|William D. Rasdal   |  |           | 9,510,035 |                |  |  | 1,348,651 | 
|                   
|                   
|                   
|                   
|Charles P. Waite    |  |           | 9,576,675 |                |  |  | 1,282,011 | 

|            |  |                                                                                                                   
|----------- |  | ------------------------------------------------------------------------------------------------------------------
|Proposal 2: |  | Ratification of Ernst & Young LLP as the Companys independent
auditors for the fiscal year ending March 31, 2003.

|                  |  |  |            | 
|----------------- |  |  | ---------- | 
|Votes For:        |  |  | 10,081,482 | 
|                 
|                 
|                 
|                 
|Votes Against:    |  |  | 766,704    | 
|                 
|                 
|                 
|                 
|Votes Abstaining: |  |  | 10,500     | 

23



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##### Table of Contents






Item 6. EXHIBITS AND REPORTS ON FORM 8-K

|     |  |                                                                     
|---- |  | --------------------------------------------------------------------
|(a)  |  | Exhibits.                                                           
|    
|    
|    
|    
|    
|    
|    
|    
|99.1 |  | Certification of Chief Executive Officer and Chief Financial Officer
|    
|    
|    
|    
|    
|    
|    
|    
|(b)  |  | Reports on Form 8-K.                                                

A Form 8-K was filed with the U.S. Securities and Exchange Commission
on July 29, 2002.

24



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##### Table of Contents






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: November 13, 2002 |  | /s/ MARGARET E. SMITH

Margaret E. Smith, Vice President,
Chief Financial Officer and Assistant
Secretary

25



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##### Table of Contents



CERTIFICATIONS

I, Tamer Husseini, certify that:



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



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



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



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



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

Date: November 13, 2002

| |     |                                                          
| | --- | ---------------------------------------------------------
| | By: | /s/ Tamer
Husseini
Tamer Husseini
Chief Executive Officer

26



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##### Table of Contents



I, Margaret E. Smith, certify that:



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



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



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



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



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

Date: November 13, 2002

| |     |                                                                                
| | --- | -------------------------------------------------------------------------------
| | By: | /s/ Margaret E. Smith
Margaret E. Smith
Vice President, Chief Financial Officer

27



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Exhibit Index

Description

|     |  |                                                                     
|---- |  | --------------------------------------------------------------------
|99.1 |  | Certification of Chief Executive Officer and Chief Financial Officer